UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~March 31,~~September 30, 2020

~~[ ]~~☐ 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~~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, Illinois61265

(Address of principal executive offices, including zip code)

~~(309) 736‑3580~~(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 ~~[ X ]~~☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 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 ~~[ X ]~~☒ No ~~[ ]~~☐

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


Large accelerated filer ~~[ ]~~☐	Accelerated filer ~~[ X ]~~☒		Non-accelerated filer ~~[ ]~~☐
Smaller reporting company ~~[ ]~~☐		Emerging growth company ~~[ ]~~☐

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

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

Yes ~~[ ]~~☐ No ~~[ X ]~~

~~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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of ~~May~~November 1, 2020, the Registrant had outstanding ~~15,773,518~~15,793,357 shares of common stock, $1.00 par value per share.

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of ~~March 31,~~September 30, 2020 and December 31, 2019

March 31,

December 31,

2020

2019

(dollars in thousands)
Assets

Cash and due from banks

$
169,827

$
76,254
Federal funds sold

4,695

9,800
Interest-bearing deposits at financial institutions

202,013

147,891

Securities held to maturity, at amortized cost

431,283

400,646
Securities available for sale, at fair value

253,288

210,695
Total securities

684,571

611,341

Loans receivable held for sale

3,994

3,673
Loans/leases receivable held for investment

3,700,674

3,686,532
Gross loans/leases receivable

3,704,668

3,690,205
Less allowance for estimated losses on loans/leases

(42,233)

(36,001)
Net loans/leases receivable

3,662,435

3,654,204




Bank-owned life insurance

59,098

58,834
Premises and equipment, net

73,319

73,859
Restricted investment securities

21,209

23,252
Other real estate owned, net

3,298

4,129
Goodwill

74,248

74,748
Intangibles

14,421

14,970
Derivatives

195,973

87,827
Assets held for sale

10,758

11,966
Other assets

56,210

59,975
Total assets

$
5,232,075

$
4,909,050




Liabilities and Stockholders' Equity




Liabilities:




Deposits:




Noninterest-bearing

$
829,782

$
777,224
Interest-bearing

3,340,696

3,133,827
Total deposits

4,170,478

3,911,051




Short-term borrowings

43,067

13,423
Federal Home Loan Bank advances

95,000

159,300
Subordinated notes

68,455

68,394
Junior subordinated debentures

37,877

37,838
Derivatives

203,744

88,437
Liabilities held for sale

3,130

5,003
Other liabilities

71,185

90,253
Total liabilities

4,692,936

4,373,699








Stockholders' Equity:




Preferred stock, $1 par value; shares authorized 250,000 March 2020 and December 2019 - no shares issued or outstanding

—

—
Common stock, $1 par value; shares authorized 20,000,000 March 2020 - 15,773,736 shares issued and outstanding December 2019 - 15,828,098 shares issued and outstanding

15,774

15,828
Additional paid-in capital

273,867

274,785
Retained earnings

254,287

245,836
Accumulated other comprehensive income (loss):

Securities available for sale

4,697

2,817
Derivatives

(9,486)

(3,915)
Total stockholders' equity

539,139

535,351
Total liabilities and stockholders' equity

$
5,232,075

$
4,909,050


	September 30,		December 31,
	2020		2019

	(dollars in thousands)
Assets
Cash and due from banks	$	68,932	$	76,254
Federal funds sold		530		9,800
Interest-bearing deposits at financial institutions		302,138		147,891

Securities held to maturity, at amortized cost		434,892		400,646
Securities available for sale, at fair value		347,196		210,695
Total securities		782,088		611,341

Loans receivable held for sale		8,811		3,673
Loans/leases receivable held for investment		4,239,166		3,686,532
Gross loans/leases receivable		4,247,977		3,690,205
Less allowance for estimated losses on loans/leases		(79,582)		(36,001)
Net loans/leases receivable		4,168,395		3,654,204

Bank-owned life insurance		60,126		58,834
Premises and equipment, net		72,001		73,859
Restricted investment securities		19,009		23,252
Other real estate owned, net		125		4,129
Goodwill		74,066		74,748
Intangibles		11,902		14,970
Derivatives		236,381		87,827
Assets held for sale		—		11,966
Other assets		68,867		59,975
Total assets	$	5,864,560	$	4,909,050

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,175,085	$	777,224
Interest-bearing		3,497,183		3,133,827
Total deposits		4,672,268		3,911,051

Short-term borrowings		30,430		13,423
Federal Home Loan Bank advances		40,000		159,300
Subordinated notes		118,577		68,394
Junior subordinated debentures		37,955		37,838
Derivatives		244,510		88,437
Liabilities held for sale		—		5,003
Other liabilities		148,207		90,253
Total liabilities		5,291,947		4,373,699


Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 September 2020 and December 2019 - 0 shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 September 2020 - 15,792,357 shares issued and outstanding December 2019 - 15,828,098 shares issued and outstanding		15,792		15,828
Additional paid-in capital		275,122		274,785
Retained earnings		283,480		245,836
Accumulated other comprehensive income (loss):
Securities available for sale		7,817		2,817
Derivatives		(9,598)		(3,915)
Total stockholders' equity		572,613		535,351
Total liabilities and stockholders' equity	$	5,864,560	$	4,909,050

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended ~~March 31,~~September 30, 2020 and 2019

2020

2019

(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$
43,159

$
45,568

Securities:

Taxable

1,727

1,666

Nontaxable

3,459

3,545

Interest-bearing deposits at financial institutions

361

923

Restricted investment securities

258

307

Federal funds sold

18

93

Total interest and dividend income

48,982

52,102

Interest expense:

Deposits

9,206

12,479

Short-term borrowings

64

71

Federal Home Loan Bank advances

449

903

Other borrowings

—

605

Subordinated notes

994

564

Junior subordinated debentures

571

572

Total interest expense

11,284

15,194

Net interest income

37,698

36,908

Provision for loan/lease losses

8,367

2,134

Net interest income after provision for loan/lease losses

29,331

34,774

Noninterest income:

Trust department fees

2,312

2,493

Investment advisory and management fees

1,727

1,736

Deposit service fees

1,477

1,554

Gains on sales of residential real estate loans, net

652

369

Gains on sales of government guaranteed portions of loans, net

—

31

Swap fee income

6,804

3,198

Earnings on bank-owned life insurance

329

540

Debit card fees

758

792

Correspondent banking fees

215

216

Other

922

1,064

Total noninterest income

15,196

11,993

Noninterest expense:

Salaries and employee benefits

18,519

20,879

Occupancy and equipment expense

4,032

3,694

Professional and data processing fees

3,369

2,750

Post-acquisition compensation, transition and integration costs

151

134

Disposition costs

517

—

FDIC insurance, other insurance and regulatory fees

683

964

Loan/lease expense

228

214

Net cost of and gains/losses on operations of other real estate

13

298

Advertising and marketing

682

785

Bank service charges

504

483

Losses on debt extinguishment

147

—

Correspondent banking expense

216

204

Intangibles amortization

549

532

Goodwill impairment

500

—

Other

1,305

1,498

Total noninterest expense

31,415

32,435

Net income before income taxes

13,112

14,332

Federal and state income tax expense

1,884

1,414

Net income

$
11,228

$
12,918

Basic earnings per common share

$
0.71

$
0.82

Diluted earnings per common share

$
0.70

$
0.81

Weighted average common shares outstanding

15,796,796

15,693,345

Weighted average common and common equivalent shares outstanding

16,011,456

15,922,940

Cash dividends declared per common share

$
0.06

$
0.06


	2020		2019

	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	44,768	$	50,406
Securities:
Taxable		1,938		1,682
Nontaxable		3,842		3,443
Interest-bearing deposits at financial institutions		92		951
Restricted investment securities		249		293
Federal funds sold		1		42
Total interest and dividend income		50,890		56,817

Interest expense:
Deposits		4,484		13,394
Short-term borrowings		11		97
Federal Home Loan Bank advances		211		1,023
Subordinated notes		1,031		1,003
Junior subordinated debentures		572		581
Total interest expense		6,309		16,098
Net interest income		44,581		40,719
Provision for loan/lease losses		20,342		2,012
Net interest income after provision for loan/lease losses		24,239		38,707

Noninterest income:
Trust department fees		2,280		2,340
Investment advisory and management fees		1,266		1,782
Deposit service fees		1,403		1,813
Gains on sales of residential real estate loans, net		1,370		890
Gains on sales of government guaranteed portions of loans, net		—		519
Swap fee income		26,688		9,797
Securities gains (losses), net		1,802		(3)
Earnings on bank-owned life insurance		502		489
Debit card fees		946		886
Correspondent banking fees		220		189
Other		1,482		1,204
Total noninterest income		37,959		19,906

Noninterest expense:
Salaries and employee benefits		25,999		24,215
Occupancy and equipment expense		3,807		3,860
Professional and data processing fees		3,758		4,030
Post-acquisition compensation, transition and integration costs		—		884
Disposition costs		192		—
FDIC insurance, other insurance and regulatory fees		1,301		542
Loan/lease expense		403		221
Net cost of (income from) and gains/losses on operations of other real estate		16		2,078
Advertising and marketing		750		1,056
Bank service charges		488		502
Losses on liability extinguishment		1,874		148
Correspondent banking expense		205		209
Intangibles amortization		531		560
Loss on sale of subsidiary		305		—
Other		1,209		1,640
Total noninterest expense		40,838		39,945
Net income before income taxes		21,360		18,668
Federal and state income tax expense		4,016		3,573
Net income	$	17,344	$	15,095

Basic earnings per common share	$	1.10	$	0.96
Diluted earnings per common share	$	1.09	$	0.94

Weighted average common shares outstanding		15,767,152		15,739,430
Weighted average common and common equivalent shares outstanding		15,923,578		15,976,742

Cash dividends declared per common share	$	0.06	$	0.06

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Nine Months Ended September 30, 2020 and 2019


	2020		2019

	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	130,542	$	143,488
Securities:
Taxable		5,714		5,026
Nontaxable		10,865		10,461
Interest-bearing deposits at financial institutions		587		3,042
Restricted investment securities		795		891
Federal funds sold		19		191
Total interest and dividend income		148,522		163,099

Interest expense:
Deposits		19,457		39,697
Short-term borrowings		81		275
Federal Home Loan Bank advances		1,007		2,685
Other borrowings		—		512
Subordinated notes		3,019		2,561
Junior subordinated debentures		1,715		1,729
Total interest expense		25,279		47,459
Net interest income		123,243		115,640
Provision for loan/lease losses		48,624		6,087
Net interest income after provision for loan/lease losses		74,619		109,553

Noninterest income:
Trust department fees		6,819		7,194
Investment advisory and management fees		4,392		5,406
Deposit service fees		4,166		5,025
Gains on sales of residential real estate loans, net		3,218		1,748
Gains on sales of government guaranteed portions of loans, net		—		589
Swap fee income		53,419		20,886
Securities gains (losses), net		1,867		(56)
Earnings on bank-owned life insurance		1,443		1,441
Debit card fees		2,479		2,591
Correspondent banking fees		633		578
Other		3,345		3,562
Total noninterest income		81,781		48,964

Noninterest expenses:
Salaries and employee benefits		65,822		67,843
Occupancy and equipment expense		11,587		11,087
Professional and data processing fees		10,773		9,811
Post-acquisition compensation, transition and integration costs		189		1,727
Disposition costs		626		—
FDIC insurance, other insurance and regulatory fees		2,892		2,432
Loan/lease expense		970		748
Net cost of (income from) and gains/losses on operations of other real estate		(303)		3,557
Advertising and marketing		1,984		2,878
Bank service charges		1,493		1,494
Losses on liability extinguishment		2,450		148
Correspondent banking expense		633		619
Intangibles amortization		1,628		1,706
Goodwill impairment		500		—
Loss on sale of subsidiary		305		—
Other		3,842		4,891
Total noninterest expenses		105,391		108,941
Net income before income taxes		51,009		49,576
Federal and state income tax expense		8,698		8,059
Net income	$	42,311	$	41,517

Basic earnings per common share	$	2.68	$	2.64
Diluted earnings per common share	$	2.65	$	2.60

Weighted average common shares outstanding		15,770,335		15,715,788
Weighted average common and common equivalent shares outstanding		15,945,832		15,946,020

Cash dividends declared per common share	$	0.18	$	0.18

See Notes to Consolidated Financial Statements (Unaudited

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three ~~months ended March 31,~~and Nine Months Ended September 30, 2020 and 2019

Three Months Ended March 31,



2020

2019

(dollars in thousands)

Net income

$
11,228

$
12,918

Other comprehensive income (loss):

Unrealized gains on securities available for sale:

Unrealized holding gains arising during the period before tax

2,481

4,144

2,481

4,144

Unrealized losses on derivatives:

Unrealized holding losses arising during the period before tax

(7,161)

(1,162)

Less reclassification adjustment for caplet amortization before tax

(110)

(157)

(7,051)

(1,005)

Other comprehensive income (loss), before tax

(4,570)

3,139

Tax expense (benefit)

(879)

795

Other comprehensive income (loss), net of tax

(3,691)

2,344

Comprehensive income

$
7,537

$
15,262


	Three Months Ended September 30,
	2020		2019

	(dollars in thousands)

Net income	$	17,344	$	15,095

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during the period before tax		585		1,827
Less reclassification adjustment for gains (losses) included in net income before tax		1,802		(3)
		(1,217)		1,830
Unrealized gains (losses) on derivatives:
Unrealized holding losses arising during the period before tax		445		(1,159)
Less reclassification adjustment for caplet amortization before tax		(149)		—
		296		(1,159)
Unrealized gains (losses) on assets held for sale:
Unrealized holding gains (losses) arising during the period before tax on securities held for sale		—		48
Unrealized holding losses arising during the period before tax on derivatives held for sale		—		(31)
Less reclassification adjustment for caplet amortization before tax		—		(80)
		—		97

Other comprehensive income (loss), before tax		(921)		768
Tax expense		(307)		224
Other comprehensive income (loss), net of tax		(614)		544

Comprehensive income	$	16,730	$	15,639


	Nine Months Ended September 30,
	2020		2019

	(dollars in thousands)

Net income	$	42,311	$	41,517

Other comprehensive income (loss):

Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period before tax		8,467		10,639
Less reclassification adjustment for gains (losses) included in net income before tax		1,867		(56)
		6,600		10,695
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(7,903)		(4,101)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(384)		(291)
		(7,519)		(3,810)
Unrealized gains (losses) on assets held for sale:
Unrealized holding gains (losses) arising during the period before tax on securities held for sale		—		48
Unrealized holding losses arising during the period before tax on derivatives held for sale		—		(31)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		—		(80)
		—		97

Other comprehensive income (loss), before tax		(919)		6,982
Tax expense		(236)		1,852
Other comprehensive income (loss), net of tax		(683)		5,130

Comprehensive income	$	41,628	$	46,647

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ~~(UNAUDITED)~~(UNAUDITED)

Three ~~months ended March 31,~~and Nine Months Ended September 30, 2020 and 2019

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive


Stock

Capital

Earnings

(Loss)

Total

(dollars in thousands)

Balance December 31, 2019

$
15,828

$
274,785

$
245,836

$
(1,098)

$
535,351
Net income

—

—

11,228

—

11,228
Other comprehensive income, net of tax

—

—

—

(3,691)

(3,691)
Common cash dividends declared, $0.06 per share

—

—

(942)

—

(942)
Repurchase and cancellation of 100,932 shares of common stock

   as a result of a share repurchase program

(101)

(1,844)

(1,835)

—

(3,780)
Issuance of 5,553 shares of common stock as a result of

  stock purchased under the Employee Stock Purchase Plan

6

208

—

—

214
Issuance of 31,729 shares of common stock as a result of

  stock options exercised

32

274

—

—

306
Stock-based compensation expense

—

641

—

—

641
Restricted stock awards and restricted stock units- 10,300 shares

   of common stock , net of restricted stock units

   withheld for payment for taxes

10

(8)

—

—

2
Exchange of 1,012 shares of common stock in connection

   with payroll taxes for restricted stock and in connection

   with stock options exercised

(1)

(189)

—

—

(190)
Balance, March 31, 2020

$
15,774

$
273,867

$
254,287

$
(4,789)

$
539,139


								Accumulated
			Additional					Other
	Common		Paid-In		Retained			Comprehensive
	Stock		Capital		Earnings			(Loss)		Total

	(dollars in thousands)

Balance December 31, 2019	$	15,828	$	274,785	$	245,836		$	(1,098)	$	535,351
Net income		—		—		11,228			—		11,228
Other comprehensive loss, net of tax		—		—		—			(3,691)		(3,691)
Common cash dividends declared, $0.06 per share		—		—		(942)			—		(942)
Repurchase and cancellation of 100,932 shares of common stock
as a result of a share repurchase program		(101)		(1,844)		(1,835)			—		(3,780)
Issuance of 5,553 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		6		208		—			—		214
Issuance of 31,729 shares of common stock as a result of
stock options exercised		32		274		—			—		306
Stock-based compensation expense		—		641		—			—		641
Restricted stock awards and restricted stock units- 10,300 shares
of common stock , net of restricted stock units
withheld for payment for taxes		10		(8)		—			—		2
Exchange of 1,012 shares of common stock in connection
with payroll taxes for restricted stock and in connection
with stock options exercised		(1)		(189)		—			—		(190)
Balance, March 31, 2020	$	15,774	$	273,867	$	254,287		$	(4,789)	$	539,139
Net income		—		—		13,739	��		—		13,739
Other comprehensive income, net of tax		—		—		—			3,622		3,622
Common cash dividends declared, $0.06 per share		—		—		(945)			—		(945)
Issuance of 16,413 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		16		462		—			—		478
Issuance of 975 shares of common stock as a result of
stock options exercised		1		9		—			—		10
Stock-based compensation expense		—		423		—			—		423
Exchange of 513 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		—		(446)		—			—		(446)
Balance, June 30, 2020	$	15,791	$	274,315	$	267,081		$	(1,167)	$	556,020
Net income		—		—		17,344			—		17,344
Other comprehensive loss, net of tax		—		—		—			(614)		(614)
Common cash dividends declared, $0.06 per share		—		—		(945)			—		(945)
Issuance of 6,310 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		6		161		—			—		167
Issuance of 1,123 shares of common stock as a result of
stock options exercised		1		23		—			—		24
Stock-based compensation expense		—		472		—			—		472
Exchange of 5,687 shares of common stock in connection
with payroll taxes for restricted stock and in connection
with stock options exercised		(6)		151		—			—		145
Balance, September 30, 2020	$	15,792	$	275,122	$	283,480		$	(1,781)	$	572,613

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive


Stock

Capital

Earnings

(Loss)

Total

(dollars in thousands)

Balance December 31, 2018

$
15,718

$
270,761

$
192,203

$
(5,544)

$
473,138
Net income

—

—

12,918

—

12,918
Other comprehensive income, net of tax

—

—

—

2,344

2,344
Common cash dividends declared, $0.06 per share

—

—

(942)

—

(942)
Issuance of 4,446 shares of common stock as a result of

  stock purchased under the Employee Stock Purchase Plan

4

124

—

—

128
Issuance of 25,238 shares of common stock as a result of

  stock options exercised

25

263

—

—

288
Stock-based compensation expense

—

722

—

—

722
Restricted stock awards and restricted stock units - 12,719

  shares of common stock, net of restricted stock units

  withheld for payment of taxes

13

(50)

—

—

(37)
Exchange of 5,169 shares of common stock in connection

   with payroll taxes for restricted stock vested and in

   connection with stock options exercised

(5)

(147)

—

—

(152)
Balance, March 31, 2019

$
15,755

$
271,673

$
204,179

$
(3,200)

$
488,407

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - continued

Three ~~months ended March 31,~~and Nine Months Ended September 30, 2020 and 2019

2020

2019

(dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES





Net income

$
11,228

$
12,918

Adjustments to reconcile net income to net cash provided by operating activities:





Depreciation

1,338

1,235

Provision for loan/lease losses

8,367

2,134

Stock-based compensation expense

641

722

Deferred compensation expense accrued

913

733

Losses on other real estate owned, net

4

224

Amortization of premiums on securities, net

159

448

Caplet amortization

110

—

Loans originated for sale

(34,459)

(18,034)

Proceeds on sales of loans

34,790

17,735

Gains on sales of residential real estate loans

(652)

(369)

Gains on sales of government guaranteed portions of loans

—

(31)

Loss on debt extinguishment, net

147

—

Gains on sales of premises and equipment

(8)

(47)

Amortization of intangibles

549

532

Accretion of acquisition fair value adjustments, net

(625)

(1,069)

Increase in cash value of bank-owned life insurance

(329)

(540)

Goodwill impairment

500

—

Decrease in other assets

5,917

1,121

Decrease in other liabilities

(21,998)

(9,110)

Net cash provided by operating activities

$
6,592

$
8,602

CASH FLOWS FROM INVESTING ACTIVITIES





Net decrease in federal funds sold

5,105

24,526

Net increase in interest-bearing deposits at financial institutions

(54,122)

(80,962)

Proceeds from sales of other real estate owned

827

202

Activity in securities portfolio:

Purchases

(83,987)

(4,079)

Calls, maturities and redemptions

3,872

4,510

Paydowns

9,182

10,426

Activity in restricted investment securities:





Purchases

(1,874)

(3,110)

Redemptions

3,917

5,895

Net increase in loans/leases originated and held for investment

(15,596)

(65,777)

Purchase of premises and equipment

(798)

(3,970)

Proceeds from sales of premises and equipment

8

117

Net cash (used in) investing activities

$
(133,466)

$
(112,222)

CASH FLOWS FROM FINANCING ACTIVITIES





Net increase in deposit accounts

259,310

217,257

Net increase (decrease)  in short-term borrowings

29,644

(12,888)

Activity in Federal Home Loan Bank advances:





Term advances

45,000

5,000

Calls and maturities

—

(15,000)

Net change in short-term and overnight advances

(109,300)

(130,365)

Activity in other borrowings:





Calls, maturities and scheduled principal payments

—

(1,937)

Prepayments

—

(21,313)

Paydown of revolving line of credit

—

(9,000)

Proceeds from subordinated notes

—

63,393

Payment of cash dividends on common stock

(947)

(939)

Proceeds from issuance of common stock, net

520

416

Repurchase and cancellation of shares

(3,780)

—

Net cash provided by financing activities

$
220,447

$
94,624

Net increase (decrease) in cash and due from banks

93,573

(8,996)

Cash and due from banks, beginning

76,254

85,523

Cash and due from banks, ending

$
169,827

$
76,527


							Accumulated
			Additional				Other
	Common		Paid-In		Retained		Comprehensive
	Stock		Capital		Earnings		(Loss)		Total

	(dollars in thousands)

Balance December 31, 2018	$	15,718	$	270,761	$	192,203	$	(5,544)	$	473,138
Net income		—		—		12,918		—		12,918
Other comprehensive income, net of tax		—		—		—		2,344		2,344
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)
Issuance of 4,446 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		4		124		—		—		128
Issuance of 25,238 shares of common stock as a result of
stock options exercised		25		263		—		—		288
Stock-based compensation expense		—		722		—		—		722
Restricted stock awards and restricted stock units - 12,719
shares of common stock, net of restricted stock units
withheld for payment of taxes		13		(50)		—		—		(37)
Exchange of 5,169 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		(5)		(147)		—		—		(152)
Balance, March 31, 2019	$	15,755	$	271,673	$	204,179	$	(3,200)	$	488,407
Net income		—		—		13,504		—		13,504
Other comprehensive income, net of tax		—		—		—		2,242		2,242
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)
Issuance of 11,346 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		11		323		—		—		334
Issuance of 2,414 shares of common stock as a result of
stock options exercised		3		41		—		—		44
Stock-based compensation expense		—		719		—		—		719
Restricted stock awards and restricted stock units- 4,769
shares of common stock, net of restricted stock units
withheld for payment of taxes		5		(5)		—		—		—
Exchange of 1,032 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		(1)		(7)		—		—		(8)
Balance, June 30, 2019	$	15,773	$	272,744	$	216,741	$	(958)	$	504,300
Net income		—		—		15,095		—		15,095
Other comprehensive income, net of tax		—		—		—		544		544
Common cash dividends declared, $0.06 per share		—		—		(944)		—		(944)
Issuance of 5,674 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		6		187		—		—		193
Issuance of 12,438 shares of common stock as a result of
stock options exercised		12		144		—		—		156
Stock-based compensation expense		—		428		—		—		428
Exchange of 589 shares of common stock in connection
with payroll taxes for restricted stock and in connection
with stock options exercised		(1)		(28)		—		—		(29)
Balance, September 30, 2019	$	15,790	$	273,475	$	230,892	$	(414)	$	519,743

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 2020 and 2019


	2020		2019

	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	42,311	$	41,517
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		4,006		3,889
Provision for loan/lease losses		48,624		6,087
Stock-based compensation expense		1,536		1,869
Deferred compensation expense accrued		2,660		2,087
Losses (gains) on other real estate owned, net		(298)		3,205
Amortization of premiums on securities, net		728		1,339
Caplet amortization		383		—
Securities (gains) losses, net		(1,867)		56
Loans originated for sale		(172,282)		(104,824)
Proceeds on sales of loans		170,362		97,916
Gains on sales of residential real estate loans		(3,218)		(1,748)
Gains on sales of government guaranteed portions of loans		—		(589)
Loss on liability extinguishment, net		2,450		148
Gains on sales of premises and equipment		(13)		(67)
Amortization of intangibles		1,628		1,706
Accretion of acquisition fair value adjustments, net		(2,194)		(3,413)
Increase in cash value of bank-owned life insurance		(1,443)		(1,441)
Loss on sale of subsidiary		305		—
Goodwill impairment		500		—
Increase in other assets		(8,351)		(1,953)
Decrease in other liabilities		43,489		336
Net cash provided by operating activities	$	129,316	$	46,120

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold		9,270		17,098
Net increase in interest-bearing deposits at financial institutions		(154,247)		(57,180)
Proceeds from sales of other real estate owned		4,353		840
Activity in securities portfolio:
Purchases		(255,500)		(28,119)
Calls, maturities and redemptions		38,461		9,074
Paydowns		33,870		36,649
Sales		28,579		33,128
Activity in restricted investment securities:
Purchases		(4,600)		(5,682)
Redemptions		8,843		5,006
Proceeds from the liquidation of bank-owned life insurance		10,999		—
Net increase in loans/leases originated and held for investment		(555,315)		(237,286)
Purchase of premises and equipment		(2,250)		(8,755)
Proceeds from sales of premises and equipment		94		146
Net cash transfered in sale of subsidiary		(349)		—
Net cash (used in) investing activities	$	(837,792)	$	(235,081)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		731,374		276,960
Net increase (decrease) in short-term borrowings		17,007		(9,091)
Activity in Federal Home Loan Bank advances:
Term advances		125,000		25,000
Calls and maturities		(81,600)		(35,000)
Net change in short-term and overnight advances		(109,300)		(15,965)
Prepayments		(55,274)		(30,228)
Activity in other borrowings:
Calls, maturities and scheduled principal payments		—		(11,937)
Prepayments		—		(46,313)
Paydown of revolving line of credit		—		(9,000)
Prepayments on brokered and public time deposits		29,359		—
Proceeds from subordinated notes		50,000		63,393
Payment of cash dividends on common stock		(2,831)		(2,822)
Proceeds from issuance of common stock, net		1,199		1,143
Repurchase and cancellation of shares		(3,780)		—
Net cash provided by financing activities	$	701,154	$	206,140

Net increase (decrease) in cash and due from banks		(7,322)		17,179

Cash and due from banks, beginning		76,254		85,523
Cash and due from banks, ending	$	68,932	$	102,702

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

~~Three months ended March 31,~~Nine Months Ended September 30, 2020 and 2019

Supplemental disclosure of cash flow information, cash payments (receipts) for:





Interest

$
11,534

$
14,146

Income/franchise taxes

(2,134)

(590)



Supplemental schedule of noncash investing activities:



Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net

(3,691)

2,344

Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised

(190)

(152)

Transfers of loans to other real estate owned

—

158

Increase (decrease)  in the fair value of back-to-back interest rate swap assets and liabilities

110,545

13,882

Dividends payable

942

942



Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest	$	26,920	$	45,826
Income/franchise taxes		16,713		(769)

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net		(683)		5,130
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised		(491)		(189)
Transfers of loans to other real estate owned		51		1,049
Due to broker for purchases of securities		8,550		—
Increase in the fair value of back-to-back interest rate swap assets and liabilities		151,398		80,760
Dividends payable		945		944
Consideration received on sale of the Bates Companies		1,328		—






Supplemental disclosure of cash flow information for sale of the Bates Companies

Assets Sold:
Cash and due from banks	$	349	$	—
Premises and equipment, net		19		—
Other assets		2,211		—
Total assets sold	$	2,579	$	—

Liabilities Sold:
Other liabilities	$	946	$	—
Total liabilities sold	$	946	$	—

Net assets sold	$	1,633	$	—


Forgiveness of earn-out consideration		880		—
Note receivable consideration		448		—
Loss on sale of the Bates Companies	$	(305)	$	—

See Notes to Consolidated Financial Statements (Unaudited)

911

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2020

~~March 31, 2020~~

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2019, included in the Company's Annual Report on Form ~~10‑K~~10-K filed with the SEC on March 13, 2020. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form ~~10‑Q~~10-Q and Rule ~~10‑01~~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 ~~March 31,~~September 30, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020, or for any other period.

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



Allowance: Allowance for estimated losses on loans/leases	~~Guaranty: Guaranty Bancshares, Ltd.~~
AOCI: Accumulated other comprehensive income (loss)	~~Guaranty Bank: Guaranty Bank and Trust Company~~
AFS: Available for sale	HTM: Held to maturity
ASC: Accounting Standards Codification	~~IB&T: Illinois Bank & Trust~~LRP: Loan Relief Program
ASU: Accounting Standards Update	m2: m2 Lease Funds, LLC
Bates Companies: Bates Financial Advisors, Inc., Bates	MSELF: Main Street Expanded Loan Facility
Financial Services, Inc., Bates Securities, Inc. and	MSNLF: Main Street New Loan Facility
Bates Financial Group, Inc.	NIM: Net interest margin
BOLI: Bank-owned life insurance	NPA: Nonperforming asset
Caps: Interest rate cap derivatives	NPL: Nonperforming loan
CARES Act: Coronavirus Aid, Relief and Economy	OREO: Other real estate owned
Security Act	OTTI: Other-than-temporary impairment
CDI: Core deposit intangible	PCI: Purchased credit impaired
CECL: Current Expected Credit Losses	PPP: Paycheck Protection Program
Community National: Community National Bancorporation	Provision: Provision for loan/lease losses
COVID-19: Coronavirus Disease 2019	QCBT: Quad City Bank & Trust Company
CRBT: Cedar Rapids Bank & Trust Company	RB&T: Rockford Bank & Trust Company
CRE: Commercial real estate	ROAA: Return on Average Assets
CSB: Community State Bank	SBA: U.S. Small Business Administration
C&I: Commercial and industrial	SEC: Securities and Exchange Commission
EPS: Earnings per share	~~SFC Bank:~~SFCB: Springfield First Community Bank
Exchange Act: Securities Exchange Act of 1934, as	Springfield Bancshares: Springfield Bancshares, Inc.
amended	TA: Tangible assets
FASB: Financial Accounting Standards Board	TCE: Tangible common equity
FDIC: Federal Deposit Insurance Corporation	TDRs: Troubled debt restructurings
FHLB: Federal Home Loan Bank	TEY: Tax equivalent yield
FRB: Federal Reserve Bank of Chicago	The Company: QCR Holdings, Inc.
GAAP: Generally Accepted Accounting Principles	USDA: U.S. Department of Agriculture

1012

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of ~~four~~4 commercial banks: QCBT, CRBT, CSB and ~~SFC Bank.~~SFCB. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. ~~The Company also engages in wealth management services through its banking subsidiaries and its subsidiaries, the Bates Companies.~~ All material intercompany transactions and balances have been eliminated in consolidation.

On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T. The financial results of RB&T prior to its sale are included in this report. See Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information about the sale.

On August 12, 2020, the Company sold of all the issued and outstanding capital stock of the Bates Companies, wholly-owned subsidiaries of the Company. See Note 10 to the Consolidated Financial Statements for additional information about the sale.

Recent accounting developments: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. Under the standard, assets measured at amortized cost (including loans, leases and AFS securities) will be presented at the net amount expected to be collected. Rather than the “incurred” model that is currently being utilized, the standard will require the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life. For public companies, ASU 2016-13 isbecame effective for fiscal years beginning after December 15, 2019, including items periods within those fiscal years. On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law. The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13. Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate will be required to comply with ASU 2016-13, beginning on the date of ~~the~~CARES Act’s enactment ~~March 27, 2020~~and continuing until the earlier ~~of the two following dates:~~of: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020.The Company has elected to defer its implementation of ASU 2016-13 as allowed by the CARES Act. The Company has developed a CECL allowance model which calculates allowances over the life of ~~the~~a loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions. Those assumptions are based upon the existing probability of default and loss given default framework. The Company will utilize economic and other forecasts over a four quarter reasonable and supportable forecast period and then fully revert back to average historical losses. The Company’s credit administration team will periodically refine the model as needed and is running parallel calculations. The Company anticipates increases in the allowance for credit losses on longer dated portfolios and decreases in the shorter dated portfolios. The Company estimates ~~a $7 million and $10 million~~an increase in the allowance for estimated losses on loans/leases in the range of $3 million to $8 million upon adoption of CECL at both January 1, 2020 and ~~March 31, 2020, respectively.~~September 30, 2020. The Company ~~is in~~continues to work on the process of finalizing the review of the most recent model run and of finalizing certain assumptions, including qualitative adjustments and economic ~~forecasts.~~ forecasts, which have resulted in adjustments to previous estimates.

Risks and Uncertainties:On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, ~~and~~ quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic.The Company currently expects that the COVID-19 pandemic ~~and the specific developments referred to above~~ will have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, ~~entertainment~~arts/entertainment/recreation and retail industries will continue to endure significant economic distress, and ~~could adversely affect their~~some borrowers’ ability and willingness to repay existing indebtedness ~~and could~~have been adversely ~~impact~~impacted. Therefore, the value of certain collateral pledged to the ~~banks.~~banks have been adversely impacted. These developments, together with economic conditions generally, have impacted and are ~~also~~ expected to continue to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral

Table of Contents

securing the Company’s loans. As a result,

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

the Company anticipates that its ~~financial condition, capital levels,~~ asset quality and results of operations ~~will be~~have been adversely affected, as described in further detail onin this report.

~~Due to~~In light of the economic impact that COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions ~~have~~ led to the occurrence of a triggering event ~~and therefore~~during the first quarter of 2020. Therefore an interim impairment test over goodwill was performed as of March 31, 2020. When such an assessment is performed, ~~should~~if the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Based upon the results of the interim goodwill assessment during the first quarter of 2020, the Company concluded that an impairment did not exist on the bank reporting units as of the time of the assessment. There was no occurrence of a triggering event during the second or third quarter of 2020; therefore no impairment test over goodwill was required.

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair


Cost

Gains

(Losses)

Value

(dollars in thousands)
March 31, 2020:








Securities HTM:








Municipal securities

$
430,233

$
21,886

$
(2,768)

$
449,351
Other securities

1,050

—

—

1,050

$
431,283

$
21,886

$
(2,768)

$
450,401








Securities AFS:








U.S. govt. sponsored agency securities

$
18,998

$
502

$
(43)

$
19,457
Residential mortgage-backed and related securities

116,768

6,149

(64)

122,853
Municipal securities

61,432

2,004

(5)

63,431
Asset-backed securities

31,076

—

(2,577)

28,499
Other securities

18,800

252

(4)

19,048

$
247,074

$
8,907

$
(2,693)

$
253,288


											Gross		Gross
									Amortized		Unrealized		Unrealized		Fair
									Cost		Gains		(Losses)		Value

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2019:
									(dollars in thousands)
September 30, 2020:
Securities HTM:
Municipal securities	$	399,596	$	26,042	$	(143)	$	425,495	$	433,842	$	26,292	$	(984)	$	459,150
Other securities		1,050		—		—		1,050		1,050		—		(1)		1,049
	$	400,646	$	26,042	$	(143)	$	426,545

									$	434,892	$	26,292	$	(985)	$	460,199

Securities AFS:
U.S. govt. sponsored agency securities	$	19,872	$	283	$	(77)	$	20,078	$	17,791	$	667	$	(21)	$	18,437
Residential mortgage-backed and related securities		118,724		2,045		(182)		120,587		128,281		6,158		(292)		134,147
Municipal securities		46,659		1,602		(4)		48,257		132,545		3,497		(809)		135,233
Asset-backed securities		16,958		—		(71)		16,887		39,696		1,108		(139)		40,665
Other securities		4,749		138		(1)		4,886		18,550		164		—		18,714
	$	206,962	$	4,068	$	(335)	$	210,695
									$	336,863	$	11,594	$	(1,261)	$	347,196


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value

	(dollars in thousands)
December 31, 2019:
Securities HTM:
Municipal securities	$	399,596	$	26,042	$	(143)	$	425,495
Other securities		1,050		—		—		1,050
	$	400,646	$	26,042	$	(143)	$	426,545

Securities AFS:
U.S. govt. sponsored agency securities	$	19,872	$	283	$	(77)	$	20,078
Residential mortgage-backed and related securities		118,724		2,045		(182)		120,587
Municipal securities		46,659		1,602		(4)		48,257
Asset-backed securities		16,958		—		(71)		16,887
Other securities		4,749		138		(1)		4,886
	$	206,962	$	4,068	$	(335)	$	210,695

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.

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.

1214

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

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 ~~March 31,~~September 30, 2020 and December 31, 2019, are summarized as follows:

Less than 12 Months

12 Months or More

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


Value

Losses

Value

Losses

Value

Losses

(dollars in thousands)
March 31, 2020:












Securities HTM:












Municipal securities

$
52,609

$
(2,762)

$
531

$
(6)

$
53,140

$
(2,768)
Other securities

1,050

—

—

—

1,050

—

$
53,659

$
(2,762)

$
531

$
(6)

$
54,190

$
(2,768)












Securities AFS:












U.S. govt. sponsored agency securities

$
1,449

$
(2)

$
1,920

$
(41)

$
3,369

$
(43)
Residential mortgage-backed and related securities

2,509

(14)

1,875

(50)

4,384

(64)
Municipal securities

386

(1)

336

(4)

722

(5)
Asset-backed securities

23,752

(2,577)

—

—

23,752

(2,577)
Other securities

246

(4)

—

—

246

(4)

$
28,342

$
(2,598)

$
4,131

$
(95)

$
32,473

$
(2,693)


													Less than 12 Months				12 Months or More				Total
															Gross				Gross				Gross
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
													Value		Losses		Value		Losses		Value		Losses

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
December 31, 2019:
													(dollars in thousands)
September 30, 2020:
Securities HTM:
Municipal securities	$	509	$	(1)	$	10,047	$	(142)	$	10,556	$	(143)	$	33,252	$	(984)	$	—	$	—	$	33,252	$	(984)
Other securities		550		—		—		—		550		—		1,049		(1)		—		—		1,049		(1)
	$	1,059	$	(1)	$	10,047	$	(142)	$	11,106	$	(143)
													$	34,301	$	(985)	$	—	$	—	$	34,301	$	(985)

Securities AFS:
U.S. govt. sponsored agency securities	$	1,431	$	(21)	$	2,117	$	(56)	$	3,548	$	(77)	$	3,243	$	(21)	$	—	$	—	$	3,243	$	(21)
Residential mortgage-backed and related securities		2,263		(17)		17,862		(165)		20,125		(182)		31,124		(292)		—		—		31,124		(292)
Municipal securities		—		—		724		(4)		724		(4)		27,277		(809)		—		—		27,277		(809)
Asset-backed securities		16,886		(71)		—		—		16,886		(71)		16,796		(139)		—		—		16,796		(139)
Other securities		249		(1)		—		—		249		(1)		—		—		—		—		—		—
	$	20,829	$	(110)	$	20,703	$	(225)	$	41,532	$	(335)
													$	78,440	$	(1,261)	$	—	$	—	$	78,440	$	(1,261)


	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

	(dollars in thousands)
December 31, 2019:
Securities HTM:
Municipal securities	$	509	$	(1)	$	10,047	$	(142)	$	10,556	$	(143)
Other securities		550		—		—		—		550		—
	$	1,059	$	(1)	$	10,047	$	(142)	$	11,106	$	(143)
Securities AFS:
U.S. govt. sponsored agency securities	$	1,431	$	(21)	$	2,117	$	(56)	$	3,548	$	(77)
Residential mortgage-backed and related securities		2,263		(17)		17,862		(165)		20,125		(182)
Municipal securities		—		—		724		(4)		724		(4)
Asset-backed securities		16,886		(71)		—		—		16,886		(71)
Other securities		249		(1)		—		—		249		(1)
	$	20,829	$	(110)	$	20,703	$	(225)	$	41,532	$	(335)

At ~~March 31,~~September 30, 2020, the investment portfolio included ~~581~~647 securities. Of this number, 5373 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~0.8%~~0.3% of the total amortized cost of the portfolio. Of these 5373 securities, ~~five~~there were 0 securities that had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At ~~March 31,~~September 30, 2020, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

The Company did not recognize OTTI on any investment securities for the three or nine months ended ~~March 31,~~September 30, 2020 and 2019.

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

~~There were no~~All sales of securities for the three and nine months ended ~~March 31,~~September 30, 2020 and ~~March 31, 2019.~~2019 were securities identified as AFS.


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

		(dollars in thousands)

Proceeds from sales of securities	$	22,252	$	23,364	$	28,579	$	28,025
Gross gains from sales of securities		1,802		143		1,936		150
Gross losses from sales of securities		—		(146)		(69)		(206)

The amortized cost and fair value of securities as of ~~March 31,~~September 30, 2020 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and ~~asset-backed~~related securities and ~~related~~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

$
3,016

$
3,023
Due after one year through five years

34,967

35,545
Due after five years

393,300

411,833

$
431,283

$
450,401
Securities AFS:




Due in one year or less

$
1,370

$
1,387
Due after one year through five years

15,804

16,131
Due after five years

82,056

84,418

99,230

101,936
Residential mortgage-backed and related securities

116,768

122,853
Asset-backed securities

31,076

28,499

$
247,074

$
253,288


	Amortized Cost		Fair Value

	(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,509	$	3,525
Due after one year through five years		32,354		32,909
Due after five years		399,029		423,765
	$	434,892	$	460,199
Securities AFS:
Due in one year or less	$	7,795	$	7,810
Due after one year through five years		14,010		14,423
Due after five years		147,081		150,151
		168,886		172,384
Residential mortgage-backed and related securities		128,281		134,147
Asset-backed securities		39,696		40,665
	$	336,863	$	347,196

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

Amortized Cost

Fair Value

(dollars in thousands)
Securities HTM:




Municipal securities

$
199,843

$
201,706




Securities AFS:




Municipal securities

47,044

48,483
Other securities

18,550

18,802

$
65,594

$
67,285


	Amortized Cost		Fair Value

	(dollars in thousands)
Securities HTM:
Municipal securities	$	204	$	203

Securities AFS:
Municipal securities		118,030		120,371
Other securities		4,500		4,664
	$	122,530	$	125,035

As of ~~March 31,~~September 30, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 91114 issuers with fair values totaling ~~$74.4~~$110.3 million and revenue bonds issued by ~~162~~182 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$438.4~~$484.1 million. The Company also held investments in general obligation bonds in 21 states, including ~~six~~9 states in which the aggregate fair value exceeded $5.0 ~~million. The Company held investments~~million, and in revenue bonds in 1824 states, including ~~seven~~13 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 93 issuers with fair values totaling $77.2 million and revenue bonds issued by 154 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $396.6 million. The Company also held investments in general obligation bonds in 22 states, including ~~six~~6states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 17 states, including 9 states in which the aggregate fair value exceeded $5.0 million. ~~The Company held investments in revenue bonds in 17 states, including nine states in which the aggregate fair value exceeded $5.0 million.~~

Table of Contents

Both general obligation and revenue bonds are diversified across many issuers. As of ~~March 31,~~September 30, 2020 ~~and~~the Company did not hold any revenue bonds of one single issuer of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. As of December 31, 2019, the Company held revenue bonds of one single issuer, located in Ohio, of which the aggregate book or market value

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investment and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by ~~each of~~ the ~~four~~4 charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. ~~Each~~The investments of each charter isare monitored individually, and as of ~~March 31,~~September 30, 2020, all were ~~well~~ within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of ~~March 31,~~September 30, 2020, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

1517

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of ~~March 31,~~September 30, 2020 and December 31, 2019 is presented as follows:

2020

2019

(dollars in thousands)

C&I loans*

$
1,484,979

$
1,507,825
CRE loans




Owner-occupied CRE

454,955

443,989
Commercial construction, land development, and other land

410,383

378,797
Other non owner-occupied CRE

917,748

913,610

1,783,086

1,736,396

Direct financing leases **

83,324

87,869
Residential real estate loans ***

237,742

239,904
Installment and other consumer loans

106,728

109,352

3,695,859

3,681,346
Plus deferred loan/lease origination costs, net of fees

8,809

8,859

3,704,668

3,690,205
Less allowance

(42,233)

(36,001)

$
3,662,435

$
3,654,204
** Direct financing leases:




Net minimum lease payments to be received

$
92,139

$
97,025
Estimated unguaranteed residual values of leased assets

616

547
Unearned lease/residual income

(9,431)

(9,703)

83,324

87,869
Plus deferred lease origination costs, net of fees

1,649

1,892

84,973

89,761
Less allowance

(1,303)

(1,464)

$
83,670

$
88,297


	2020		2019

	(dollars in thousands)

C&I loans*	$	1,823,049	$	1,507,825
CRE loans
Owner-occupied CRE		486,254		443,989
Commercial construction, land development, and other land		503,086		378,797
Other non owner-occupied CRE		1,010,375		913,610
		1,999,715		1,736,396

Direct financing leases **		73,011		87,869
Residential real estate loans ***		245,032		239,904
Installment and other consumer loans		102,471		109,352
		4,243,278		3,681,346
Plus deferred loan/lease origination costs, net of fees		4,699		8,859
		4,247,977		3,690,205
Less allowance		(79,582)		(36,001)
	$	4,168,395	$	3,654,204
** Direct financing leases:
Net minimum lease payments to be received	$	80,560	$	97,025
Estimated unguaranteed residual values of leased assets		616		547
Unearned lease/residual income		(8,165)		(9,703)
		73,011		87,869
Plus deferred lease origination costs, net of fees		1,270		1,892
		74,281		89,761
Less allowance		(1,902)		(1,464)
	$	72,379	$	88,297

* Includes equipment financing agreements outstanding at m2, totaling ~~$145.3~~$162.1 million and $142.0 million as of ~~March 31,~~September 30, 2020 and December 31, 2019, 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 ~~large~~ majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.

*** Includes residential real estate loans held for sale totaling ~~$4.0~~$8.8 million and $3.7 million as of ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

Changes in accretable yield for acquired loans were as follows:

Three months ended March 31, 2020

PCI

Performing



Loans

Loans

Total

Balance at the beginning of the period

$
(57)

$
(6,378)

$
(6,435)

Reclassification of nonaccretable discount to accretable

(30)

—

(30)

Accretion recognized

28

653

681

Balance at the end of the period

$
(59)

$
(5,725)

$
(5,784)


							Three months ended September 30, 2020						Nine months ended September 30, 2020
							PCI		Performing				PCI		Performing
							Loans		Loans		Total		Loans		Loans		Total

	Three months ended March 31, 2019
	PCI		Performing
	Loans		Loans		Total


							(dollars in thousands)

Balance at the beginning of the period	$	(667)	$	(9,656)	$	(10,323)	$	(58)	$	(4,935)	$	(4,993)	$	(57)	$	(6,378)	$	(6,435)
Reclassification of nonaccretable discount to accretable								—		—		—		(30)		—		(30)
Accretion recognized		348		826		1,174		1		941		942		30		2,384		2,414
Balance at the end of the period	$	(319)	$	(8,830)	$	(9,149)	$	(57)	$	(3,994)	$	(4,051)	$	(57)	$	(3,994)	$	(4,051)


	Three months ended September 30, 2019						Nine months ended September 30, 2019
	PCI		Performing				PCI		Performing
	Loans		Loans		Total		Loans		Loans		Total

	(dollars in thousands)

Balance at the beginning of the period	$	(151)	$	(8,489)	$	(8,640)	$	(667)	$	(10,127)	$	(10,794)
Reclassification of nonaccretable discount to accretable		—		—		—		(159)		—		(159)
Accretion recognized		94		1,344		1,438		769		2,982		3,751
Balance at the end of the period	$	(57)	$	(7,145)	$	(7,202)	$	(57)	$	(7,145)	$	(7,202)

The aging of the loan/lease portfolio by classes of loans/leases as of ~~March 31,~~September 30, 2020 and December 31, 2019 is presented as follows:

As of March 31, 2020

Accruing Past

30-59 Days

60-89 Days

Due 90 Days or

Nonaccrual

Classes of Loans/Leases

Current

Past Due

Past Due

More

Loans/Leases

Total

(dollars in thousands)

C&I

$
1,479,395

$
3,445

$
612

$
—

$
1,527

$
1,484,979

CRE













Owner-Occupied CRE

454,670

—

186

—

99

454,955

Commercial Construction, Land Development, and Other Land

408,392

767

—

1,224

—

410,383

Other Non Owner-Occupied CRE

905,607

4,577

—

—

7,564

917,748

Direct Financing Leases

81,459

487

213

—

1,165

83,324

Residential Real Estate

231,288

5,047

667

82

658

237,742

Installment and Other Consumer

105,677

319

4

113

615

106,728

$
3,666,488

$
14,642

$
1,682

$
1,419

$
11,628

$
3,695,859













As a percentage of total loan/lease portfolio

99.20
%

0.40
%

0.05
%

0.04
%

0.31
%

100.00
%


	As of December 31, 2019
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual

																			As of September 30, 2020
																												Accruing Past
																						30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More		��	Loans/Leases			Total			Current			Past Due			Past Due			More			Loans/Leases			Total
	(dollars in thousands)

																			(dollars in thousands)

C&I	$	1,499,891		$	6,126		$	572		$	—		$	1,236		$	1,507,825		$	1,816,454		$	1,275		$	339		$	—		$	4,981		$	1,823,049
CRE
Owner-Occupied CRE		443,707			177			71			—			34			443,989			485,950			—			—			—			304			486,254
Commercial Construction, Land Development, and Other Land		375,940			2,857			—			—			—			378,797			503,086			—			—			—			—			503,086
Other Non Owner-Occupied CRE		909,684			73			—			—			3,853			913,610			999,369			378			—			—			10,628			1,010,375
Direct Financing Leases		85,636			463			253			—			1,517			87,869			71,692			619			51			—			649			73,011
Residential Real Estate		235,845			2,939			414			—			706			239,904			243,646			—			512			60			814			245,032
Installment and Other Consumer		108,750			3			10			33			556			109,352			102,107			34			83			26			221			102,471
	$	3,659,453		$	12,638		$	1,320		$	33		$	7,902		$	3,681,346

																			$	4,222,304		$	2,306		$	985		$	86		$	17,597		$	4,243,278

As a percentage of total loan/lease portfolio		99.41	%		0.34	%		0.04	%		0.00	%		0.21	%		100.00	%		99.52	%		0.05	%		0.02	%		0.00	%		0.41	%		100.00	%


	As of December 31, 2019
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total

	(dollars in thousands)

C&I	$	1,499,891		$	6,126		$	572		$	—		$	1,236		$	1,507,825
CRE
Owner-Occupied CRE		443,707			177			71			—			34			443,989
Commercial Construction, Land Development, and Other Land		375,940			2,857			—			—			—			378,797
Other Non Owner-Occupied CRE		909,684			73			—			—			3,853			913,610
Direct Financing Leases		85,636			463			253			—			1,517			87,869
Residential Real Estate		235,845			2,939			414			—			706			239,904
Installment and Other Consumer		108,750			3			10			33			556			109,352
	$	3,659,453		$	12,638		$	1,320		$	33		$	7,902		$	3,681,346

As a percentage of total loan/lease portfolio		99.41	%		0.34	%		0.04	%		0.00	%		0.21	%		100.00	%

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

NPLs by classes of loans/leases as of ~~March 31,~~September 30, 2020 and December 31, 2019 are presented as follows:

As of March 31, 2020

Accruing Past

Due 90 Days or

Nonaccrual

Percentage of

Classes of Loans/Leases

More

Loans/Leases **

Accruing TDRs

Total NPLs

Total NPLs

(dollars in thousands)

C&I

$
—

$
1,527

$
359

$
1,886

13.88
%
CRE





Owner-Occupied CRE

—

99

—

99

0.73
%
Commercial Construction, Land Development, and Other Land

1,224

—

—

1,224

9.01
%
Other Non Owner-Occupied CRE

—

7,564

—

7,564

55.64
%
Direct Financing Leases

—

1,165

186

1,351

9.94
%
Residential Real Estate

82

658

—

740

5.44
%
Installment and Other Consumer

113

615

—

728

5.36
%

$
1,419

$
11,628

$
545

$
13,592

100.00
%

				��
	As of September 30, 2020
	Accruing Past
	Due 90 Days or		Nonaccrual						Percentage of
Classes of Loans/Leases	More		Loans/Leases **		Accruing TDRs		Total NPLs		Total NPLs

	(dollars in thousands)

C&I	$	—	$	4,981	$	828	$	5,809	30.99	%
CRE
Owner-Occupied CRE		—		304		—		304	1.62	%
Commercial Construction, Land Development, and Other Land		—		—		—		—	-	%
Other Non Owner-Occupied CRE		—		10,628		—		10,628	56.70	%
Direct Financing Leases		—		649		233		882	4.71	%
Residential Real Estate		60		814		—		874	4.66	%
Installment and Other Consumer		26		221		—		247	1.32	%
	$	86	$	17,597	$	1,061	$	18,744	100.00	%

** Nonaccrual loans/leases included ~~$298~~$204 thousand of TDRs, including ~~$50~~$48 thousand in commercial and industrial loans, ~~$163 thousand~~$50 in ~~direct financing leases, $31 thousand in residential~~commercial real estate loans, and ~~$54~~$106 thousand in installment loans.


	As of December 31, 2019
	Accruing Past
	Due 90 Days or		Nonaccrual						Percentage of

											As of December 31, 2019
											Accruing Past
											Due 90 Days or		Nonaccrual						Percentage of
Classes of Loans/Leases	More		Loans/Leases **		Accruing TDRs		Total NPLs		Total NPLs		More		Loans/Leases **		Accruing TDRs		Total NPLs		Total NPLs
		(dollars in thousands)

												(dollars in thousands)

C&I	$	—	$	1,236	$	646	$	1,882	21.12	%	$	—	$	1,236	$	646	$	1,882	21.12	%
CRE
Owner-Occupied CRE		—		34		—		34	0.38	%		—		34		—		34	0.38	%
Commercial Construction, Land Development, and Other Land		—		—		—		—	-	%		—		—		—		—	-	%
Other Non Owner-Occupied CRE		—		3,853		—		3,853	43.22	%		—		3,853		—		3,853	43.22	%
Direct Financing Leases		—		1,517		333		1,850	20.75	%		—		1,517		333		1,850	20.75	%
Residential Real Estate		—		706		—		706	7.92	%		—		706		—		706	7.92	%
Installment and Other Consumer		33		556		—		589	6.61	%		33		556		—		589	6.61	%
	$	33	$	7,902	$	979	$	8,914	100.00	%
											$	33	$	7,902	$	979	$	8,914	100.00	%

** Nonaccrual loans/leases included $747 thousand of TDRs, including $98 thousand in C&I loans, $269 thousand in CRE loans, $294 thousand in direct financing leases, $31 thousand in residential real estate loans, and $55 thousand in installment loans.

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

Changes in the allowance by portfolio segment for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively, are presented as follows:


													Three Months Ended September 30, 2020
																	Direct Financing		Residential Real		Installment and
													C&I		CRE		Leases		Estate		Other Consumer		Total

	Three Months Ended March 31, 2020
					Direct Financing		Residential Real		Installment and
	C&I		CRE		Leases		Estate		Other Consumer		Total
	(dollars in thousands)

													(dollars in thousands)

Balance, beginning	$	16,072	$	15,379	$	1,464	$	1,948	$	1,138	$	36,001	$	25,748	$	29,123	$	1,639	$	3,010	$	1,307	$	60,827
Provisions (credits) charged to expense		3,697		3,816		394		336		124		8,367
Provisions charged to expense														9,008		10,428		608		253		45		20,342
Loans/leases charged off		(1,639)		—		(600)		—		(96)		(2,335)		(1,079)		(362)		(358)		—		(20)		(1,819)
Recoveries on loans/leases previously charged off		21		74		45		29		31		200		150		64		13		—		5		232
Balance, ending	$	18,151	$	19,269	$	1,303	$	2,313	$	1,197	$	42,233	$	33,827	$	39,253	$	1,902	$	3,263	$	1,337	$	79,582


													Three Months Ended September 30, 2019
																	Direct Financing		Residential Real		Installment and
													C&I		CRE		Leases		Estate		Other Consumer		Total

	Three Months Ended March 31, 2019
					Direct Financing		Residential Real		Installment and
	C&I		CRE		Leases		Estate		Other Consumer		Total
	(dollars in thousands)

													(dollars in thousands)

Balance, beginning	$	16,420	$	17,719	$	1,792	$	2,557	$	1,359	$	39,847	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104
Provisions (credits) charged to expense		1,007		534		445		(18)		166		2,134
Reclassification of allowance related to held for sale assets														(2,814)		(2,392)		—		(628)		(288)		(6,122)
Provisions (credits) charged to expense*														998		220		80		241		45		1,584
Loans/leases charged off		(334)		—		(652)		—		(74)		(1,060)		(349)		—		(351)		(37)		(4)		(741)
Recoveries on loans/leases previously charged off		166		50		21		—		6		243		68		100		114		—		9		291
Balance, ending	$	17,259	$	18,303	$	1,606	$	2,539	$	1,457	$	41,164	$	16,151	$	15,291	$	1,302	$	2,158	$	1,214	$	36,116


	Nine Months Ended September 30, 2020
					Direct Financing		Residential Real		Installment and
	C&I		CRE		Leases		Estate		Other Consumer		Total

	(dollars in thousands)

Balance, beginning	$	16,072	$	15,379	$	1,464	$	1,948	$	1,138	$	36,001
Provisions charged to expense		20,564		24,609		1,890		1,286		275		48,624
Loans/leases charged off		(3,058)		(873)		(1,554)		—		(119)		(5,604)
Recoveries on loans/leases previously charged off		249		138		102		29		43		561
Balance, ending	$	33,827	$	39,253	$	1,902	$	3,263	$	1,337	$	79,582



	Nine Months Ended September 30, 2019
					Direct Financing		Residential Real		Installment and
	C&I		CRE		Leases		Estate		Other Consumer		Total

	(dollars in thousands)

Balance, beginning	$	16,420	$	17,719	$	1,792	$	2,557	$	1,359	$	39,847
Reclassification of allowance related to held for sale assets		(2,814)		(2,392)		—		(628)		(288)		(6,122)
Provisions (credits) charged to expense*		3,120		1,168		856		309		206		5,659
Loans/leases charged off		(876)		(1,369)		(1,501)		(109)		(99)		(3,953)
Recoveries on loans/leases previously charged off		300		164		155		31		36		685
Balance, ending	$	16,151	$	15,291	$	1,302	$	2,158	$	1,214	$	36,116

*Excludes provision related to loans included in assets held for sale of $428 thousand for the three and nine months ended September 30, 2019.

Table of Contents

The allowance by impairment evaluation and by portfolio segment as of ~~March 31,~~September 30, 2020 and December 31, 2019 is presented as follows:


																			As of September 30, 2020
																									Direct Financing			Residential Real			Installment and
																			C&I			CRE			Leases			Estate			Other Consumer			Total

	As of March 31, 2020
							Direct Financing			Residential Real			Installment and
	C&I			CRE			Leases			Estate			Other Consumer			Total
	(dollars in thousands)

																			(dollars in thousands)
																													��
Allowance for impaired loans/leases	$	86		$	1,228		$	20		$	15		$	78		$	1,427		$	—		$	3,210		$	—		$	21		$	75		$	3,306
Allowance for nonimpaired loans/leases		18,065			18,041			1,283			2,298			1,119			40,806			33,827			36,043			1,902			3,242			1,262			76,276
	$	18,151		$	19,269		$	1,303		$	2,313		$	1,197		$	42,233

																			$	33,827		$	39,253		$	1,902		$	3,263		$	1,337		$	79,582

Impaired loans/leases	$	2,346		$	7,681		$	1,574		$	603		$	615		$	12,819		$	2,004		$	14,669		$	944		$	766		$	221		$	18,604
Nonimpaired loans/leases		1,482,633			1,775,405			81,750			237,139			106,113			3,683,040			1,821,045			1,985,046			72,067			244,266			102,250			4,224,674
	$	1,484,979		$	1,783,086		$	83,324		$	237,742		$	106,728		$	3,695,859

																			$	1,823,049		$	1,999,715		$	73,011		$	245,032		$	102,471		$	4,243,278

Allowance as a percentage of impaired loans/leases		3.67	%		15.99	%		1.27	%		2.49	%		12.68	%		11.13	%		—	%		21.88	%		—	%		2.74	%		33.94	%		17.77	%
Allowance as a percentage of nonimpaired loans/leases		1.22	%		1.02	%		1.57	%		0.97	%		1.05	%		1.11	%		1.86	%		1.82	%		2.64	%		1.33	%		1.23	%		1.81	%
Total allowance as a percentage of total loans/leases		1.22	%		1.08	%		1.56	%		0.97	%		1.12	%		1.14	%		1.86	%		1.96	%		2.61	%		1.33	%		1.30	%		1.88	%


																			As of December 31, 2019
																									Direct Financing			Residential Real			Installment and
																			C&I			CRE			Leases			Estate			Other Consumer			Total

	As of December 31, 2019
							Direct Financing			Residential Real			Installment and
	C&I			CRE			Leases			Estate			Other Consumer			Total
	(dollars in thousands)

																			(dollars in thousands)

Allowance for impaired loans/leases	$	170		$	125		$	270		$	15		$	80		$	660		$	170		$	125		$	270		$	15		$	80		$	660
Allowance for nonimpaired loans/leases		15,902			15,254			1,194			1,933			1,058			35,341			15,902			15,254			1,194			1,933			1,058			35,341
	$	16,072		$	15,379		$	1,464		$	1,948		$	1,138		$	36,001

																			$	16,072		$	15,379		$	1,464		$	1,948		$	1,138		$	36,001

Impaired loans/leases	$	1,846		$	3,585		$	2,025		$	649		$	556		$	8,661		$	1,846		$	3,585		$	2,025		$	649		$	556		$	8,661
Nonimpaired loans/leases		1,505,979			1,732,811			85,844			239,255			108,796			3,672,685			1,505,979			1,732,811			85,844			239,255			108,796			3,672,685
	$	1,507,825		$	1,736,396		$	87,869		$	239,904		$	109,352		$	3,681,346

																			$	1,507,825		$	1,736,396		$	87,869		$	239,904		$	109,352		$	3,681,346

Allowance as a percentage of impaired loans/leases		9.21	%		3.49	%		13.33	%		2.31	%		14.41	%		7.62	%		9.21	%		3.49	%		13.33	%		2.31	%		14.41	%		7.62	%
Allowance as a percentage of nonimpaired loans/leases		1.06	%		0.88	%		1.39	%		0.81	%		0.97	%		0.96	%		1.06	%		0.88	%		1.39	%		0.81	%		0.97	%		0.96	%
Total allowance as a percentage of total loans/leases		1.07	%		0.89	%		1.67	%		0.81	%		1.04	%		0.98	%		1.07	%		0.89	%		1.67	%		0.81	%		1.04	%		0.98	%

Information for impaired loans/leases is presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.

1922

Table of Contents

~~Part I~~

~~Item 1~~Loans/leases, by classes of financing receivable, considered to be impaired as of and for the nine months ended September 30, 2020 are presented as follows:


	Nine Months Ended September 30, 2020

											Interest Income
							Average				Recognized for
	Recorded		Unpaid Principal		Related		Recorded		Interest Income		Cash Payments
Classes of Loans/Leases	Investment		Balance		Allowance		Investment		Recognized		Received
	(dollars in thousands)

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	2,004	$	2,114	$	—	$	1,418	$	35	$	35
CRE
Owner-Occupied CRE		287		528		—		146		—		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		1,336		1,336		—		334		22		22
Direct Financing Leases		944		944		—		792		16		16
Residential Real Estate		507		507		—		416		—		—
Installment and Other Consumer		146		146		—		119		—		—
	$	5,224	$	5,575	$	—	$	3,225	$	73	$	73

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	—	$	—	$	—	$	—	$	—	$	—
CRE
Owner-Occupied CRE		—		—		—		—		—		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		13,046		13,046		3,210		7,228		—		—
Direct Financing Leases		—		—		—		—		—		—
Residential Real Estate		259		259		21		220		—		—
Installment and Other Consumer		75		75		75		69		—		—
	$	13,380	$	13,380	$	3,306	$	7,517	$	—	$	—

Total Impaired Loans/Leases:
C&I	$	2,004	$	2,114	$	—	$	1,418	$	35	$	35
CRE
Owner-Occupied CRE		287		528		—		146		—		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		14,382		14,382		3,210		7,562		22		22
Direct Financing Leases		944		944		—		792		16		16
Residential Real Estate		766		766		21		636		—		—
Installment and Other Consumer		221		221		75		188		—		—
	$	18,604	$	18,955	$	3,306	$	10,742	$	73	$	73

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

Table of Contents

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended ~~March 31,~~September 30, 2020 ~~are presented as follows:~~

2020

Interest Income

Average

Recognized for

Recorded

Unpaid Principal

Related

Recorded

Interest Income

Cash Payments
Classes of Loans/Leases

Investment

Balance

Allowance

Investment

Recognized

Received

(dollars in thousands)












Impaired Loans/Leases with No Specific Allowance Recorded:












C&I

$
2,260

$
2,332

$
—

$
1,895

$
12

$
12
CRE










Owner-Occupied CRE

99

115

—

102

—

—
Commercial Construction, Land Development, and Other Land

—

—

—

—

—

—
Other Non Owner-Occupied CRE

1,054

1,054

—

662

7

7
Direct Financing Leases

1,515

1,515

—

1,440

6

6
Residential Real Estate

423

407

—

399

—

—
Installment and Other Consumer

538

538

—

507

—

—

$
5,889

$
5,961

$
—

$
5,005

$
25

$
25












Impaired Loans/Leases with Specific Allowance Recorded:












C&I

$
86

$
86

$
86

$
43

$
—

$
—
CRE

Owner-Occupied CRE

—

—

—

—

—

—
Commercial Construction, Land Development, and Other Land

—

—

—

—

—

—
Other Non Owner-Occupied CRE

6,528

6,528

1,228

4,698

—

—
Direct Financing Leases

59

59

20

61

—

—
Residential Real Estate

180

180

15

180

—

—
Installment and Other Consumer

77

77

78

79

—

—

$
6,930

$
6,930

$
1,427

$
5,061

$
—

$
—












Total Impaired Loans/Leases:












C&I

$
2,346

$
2,418

$
86

$
1,938

$
12

$
12
CRE












Owner-Occupied CRE

99

115

—

102

—

—
Commercial Construction, Land Development, and Other Land

—

—

—

—

—

—
Other Non Owner-Occupied CRE

7,582

7,582

1,228

5,360

7

7
Direct Financing Leases

1,574

1,574

20

1,501

6

6
Residential Real Estate

603

587

15

579

—

—
Installment and Other Consumer

615

615

78

586

—

—

$
12,819

$
12,891

$
1,427

$
10,066

$
25

$
25

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

~~Loans/leases, by classes of financing receivable, considered to be impaired as of~~ and ~~for the three months ended March 31,~~ 2019 are presented as follows:


											Interest Income
							Average				Recognized for
	Recorded		Unpaid Principal		Related		Recorded		Interest Income		Cash Payments

													Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
																	Interest Income						Interest Income
													Average				Recognized for		Average				Recognized for
													Recorded		Interest Income		Cash Payments		Recorded		Interest Income		Cash Payments
Classes of Loans/Leases	Investment		Balance		Allowance		Investment		Recognized		Received		Investment		Recognized		Received		Investment		Recognized		Received
	(dollars in thousands)
													(dollars in thousands)

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	2,256	$	2,300	$	—	$	2,124	$	23	$	23	$	1,825	$	11	$	11	$	1,433	$	6	$	6
CRE
Owner-Occupied CRE		104		104		—		106		6		6		292		—		—		42		—		—
Commercial Construction, Land Development, and Other Land		500		500		—		503		7		7		—		—		—		—		—		—
Other Non Owner-Occupied CRE		1,675		1,675		—		1,687		22		22		668		7		7		739		7		7
Direct Financing Leases		1,948		1,948		—		2,011		11		11		953		6		6		1,359		6		6
Residential Real Estate		705		779		—		713		—		—		512		—		—		540		—		—
Installment and Other Consumer		778		778		—		770		3		3		146		—		—		543		—		—
	$	7,966	$	8,084	$	—	$	7,914	$	72	$	72

													$	4,396	$	24	$	24	$	4,656	$	19	$	19

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	2,045	$	2,045	$	841	$	1,946	$	9	$	9	$	—	$	—	$	—	$	141	$	—	$	—
CRE
Owner-Occupied CRE		289		646		33		297		—		—		—		—		—		123		—		—
Commercial Construction, Land Development, and Other Land		144		144		28		146		—		—		—		—		—		—		—		—
Other Non Owner-Occupied CRE		7,443		7,443		2,052		7,510		48		48		9,757		—		—		3,254		—		—
Direct Financing Leases		237		237		142		206		—		—		—		—		—		120		—		—
Residential Real Estate		988		988		236		915		1		1		260		—		—		390		—		—
Installment and Other Consumer		147		147		107		137		—		—		77		—		—		84		—		—
	$	11,293	$	11,650	$	3,439	$	11,157	$	58	$	58

													$	10,094	$	—	$	—	$	4,112	$	—	$	—

Total Impaired Loans/Leases:
C&I	$	4,301	$	4,345	$	841	$	4,070	$	32	$	32	$	1,825	$	11	$	11	$	1,574	$	6	$	6
CRE
Owner-Occupied CRE		393		750		33		403		6		6		292		—		—		165		—		—
Commercial Construction, Land Development, and Other Land		644		644		28		649		7		7		—		—		—		—		—		—
Other Non Owner-Occupied CRE		9,118		9,118		2,052		9,197		70		70		10,425		7		7		3,993		7		7
Direct Financing Leases		2,185		2,185		142		2,217		11		11		953		6		6		1,479		6		6
Residential Real Estate		1,693		1,767		236		1,628		1		1		772		—		—		930		—		—
Installment and Other Consumer		925		925		107		907		3		3		223		—		—		627		—		—
	$	19,259	$	19,734	$	3,439	$	19,071	$	130	$	130
													$	14,490	$	24	$	24	$	8,768	$	19	$	19

2124

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2019 are presented as

follows:


			Unpaid
	Recorded		Principal		Related

									Unpaid
							Recorded		Principal		Related
Classes of Loans/Leases	Investment		Balance		Allowance		Investment		Balance		Allowance
	(dollars in thousands)
							(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	1,607	$	1,647	$	—	$	1,607	$	1,647	$	—
CRE
Owner-Occupied CRE		34		50		—		34		50		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		684		686		—		684		686		—
Direct Financing Leases		1,642		1,642		—		1,642		1,642		—
Residential Real Estate		469		614		—		469		614		—
Installment and Other Consumer		476		476		—		476		476		—
	$	4,912	$	5,115	$	—

							$	4,912	$	5,115	$	—

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	239	$	239	$	170	$	239	$	239	$	170
CRE
Owner-Occupied CRE		—		—		—		—		—		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		2,867		2,867		125		2,867		2,867		125
Direct Financing Leases		383		383		270		383		383		270
Residential Real Estate		180		180		15		180		180		15
Installment and Other Consumer		80		80		80		80		80		80
	$	3,749	$	3,749	$	660

							$	3,749	$	3,749	$	660

Total Impaired Loans/Leases:
C&I	$	1,846	$	1,886	$	170	$	1,846	$	1,886	$	170
CRE
Owner-Occupied CRE		34		50		—		34		50		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		3,551		3,553		125		3,551		3,553		125
Direct Financing Leases		2,025		2,025		270		2,025		2,025		270
Residential Real Estate		649		794		15		649		794		15
Installment and Other Consumer		556		556		80		556		556		80
	$	8,661	$	8,864	$	660
							$	8,661	$	8,864	$	660

Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

For C&I and CRE loans, the Company’s credit quality indicator consists of internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.

For certain C&I loans (equipment financing agreements), direct financing leases, residential real estate loans, and installment and other consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of ~~March 31,~~September 30, 2020 and December 31, 2019:



	As of March 31, 2020
			CRE
					Non-Owner Occupied
					Commercial
					Construction,
					Land
			Owner-Occupied		Development,						As a % of


													As of September 30, 2020
															CRE
																	Non-Owner Occupied
																	Commercial
																	Construction,
																	Land
															Owner-Occupied		Development,						As a % of
Internally Assigned Risk Rating	C&I		CRE		and Other Land		Other CRE		Total		Total		C&I		CRE		and Other Land		Other CRE		Total		Total
	(dollars in thousands)

													(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,309,540	$	449,463	$	408,341	$	884,112	$	3,051,456	97.72	%	$	1,610,503	$	478,852	$	491,928	$	929,398	$	3,510,681	95.91	%
Special Mention (Rating 6)		11,805		3,665		722		18,546		34,738	1.11	%		25,547		2,211		680		51,149		79,587	2.17	%
Substandard (Rating 7)		18,375		1,827		1,320		15,090		36,612	1.17	%		24,912		5,191		10,478		29,828		70,409	1.92	%
Doubtful (Rating 8)		—		—		—		—		—	—	%		—		—		—		—		—	—	%
	$	1,339,720	$	454,955	$	410,383	$	917,748	$	3,122,806	100.00	%
													$	1,660,962	$	486,254	$	503,086	$	1,010,375	$	3,660,677	100.00	%



	As of March 31, 2020
			Direct Financing		Residential Real		Installment and				As a % of


													As of September 30, 2020
															Direct Financing		Residential Real		Installment and				As a % of
Delinquency Status *	C&I		Leases		Estate		Other Consumer		Total		Total		C&I		Leases		Estate		Other Consumer		Total		Total
	(dollars in thousands)

													(dollars in thousands)

Performing	$	144,148	$	81,973	$	237,002	$	106,000	$	569,123	99.31	%	$	162,043	$	72,129	$	244,157	$	102,224	$	580,553	99.65	%
Nonperforming		1,111		1,351		740		728		3,930	0.69	%		44		882		875		247		2,048	0.35	%
	$	145,259	$	83,324	$	237,742	$	106,728	$	573,053	100.00	%
													$	162,087	$	73,011	$	245,032	$	102,471	$	582,601	100.00	%



		As of December 31, 2019
				CRE
						Non-Owner Occupied
						Commercial
						Construction,
						Land
				Owner-Occupied		Development,						As a % of


														As of December 31, 2019
																CRE
																		Non-Owner Occupied
																		Commercial
																		Construction,
																		Land
																Owner-Occupied		Development,						As a % of
Internally Assigned Risk Rating	��	C&I		CRE		and Other Land		Other CRE		Total		Total		C&I		CRE		and Other Land		Other CRE		Total		Total
		(dollars in thousands)

														(dollars in thousands)

Pass (Ratings 1 through 5)		$	1,334,446	$	439,418	$	378,572	$	896,206	$	3,048,642	98.28	%	$	1,334,446	$	439,418	$	378,572	$	896,206	$	3,048,642	98.27	%
Special Mention (Rating 6)			12,962		3,044		41		3,905		19,952	0.65	%		12,962		3,044		41		3,905		19,952	0.65	%
Substandard (Rating 7)			18,439		1,527		184		13,499		33,649	1.09	%		18,439		1,527		184		13,499		33,649	1.08	%
Doubtful (Rating 8)			—		—		—		—		—	0.01	%		—		—		—		—		—	—	%
		$	1,365,847	$	443,989	$	378,797	$	913,610	$	3,102,243	100.00	%
														$	1,365,847	$	443,989	$	378,797	$	913,610	$	3,102,243	100.00	%


	As of December 31, 2019
			Direct Financing		Residential Real		Installment and				As a % of

													As of December 31, 2019
															Direct Financing		Residential Real		Installment and				As a % of
Delinquency Status *	C&I		Leases		Estate		Other Consumer		Total		Total		C&I		Leases		Estate		Other Consumer		Total		Total
	(dollars in thousands)

													(dollars in thousands)

Performing	$	140,992	$	86,019	$	239,198	$	108,763	$	574,972	99.29	%	$	140,992	$	86,019	$	239,198	$	108,763	$	574,972	99.29	%
Nonperforming		986		1,850		706		589		4,131	0.71	%		986		1,850		706		589		4,131	0.71	%
	$	141,978	$	87,869	$	239,904	$	109,352	$	579,103	100.00	%
													$	141,978	$	87,869	$	239,904	$	109,352	$	579,103	100.00	%

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

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

As of ~~March 31,2020~~September 30, 2020 and December 31, 2019, TDRs totaled ~~$843 thousand~~$1.3 million and $1.7 million, 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 ~~March 31,~~September 30, 2020 and 2019. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

For the three months ended March 31, 2020




Pre-

Post-


Modification

Modification

Number of

Recorded

Recorded

Specific
Classes of Loans/Leases

Loans / Leases

Investment

Investment

Allowance

CONCESSION - Significant Payment Delay








C&I

2

$
111

$
111

$
—
Direct Financing Leases

1

68

68

—

3

$
179

$
179

$
—


	For the three months ended March 31, 2019
		Pre-		Post-
		Modification		Modification
	Number of	Recorded		Recorded		Specific

								For the three months ended September 30, 2020							For the three months ended September 30, 2019
									Pre-		Post-					Pre-		Post-
									Modification		Modification					Modification		Modification
								Number of	Recorded		Recorded		Specific		Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans / Leases	Investment		Investment		Allowance		Loans / Leases	Investment		Investment		Allowance		Loans / Leases	Investment		Investment		Allowance

								(dollars in thousands)
CONCESSION - Significant Payment Delay
C&I								3	$	197	$	197	$	—	—	$	—	$	—	$	—
Direct Financing Leases	4		122		122		—	—		—		—		—	3		116		116		—
	4	$	122	$	122	$	—
								3	$	197	$	197	$	—	3	$	116	$	116	$	—

CONCESSION - Extension of Maturity
Installment and Other Consumer								—		—		—		—	1	$	56	$	56	$	56
								—	$	—	$	—	$	—	1	$	56	$	56	$	56

TOTAL								3	$	197	$	197	$	—	4	$	172	$	172	$	56


	For the nine months ended September 30, 2020							For the nine months ended September 30, 2019
		Pre-		Post-					Pre-		Post-
		Modification		Modification					Modification		Modification
	Number of	Recorded		Recorded		Specific		Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans / Leases	Investment		Investment		Allowance		Loans / Leases	Investment		Investment		Allowance

	(dollars in thousands)
CONCESSION - Significant Payment Delay
C & I	5	$	308	$	308	$	—	1	$	19	$	19	$	—
Direct Financing Leases	3		145		145		—	6		219		219		20
	8	$	453	$	453	$	—	7	$	238	$	238	$	20

CONCESSION - Forgiveness of Principal
C & I	—	$	—	$	—	$	—	1		587		537		—
	—	$	—	$	—	$	—	1	$	587	$	537	$	—

CONCESSION - Extension of Maturity
Installment and Other Consumer	—	$	—	$	—	$	—	1		56		56		56
	—	$	—	$	—	$	—	1	$	56	$	56	$	56

TOTAL	8	$	453	$	453	$	—	9	$	881	$	831	$	76

Of the loans restructured during the ~~three~~nine months ended ~~March 31,~~September 30, 2020, ~~and~~NaN were on nonaccrual. Of the loans restructured during the nine months ended September 30, 2019, ~~none~~3 with post-modification recorded balances of $121 thousand were on nonaccrual.

For the three months ended ~~March 31,~~September 30, 2020, ~~one~~1 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. ThisTDR was ~~related to one customer whose~~a lease ~~was~~ restructured in the fourth quarter of 2019 with pre-modification balances totaling ~~$55~~$32 thousand.

For the ~~three~~nine months ended ~~March 31, 2019,none~~September 30, 2020, 3 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. These TDRs included the TDR that defaulted in the third quarter of 2020 as well as a lease that was restructured in the fourth quarter of 2019 with pre-modification balance of $55 thousand and a commercial loan that that was restructured in the fourth quarter of 2019 with a pre-modification balance of $48 thousand.

For the nine months ended September 30, 2019, 2 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. These TDRs were related to one customer whose leases were restructured in the first quarter of 2019 with pre-modification balances totaling $66 thousand.

Not included in the table above ~~the Company had four~~are 10 TDRs that were restructured and charged off for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, totaling ~~$296~~$482 thousand. The Company had ~~two~~3 TDRs that were restructured and charged off for the three

Table of Contents

months ended ~~March 31,~~September 30, 2020, totaling $128 thousand The Company had 3 TDRs that were restructured and charged off for the nine months ended September 30, 2019, totaling ~~$56~~$108 thousand.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be related to COVID-19, the existing loan could not be more than 30 days past due as of December 31, 2019 and the modification must be executed between March 1, 2020 and the earlier of 60 days after the termination of the National Emergency or December 31, 2020. If a modification does not meet the criteria of the CARES Act, a deferral can still be excluded from TDR treatment as long as the modifications meet the banking regulatory criteria discussed in the preceding paragraph.

The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. Since implementing the program, the Company has provided 1,498 bank modifications of loans to commercial and consumer clients totaling $522 million and 953 m2 modifications of loans and leases totaling $53 million for a combined 2,451 modifications totaling $575 million, representing 13.53% of the total loan and lease portfolio. As of September 30, 2020, the majority of customers have resumed regularly scheduled payments with only 238 total loans/leases representing $83 million, or 1.95% of total loans/leases, receiving a second deferral under the LRP.

2428

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

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

The Company entered into interest rate caps in December 2019 to hedge against the risk of rising interest rates on liabilities. The liabilities consist of $375.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and Prime. The interest rate caps are designated as cash flow hedges in accordance with ASC 815. An initial premium of $4.3 million was paid upfront for the caps executed in 2019. 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

March 31, 2020

December 31, 2019

(dollars in thousands)

Deposits

1/1/2020

1/1/2023

Other Assets

$
25,000

1.75
%

$
18

$
112

Deposits

1/1/2020

1/1/2023

Other Assets

50,000

1.57

35

218

Deposits

1/1/2020

1/1/2023

Other Assets

25,000

1.90

16

96

Deposits

1/1/2020

1/1/2023

Other Assets

25,000

1.80

17

109

Deposits

1/1/2020

1/1/2024

Other Assets

25,000

1.75

47

214

Deposits

1/1/2020

1/1/2024

Other Assets

50,000

1.57

85

401

Deposits

2/1/2020

2/1/2024

Other Assets

25,000

1.90

44

202

Deposits

1/1/2020

1/1/2024

Other Assets

25,000

1.80

42

201

Deposits

1/1/2020

1/1/2025

Other Assets

25,000

1.75

94

337

Deposits

1/1/2020

1/1/2025

Other Assets

50,000

1.57

171

617

Deposits

3/1/2020

3/1/2025

Other Assets

25,000

1.90

94

332

Deposits

1/1/2020

1/1/2025

Other Assets

25,000

1.80

86

309

$
375,000

$
749

$
3,148


			Balance Sheet					Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		September 30, 2020		December 31, 2019
(dollars in thousands)

Deposits	1/1/2020	1/1/2023	Other Assets	$	25,000	1.75	%	$	6	$	112
Deposits	1/1/2020	1/1/2023	Other Assets		50,000	1.57			11		218
Deposits	1/1/2020	1/1/2023	Other Assets		25,000	1.90			5		96
Deposits	1/1/2020	1/1/2023	Other Assets		25,000	1.80			6		109
Deposits	1/1/2020	1/1/2024	Other Assets		25,000	1.75			17		214
Deposits	1/1/2020	1/1/2024	Other Assets		50,000	1.57			35		401
Deposits	2/1/2020	2/1/2024	Other Assets		25,000	1.90			17		202
Deposits	1/1/2020	1/1/2024	Other Assets		25,000	1.80			17		201
Deposits	1/1/2020	1/1/2025	Other Assets		25,000	1.75			37		337
Deposits	1/1/2020	1/1/2025	Other Assets		50,000	1.57			75		617
Deposits	3/1/2020	3/1/2025	Other Assets		25,000	1.90			40		332
Deposits	1/1/2020	1/1/2025	Other Assets		25,000	1.80			38		309
				$	375,000			$	304	$	3,148

The Company has entered into interest rate swaps to hedge against the risk of rising rates on its rolling fixed rate short-term FHLB advances or brokered CDs and its variable rate trust preferred securities. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:

Balance Sheet

Fair Value as of
Hedged Item

Effective Date

Maturity Date

Location

Notional Amount

Receive Rate

Pay Rate

March 31, 2020

December 31, 2019
(dollars in thousands)
CRBT - FHLB Advances or Brokered CDs

3/16/2020

3/16/2023

Derivatives - Liabilities

$
30,000

0.89
%

1.12
%

$
(644)

$
-
SFCB - FHLB Advances or Brokered CDs

3/16/2020

3/16/2023

Derivatives - Liabilities

10,000

0.74
%

0.95
%

(162)

$
-
QCR Holdings Statutory Trust II

9/30/2018

9/30/2028

Derivatives - Liabilities

10,000

4.30
%

5.85
%

(1,992)

$
(971)
QCR Holdings Statutory Trust III

9/30/2018

9/30/2028

Derivatives - Liabilities

8,000

4.30
%

5.85
%

(1,594)

(777)
QCR Holdings Statutory Trust V

7/7/2018

7/7/2028

Derivatives - Liabilities

10,000

3.54
%

4.54
%

(1,935)

(944)
Community National Statutory Trust II

9/20/2018

9/20/2028

Derivatives - Liabilities

3,000

3.29
%

5.17
%

(597)

(291)
Community National Statutory Trust III

9/15//2018

9/15/2028

Derivatives - Liabilities

3,500

2.49
%

4.75
%

(698)

(339)
Guaranty Bankshares Statutory Trust I

9/15/2018

9/15/2028

Derivatives - Liabilities

4,500

2.49
%

4.75
%

(898)

(436)



$
79,000

3.66
%

5.24
%

$
(8,520)

$
(3,758)


			Balance Sheet							Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2020		December 31, 2019
(dollars in thousands)
CRBT - FHLB Advances or Brokered CDs	3/16/2020	3/16/2023	Derivatives - Liabilities	$	30,000	0.23	%	1.12	%	$	(660)	$	-
SFCB - FHLB Advances or Brokered CDs	3/16/2020	3/16/2023	Derivatives - Liabilities		10,000	0.24	%	0.95	%		(181)		-
QCR Holdings Statutory Trust II	9/30/2018	9/30/2028	Derivatives - Liabilities		10,000	3.07	%	5.85	%		(1,963)		(971)
QCR Holdings Statutory Trust III	9/30/2018	9/30/2028	Derivatives - Liabilities		8,000	3.07	%	5.85	%		(1,570)		(777)
QCR Holdings Statutory Trust V	7/7/2018	7/7/2028	Derivatives - Liabilities		10,000	1.83	%	4.54	%		(1,909)		(944)
Community National Statutory Trust II	9/20/2018	9/20/2028	Derivatives - Liabilities		3,000	2.40	%	5.17	%		(587)		(291)
Community National Statutory Trust III	9/15//2018	9/15/2028	Derivatives - Liabilities		3,500	2.00	%	4.75	%		(684)		(339)
Guaranty Bankshares Statutory Trust I	9/15/2018	9/15/2028	Derivatives - Liabilities		4,500	2.00	%	4.75	%		(879)		(436)
				$	79,000	1.34	%	5.24	%	$	(8,433)	$	(3,758)

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.~~institution counterparty. Additionally, the Company receives an upfront fee from the financial institution counterparty, dependent upon the pricing that is recognized upon receipt from the financial institution counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.

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


		September 30, 2020				December 31, 2019
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value

	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	1,435,379	$	236,077	$	787,221	$	84,679
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	1,435,379	$	236,077	$	787,221	$	84,679

Table of Contents

Swap fee income totaled $26.7 million and $9.8 million for the three months ended September 30, 2020 and 2019, respectively. Swap fee income totaled $53.4 million and $20.9 million for the nine months ended September 30, 2020 and 2019, respectively.

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, 2020		December 31, 2019

	(dollars in thousands)

Cash	$	81,373	$	10,990
U.S govt. sponsored agency securities		3,650		3,541
Municipal securities		50,730		68,089
Residential mortgage-backed and related securities		105,631		27,027
	$	241,384	$	109,647

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

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

publicly available credit rating and financial information. Additionally, the Company enters into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The ISDA master agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its ~~borrower~~borrower/customer counterparties through its normal loan underwriting and credit monitoring policies and procedures. ~~The~~Specifically, the underwriting considers collateral value, including the excess collateral over the loan value and swap exposure, and debt service capacity for the underlying loan as well as the exposure from the interest rate swap. Ongoing credit monitoring policies and procedures are current. As of September 30, 2020, the Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

NOTE 5 – SUBORDINATED NOTES

On September 14, 2020, the Company completed a private offering of $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 15, 2030. The subordinated notes, which qualify as Tier 2 capital for the Company, will bear interest at a fixed rate of 5.125% per year, from and including September 14, 2020 to, but excluding September 15, 2025 or earlier redemption. From and including September 15, 2025 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then three-month Term SOFR, plus 500 basis points. Interest ~~rate swaps that~~on the subordinated notes is payable quarterly, commencing on December 15, 2020. The notes are ~~not designated as hedging instruments~~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 15, 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 ~~summarized~~subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.

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

March 31, 2020

December 31, 2019

Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:

Interest rate swap contracts

$
915,109

$
195,224

$
787,221

$
84,679
Non-Hedging Interest Rate Derivatives Liabilities:

Interest rate swap contracts

$
915,109

$
195,224

$
787,221

$
84,679

~~Swap fee income totaled $6.8 million and $3.2 million for the three months ended March 31, 2020 and 2019, respectively. Swap fee income totaled $28.3 million for the year ended December 31, 2019.~~


		Amount Outstanding	Interest Rate			Amount Outstanding	Interest Rate
		as of September 30, 2020	as of September 30, 2020			as of December 31, 2019	as of December 31, 2019		Maturity Date
		(dollars in thousands)

Subordinated debenture dated 9/14/20	$	50,000	5.125	%	$	-	—	%	9/15/2030
Subordinated debenture dated 2/1/19		65,000	5.375	%		65,000	5.375	%	9/15/2030
Subordinated debenture dated 4/30/16*		2,000	4.00	%		2,000	4.00	%	4/30/2026
Subordinated debenture dated 9/15/16*		3,000	4.00	%		3,000	4.00	%	9/15/2026
Debt issuance costs		(1,423)				(1,606)
Total Subordinated Debentures	$	118,577			$	68,394

*Assumed in acquisition of SFCB

Table of Contents

NOTE 56 - EARNINGS PER SHARE

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

Three months ended

March 31,



2020


2019

Net income

$
11,228

$
12,918

  Basic EPS

$
0.71

$
0.82

  Diluted EPS

$
0.70

$
0.81

Weighted average common shares outstanding

15,796,796

15,693,345

Weighted average common shares issuable upon exercise of stock options

    and under the employee stock purchase plan

214,660

229,595

Weighted average common and common equivalent shares outstanding

16,011,456

15,922,940


		Three months ended			Nine months ended
		September 30,			September 30,
		2020		2019		2020		2019

	(dollars in thousands, except share data)

Net income	$	17,344	$	15,095	$	42,311	$	41,517


Basic EPS	$	1.10	$	0.96	$	2.68	$	2.64
Diluted EPS	$	1.09	$	0.94	$	2.65	$	2.60

Weighted average common shares outstanding		15,767,152		15,739,430		15,770,335		15,715,788
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan		156,426		237,312		175,497		230,232
Weighted average common and common equivalent shares outstanding		15,923,578		15,976,742		15,945,832		15,946,020

2631

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

NOTE 67 – 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 ~~March 31,~~September 30, 2020 and December 31, 2019:

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs


Fair Value

(Level 1)

(Level 2)

(Level 3)

(dollars in thousands)
March 31, 2020:








Securities AFS:








U.S. govt. sponsored agency securities

$
19,457

$
—

$
19,457

$
—
Residential mortgage-backed and related securities

122,853

—

122,853

—
Municipal securities

63,431

—

63,431

—
Asset-backed securities

28,499

28,499

Other securities

19,048

—

19,048

—
Derivatives

195,973

—

195,973

—
Total assets measured at fair value

$
449,261

$
—

$
449,261

$
—








Derivatives

$
203,744

$
—

$
203,744

$
—
Total liabilities measured at fair value

$
203,744

$
—

$
203,744

$
—
















December 31, 2019:








Securities AFS:








U.S. govt. sponsored agency securities

$
20,078

$
—

$
20,078

$
—
Residential mortgage-backed and related securities

120,587

—

120,587

—
Municipal securities

48,257

—

48,257

—
Asset-backed securities

16,887

16,887

Other securities

4,886

—

4,886

—
Derivatives

87,827

—

87,827

—
Total assets measured at fair value

$
298,522

$
—

$
298,522

$
—








Derivatives

$
88,437

$
—

$
88,437

$
—
Total liabilities measured at fair value

$
88,437

$
—

$
88,437

$
—


			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, 2020:
Securities AFS:
U.S. govt. sponsored agency securities	$	18,437	$	—	$	18,437	$	—
Residential mortgage-backed and related securities		134,147		—		134,147		—
Municipal securities		135,233		—		135,233		—
Asset-backed securities		40,665		—		40,665		—
Other securities		18,714		—		18,714		—
Derivatives		236,381		—		236,381		—
Total assets measured at fair value	$	583,577	$	—	$	583,577	$	—

Derivatives	$	244,510	$	—	$	244,510	$	—
Total liabilities measured at fair value	$	244,510	$	—	$	244,510	$	—


December 31, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	20,078	$	—	$	20,078	$	—
Residential mortgage-backed and related securities		120,587		—		120,587		—
Municipal securities		48,257		—		48,257		—
Asset-backed securities		16,887		—		16,887		—
Other securities		4,886		—		4,886		—
Derivatives		87,827		—		87,827		—
Total assets measured at fair value	$	298,522	$	—	$	298,522	$	—

Derivatives	$	88,437	$	—	$	88,437	$	—
Total liabilities measured at fair value	$	88,437	$	—	$	88,437	$	—

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

Interest rate caps are used for the purpose of hedging interest rate risk. The interest rate caps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

Interest rate swaps are ~~executed~~used for ~~select commercial customers.~~the purpose of hedging interest rate risk on FHLB advances, brokered deposits and junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The

Table of Contents

fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

Interest rate swaps are also ~~used~~executed for ~~the purpose of hedging interest rate risk on FHLB advances, brokered deposits and junior subordinated debt.~~select commercial customers. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Assets measured at fair value on a non-recurring basis comprise the following at ~~March 31,~~September 30, 2020 and December 31, 2019:

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs


Fair Value

Level 1

Level 2

Level 3

(dollars in thousands)
March 31, 2020:








Impaired loans/leases

$
6,062

$
—

$
—

$
6,062
OREO

3,562

—

—

3,562

$
9,624

$
—

$
—

$
9,624

December 31, 2019:








Impaired loans/leases

$
3,394

$
—

$
—

$
3,394
OREO

4,459

—

—

4,459

$
7,853

$
—

$
—

$
7,853


			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, 2020:
Impaired loans/leases	$	11,226	$	—	$	—	$	11,226
OREO		135		—		—		135
	$	11,361	$	—	$	—	$	11,361

December 31, 2019:
Impaired loans/leases	$	3,394	$	—	$	—	$	3,394
OREO		4,459		—		—		4,459
	$	7,853	$	—	$	—	$	7,853

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

OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the property.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

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

Quantitative Information about Level Fair Value Measurements

Fair Value

Fair Value

March 31,

December 31,


2020

2019

Valuation Technique

Unobservable Input

Range

(dollars in thousands)

Impaired loans/leases

$
6,062

$
3,394

Appraisal of collateral

Appraisal adjustments

(10.00)
%
to

(30.00)
%
OREO

3,562

4,459

Appraisal of collateral

Appraisal adjustments

0.00
%
to

(35.00)
%


	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	September 30,		December 31,
	2020		2019		Valuation Technique	Unobservable Input	Range

	(dollars in thousands)

Impaired loans/leases	$	11,226	$	3,394	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		135		4,459	Appraisal of collateral	Appraisal adjustments	0.00	%	to	(35.00)	%

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

Table of Contents

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

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

Fair Value

As of March 31, 2020

As of December 31, 2019

Hierarchy

Carrying

Estimated

Carrying

Estimated


Level

Value

Fair Value

Value

Fair Value

(dollars in thousands)

Cash and due from banks

Level 1

$
169,827

$
169,827

$
76,254

$
76,254
Federal funds sold

Level 2

4,695

4,695

9,800

9,800
Interest-bearing deposits at financial institutions

Level 2

202,013

202,013

147,891

147,891
Investment securities:



HTM

Level 2

431,283

450,401

400,646

426,545
AFS

*

253,288

253,288

210,695

210,695
Loans/leases receivable, net

Level 3

5,613

6,062

3,143

3,394
Loans/leases receivable, net

Level 2

3,656,822

3,624,689

3,651,061

3,606,520
Derivatives

Level 2

195,973

195,973

87,827

87,827

Deposits:



Nonmaturity deposits

Level 2

3,292,795

3,292,795

3,184,726

3,184,726
Time deposits

Level 2

877,683

887,294

726,325

742,444
Short-term borrowings

Level 2

43,067

43,067

13,423

13,423
FHLB advances

Level 2

95,000

96,515

159,300

159,193
Subordinated notes

Level 2

68,455

68,673

68,394

68,563
Junior subordinated debentures

Level 2

37,877

30,541

37,838

30,477
Derivatives

Level 2

203,744

203,744

88,437

88,437


	Fair Value	As of September 30, 2020				As of December 31, 2019
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value

		(dollars in thousands)

Cash and due from banks	Level 1	$	68,932	$	68,932	$	76,254	$	76,254
Federal funds sold	Level 2		530		530		9,800		9,800
Interest-bearing deposits at financial institutions	Level 2		302,138		302,138		147,891		147,891
Investment securities:
HTM	Level 2		434,892		460,199		400,646		426,545
AFS	*		347,196		347,196		210,695		210,695
Loans/leases receivable, net	Level 3		10,394		11,226		3,143		3,394
Loans/leases receivable, net	Level 2		4,158,001		4,142,232		3,651,061		3,606,520
Derivatives	Level 2		236,381		236,381		87,827		87,827

Deposits:
Nonmaturity deposits	Level 2		4,116,250		4,116,250		3,184,726		3,184,726
Time deposits	Level 2		556,018		562,068		726,325		742,444
Short-term borrowings	Level 2		30,430		30,430		13,423		13,423
FHLB advances	Level 2		40,000		40,182		159,300		159,193
Subordinated notes	Level 2		118,577		118,724		68,394		68,563
Junior subordinated debentures	Level 2		37,955		30,487		37,838		30,477
Derivatives	Level 2		244,510		244,510		88,437		88,437

*See previous table in Note 2.

NOTE 78 – 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.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

The Company's primary segment, Commercial Banking, is geographically divided by markets into the secondary segments comprised of the ~~four held for investment~~4 subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, and ~~SFC Bank.~~SFCB. Each of these secondary 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 Wealth Management segment represents the trust, asset management, investment management and advisory services offered at the Company's subsidiary banks and the Bates Companies in aggregate. The Bates Companies were sold on August 12, 2020 and the business segment information below reflects the activity of the Bates Companies through this date. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts, custodial services, and investments managed. NoNaN assets of the subsidiary banks have been allocated to the Wealth Management segment.

The Company's All Other segment includes the corporate operations of the parent and operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds. The financial results for RB&T prior to the sale of the majority of its assets and liabilities at November 30, 2019 are also included in the Company’s All Other ~~Segment as are the assets held for sale at March 31, 2020.~~Segment.

Table of Contents

Selected financial information on the Company's business segments is presented as follows as of and for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

Commercial Banking

Wealth

Intercompany

Consolidated

QCBT

CRBT

CSB

SFC Bank

Management

All other

Eliminations

Total

(dollars in thousands)
Three Months Ended March 31, 2020





Total revenue
$
19,499

$
21,995

$
10,051

$
8,691

$
4,039

$
15,618

$
(15,715)

$
64,178
Net interest income

14,428

11,386

7,500

5,642

—

(1,488)

230

37,698
Provision

3,183

2,250

1,964

970

—

—

—

8,367
Net income (loss) from continuing operations

4,903

6,377

1,038

2,207

821

11,137

(15,255)

11,228
Goodwill

3,223

14,980

9,888

45,975

—

182

—

74,248
Intangibles

—

2,560

3,812

6,573

—

1,476

—

14,421
Total assets

1,914,785

1,719,773

863,903

708,735

—

695,511

(670,632)

5,232,075















Three Months Ended March 31, 2019















Total revenue
$
18,544

$
19,244

$
9,270

$
7,288

$
4,229

$
20,178

$
(14,658)

$
64,095
Net interest income

12,139

10,407

6,966

5,227

—

2,169

—

36,908
Credit loss expense

1,020

425

150

500

—

39

—

2,134
Net income (loss)

4,185

5,100

2,157

1,653

1,158

13,115

(14,450)

12,918
Goodwill

3,223

14,980

9,888

45,975

—

3,806

—

77,872
Intangibles

—

3,061

4,501

7,501

—

1,855

—

16,918
Total assets

1,660,374

1,446,637

785,076

638,542

—

1,137,465

(601,432)

5,066,662


	Commercial Banking								Wealth				Intercompany		Consolidated
	QCBT		CRBT		CSB		SFCB		Management		All other		Eliminations		Total

	(dollars in thousands)
Three Months Ended September 30, 2020
Total revenue	$	20,856	$	43,331	$	11,033	$	10,266	$	3,545	$	21,657	$	(21,839)	$	88,849
Net interest income		16,648		14,432		8,593		6,159		—		(1,531)		280		44,581
Provision for loan/lease losses		7,861		8,878		2,493		1,110		—		—		—		20,342
Net income (loss) from continuing operations		2,455		13,221		1,867		2,869		1,053		17,362		(21,483)		17,344
Goodwill		3,223		14,980		9,888		45,975		—		—		—		74,066
Intangibles		—		2,313		3,474		6,115		—		—		—		11,902
Total assets		2,205,934		2,012,182		937,016		803,478		—		756,716		(850,766)		5,864,560

Three Months Ended September 30, 2019
Total revenue	$	21,230	$	25,707	$	11,596	$	8,351	$	4,122	$	27,753	$	(22,036)	$	76,723
Net interest income		13,357		11,478		8,894		5,056		—		1,934		—		40,719
Provision for loan/lease losses		948		150		150		276		—		488		—		2,012
Net income (loss) from continuing operations		4,870		7,900		3,482		2,116		926		15,081		(19,280)		15,095
Goodwill		3,223		14,980		9,888		45,975		—		3,682		—		77,748
Intangibles		—		2,810		4,154		7,034		—		1,531		—		15,529
Total assets		1,642,950		1,592,896		801,596		693,898		—		1,180,872		(619,830)		5,292,382

Nine Months Ended September 30, 2020
Total revenue	$	60,083	$	99,938	$	30,836	$	28,490	$	11,211	$	55,087	$	(55,342)	$	230,303
Net interest income		46,728		38,638		23,631		18,002		—		(4,514)		758		123,243
Provision for loan/lease losses		18,583		18,288		7,268		4,485		—		—		—		48,624
Net income (loss)		10,664		30,178		3,496		6,974		2,860		42,296		(54,157)		42,311
Goodwill		3,223		14,980		9,888		45,975		—		—		—		74,066
Intangibles		—		2,313		3,474		6,115		—		—		—		11,902
Total assets		2,205,934		2,012,182		937,016		803,478		—		756,716		(850,766)		5,864,560

Nine Months Ended September 30, 2019
Total revenue	$	60,148	$	68,526	$	30,596	$	23,396	$	12,599	$	71,361	$	(54,563)	$	212,063
Net interest income		38,129		32,671		23,154		15,707		—		5,979		—		115,640
Provision for loan/lease losses		2,941		875		451		1,261		—		559		—		6,087
Net income (loss) from continuing operations		13,560		19,928		7,845		5,848		2,667		42,566		(50,897)		41,517
Goodwill		3,223		14,980		9,888		45,975		—		3,682		—		77,748
Intangibles		—		2,810		4,154		7,034		—		1,531		—		15,529
Total assets		1,642,950		1,592,896		801,596		693,898		—		1,180,872		(619,830)		5,292,382

NOTE 89 – REGULATORY CAPITAL REQUIREMENTS

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

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification 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 ~~March 31,~~September 30, 2020 and December 31, 2019, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

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'~~banks’ actual capital amounts and ratios as of ~~March 31,~~September 30, 2020 and

Table of Contents

December 31, 2019 are presented in the following table (dollars in thousands). As of ~~March 31,~~September 30, 2020 and December 31, 2019, each of the subsidiary banks met the requirements to be “well capitalized”.

For Capital

To Be Well

Adequacy Purposes

Capitalized Under

For Capital

With Capital

Prompt Corrective

Actual

Adequacy Purposes

Conservation Buffer

Action Provisions


Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of March 31, 2020:

Company:

Total risk-based capital

$
601,259

13.54
%
$
355,226
>
8.00
%
$
466,233
>
10.50
%
$
444,032
>
10.00
%
Tier 1 risk-based capital

495,455

11.16

266,419
>
6.00

377,427
>
8.50

355,226
>
8.00

Tier 1 leverage

495,455

10.19

194,477
>
4.00

194,477
>
4.00

243,097
>
5.00

Common equity Tier 1

457,578

10.31

199,814
>
4.50

310,822
>
7.00

288,621
>
6.50

Quad City Bank & Trust:







Total risk-based capital

$
191,590

12.03
%
$
127,429
>
8.00
%
$
167,251
>
10.50
%
$
159,287
>
10.00
%
Tier 1 risk-based capital

175,861

11.04

95,572
>
6.00

135,394
>
8.50

127,429
>
8.00

Tier 1 leverage

175,861

10.07

69,825
>
4.00

69,825
>
4.00

87,282
>
5.00

Common equity Tier 1

175,861

11.04

71,679
>
4.50

111,501
>
7.00

103,536
>
6.50

Cedar Rapids Bank & Trust:







Total risk-based capital

$
184,319

12.21
%
$
120,785
>
8.00
%
$
158,531
>
10.50
%
$
150,982
>
10.00
%
Tier 1 risk-based capital

168,693

11.17

90,589
>
6.00

128,334
>
8.50

120,785
>
8.00

Tier 1 leverage

168,693

10.53

64,084
>
4.00

64,084
>
4.00

80,105
>
5.00

Common equity Tier 1

168,693

11.17

67,942
>
4.50

105,687
>
7.00

98,138
>
6.50

Community State Bank:







Total risk-based capital

$
94,289

12.59
%
$
59,930
>
8.00
%
$
78,658
>
10.50
%
$
74,912
>
10.00
%
Tier 1 risk-based capital

86,636

11.57

44,947
>
6.00

63,675
>
8.50

59,930
>
8.00

Tier 1 leverage

86,636

10.25

33,808
>
4.00

33,808
>
4.00

42,261
>
5.00

Common equity Tier 1

86,636

11.57

33,710
>
4.50

52,439
>
7.00

48,693
>
6.50

Springfield First Community Bank:







Total risk-based capital

$
74,501

12.49
%
$
47,723
>
8.00
%
$
62,636
>
10.50
%
$
59,654
>
10.00
%
Tier 1 risk-based capital

66,392

11.13

35,792
>
6.00

50,706
>
8.50

47,723
>
8.00

Tier 1 leverage

66,392

10.43

25,470
>
4.00

25,470
>
4.00

31,838
>
5.00

Common equity Tier 1

66,392

11.13

26,844
>
4.50

41,758
>
7.00

38,775
>
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
As of September 30, 2020:
Company:
Total risk-based capital	$	700,831	14.93	%	$	375,643	>	8.00	%	$	493,031	>	10.50	%	$	469,553	>	10.00	%
Tier 1 risk-based capital		528,228	11.25			281,732	>	6.00			399,120	>	8.50			375,643	>	8.00
Tier 1 leverage		528,228	9.21			229,457	>	4.00			229,457	>	4.00			286,822	>	5.00
Common equity Tier 1		490,273	10.44			211,299	>	4.50			328,687	>	7.00			305,210	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	204,284	12.13	%	$	134,760	>	8.00	%	$	176,872	>	10.50	%	$	168,450	>	10.00	%
Tier 1 risk-based capital		183,131	10.87			101,070	>	6.00			143,182	>	8.50			134,760	>	8.00
Tier 1 leverage		183,131	7.85			93,313	>	4.00			93,313	>	4.00			116,642	>	5.00
Common equity Tier 1		183,131	10.87			75,802	>	4.50			117,915	>	7.00			109,492	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	214,219	12.92	%	$	132,656	>	8.00	%	$	174,112	>	10.50	%	$	165,821	>	10.00	%
Tier 1 risk-based capital		193,384	11.66			99,492	>	6.00			140,948	>	8.50			132,656	>	8.00
Tier 1 leverage		193,384	9.72			79,559	>	4.00			79,559	>	4.00			99,449	>	5.00
Common equity Tier 1		193,384	11.66			74,619	>	4.50			116,074	>	7.00			107,783	>	6.50
Community State Bank:
Total risk-based capital	$	99,123	12.74	%	$	62,222	>	8.00	%	$	81,666	>	10.50	%	$	77,777	>	10.00	%
Tier 1 risk-based capital		89,359	11.49			46,666	>	6.00			66,110	>	8.50			62,222	>	8.00
Tier 1 leverage		89,359	9.85			36,273	>	4.00			36,273	>	4.00			45,341	>	5.00
Common equity Tier 1		89,359	11.49			35,000	>	4.50			54,444	>	7.00			50,555	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	83,283	13.68	%	$	48,718	>	8.00	%	$	63,943	>	10.50	%	$	60,898	>	10.00	%
Tier 1 risk-based capital		71,617	11.76			36,539	>	6.00			51,763	>	8.50			48,718	>	8.00
Tier 1 leverage		71,617	10.27			27,903	>	4.00			27,903	>	4.00			34,879	>	5.00
Common equity Tier 1		71,617	11.76			27,404	>	4.50			42,629	>	7.00			39,584	>	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
As of December 31, 2019:
Company:
Total risk-based capital	$	581,234	13.33	%	$	348,937	>	8.00	%	$	457,980	>	10.500	%	$	436,171	>	10.00	%
Tier 1 risk-based capital		481,702	11.04			261,703	>	6.00			370,746	>	8.500			348,937	>	8.00
Tier 1 leverage		481,702	9.53			202,207	>	4.00			202,207	>	4.000			252,758	>	5.00
Common equity Tier 1		443,864	10.18			196,277	>	4.50			305,320	>	7.000			283,511	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	183,855	11.83	%	$	124,362	>	8.00	%	$	163,225	>	10.500	%	$	155,452	>	10.00	%
Tier 1 risk-based capital		170,137	10.94			93,271	>	6.00			132,134	>	8.500			124,362	>	8.00
Tier 1 leverage		170,137	9.94			68,479	>	4.00			68,479	>	4.000			85,598	>	5.00
Common equity Tier 1		170,137	10.94			69,953	>	4.50			108,817	>	7.000			101,044	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	175,498	11.90	%	$	117,953	>	8.00	%	$	154,813	>	10.500	%	$	147,441	>	10.00	%
Tier 1 risk-based capital		162,127	11.00			88,465	>	6.00			125,325	>	8.500			117,953	>	8.00
Tier 1 leverage		162,127	10.41			62,286	>	4.00			62,286	>	4.000			77,857	>	5.00
Common equity Tier 1		162,127	11.00			66,349	>	4.50			103,209	>	7.000			95,837	>	6.50
Community State Bank:
Total risk-based capital	$	92,095	12.32	%	$	59,813	>	8.00	%	$	78,504	>	10.500	%	$	74,766	>	10.00	%
Tier 1 risk-based capital		85,437	11.43			44,860	>	6.00			63,551	>	8.500			59,813	>	8.00
Tier 1 leverage		85,437	10.39			32,902	>	4.00			32,902	>	4.000			41,128	>	5.00
Common equity Tier 1		85,437	11.43			33,645	>	4.50			52,336	>	7.000			48,598	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	71,074	12.72	%	$	44,704	>	8.00	%	$	58,674	>	10.500	%	$	55,880	>	10.00	%
Tier 1 risk-based capital		63,956	11.45			33,528	>	6.00			47,498	>	8.500			44,704	>	8.00
Tier 1 leverage		63,956	9.70			26,379	>	4.00			26,379	>	4.000			32,974	>	5.00
Common equity Tier 1		63,956	11.45			25,146	>	4.50			39,116	>	7.000			36,322	>	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

As of December 31, 2019:

Company:

Total risk-based capital

$
581,234

13.33
%
$
348,937
>
8.00
%
$
457,980
>
10.500
%
$
436,171
>
10.00
%
Tier 1 risk-based capital

481,702

11.04

261,703
>
6.00

370,746
>
8.500

348,937
>
8.00

Tier 1 leverage

481,702

9.53

202,207
>
4.00

202,207
>
4.000

252,758
>
5.00

Common equity Tier 1

443,864

10.18

196,277
>
4.50

305,320
>
7.000

283,511
>
6.50

Quad City Bank & Trust:







Total risk-based capital

$
183,855

11.83
%
$
124,362
>
8.00
%
$
163,225
>
10.500
%
$
155,452
>
10.00
%
Tier 1 risk-based capital

170,137

10.94

93,271
>
6.00

132,134
>
8.500

124,362
>
8.00

Tier 1 leverage

170,137

9.94

68,479
>
4.00

68,479
>
4.000

85,598
>
5.00

Common equity Tier 1

170,137

10.94

69,953
>
4.50

108,817
>
7.000

101,044
>
6.50

Cedar Rapids Bank & Trust:







Total risk-based capital

$
175,498

11.90
%
$
117,953
>
8.00
%
$
154,813
>
10.500
%
$
147,441
>
10.00
%
Tier 1 risk-based capital

162,127

11.00

88,465
>
6.00

125,325
>
8.500

117,953
>
8.00

Tier 1 leverage

162,127

10.41

62,286
>
4.00

62,286
>
4.000

77,857
>
5.00

Common equity Tier 1

162,127

11.00

66,349
>
4.50

103,209
>
7.000

95,837
>
6.50

Community State Bank:







Total risk-based capital

$
92,095

12.32
%
$
59,813
>
8.00
%
$
78,504
>
10.500
%
$
74,766
>
10.00
%
Tier 1 risk-based capital

85,437

11.43

44,860
>
6.00

63,551
>
8.500

59,813
>
8.00

Tier 1 leverage

85,437

10.39

32,902
>
4.00

32,902
>
4.000

41,128
>
5.00

Common equity Tier 1

85,437

11.43

33,645
>
4.50

52,336
>
7.000

48,598
>
6.50

Springfield First Community Bank:







Total risk-based capital

$
71,074

12.72
%
$
44,704
>
8.00
%
$
58,674
>
10.500
%
$
55,880
>
10.00
%
Tier 1 risk-based capital

63,956

11.45

33,528
>
6.00

47,498
>
8.500

44,704
>
8.00

Tier 1 leverage

63,956

9.70

26,379
>
4.00

26,379
>
4.000

32,974
>
5.00

Common equity Tier 1

63,956

11.45

25,146
>
4.50

39,116
>
7.000

36,322
>
6.50

3136

Table of Contents

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

NOTE 10 –SALE OF SUBSIDIARY

~~NOTE 9 – SUBSEQUENT EVENT~~

On ~~April 2,~~August 12, 2020, the Company ~~entered into a stock purchase agreement to sell~~sold all the issued and outstanding capital stock of the Bates Companies. The aggregate consideration ~~to be~~ paid to the Company ~~shall be an amount equal to $500,000~~was a $500 thousand note receivable, less imputed interest of $52 thousand, plus cancellation of all future amounts otherwise to become payable to the purchaser by the Company under an earn-out agreement entered into between the same parties in 2018 with a non-discounted value of approximately ~~$1.6 million~~$880 thousand at ~~March 31,~~September 30, 2020.

~~This transaction is subject to regulatory approval~~

Assets and ~~is expected to close late in~~liabilities of the ~~second quarter~~Bates Companies sold are summarized as follows as of ~~2020.~~the date of closing:


	As of
	August 12, 2020
	(dollars in thousands)

ASSETS
Cash and due from banks	$	349
Premises and equipment, net		19
Other assets		2,211
Total assets sold	$	2,579

LIABILITIES
Other liabilities	$	946
Total liabilities sold	$	946

Net assets sold	$	1,633



Forgiveness of earn-out consideration		880
Note receivable consideration		448
Loss on sale of subsidiary	$	305

~~Goodwill impairment~~Disposition costs related to the ~~execution~~sale totaled $192 thousand and were comprised primarily of ~~the agreement to sell the Bates Companies was $500,000 in the first quarter of 2020.~~legal, accounting and personnel costs.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~INTRODUCTION~~

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three and nine months ending ~~March 31,~~September 30, 2020. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. The page locations and specific sections and notes that are referred to in this discussion are presented in the table of contents.

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

~~GENERAL~~

GENERAL

QCR Holdings, Inc. is a financial holding company and the parent company of QCBT, CRBT, CSB and ~~SFC Bank.~~SFCB. QCBT, CRBT and CSB are Iowa-chartered commercial banks and ~~SFC Bank~~SFCB is a Missouri-chartered commercial bank. All four charters are members of the Federal Reserve system with depository accounts insured to the maximum amount permitted by the FDIC.

●

QCBT commenced operations in 1994 and provides full-service commercial and consumer banking, and trust and asset management services to customers in the Quad City area and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. QCBT also provides leasing services through its wholly-owned subsidiary, m2, located in Brookfield, Wisconsin. In addition, QCBT owns 100% of Quad City Investment Advisors, LLC, which is an investment management and advisory company.

●

CRBT commenced operations in 2001 and provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its five offices located in Cedar Rapids and Marion, Iowa. Cedar Falls and Waterloo, Iowa and adjacent communities are served through three additional CRBT offices (one in Cedar Falls and two in Waterloo).

●

CSB was acquired by the Company in 2016 and provides full-service commercial and consumer banking services to the Des Moines, Iowa area and adjacent communities through its 10 offices, including its main office located on North Ankeny Boulevard in Ankeny, Iowa.

●

~~SFC Bank~~SFCB became a subsidiary of the Company in 2018 and provides full-service commercial and consumer banking services to the Springfield, Missouri area through its main office located on Glenstone Avenue in Springfield, Missouri.

IMPACT OF COVID-19

The progression of the COVID-19 pandemic in the United States has had an adverse impact on the Company’s financial condition and results of operations as of and for the three and nine months ended ~~March 31,~~September 30, 2020, and ~~is expected to~~could have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on the Company’s Market Areas

The Company offers commercial and consumer banking products and services primarily in ~~Illinois,~~Iowa, Missouri and ~~Iowa.~~Illinois. Each of these three states has taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. In June 2020, the governors of Iowa, Missouri and Illinois ~~Governor J.B Pritzker has ordered individuals to stay at home and non-essential businesses to cease all activities,~~ in each ~~case subject to limited exceptions. This order went into effect on March 21, 2020 and is currently effective through~~lifted or modified COVID-19 restrictions.

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May 30, 2020. In Missouri, Governor Mike Parson has ordered individuals to stay at home, and imposed limitations on gathering sizes applicable to businesses. This order went into effect on April 3, 2020 and expired May 3, 2020, withAlthough the ~~gradual~~ reopening of ~~certain businesses. In Iowa, Governor Kim Reynolds recently issued a series of orders, including orders for many retail establishments~~each jurisdiction is subject to ~~close~~change and ~~imposing limitations on gathering sizes in certain parts of the state. Such orders are generally~~setback, currently ~~effective through May 15, 2020. All~~all of the subsidiary banks’ branches ~~have been permitted to remain~~are open ~~under the orders, although the banks have maintained limited lobby access at all branches since March 13, 2020.~~during normal business hours.

Each state ~~has~~ experienced rapidly increasing unemployment levels as a result of the curtailment of business activities, rising from an average of ~~4.0%~~4.6% in Illinois in ~~January~~March 2020 to an average of ~~4.6%~~11.0% in ~~March~~August 2020, according to the Illinois Department of Employment Security. The unemployment rate in Illinois has improved from its highest point this year in May 2020 of an average of 15.2%. Unemployment rose from an average of ~~3.5%~~4.5% in Missouri in ~~January~~March 2020 to ~~4.5%~~4.9% in ~~March~~September 2020, according to the Missouri Department of Labor and Industrial Relations. The unemployment rate in Missouri has improved from its highest point this year in May 2020 of an average of 10.1%. In Iowa, unemployment rose from an average of ~~2.8%~~3.7% in ~~January~~March 2020 to ~~3.7%~~4.7% in ~~March~~September 2020, according to the Iowa Workforce Development. ~~These levels are expected to rise further. To date, many~~The unemployment rate in Iowa has improved from its highest point this year in May 2020 of ~~the public health and economic effects~~an average of ~~COVID-19 have been concentrated in large cities, but we anticipate that these effects will occur on a more delayed basis in smaller communities, where the Company’s banking operations are focused.~~10.0%.

Policy and Regulatory Developments

Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

●

The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%.

●

On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, which ~~provides~~provided for cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act, which authorized an additional $310 billion of PPP loans. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals ~~may~~could apply for loans from existing SBA lenders and other approved regulated lenders that ~~enroll~~enrolled in the program, subject to limitations and eligibility criteria. The original timeframe for PPP lending expired on June 30, 2020, but Congress acted on June 30, 2020 to provide a 5-week PPP extension for lending to allow small businesses additional time to apply for the remaining PPP funds allocated by Congress in connection with the CARES Act. The subsidiary banks ~~are participating~~have participated as lenders in the PPP.

●

In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. ~~See~~To be eligible, the modification must be related to COVID-19, the existing loan could not be more than 30 days past due as of December 31, 2019 and the modification must be executed between March 1, 2020 and the earlier of 60 days after the termination of the National Emergency or December 31, 2020. If a modification does not meet the criteria of the CARES Act, a deferral can still be excluded from TDR treatment as long as the modifications meet the FASB criteria discussed in Note 3 of the Consolidated Financial ~~Statements for additional discussion on TDRs.~~

Statements.

●

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19 and stated that institutions generally do not need to categorize COVID-19-related modifications as ~~TDRs, and the~~TDRs. The agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 3 of the Consolidated Financial Statements for additional discussion on TDRs.

●

On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to

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facilitate lending to small and midsized businesses: the MSNLF and the MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized

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tranches of existing loans originated before April 8, 2020. The combined size of the program will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve has provided additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio.

●

In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19, but then subsequently downgraded after March 22, 2020 to gain access to such a facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion.

As of September 30, 2020, the Company is only participating in the PPP and not the Main Street Business Lending Program.

Effects on the Company’s Business

The Company currently expects that the COVID-19 pandemic and the specific developments referred to above ~~will~~could continue to have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, ~~entertainment~~arts/entertainment/recreation and retail industries ~~will~~could continue to endure significant economic distress, and ~~could adversely affect their ability and willingness~~some borrowers’ability to repay existing indebtedness ~~and could~~have been adversely ~~impact~~effected. Therefore, the value of certain collateral pledged to the ~~banks.~~banks have been adversely impacted. These developments, together with economic conditions generally, have impacted and are ~~also~~ expected to continue to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. In addition, the Company’s loan and lease growth, ~~could slow~~ exclusive of ~~the~~ PPP loans, could slow while deposit growth could accelerate as businesses and consumers navigate the continuing impact. As a result, the Company anticipates that its ~~financial condition, capital levels,~~ asset quality and results of operations ~~will~~could be adversely affected, as described in further detail below.

The Company’s Response

The Company has taken numerous steps in response to the COVID-19 pandemic, including the following:

●

The Company implemented ~~a loan relief program~~its LRP offering to extend qualifying customers’ payments for 90 days. The program has provided ~~2,158~~2,451 modifications of loans and leases totaling ~~$497.0~~$575.0 million to commercial and consumer clients as of ~~May 1,~~September 30, 2020.

●

As the Company moved ~~to limited lobby access~~ to protect the health and safety of its employees and clients, digital collaboration and digital banking applications have become business critical. The Company is using virtual meetings to stay connected with its clients and bank customers are leveraging the Company’s mobile banking capabilities. The Company’s digital communications tool is a modern enterprise video application, with an easy, reliable and secure cloud platform for video and audio conferencing, chat and web conferencing across mobile, desktop and room systems. It has enabled the Company to continue to collaborate in real-time across the enterprise and to meet face-to-face with ~~our~~ clients while working remotely to adhere to the Center for Disease Control’s physical distancing guidelines. Clients are using the Company’s existing mobile banking

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and mobile payment capabilities including: on-line banking, remote deposit, on-line retail loan applications and person-to-person payment applications that are available across multiple form factors. These applications have enabled customers to engage with the Company virtually to meet their community banking needs. The Company proactively reached out to customers to make sure that they knew how to use these tools and increased their mobile deposit limits to enable expanded use of remote deposit

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features. The Company also worked with primary digital banking solution providers to make adjustments to their hosting capabilities to accommodate the unprecedented levels of volume through this digital channel.

●

The Company began to execute on its Public Emergency Preparedness Plan (“PEP”) mid-February. The PEP was created to coordinate resources in an organized manner to respond to any public emergency that may significantly affect staffing. One of the situations specifically called out in the plan is a health-related event such as a specific threat of influenza, or other disease, creating pandemic conditions. This program is an important part of the Company’s Business Continuity Program, which specifically addresses rapid recovery from an occurrence that would disable any entity for a period exceeding 48 hours. The goal of the plan is to protect employees, customers, facilities, systems, property and operations during any public emergency and maintain normal operations, to the extent possible, consistent with those goals. In the event that normal operations cannot be maintained, the goals will be to maximize the continuity of the essential services to our customers, protect the health and safety of employees and customers, and minimize adverse financial impact to our institutions. Finally, the plan ~~will provide~~provides for a return to full operations and services as quickly as possible. The plan was fully implemented during the first two weeks of March and the following strategies were executed:

Emergency Preparedness Response Team critical members were identified to direct the Company’s planning, preparedness, training and response to lead the recovery effort with the COVID-19 pandemic;

increased cash reserves at all charters were established and the charters began monitoring cash outflows;

IT testing began to ensure the Company’s systems were capable of handling traffic generated by employees working from home;

~~reviewed~~ cross training lists for each department were reviewed in case of staff shortages;

departments were split into specific ~~departments into~~ shifts so not all employees were working together at the same time; and

communication sites were activated in case emergency information needed to be communicated to employees.

●

The PPP was approved as part of the CARES Act and authorized up to $349 billion in forgivable loans to small businesses to pay their employees and for other operating expenses, during the COVID-19 crisis, and an additional $310 billion of loans were authorized to be made underUnder the PPP, ~~in a second phase of funding. The~~the Company has processed ~~1,627~~1,698 loans for a total of ~~$355.6~~$357.5 million as of ~~May 1,~~September 30, 2020. The Company is continuing to take PPP applications and is currently processing new loans under newly approved additional funding.

PPP loans are included in the C&I category of loans in Note 3 of the Consolidated Financial Statements.

●

The Company has implemented a number of actions to support a healthy workforce, including:

adopting alternative work practices such as working in shifts, social distancing in our facilities and adding remote work options for approximately half of our workforce;

discontinued business travel, large events and meetings; and

~~utilizing online meeting platforms.~~

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utilizing online meeting platforms.

●

On February 28, 2020, the Company’s Board of Directors authorized a share repurchase program, permitting the repurchase of up to 800,000 shares of the Company’s outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if the Company does not maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic.

It is undecided whether or when the Company will resume the repurchase of shares under this program in the future.

EXECUTIVE OVERVIEW

The Company reported net income of ~~$11.2~~$17.3 million and diluted EPS of ~~$0.70~~$1.09 for the quarter ended ~~March 31,~~September 30, 2020. By comparison, for the quarter ended ~~December 31,~~June 30, 2020, the Company reported net income of $13.7 million and diluted EPS of $0.86. For the quarter ended September 30, 2019, the Company reported net income of ~~$15.9~~$15.1 million, and diluted EPS of ~~$0.99.~~$0.94. For the ~~quarter~~nine months ended ~~March 31,~~September 30, 2020, the Company reported net income of $42.3 million, and diluted EPS of $2.65. By comparison, for the nine months ended September 30, 2019, the Company reported net income of ~~$12.9~~$41.5 million, and diluted EPS of ~~$0.81.~~$2.60.

The ~~first~~third quarter of 2020 was also highlighted by the following results and events:

●

~~Net~~Record net income of ~~$11.2~~$17.3 million, or ~~$0.70~~$1.09 per diluted share;

●

Adjusted net income (non-GAAP) of ~~$12.4~~$17.7 million, or ~~$0.77~~$1.11 per diluted share;

●

Record noninterest income of $38.0 million;

●

Record pre-provision/pre-tax adjusted net income (non-GAAP) of $42.2 million;

●

NIM increased ~~by 4~~22 bps and NIM (TEY)(non-GAAP) increased by 524 bps to ~~3.40%~~3.36% and ~~3.56%~~3.51%, respectively;

●

~~Noninterest income of $15.2 million;~~

Annualized core loan and lease growth (non-GAAP) of ~~1.6%~~11.5% for the ~~quarter;~~

quarter, excluding SBA PPP loans;

●

~~Annualized deposit growth of 26.5% for the quarter; and~~

Provision expense of ~~$8.4~~$20.3 million for the quarter, increasing ALLL to Total Loans, excluding PPP loans (non-GAAP), by 1644 bps to ~~1.14%.~~

2.05%

●

Annualized core deposit growth of 36.4% for the quarter; and

●

LRP participation down approximately 90% from the prior quarter to only 1.95% of total loans and leases.

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

For the three months ended

March 31, 2020

December 31, 2019

March 31, 2019

(dollars in thousands)

Net income

$
11,228

$
15,891

$
12,918

Diluted earnings per common share

$
0.70

$
0.99

$
0.81

Weighted average common and common equivalent shares outstanding

16,011,456

16,033,043

15,922,940

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

For the three months ended


March 31, 2020

December 31, 2019

March 31, 2019


(dollars in thousands)

Net interest income

$
37,698

$
39,919

$
36,908

Provision expense

8,367

979

2,134

Noninterest income

15,196

29,805

11,993

Noninterest expense

31,415

46,294

32,435

Federal and state income tax expense

1,884

6,560

1,414

Net income

$
11,228

$
15,891

$
12,918


	For the three months ended						For the nine months ended
	September 30, 2020		June 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

	(dollars in thousands)

Net income	$	17,344	$	13,739	$	15,095	$	42,311	$	41,517

Diluted earnings per common share	$	1.09	$	0.86	$	0.94	$	2.65	$	2.60

Weighted average common and common equivalent shares outstanding		15,923,578		15,895,336		15,976,742		15,945,832		15,946,020

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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, 2020		June 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

	(dollars in thousands)
Net interest income	$	44,581	$	40,948	$	40,719	$	123,243	$	115,640
Provision expense		20,342		19,915		2,012		48,624		6,087
Noninterest income		37,959		28,626		19,906		81,781		48,964
Noninterest expense		40,838		33,122		39,945		105,391		108,941
Federal and state income tax expense		4,016		2,798		3,573		8,698		8,059
Net income	$	17,344	$	13,739	$	15,095	$	42,311	$	41,517

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

●

Net interest income in the ~~first~~third quarter of 2020 was ~~down 6%~~up 9% compared to the ~~fourth~~second quarter of 2019. Comparisons of net interest income were impacted by the sale of RB&T on November 30, 2019 and varying levels of acquisition-related net accretion. While the sale of RB&T reduced average earning assets by 5.3% on a linked-quarter basis, net interest income was nearly static due to a significant increase in net interest margin in the first quarter of 2020. ~~Net interest income increased 2% compared to the first quarter of 2019.~~ The increase was primarily due to an increase in net interest margin due to strong loan growth and significant declines in cost of funds, and to a lesser extent, the growth in average interest-earning assets of $25.6 million, or 0.5% on a linked quarter basis. Net interest income increased 9% compared to the third quarter of 2019 and 7% when comparing the first nine months of 2020 to the same period of the prior year. The increase was primarily due to loan growth led by Specialty Finance Group and new relationships from PPP loan customers during the ~~full year 2019.~~

first nine months of 2020.

●

Provision expense in the ~~first~~third quarter of 2020 increased ~~$7.4~~$427 thousand compared to the second quarter of 2020. Provision expense increased $18.3 million compared to the ~~fourth~~third quarter of ~~2019. Provision expense increased $6.2~~2019 and $42.5 million ~~compared~~when comparing the first nine months of 2020 to the ~~first quarter of 2019.~~same period in the prior year. The increase was primarily due to increased qualitative allocations in response to deteriorating economic conditions as related to the effects of COVID-19. See the Provision for ~~Loan~~ Loan/Lease Losses section of this report for additional details.

●

Noninterest income in the ~~first~~third quarter of 2020 ~~decreased 49%~~increased 33% compared to the ~~fourth~~second quarter of 2020 primarily due to higher swap fee income. Noninterest income increased 91% compared to the third quarter of 2019 ~~primarily due~~and 67% when comparing the first nine months of 2020 to ~~a gain on sale of assets and liabilities of RB&T totaling $12.3 million~~the same period in the ~~fourth quarter of 2019. Excluding this, noninterest income increased 27% compared to the first quarter of 2019.~~prior year. This increase was also primarily attributable to higher swap fee ~~income.~~

~~Noninterest expense decreased 32%~~income in the first nine months of 2020.

●

Noninterest expense increased 23% in the third quarter of 2020 compared to the ~~fourth~~second quarter of ~~2019.~~2020. Salaries and employee benefits were ~~$18.5~~$26.0 million in the ~~first~~third quarter of 2020 as compared to ~~$24.2~~$21.3 million in the ~~fourth~~second quarter of ~~2019~~2020 primarily due to ~~reduced bonus and~~higher incentive compensation as a result of the ~~impact of COVID-19. Post-acquisition, compensation, transition~~higher swap fee income and ~~integration costs~~strong financial results. FDIC and other insurance, and regulatory fees were ~~$151 thousand~~$1.3 million in the ~~first~~third quarter of 2020 as compared to $908 thousand in the second quarter of 2020 due to increased asset growth in both loans and cash. Loss on liability extinguishment was $1.9 million in the ~~fourth quarter of 2019 primarily due to data processing conversion costs at SFC Bank in the fourth quarter of 2019. Disposition costs were $517 thousand in the first~~third quarter of 2020 as compared to ~~$3.3 million~~$429 thousand in the ~~fourth~~second quarter of 2020 due to increased early payoffs of FHLB advances in the third quarter. Noninterest expense increased 2% compared to the third quarter of 2019 and decreased 3% when comparing the first nine months of 2020 to the same period in the prior year. Salaries and employee benefits for the first nine months of 2020 were down 3% from prior year primarily due to the sale of RB&T ~~occurring in the fourth quarter of 2019. The Company had $3.0 million of goodwill impairment in the fourth quarter related to the Bates Companies~~and deferred costs due to ~~the exit of the Rockford market with the sale of RB&T. Noninterest expense decreased 3% compared to the first quarter of 2019.~~

PPP loans.

●

Federal and state income tax expense in the ~~first~~third quarter of 2020 ~~decreased 71%~~increased 44% compared to the ~~fourth~~second quarter of ~~2019.~~2020. Federal and state income tax expense increased ~~33%~~12% compared to the ~~first~~third quarter of ~~2019.~~2019 and increased 8% when comparing the first nine months of 2020 to the same period in the prior year. See the “Income Taxes” section of this report for additional details on these increases.

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STRATEGIC FINANCIAL METRICS

The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form ~~10‑K~~10-K for the year ended December 31, 2019. The Company's long-term strategic financial metrics are as follows:

●

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

●

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

●

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

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


						Year to Date
Strategic Financial Metric*	Key Metric	Target	~~For the Quarter Ending~~
~~Strategic Financial Metric~~	~~Key Metric~~	~~Target~~	~~March 31,~~September 30, 2020*
Loans and leases growth organically **	Loans and leases growth	> 9% annually		~~1.6~~11.5	%
Fee income growth	Fee income growth	> 6% annually		~~(8.3)~~61.1	%
Improve operational efficiencies and hold noninterest expense growth	Noninterest expense growth	< 5% annually		~~(13.7)~~(5.3)	%

* 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 for the quarter ended March 31, 2020.~~expense.

** Loans and leases growth excludes PPP loans.

It should be noted that these initiatives are long-term targets. Due to the impact of the COVID-19 pandemic, among other factors, the Company may not be able to achieve these goals for the full year 2020.

STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the ~~first~~third quarter of 2020 to support its corporate strategy:

●

The Company grew loans and leases organically in the ~~first~~third quarter of 2020 by ~~1.6%~~11.5% on an annualized ~~basis. Loan and lease growth was adversely impacted by scheduled payoffs early in the quarter and reduced economic activity~~basis, excluding PPP loans (non-GAAP), reflecting healthy demand across all ~~markets as a result of the voluntary or mandatory closures of public venues, businesses, schools and government offices due to the COVID-19 pandemic.~~

markets.

●

Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states currently served – Iowa, ~~Illinois,~~ Wisconsin, Missouri and ~~Missouri.~~Illinois. The Company ~~acts~~acted as the correspondent bank for 192 downstream banks with average total noninterest bearing deposits of $307.0 million and average total interest bearing deposits of $542.6 million during the first nine months of 2020. By comparison, the Company acted as the correspondent bank for 195 downstream banks with average total noninterest bearing deposits of ~~$185.6~~$170.5 million and average total interest bearing deposits of ~~$355.4~~$330.5 million during the first three months of 2020. By comparison, the Company acted as the correspondent bank for 196 downstream banks with average total noninterest bearing deposits of $170.4 million and average total interest bearing deposits of $286.1 million during the first threenine months of 2019. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

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●

As a result of the relatively low interest rate environment including a flat ~~to inverted~~ yield curve, the Company has focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as appropriate for the borrowers and the Company. Swap fee income totaled ~~$6.8~~$53.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 as compared to ~~$3.2~~$20.9 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

●

Noninterest expense for the first ~~quarter~~nine months of 2020 totaled ~~$31.4~~$105.4 million as compared to ~~$32.4~~$108.9 million in the first ~~quarter~~nine months of 2019. ~~The decrease was~~Salaries and employee benefits for the first nine months of 2020 were down 3% from the same period of the prior year primarily due to ~~a decline in salaries and employee benefits as a result of reduced bonus and incentive compensation due to the impact of COVID-19 and~~ the sale of RB~~&T.~~

&T and deferred costs due to PPP loans.

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GAAP TO NON-GAAP RECONCILIATIONS

The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “TCE/TA ratio excluding PPP loans”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “pre-provision/pre-tax adjusted income”, “pre-provision/pre-tax adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, ~~and~~ “efficiency ratio”, “ALLL to total loans and leases excluding PPP loans” and “loan growth annualized excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:

●

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

●

TCE/TA ratio excluding PPP loans (non-GAAP) is reconciled to stockholders’ equity and total assets;

●

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

●

Pre-provision/Pre-tax adjusted income isand pre-provision/pre-tax adjusted ROAA (all non-GAAP measures) are reconciled to net income;

●

NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM; ~~and~~

●

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

income; and

●

ALLL to total loans and leases excluding PPP loans and loan growth annualized excluding PPP loans are reconciled to ALLL and total loans and leases.

The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets. The TCE/TA ratio excluding PPP loans non-GAAP ratio is provided as the Company’s management believes this financial measure is important to investors as total assets for the quarter ended September 30, 2020 and June 30, 2020 were materially higher due to the addition of PPP loans. By excluding the PPP loans, management believes the investor is provided a better comparison to prior periods for analysis.

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

The pre-provision/pre-tax adjusted income ~~is a measurement~~and pre-provision/pre-tax adjusted ROAA are measurements of the Company’s financial performance excluding provision and income taxes as well as non-recurring income and expense items. The

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Company’s management believes this financial measure is important to investors as the provision for the ~~quarter~~quarters ended ~~March 31,~~September 30, 2020 and June 30, 2020 was materially higher due to the impact of ~~COVID-19 as well as its impact on income taxes.~~COVID-19. By excluding the provision and income taxes as well as non-recurring income and expense items, the investor is provided a better comparison to prior periods for analysis.

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

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

ALLL to total loans and leases, excluding PPP loans, and loan growth annualized, excluding PPP loans, are ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the quarters ended September 30, 2020 and June 30, 2020 were materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an increase in ALLL. By excluding the PPP loans, the investor is provided a better comparison to prior periods for analysis.


	As of
GAAP TO NON-GAAP	September 30,			June 30,			September 30,
RECONCILIATIONS	2020			2020			2019

		(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	572,613		$	556,020		$	519,743
Less: Intangible assets		85,968			88,120			93,277
TCE (non-GAAP)	$	486,645		$	467,900		$	426,466

Total assets (GAAP)	$	5,864,560		$	5,604,761		$	5,292,382
Less: Intangible assets		85,968			88,120			93,277
TA (non-GAAP)	$	5,778,592		$	5,516,641		$	5,199,105

TCE/TA ratio (non-GAAP)		8.42	%		8.48	%		8.20	%


TCE/TA RATIO EXCLUDING PPP LOANS
Stockholders' equity (GAAP)	$	572,613		$	556,020		$	519,743
Less: PPP loan interest income (post-tax)		4,934			2,085			—
Less: Intangible assets		85,968			88,120			93,277
TCE (non-GAAP)	$	481,711		$	465,815		$	426,466

Total assets (GAAP)	$	5,864,560		$	5,604,761		$	5,292,382
Less: PPP loans		357,506			358,052			—
Less: Intangible assets		85,968			88,120			93,277
TA (non-GAAP)	$	5,421,086		$	5,158,589		$	5,199,105

TCE/TA ratio excluding PPP loans (non-GAAP)		8.89	%		9.03	%		8.20	%

As of

GAAP TO NON-GAAP

March 31,

December 31,

March 31,

RECONCILIATIONS

2020

2019

2019

(dollars in thousands, except per share data)

TCE/TA RATIO





Stockholders' equity (GAAP)

$
539,139

$
535,351

$
488,407

Less: Intangible assets

88,669

89,718

94,790

TCE (non-GAAP)

$
450,470

$
445,633

$
393,617

Total assets (GAAP)

$
5,232,075

$
4,909,050

$
5,066,662

Less: Intangible assets

88,669

89,718

94,790

TA (non-GAAP)

$
5,143,406

$
4,819,332

$
4,971,872

TCE/TA ratio (non-GAAP)

8.76
%

9.25
%

7.92
%

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Part I

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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,
										2020			2020			2019			2020			2019

	For the Quarter Ended
	March 31,			December 31,			March 31,
	2020			2019			2019
	(dollars in thousands, except per share data)
										(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	11,228		$	15,891		$	12,918		$	17,344		$	13,739		$	15,095		$	42,311		$	41,517
Less nonrecurring items (post-tax) (*):
Less non-coore items (post-tax) (*):
Income:
Securities gains (losses), net		—			21			—		$	1,424		$	51		$	(2)		$	1,475		$	(43)
Gain on sale of assets and liabilities of subsidiary	$	—		$	8,539		$	—
Total nonrecurring income (non-GAAP)	$	—		$	8,560		$	—
Total non-core income (non-GAAP)										$	1,424		$	51		$	(2)		$	1,475		$	(43)
Expense:
Losses on debt extinguishment	$	116		$	228		$	—		$	1,480		$	339		$	117		$	1,936		$	117
Goodwill impairment		500			3,000			—			—			—			—			500			—
Disposition costs		408			2,627			—			152			(66)			—			495			—
Tax expense on expected liquidation of RB&T BOLI		—			790			—
Post-acquisition compensation, transition and integration costs		119			1,465			106			(25)			55			698			149			1,363
Total nonrecurring expense (non-GAAP)	$	1,144		$	8,110		$	106


Loss on sale of subsidiary											212			—			—			212			—
Total non-core expense (non-GAAP)										$	1,819		$	328		$	815		$	3,291		$	1,480


Adjusted net income (non-GAAP)	$	12,372		$	15,441		$	13,024		$	17,739		$	14,016		$	15,912		$	44,127		$	43,040


PRE-PROVISION/PRE-TAX ADJUSTED INCOME
Net income (GAAP)	$	11,228		$	15,891		$	12,918		$	17,344		$	13,739		$	15,095		$	42,311		$	41,517
Less: Non-core income not tax-effected		—			12,313			—			1,802			65			(3)			1,867			(54)
Plus: Non-core expense not tax-effected		1,315			9,258			134			2,339			416			1,032			4,070			1,873
Provision expense		8,367			979			2,134			20,342			19,915			2,012			48,624			6,087
Federal and state income tax expense		1,884			6,560			1,414			4,016			2,798			3,573			8,698			8,059
Pre-provision/pre-tax adjusted income (non-GAAP)	$	22,794		$	20,375		$	16,600		$	42,239		$	36,803		$	21,714		$	101,836		$	57,591


PRE-PROVISION/PRE-TAX ADJUSTED RETURN ON AVERAGE ASSETS (NON-GAAP)
Pre-provision/pre-tax adjusted income (non-GAAP)										$	42,239		$	36,803		$	21,714		$	101,836		$	57,591

Average assets											5,820,555			5,800,164			5,217,763			5,524,087			5,088,055

Pre-provision/pre-tax adjusted return on average assets (non-GAAP)											2.90	%		2.54	%		1.66	%		2.46	%		1.51	%

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	12,372		$	15,441		$	13,024		$	17,739		$	14,016		$	15,912		$	44,127		$	43,040


Weighted average common shares outstanding		15,796,796			15,772,703			15,693,345			15,767,152			15,747,056			15,739,430			15,770,335			15,715,788
Weighted average common and common equivalent shares outstanding		16,011,456			16,033,043			15,922,940			15,923,578			15,895,336			15,976,742			15,945,832			15,946,020


Adjusted EPS (non-GAAP):
Basic	$	0.78		$	0.98		$	0.83		$	1.13		$	0.89		$	1.01		$	2.80		$	2.74
Diluted	$	0.77		$	0.96		$	0.82		$	1.11		$	0.88		$	1.00		$	2.77		$	2.70


ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	12,372		$	15,441		$	13,024		$	17,739		$	14,016		$	15,912		$	44,127		$	43,040


Average Assets	$	4,948,311		$	5,147,754		$	4,968,502		$	5,820,555		$	5,800,164		$	5,217,763		$	5,524,087		$	5,088,055


Adjusted ROAA (annualized) (non-GAAP)		1.00	%		1.20	%		1.05	%		1.22	%		0.97	%		1.22	%		1.07	%		1.13	%


ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	37,698		$	39,919		$	36,908		$	44,581		$	40,948		$	40,719		$	123,243		$	115,640
Plus: Tax equivalent adjustment		1,790			1,783			1,794			1,942			1,728			1,763			5,587			4,944
Net interest income - tax equivalent (non-GAAP)	$	39,488		$	41,702		$	38,702		$	46,523		$	42,676		$	42,482		$	128,830		$	120,584
Less: Acquisition accounting net accretion		625			931			1,069
Less: Accquisition accounting net accretion											833			736			1,268			2,194			3,413
Adjusted net interest income		38,863			40,771			37,633			45,690			41,940			41,214			126,636			117,171


Average earning assets	$	4,461,018		$	4,711,310		$	4,612,553		$	5,278,298		$	5,252,663		$	4,791,274		$	4,998,352		$	4,700,617


NIM (GAAP)		3.40	%		3.36	%		3.25	%		3.36	%		3.14	%		3.37	%		3.29	%		3.29	%
NIM (TEY) (non-GAAP)		3.56	%		3.51	%		3.40	%		3.51	%		3.27	%		3.52	%		3.44	%		3.43	%
Adjusted NIM (TEY) (non-GAAP)		3.50	%		3.43	%		3.31	%		3.44	%		3.21	%		3.41	%		3.38	%		3.33	%


EFFICIENCY RATIO
Noninterest expense (GAAP)	$	31,415		$	46,294		$	32,435		$	40,838		$	33,122		$	39,945		$	105,391		$	108,941


Net interest income (GAAP)	$	37,698		$	39,919		$	36,908		$	44,581		$	40,948		$	40,719		$	123,243		$	115,640
Noninterest income (GAAP)		15,196			29,805			11,993			37,959			28,626			19,906			81,781			48,964
Total income	$	52,894		$	69,724		$	48,901		$	82,540		$	69,574		$	60,625		$	205,024		$	164,604


Efficiency ratio (noninterest expense/total income) (non-GAAP)		59.39	%		66.40	%		66.33	%		49.48	%		47.61	%		65.89	%		51.40	%		66.18	%

ALLLTO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS
ALLL										$	79,582		$	60,827		$	36,116		$	79,582		$	36,116

Total loans and leases										$	4,247,977		$	4,140,259		$	3,610,270		$	4,247,977		$	3,610,270
Less: PPP loans											357,506			358,052			—			357,506			—
Total loans and leases, excluding PPP loans										$	3,890,471		$	3,782,207		$	3,610,270		$	3,890,471		$	3,610,270

ALLL to total loans and leases, excluding PPP loans											2.05	%		1.61	%		1.00	%		2.05	%		1.00	%

LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS
Total loans and leases										$	4,247,977		$	4,140,259		$	3,610,270		$	4,247,977		$	3,610,270
Less: PPP loans											357,506			358,052			—			357,506			—
Total loans and leases, excluding PPP loans										$	3,890,471		$	3,782,207		$	3,610,270		$	3,890,471		$	3,610,270

Loan growth annualized, excluding PPP loans											11.45	%		8.37	%		(30.71)	%		16.28	%		(9.84)	%

* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of goodwill impairment which is not deductible for tax and ~~gain~~gain/loss on sale of subsidiary which has an estimated effective tax rate of 30.5%.

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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 2%9% to ~~$39.5~~$46.5 million for the quarter ended ~~March 31,~~September 30, 2020 compared to the same quarter of the prior year, and increased 7% to $128.8 million for the nine months ended September 30, 2020 compared to the same period of the prior year. Excluding the tax equivalent adjustments, net interest income increased 2%10% for the quarter ended ~~March 31,~~September 30, 2020 compared to the same quarter of the prior year, and increased 7% for the nine months ended September 30, 2020 compared to the same period of the prior year. Net interest income improved due to the following factors:

●

~~Strong~~Continued organic loan and deposit ~~growth over the past 12 months;~~

growth;

●

Significant growth in PPP loans in the early part of the second quarter of 2020;

~~Decreased~~●

Reduction in higher cost wholesale funds with strong core deposit growth including noninterest bearing deposits; and

●

Significant reduction in cost of ~~funds; and~~

funds.

~~Reduced borrowings.~~

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
	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
	2020		2019		2019		2020		2019		2019

													Tax Equivalent Basis						GAAP
													For the Quarter Ended						For the Quarter Ended
													September 30,		June 30,		September 30,		September 30,		June 30,		September 30,
													2020		2020		2019		2020		2020		2019
Average Yield on Interest-Earning Assets	4.58	%	4.61	%	4.74	%	4.39	%	4.46	%	4.58	%	3.99	%	3.86	%	4.85	%	3.86	%	3.70	%	4.70	%
Average Cost of Interest-Bearing Liabilities	1.33	%	1.44	%	1.72	%	1.33	%	1.44	%	1.72	%	0.66	%	0.80	%	1.71	%	0.67	%	0.79	%	1.71	%
Net Interest Spread	3.24	%	3.17	%	3.02	%	3.07	%	3.02	%	2.86	%	3.33	%	3.06	%	3.14	%	3.19	%	2.91	%	2.99	%
NIM	3.56	%	3.51	%	3.40	%	3.40	%	3.36	%	3.25	%	3.51	%	3.27	%	3.52	%	3.36	%	3.14	%	3.37	%
NIM Excluding Acquisition Accounting Net Accretion	3.50	%	3.43	%	3.31	%	3.37	%	3.28	%	3.15	%	3.44	%	3.21	%	3.41	%	3.36	%	3.10	%	3.27	%


	Tax Equivalent Basis				GAAP
	For the Nine Months Ended				For the Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Average Yield on Interest-Earning Assets	4.12	%	4.78	%	3.96	%	4.64	%
Average Cost of Interest-Bearing Liabilities	0.91	%	1.73	%	0.67	%	1.73	%
Net Interest Spread	3.21	%	3.05	%	3.29	%	2.91	%
NIM	3.44	%	3.43	%	3.29	%	3.29	%
NIM Excluding Acquisition Accounting Net Accretion	3.38	%	3.33	%	3.24	%	3.19	%

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

March 31,

December 31,

March 31,


2020


2019


2019

(dollars in thousands)

Acquisition Accounting Net Accretion in NIM
$
625

$
931

$
1,069


		For the Quarter Ended						For the Nine Months Ended
		September 30,		June 30,		September 30,		September 30,		September 30,
		2020		2020		2019		2020		2019
		(dollars in thousands)						(dollars in thousands)

Acquisition Accounting Net Accretion in NIM	$	833	$	736	$	1,268	$	2,194	$	3,413

NIM on a tax equivalent basis was up 24 basis pointson a linked quarter basis. Excluding acquisition accounting net accretion, NIM was up 23 basis points on a linked quarter basis. The increase in net interest margin during the quarter

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~NIM on a tax equivalent basis was up 5 basis pointson a linked quarter basis. Excluding acquisition accounting net accretion, NIM was up 7 basis points on a linked quarter basis. The increase in net interest margin during the quarter~~ was due to ~~an 11~~a 13 basis point ~~decrease~~increase in the yield on earning assets combined with a 14 basis point decline in the total cost of interest-bearing funds (due to both mix and rate).

The ~~Company's~~Company’s management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet

~~management~~ strategies which include better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate changes and finding additional ways to manage NIM through derivatives.

In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2019 and 2020.

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


																	For the Three Months Ended September 30,
																	2020								2019
																				Interest		Average						Interest		Average
																	Average			Earned		Yield or			Average			Earned		Yield or
																	Balance			or Paid		Cost			Balance			or Paid		Cost

	For the Three Months Ended March 31,
	2020								2019
				Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)
																	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	5,324		$	18		1.36	%	$	15,736		$	93		2.40	%	$	2,205		$	1		0.18	%	$	7,234		$	42		2.30	%
Interest-bearing deposits at financial institutions		128,612			361		1.13	%		155,463			923		2.41	%		321,679			92		0.11	%		172,386			951		2.19	%
Investment securities (1)		619,307			6,080		3.95	%		660,454			6,096		3.74	%		749,425			6,836		3.66	%		626,471			6,080		3.85	%
Restricted investment securities		21,365			258		4.86	%		21,285			307		5.85	%		19,714			249		4.94	%		22,719			293		5.12	%
Gross loans/leases receivable (1) (2) (3)		3,686,410			44,056		4.81	%		3,759,615			46,477		5.01	%		4,185,275			45,654		4.34	%		3,962,464			51,214		5.13	%
Total interest earning assets		4,461,018			50,773		4.58	%		4,612,553			53,896		4.74	%		5,278,298			52,832		3.99	%		4,791,274			58,580		4.85	%


Noninterest-earning assets:
Cash and due from banks		99,426								78,631								75,480								85,262
Premises and equipment		73,906								76,523								72,618								79,646
Less allowance		(36,000)								(40,461)								(61,892)								(41,673)
Other		349,936								241,256								456,051								303,254
Total assets	$	4,948,286							$	4,968,502							$	5,820,555							$	5,217,763


LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	2,379,635			5,327		0.90	%	$	2,288,109			7,174		1.27	%	$	2,932,988			2,086		0.28	%	$	2,505,383			7,907		1.25	%
Time deposits		785,135			3,879		1.99	%		1,012,459			5,305		2.12	%		638,031			2,399		1.50	%		975,736			5,486		2.23	%
Short-term borrowings		19,315			64		1.33	%		14,377			71		2.00	%		26,996			11		0.17	%		17,333			98		2.24	%
FHLB advances		111,407			449		1.62	%		147,355			903		2.49	%		57,078			211		1.45	%		123,107			1,023		3.30	%
Other borrowings		—			—		—	%		43,701			605		5.61	%
Subordinated notes		68,418			994		5.84	%		38,637			564		5.92	%		77,783			1,031		5.30	%		68,299			1,003		5.83	%
Junior subordinated debentures		37,853			571		6.07	%		37,686			572		6.16	%		37,936			571		5.89	%		37,774			581		6.10	%
Total interest-bearing liabilities		3,401,763			11,284		1.33	%		3,582,324			15,194		1.72	%		3,770,812			6,309		0.66	%		3,727,632			16,098		1.71	%


Noninterest-bearing demand deposits		789,913								810,300								1,155,862								821,876
Other noninterest-bearing liabilities		210,932								93,455								318,890								152,060
Total liabilities		4,402,608								4,486,079								5,245,564								4,701,568


Stockholders' equity		545,678								482,423								574,991								516,195
Total liabilities and stockholders' equity	$	4,948,286							$	4,968,502							$	5,820,555							$	5,217,763
Net interest income				$	39,489							$	38,702							$	46,523							$	42,482
Net interest spread							3.24	%							3.02	%							3.33	%							3.14	%
Net interest margin							3.40	%							3.25	%							3.36	%							3.37	%
Net interest margin (TEY)(Non-GAAP)							3.56	%							3.40	%							3.51	%							3.52	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.50	%							3.31	%							3.44	%							3.41	%
Ratio of average interest-earning assets to average interest-bearing liabilities		131.14	%							128.76	%							139.98	%							128.53	%

(1)

~~(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)

~~(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)

~~(3)~~

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

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Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended ~~March 31,~~September 30, 2020



							Inc./(Dec.)		Components
							from		of Change (1)
							Prior Period (1)		Rate		Volume


	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume
	2020 vs. 2019
	(dollars in thousands)
							2020 vs. 2019
							(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	(75)	$	(30)	$	(45)	$	(41)	$	(23)	$	(18)
Interest-bearing deposits at financial institutions		(562)		(424)		(138)		(859)		(3,864)		3,005
Investment securities (2)		(16)		1,435		(1,451)		756		(1,754)		2,510
Restricted investment securities		(49)		(58)		9		(44)		(9)		(35)
Gross loans/leases receivable (2) (3)		(2,421)		(1,645)		(776)		(5,560)		(20,816)		15,256
Total change in interest income		(3,123)		(722)		(2,401)		(5,748)		(26,466)		20,718


INTEREST EXPENSE
Interest-bearing deposits		(1,847)		(3,672)		1,825		(5,821)		(13,543)		7,722
Time deposits		(1,426)		(320)		(1,106)		(3,087)		(1,505)		(1,582)
Short-term borrowings		(7)		(101)		94		(87)		(325)		238
Federal Home Loan Bank advances		(454)		(267)		(187)		(812)		(415)		(397)
Other borrowings		(605)		(303)		(302)
Subordinated notes		430		—		430		28		—		28
Junior subordinated debentures		(1)		(16)		15		(10)		(27)		17
Total change in interest expense		(3,910)		(4,679)		769		(9,789)		(15,815)		6,026


Total change in net interest income	$	787	$	3,957	$	(3,170)	$	4,041	$	(10,651)	$	14,692

(1)

~~(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)

~~(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)

~~(3)~~

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

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	For the Nine Months Ended September 30,
	2020								2019
				Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost

	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	2,795		$	19		0.89	%	$	10,887		$	191		2.35	%
Interest-bearing deposits at financial institutions		327,902			587		0.24	%		170,167			3,042		2.39	%
Investment securities (1)		688,985			19,567		3.78	%		643,975			18,237		3.79	%
Restricted investment securities		20,767			795		5.03	%		21,670			891		5.50	%
Gross loans/leases receivable (1) (2) (3)		3,957,903			133,141		4.49	%		3,853,918			145,682		5.05	%
Total interest earning assets		4,998,352			154,109		4.12	%		4,700,617			168,043		4.78	%

Noninterest-earning assets:
Cash and due from banks		85,655								82,096
Premises and equipment, net		73,298								78,059
Less allowance for estimated losses on loans/leases		(46,978)								(41,119)
Other		413,760								268,403
Total assets	$	5,524,087							$	5,088,055

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	2,718,613			9,920		0.49	%	$	2,418,420			23,351		1.29	%
Time deposits		743,746			9,537		1.71	%		1,000,529			16,346		2.18	%
Short-term borrowings		23,804			81		0.45	%		15,952			275		2.30	%
Federal Home Loan Bank advances		87,920			1,007		1.50	%		115,539			2,685		3.11	%
Other borrowings		—			—		—	%		18,084			512		3.79	%
Subordinated notes		71,582			3,019		5.63	%		58,392			2,561		5.86	%
Junior subordinated debentures		37,894			1,715		5.95	%		37,730			1,729		6.13	%
Total interest-bearing liabilities		3,683,559			25,279		0.91	%		3,664,646			47,459		1.73	%

Noninterest-bearing demand deposits		1,009,970								809,469
Other noninterest-bearing liabilities		271,639								114,980
Total liabilities		4,965,168								4,589,095

Stockholders' equity		558,919								498,960
Total liabilities and stockholders' equity	$	5,524,087							$	5,088,055
Net interest income				$	128,830							$	120,584
Net interest spread							3.21	%							3.05	%
Net interest margin							3.29	%							3.29	%
Net interest margin (TEY)(Non-GAAP)							3.44	%							3.43	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.40	%							3.33	%
Ratio of average interest earning assets to average interest-bearing liabilities		135.69	%							128.27	%

(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.

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Analysis of Changes of Interest Income/Interest Expense
For the nine months ended September 30, 2020

	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume

	2020 vs. 2019
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	(172)	$	(78)	$	(94)
Interest-bearing deposits at other financial institutions		(2,455)		(4,924)		2,469
Investment securities (2)		1,330		(49)		1,379
Restricted investment securities		(96)		(64)		(32)
Gross loans/leases receivable (2) (3)		(12,541)		(18,546)		6,005
Total change in interest income		(13,934)		(23,661)		9,727

INTEREST EXPENSE
Interest-bearing demand deposits		(13,431)		(17,660)		4,229
Time deposits		(6,809)		(3,110)		(3,699)
Short-term borrowings		(194)		(345)		151
Federal Home Loan Bank advances		(1,678)		(1,147)		(531)
Other borrowings		(512)		(256)		(256)
Subordinated notes		458		—		458
Junior subordinated debentures		(14)		—		(14)
Total change in interest expense		(22,180)		(22,518)		338
Total change in net interest income	$	8,246	$	(1,143)	$	9,389

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

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

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

CRITICAL ACCOUNTING POLICIES

The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.

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

GOODWILL

The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form ~~10‑K~~10-K for the year ended December 31, 2019.

Due to the economic impact ~~that~~of COVID-19 ~~has had on~~during the ~~Company,~~first quarter of 2020, management concluded that factors such as the decline in macroeconomic conditions ~~have~~ led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of March 31, 2020. There was no occurrence of a triggering event in the second or third quarters of 2020. Therefore no impairment test of goodwill was performed as of June 30, 2020 or September 30, 2020.

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When such an assessment is performed, should the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Based upon the results of the interim goodwill assessment during the first quarter of 2020, the Company concluded that an impairment did not exist on the bank reporting units as of the time of the assessment.

During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies. This was the result of the announcement of a sale of the Bates Companies as discussed in Note 910 of the Consolidated Financial Statements.

ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form ~~10‑K~~10-K for the year ended December 31, 2019.

The Company believes the COVID-19 pandemic ~~may~~could have an adverse effect on the credit quality of its loan portfolio during the remainder of 2020. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the allowance for loan and lease losses.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income decreased 6%10%, comparing the third quarter of 2020 to the same period of 2019, and decreased 9% comparing the first ~~quarter~~nine months of 2020 to the same period of 2019. This ~~increase~~decrease was primarily the result of a reduction in average yields on loans and ~~leases and~~leases. During the last month of the first quarter, market rates fell as the Federal Reserve cut the Federal Funds Rate by 150 basis points to a ~~decrease in average earning assets due to the sale~~range of ~~RB&T.~~ 0.00%-0.25%.

Overall, the Company's average earning assets ~~decreased 3%~~increased 10%, comparing the ~~first~~third quarter of 2020 to the ~~first~~third quarter of 2019. During the same time period, average excess liquidity increased by 87%. Average gross loans and leases ~~decreased 2%~~increased 6%, while average investment securities ~~decreased 6%. The decreases in average~~increased 20% during the same time period. Average earning assets ~~and average~~increased 6%, comparing the first nine months of 2020 to the same period of 2019. Average excess liquidity increased by $158 million comparing the first nine months of 2020 to the same period of 2019. Average gross loans and leases increased 3%, while average investment securities increased 7% during the same time period. The increases in excess liquidity were the result of outsized growth in core deposits led by the ~~sale of RB&T.~~Company’s correspondent banking client base.

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

INTEREST EXPENSE

Interest expense for the ~~first~~third quarter of 2020 decreased ~~26%~~61% from the third quarter of 2019 and decreased 47% comparing the first ~~quarter~~nine months of 2020 to the same period of 2019. The cost of funds on the Company’s average interest-bearing liabilities ~~has decreased~~declined sharply on a linked-quarter basis with the current interest rate environment. During the last month of the first quarter, market interest rates fell as the Federal Reserve cut the Federal Funds rate by 150 bps to a range of 0%-0.25%. As a direct result, the Company’s interest expense declined modestly on a linked-quarter basis.

The Company's management intends to continue to shift the mix of funding from wholesale funds to well-priced core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company's franchise value, reduce funding costs and increase fee income opportunities through deposit service charges. ~~The Company also increased short-term wholesale funding at the end of the quarter to quickly generate on-balance liquidity in an abundance of caution as a response to the COVID-19 pandemic.~~

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PROVISION FOR LOAN/LEASE LOSSES

The Company’s provision for loan and lease losses totaled ~~$8.4~~$20.3 million for the ~~first~~third quarter of 2020, which is significantly higher than $2.0 million for the third quarter of 2019. Provision for the first nine months of 2020 totaled $48.6 million, which was up from ~~$2.1~~$6.1 million in the first ~~quarter~~nine months of 2019. The increase in the provision for loan and lease losses was primarily due to increased qualitative allocations in response to deteriorating economic conditions related to the effects of COVID-19.

~~With the uncertainty regarding the severity and duration of the economic impacts caused by the effects of COVID-19, the Company is not providing specific forward guidance on future provisions.~~ The Company ~~does anticipate~~anticipates the provision tocould be elevated in future periods due to the broad reach of COVID-19 across many impacted individuals and ~~industries impacted.~~industries. The dramatic slowdown in economic activity will likely continue to negatively impact the credit quality of the Company’s loan portfolio with increased levels of loan defaults. The CARES Act provides significant resources for individuals and industries that could lessen the impact of COVID-19, in addition to the Company’s own loan relief programs.

The Company has elected to defer its implementation of CECL as allowed by the CARES Act. See Note 1 of the Consolidated Financial Statements for further discussion.

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

In accordance with GAAP for business combination accounting, acquired loans are recorded at fair value; therefore, no allowance is associated with such loans at acquisition. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance through provision. This provision, when coupled with net charge-offs of ~~$2.1~~$5.0 million for the first ~~three~~nine months of 2020, increased the Company's allowance to ~~$42.2~~$79.6 million at ~~March 31,~~September 30, 2020. As of ~~March 31,~~September 30, 2020, the Company's allowance to total loans/leases was ~~1.14%~~1.87%, which was up from ~~0.98%~~1.47% at ~~December 31, 2019~~June 30, 2020 and ~~1.08%~~1.00% at ~~March 31,~~September 30, 2019. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($~~6.3~~4.5 million and ~~$10.4~~$7.7 million at ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019, respectively).

The following table represents the current balance of loans to customers with concentrations in industries that management has deemed to have a higher risk of being impacted by COVID-19:

As of March 31,

2020




% of Total Gross

Amount

Loans and Leases

(dollars in thousands)

Construction

$
282,117

7.62
%
Retail and Lessors of Property Secured by Retail Property, excluding Automotive

201,998

5.45

Manufacturing

138,782

3.75

Wholesale

105,880

2.86

Hotel

66,129

1.79

Nursing & Senior Care

65,644

1.77

Restaurants and Lessors of Property Secured by Restaurant Property

52,172

1.41

Arts & Entertainment

23,589

0.64

Educational Services

19,956

0.54

$
956,267

25.81
%


	As of September 30,
	2020
			% of Total Gross
	Amount		Loans and Leases

	(dollars in thousands)

Hotels	$	83,759	1.97	%
Restaurants (full service and limited service only)		40,393	0.95
Arts, Entertainment and Recreation		28,162	0.66
	$	152,314	3.59	%

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

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~~The following table represents a breakdown of retail loans, excluding automotive related loans:~~

As of March 31,

2020




% of Total Gross

Amount

Loans and Leases

(dollars in thousands)

Non-Owner Occupied Retail CRE

$
172,376

4.65
%
Owner Occupied Retail CRE

10,115

0.27

All Other Retail

19,507

0.53

$
201,998

5.45
%

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

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.


									Three Months Ended
									September 30,		September 30,
									2020		2019		$ Change		% Change

	Three Months Ended
	March 31,		March 31,
	2020		2019		$ Change		% Change
	(dollars in thousands)

									(dollars in thousands)

Trust department fees	$	2,312	$	2,493	$	(181)	(7.3)	%	$	2,280	$	2,340	$	(60)	(2.6)	%
Investment advisory and management fees		1,727		1,736		(9)	(0.5)			1,266		1,782		(516)	(29.0)
Deposit service fees		1,477		1,554		(77)	(5.0)			1,403		1,813		(410)	(22.6)
Gains on sales of residential real estate loans, net		652		369		283	76.7			1,370		890		480	53.9
Gains on sales of government guaranteed portions of loans, net		—		31		(31)	(100.0)			—		519		(519)	(100.0)
Swap fee income		6,804		3,198		3,606	112.8			26,688		9,797		16,891	172.4
Securities gains (losses), net										1,802		(3)		1,805	60,166.7
Earnings on bank-owned life insurance		329		540		(211)	(39.1)			502		489		13	2.7
Debit card fees		758		792		(34)	(4.3)			946		886		60	6.8
Correspondent banking fees		215		216		(1)	(0.5)			220		189		31	16.4
Other		922		1,064		(142)	(13.3)			1,482		1,204		278	23.1
Total noninterest income	$	15,196	$	11,993	$	3,203	26.7	%	$	37,959	$	19,906	$	18,053	90.7	%


	Nine Months Ended
	September 30,		September 30,
	2020		2019		$ Change		% Change

	(dollars in thousands)

Trust department fees	$	6,819	$	7,194	$	(375)	(5.2)	%
Investment advisory and management fees		4,392		5,406		(1,014)	(18.8)
Deposit service fees		4,166		5,025		(859)	(17.1)
Gains on sales of residential real estate loans, net		3,218		1,748		1,470	84.1
Gains on sales of government guaranteed portions of loans, net		—		589		(589)	(100.0)
Swap fee income		53,419		20,886		32,533	155.8
Securities gains (losses), net		1,867		(56)		1,923	3,433.9
Earnings on bank-owned life insurance		1,443		1,441		2	0.1
Debit card fees		2,479		2,591		(112)	(4.3)
Correspondent banking fees		633		578		55	9.5
Other		3,345		3,562		(217)	(6.1)
Total noninterest income	$	81,781	$	48,964	$	32,817	67.0	%

In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $164.3 million in the third quarter of 2020. However, assets under management decreased ~~$474.7~~$19.1 million in the first ~~three~~nine months of 2020 ~~with the~~due to deteriorating economic ~~conditions.~~conditions caused by the COVID-19 pandemic. With the decrease in assets under management, trust department fees decreased 7%5%, comparing the first ~~quarter~~nine months of 2020 to the same period of the prior year. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations.

Investment advisory and management fees decreased 1%29%, comparing the ~~first~~third quarter of 2020 to the same period of the prior ~~year.~~year, and decreased 19% when comparing the first nine months of 2020 to the same period of 2019. Brokerage

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assets, excluding brokerage assets of the Bates Companies, decreased ~~$279.4~~$25.1 million in the first ~~three~~nine months of 2020 ~~with the~~due to deteriorating economic ~~conditions.~~conditions caused by the COVID-19 pandemic. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations. The levels of trust and brokerage assets under management were negatively impacted by the decline in the market as a result of ~~COVID-19.~~

~~Table~~COVID-19 as well as the sale of ~~Contents~~

~~Part I~~

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

the Bates Companies in August 2020.

Deposit service fees decreased 5%23% comparing the third quarter of 2020 to the same period of the prior year, and decreased 17% when comparing the first ~~quarter~~nine months of 2020 to the same period of the prior year. This decrease was primarily due to the sale of RB&T, as well as lower transactional volume due to current economic conditions. The Company continues to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, increased ~~77%~~54% when comparing the third quarter of 2020 to the same period of the prior year, and increased 84% when comparing the first ~~quarter~~nine months of 2020 to the same period of the prior year. The increase was primarily due to the refinancing of residential real estate loans with lower interest rates in the first ~~quarter~~nine months of 2020.

The Company did not have any gains on the sale of government-guaranteed portions of loans for the ~~first quarter of 2020 as compared to $31 thousand in~~three or nine months ended September 30, 2020. Over the first quarter of 2019. As reflected by these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. The Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company's portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. Recently,past few years, competitors have been offering SBA loan candidates traditional financing without a guarantee and the Company is not willing to relax its structure for those lending opportunities. And, for USDA loans, the governmental regulations have tightened which has led to sharply reduced supply for non-governmental lenders.

As a result of the low interest rate environment and its continued focus across all subsidiary banks, the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrowers and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income totaled ~~$6.8~~$26.7 million for the ~~first~~third quarter of 2020, compared to ~~$3.2~~$9.8 million for the third quarter of 2019. Swap fee income totaled $53.4 million for the first ~~quarter~~nine months of 2020, compared to $20.9 million in the first nine months of 2019. The increase in swap fee income for the first ~~three~~nine months of 2020, as compared to all prior periods, was due to both the volume and the size of the transactions executed. Future levels of swap fee income are somewhat dependent upon prevailing interest rates.

Securities gains totaled $1.8 million and $1.9 million for the three and nine months ended September 30, 2020, respectively. By comparison, securities losses totaled $3 thousand and $56 thousand for the three and nine months ended September 30, 2019. As part of a balance sheet deleverage strategy in the third quarter 2020, the Company sold select securities at gains to help offset the cost of prepaying select high-cost borrowings.

Earnings on BOLI ~~decreased 39%~~increased 3% comparing the ~~first~~third quarter of 2020 to the third quarter of 2019, and remained constant comparing the first ~~quarter~~nine months of 2020 to the first nine months of 2019. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity ~~market~~markets and can lead to volatility in earnings. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 7% comparing the third quarter of 2020 to the third quarter of the prior year, and decreased 4% comparing the first ~~quarter~~ nine months

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of 2020 to the first ~~quarter~~nine months of ~~the prior year.~~2019. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a retail deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees ~~decreased 1%~~increased 16% comparing the ~~first~~third quarter of 2020 to the ~~first~~third quarter of the prior ~~year.~~year, and increased 10% comparing the first nine months of 2020 to the first nine months of 2019. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately ~~195~~192 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income increased 23% comparing the third quarter of 2020 to the third quarter of the prior year, and decreased 6% comparing the first nine months of 2020 to the first nine months of 2019. The increase in the third quarter of 2020 was primarily due to one-time VISA conversion fee income.

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~~Other noninterest income decreased 13% comparing the first quarter of 2020 to the first quarter of the prior year. This decrease was primarily due to the sale of RB&T.~~

NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.


									Three Months Ended
									September 30,		September 30,
									2020		2019		$ Change		% Change

	Three Months Ended
	March 31,		March 31,
	2020		2019		$ Change		% Change
	(dollars in thousands)

									(dollars in thousands)

Salaries and employee benefits	$	18,519	$	20,879	$	(2,360)	(11.3)	%	$	25,999	$	24,215	$	1,784	7.4	%
Occupancy and equipment expense		4,032		3,694		338	9.1			3,807		3,860		(53)	(1.4)
Professional and data processing fees		3,369		2,750		619	22.5			3,758		4,030		(272)	(6.7)
Post-acquisition compensation, transition and integration costs		151		134		17	12.7			(32)		884		(916)	(103.6)
Disposition costs		517		—		517	100.0			192		—		192	100.0
FDIC insurance, other insurance and regulatory fees		683		964		(281)	(29.1)			1,301		542		759	140.0
Loan/lease expense		228		214		14	6.5			403		221		182	82.4
Net cost of and gains/losses on operations of other real estate		13		298		(285)	(95.6)
Net cost of (income from) and gains/losses on operations of other real estate										16		2,078		(2,062)	(99.2)
Advertising and marketing		682		785		(103)	(13.1)			750		1,056		(306)	(29.0)
Bank service charges		504		483		21	4.3			488		502		(14)	(2.8)
Loss on debt extinguishment		147		—		147	100.0
Loss on liability extinguishment										1,874		148		1,726	1,166.2
Correspondent banking expense		216		204		12	5.9			205		209		(4)	(1.9)
Intangibles amortization		549		532		17	3.2			531		560		(29)	(5.2)
Goodwill Impairment		500		—		500	100.0
Loss on sale of subidiary										305		—		305	100.0
Other		1,305		1,498		(193)	(12.9)			1,241		1,640		(399)	(24.3)
Total noninterest expense	$	31,415	$	32,435	$	(1,020)	(3.1)	%	$	40,838	$	39,945	$	893	2.2	%


	Nine Months Ended
	September 30,		September 30,
	2020		2019		$ Change		% Change

	(dollars in thousands)

Salaries and employee benefits	$	65,822	$	67,843	$	(2,021)	(3.0)	%
Occupancy and equipment expense		11,587		11,087		500	4.5
Professional and data processing fees		10,773		9,811		962	9.8
Post-acquisition compensation, transition and integration costs		189		1,727		(1,538)	(89.1)
Disposition costs		626		—		626	100.0
FDIC insurance, other insurance and regulatory fees		2,892		2,432		460	18.9
Loan/lease expense		970		748		222	29.7
Net cost of (income from) and gains/losses on operations of other real estate		(303)		3,557		(3,860)	(108.5)
Advertising and marketing		1,984		2,878		(894)	(31.1)
Bank service charges		1,493		1,494		(1)	(0.1)
Losses on liability extinguishment, net		2,450		148		2,302	1,555.4
Correspondent banking expense		633		619		14	2.3
Intangibles amortization		1,628		1,706		(78)	(4.6)
Goodwill Impairment		500		—		500	100.0
Loss on sale of subsidiary		305		—		305	100.0
Other		3,842		4,891		(1,049)	(21.4)
Total noninterest expense	$	105,391	$	108,941	$	(3,550)	(3.3)	%

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency.

Salaries and employee benefits, which is the largest component of noninterest expense, ~~decreased~~increased from the third quarter of 2019 to the third quarter of 2020 by 7%. The increased expense was primarily related to increased incentive compensation driven by strong financial results and higher swap fee income. This line item decreased 3% when comparing the first ~~quarter~~nine months of 2020 to the first ~~quarter~~nine months of ~~2019 by 11%. This~~2019. The decrease was primarily related to the sale of RB&T and ~~reduced bonus and incentive compensation~~deferred costs due to ~~the impact~~PPP loans.

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Occupancy and equipment expense decreased 1% comparing the third quarter of 2020 to the same period of the prior year, and increased 9%5% comparing the first ~~quarter~~nine months of 2020 to the same period of the prior year. The increased expense for the nine months of 2020 was due to higher information technology service contract costs and increases in repairs and maintenance costs to existing buildings.

Professional and data processing fees ~~increased 23%~~decreased 7% comparing the ~~first~~third quarter of 2020 to the same period in 2019. The decrease was primarily due to legal fees incurred in the third quarter of 2019 related to the sale of RB&T. Professional and data processing fees increased 10% comparing the first nine months of 2020 to the same period of the prior year. This increased expense was mostly due to higher data processing costs. ~~Generally, professional and data processing fees can fluctuate depending on certain one-time project costs.~~

Post-acquisition costs decreased 104% comparing the third quarter of 2020 to the same period in 2019. Post-acquisition costs totaled ~~$151~~$189 thousand for the first ~~quarter~~nine months of 2020 as compared to ~~$134 thousand~~$1.7 million for the same period of the prior year. These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to previous mergers/acquisitions.

Disposition costs totaled ~~$517~~$192 thousand for the third quarter of 2020 and $626 thousand for the first ~~quarter~~nine months of 2020. The costs were comprised primarily of legal, accounting, personnel costs and IT deconversion costs related to the sale of Bates Companies in the third quarter of 2020 and the sale of RB&T in the fourth quarter of 2019. There were no disposition costs for the third quarter or first ~~quarter~~nine months of 2019.

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FDIC insurance, other insurance and regulatory fee expense ~~decreased 29%~~increased 140%, comparing the ~~first~~third quarter of 2020 to the ~~first~~third quarter of ~~2019.~~2019, and increased 19% comparing the first nine months of 2020 to the same period of the prior year. The ~~decrease~~increase in expense was due to an increase in the ~~award~~asset size of ~~assessment credits by~~ the Company in 2020 as well as a credit to FDIC insurance assessments received in ~~September 2019 that carried forward into the first quarter of 2020.~~2019.

Loan/lease expense increased 7%82% when comparing the ~~first~~third quarter of 2020 to the same quarter of ~~2019.~~2019, and increased 30% comparing the first nine months of 2020 to the same period of the prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net cost ~~of (income from)~~from and gains/losses on operations of other real estate totaled ~~$13~~$16 thousand for the ~~first~~third quarter of 2020, compared to ~~$298~~net cost of and gains/losses on operations of other real estate of $2.1 million for the third quarter of 2019. Net income from and gains/losses on operations of other real estate totaled $303 thousand for the first nine months of 2020 compared to net cost of and gains/losses on operations of other real estate of $3.6 million for the same period of the prior year. In the first nine months of 2020, the Company has sold OREO property of $4 million with corresponding gains of $369 thousand. In the third quarter of ~~2019.~~ 2019, the Company wrote down an OREO property by $2.0 million.

Advertising and marketing expense decreased ~~13%~~29% comparing the ~~first~~third quarter of 2020 to the ~~first~~third quarter of ~~2019.~~2019, and decreased 31% comparing the first nine months of 2020 to the same period of the prior year. The decrease in expense was primarily due to the sale of RB&T.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, ~~increased 4%~~decreased 3% when comparing the ~~first~~third quarter of 2020 to the same quarter of ~~2019.~~2019, and remained stable when comparing the first nine months of 2020 to the same period of the prior year. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses ~~will~~is expected to also increase.

Losses on ~~debt~~liability extinguishment were ~~$147 thousand~~$1.9 million for the ~~three~~third quarter of 2020 and $2.5 million for the first nine months ~~ended March 31,~~of 2020. These losses relate to the prepayment of certain FHLB advances, high-cost brokered and public certificates of deposit. ~~There~~Losses on liability extinguishment were ~~no losses on debt extinguishment~~$148 thousand for the three and nine months ended ~~March 31,~~September 30, 2019. These losses relate to the prepayment of certain FHLB advances.

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Correspondent banking expense ~~increased 6%~~decreased 2% when comparing the ~~first~~third quarter of 2020 to the ~~first~~third quarter of ~~2019.~~2019 and increased 2% when comparing the first nine months of 2020 to the same period of the prior year. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

Intangibles amortization expense ~~increased 3%~~decreased 5% when comparing the ~~first~~third quarter of 2020 to the same quarter of ~~2019.~~2019, and decreased 5% when comparing the first nine months of 2020 to the same period of the prior year. The first nine months of 2019 included $109 thousand of an adjustment to intangible amortization expense related to the finalization of purchase accounting related to the acquisition of the Bates Companies.

Goodwill impairment expense totaled $500 thousand in the first ~~quarter~~nine months of 2020 related to the sale of the Bates Companies. There was no goodwill impairment expense in the first ~~quarter~~nine months of 2019.

Loss on sale of subsidiary totaled $305 thousand in the first three and nine months of 2020 related to the sale of the Bates Companies. See Note 10 to the Consolidated Financial Statements for further discussion on the sale of the Bates Companies. There was no loss on sale of subsidiary in the first nine months of 2020.

Other noninterest expense ~~was down 13%~~decreased 24% when comparing the ~~first~~third quarter of 2020 to the ~~first~~third quarter of ~~2019.~~2019, and decreased 21% when comparing the first nine months of 2020 to the same period of the prior year. This was primarily due to the sale of RB&T. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management.

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

INCOME TAXES

In the ~~first~~third quarter of 2020, the Company incurred income tax expense of ~~$1.9~~$4.0 million. During the first nine months of the year, the Company incurred income tax expense of $8.7 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.


									For the Three Months Ended September 30,								For the Nine Months Ended September 30,
									2020				2019				2020				2019
											% of				% of				% of				% of
											Pretax				Pretax				Pretax				Pretax
									Amount		Income		Amount		Income		Amount		Income		Amount		Income

	For the Three Months Ended March 31,
	2020				2019
			% of				% of
			Pretax				Pretax
	Amount		Income		Amount		Income
	(dollars in thousands)

									(dollars in thousands)

Computed "expected" tax expense	$	2,754	21.0	%	$	3,010	21.0	%	$	4,486	21.0	%	$	3,920	21.0	%	$	10,712	21.0	%	$	10,411	21.0	%
Tax exempt income, net		(1,225)	(9.3)			(1,107)	(7.7)			(1,350)	(6.3)			(1,169)	(6.3)			(3,822)	(7.5)			(3,344)	(6.7)
Bank-owned life insurance		(55)	(0.4)			(113)	(0.8)			(101)	(0.5)			(103)	(0.6)			(271)	(0.5)			(303)	(0.6)
State income taxes, net of federal benefit, current year		677	5.2			649	4.5			1,003	4.7			964	5.2			2,456	4.8			2,384	4.8
Tax credits		(116)	(0.9)			(39)	(0.3)			(116)	(0.5)			(39)	(0.2)			(348)	(0.7)			(116)	(0.2)
True-up adjustment to year-end provision		—	—			(715)	(5.0)			—	—			—	—			—	—			(715)	(1.4)
Excess tax benefit on stock options exercised and restricted stock awards vested		(264)	(2.0)			(100)	(0.7)			14	0.1			(54)	(0.3)			(248)	(0.5)			(208)	(0.4)
Other		113	0.8			(171)	(1.2)			80	0.4			54	0.3			219	0.5			(50)	(0.2)
Federal and state income tax expense	$	1,884	14.4	%	$	1,414	9.9	%	$	4,016	18.8	%	$	3,573	19.1	%	$	8,698	17.1	%	$	8,059	16.3	%

The effective tax rate for the quarter ended ~~March 31,~~September 30, 2020 was ~~14.4%~~18.8%, which was ~~an increase~~a modest decrease from the effective tax rate of ~~9.9%~~19.1% for the quarter ended ~~March 31,~~September 30, 2019. The effective tax rate for the nine months ended September 30, 2020 was 17.1%, which was an modest increase over the effective tax rate of 16.3% for the nine months ended September 30, 2019. During the first quarter of 2019 and in conjunction with the Company’s year-end tax preparation process, the Company identified a one-time true-up adjustment of $715 thousand. Excluding this, the Company’s effective tax rate was approximately ~~15.0%~~17.7% for the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

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FINANCIAL CONDITION

Following is a table that represents the major categories of the Company’s balance sheet. On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T. As a result, those assets and liabilities of RB&T are not included in the Company’s results of its financial condition as of ~~March 31,~~September 30, 2020, June 30, 2020 and December 31, 2019, the removal of which impacts balance sheet comparisons to ~~March 31,~~September 30, 2019.



	March 31, 2020				December 31, 2019				March 31, 2019


	Amount		%		Amount		%		Amount		%

													As of
													September 30, 2020				June 30, 2020				December 31, 2019				September 30, 2019
													(dollars in thousands)

													Amount		%		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	376,535	7	%	$	233,945	5	%	$	292,559	6	%	$	371,600	6	%	$	231,477	4	%	$	233,945	5	%	$	288,934	5	%
Securities		684,571	13	%		611,341	12	%		655,749	13	%		782,088	13	%		748,883	13	%		611,341	12	%		555,409	10	%
Net loans/leases		3,662,435	70	%		3,654,204	75	%		3,758,268	74	%		4,168,395	72	%		4,079,432	73	%		3,654,204	75	%		3,574,154	68	%
Derivatives		195,973	4	%		87,827	2	%		36,375	1	%		236,381	4	%		225,164	4	%		87,827	2	%		104,418	2	%
Other assets		301,803	6	%		309,767	6	%		323,711	6	%		306,096	5	%		309,040	6	%		309,767	6	%		303,920	6	%
Assets held for sale		10,758	0	%		11,966	0	%		—	-	%		—	-	%		10,765	-	%		11,966	-	%		465,547	9	%
Total assets	$	5,232,075	100	%	$	4,909,050	100	%	$	5,066,662	100	%	$	5,864,560	100	%	$	5,604,761	100	%	$	4,909,050	100	%	$	5,292,382	100	%


Total deposits	$	4,170,478	80	%	$	3,911,051	80	%	$	4,194,220	82	%	$	4,672,268	79	%	$	4,349,775	78	%	$	3,911,051	80	%	$	3,802,241	72	%
Total borrowings		244,399	5	%		278,955	5	%		282,994	6	%		226,962	4	%		376,250	7	%		278,955	5	%		320,457	6	%
Derivatives		203,744	4	%		88,437	2	%		38,229	1	%		244,510	4	%		233,589	4	%		88,437	2	%		109,242	2	%
Other liabilities		71,185	1	%		90,253	2	%		62,812	1	%		148,207	3	%		87,539	1	%		90,253	2	%		70,169	1	%
Liabilities held for sale		3,130	-	%		5,003	-	%		—	-	%		—	-	%		1,588	0	%		5,003	-	%		470,530	9	%
Total stockholders' equity		539,139	10	%		535,351	11	%		488,407	10	%		572,613	10	%		556,020	10	%		535,351	11	%		519,743	10	%
Total liabilities and stockholders' equity	$	5,232,075	100	%	$	4,909,050	100	%	$	5,066,662	100	%	$	5,864,560	100	%	$	5,604,761	100	%	$	4,909,050	100	%	$	5,292,382	100	%

During the ~~first~~third quarter of 2020, the Company's total assets increased ~~$323.0~~$259.8 million, or 7%5% from ~~December 31, 2019,~~June 30, 2020, to a total of ~~$5.2~~$5.9 billion. The Company’s ~~cash, federal funds sold, and interest-bearing deposits~~net loans/leases increased ~~$142.6 million and total deposits increased $259.4~~$89.0 million in the ~~first~~third quarter of 2020. Total deposits increased $322.5 million in the third quarter of 2020 primarily due to an increase in noninterest-bearing demand ~~deposits and short-term brokered CDs, the latter of which were accessed to build liquidity in an abundance of caution in light of current economic factors.~~deposits. Borrowings decreased ~~$34.6~~$149.3 million in the ~~first~~third quarter of 2020 which consisted primarily of ~~allowing~~a decrease in FRB borrowings of $100.0 million, a decrease in overnight FHLB advances of $55.0 million and a decrease in short-term FHLB advances of $50.0 million of which all were offset by an issuance of $50.0 million of subordinated notes. During the quarter, the Company had significant core deposit growth mostly from its correspondent banking clients. The outsized deposit growth exceeded the strong loan growth and led to ~~mature given~~ the ~~increase in deposits.~~Company carrying excess liquidity during the quarter.

INVESTMENT SECURITIES

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

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


																As of
																September 30, 2020					June 30, 2020					December 31, 2019					September 30, 2019
																Amount			%		Amount			%		Amount			%		Amount			%

	As of
	March 31, 2020					December 31, 2019					March 31, 2019
	Amount			%		Amount			%		Amount			%
	(dollars in thousands)

																(dollars in thousands)

U.S. govt. sponsored agency securities	$	19,457		3	%	$	20,078		3	%	$	35,843		5	%	$	18,437		2	%	$	17,472		2	%	$	20,078		3	%	$	21,268		4	%
Municipal securities		493,664		72	%		447,853		73	%		450,376		69	%		569,075		73	%		526,192		71	%		447,853		73	%		391,329		71	%
Residential mortgage-backed and related securities		122,853	��	18	%		120,587		20	%		161,692		25	%		134,147		17	%		145,672		19	%		120,587		20	%		123,880		22	%
Asset-backed securities		28,499		4	%		16,887		3	%		—		—	%		40,665		5	%		39,797		5	%		16,887		3	%		10,957		2	%
Other securities		20,098		3	%		5,936		1	%		7,838		1	%		19,764		3	%		19,750		3	%		5,936		1	%		7,975		1	%
	$	684,571		100	%	$	611,341		100	%	$	655,749		100	%

																$	782,088		100	%	$	748,883		100	%	$	611,341		100	%	$	555,409		100	%

Securities as a % of Total Assets		13.11	%				12.45	%				12.94	%				13.34	%				13.36	%				12.45	%				11.51	%
Net Unrealized Gains as a % of Amortized Cost		3.73	%				4.88	%				1.46	%				4.62	%				4.16	%				4.88	%				4.54	%
Duration (in years)		6.7					6.7					6.6					6.6					6.3					6.7					6.5
Yield on investment securities (tax equivalent)		3.95	%				3.80	%				3.74	%				3.66	%				3.77	%				3.80	%				3.85	%

Management monitors the level of unrealized gains/losses including performing quarterly reviews of individual securities for evidence of OTTI. Management identified no OTTI in any of the periods presented.

The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities. The asset-backed securities, which are comprised of collateral loan obligations, are backed by pools of senior secured commercial loans and were AAA rated as of ~~March 31,~~September 30, 2020.

See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's investment securities.

LOANS/LEASES

Total loans/leases, excluding PPP loans (non-GAAP), grew ~~1.6%~~11.5% on an annualized basis during the ~~first~~third quarter of ~~2020. The Company experienced several large payoffs during the quarter, which impacted loan growth, as well as slower growth in March due to the pandemic.~~2020 and 7.2% year-to-date. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following table.


													As of
													September 30, 2020				June 30, 2020				December 31, 2019				September 30, 2019
													Amount		%		Amount		%		Amount		%		Amount		%

	As of
	March 31, 2020				December 31, 2019				March 31, 2019
	Amount		%		Amount		%		Amount		%
	(dollars in thousands)

C&I loans	$	1,484,979	41	%	$	1,507,825	41	%	$	1,479,247	39	%
													(dollars in thousands)

C&I loans*													$	1,823,049	43	%	$	1,850,110	45	%	$	1,507,825	41	%	$	1,469,978	41	%
CRE loans		1,783,086	48	%		1,736,396	47	%		1,790,845	47	%		1,999,715	47	%		1,869,162	45	%		1,736,396	47	%		1,687,922	46	%
Direct financing leases		83,324	2	%		87,869	2	%		108,543	3	%		73,011	2	%		79,105	2	%		87,869	2	%		92,307	3	%
Residential real estate loans		237,742	6	%		239,904	7	%		288,502	8	%		245,032	6	%		241,069	6	%		239,904	7	%		245,667	7	%
Installment and other consumer loans		106,728	3	%		109,352	3	%		123,087	3	%		102,471	2	%		99,150	2	%		109,352	3	%		106,540	3	%
Total loans/leases	$	3,695,859	100	%	$	3,681,346	100	%	$	3,790,224	100	%	$	4,243,278	100	%	$	4,138,596	100	%	$	3,681,346	100	%	$	3,602,414	100	%
Plus deferred loan/lease origination costs, net of fees		8,809				8,859				9,208				4,699				1,663				8,859				7,856
Less allowance		(42,233)				(36,001)				(41,164)				(79,582)				(60,827)				(36,001)				(36,116)
Net loans/leases	$	3,662,435			$	3,654,204			$	3,758,268			$	4,168,395			$	4,079,432			$	3,654,204			$	3,574,154

*Includes PPP loans totaling $357.5 million and $358.1 million as of September 30, 2020 and June 30, 2020, respectively.

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of ~~March 31,~~September 30, 2020 and ~~December 31, 2019,~~June 30, 2020, approximately ~~26%~~24% and 25% of the CRE loan portfolio was ~~owner-occupied.~~

owner-occupied, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Following is a listing of significant industries within the Company's CRE loan portfolio:


													As of September 30,				As of June 30,				As of December 31,				As of September 30,
													2020				2020				2019				2019
													Amount		%		Amount		%		Amount		%		Amount		%

	As of March 31,				As of December 31,				As of March 31,
	2020				2019				2019
	Amount		%		Amount		%		Amount		%
	(dollars in thousands)

													(dollars in thousands)

Lessors of Residential Buildings													$	661,562	33	%		545,026	29	%	$	465,172	27	%	$	403,766	24	%
Lessors of Nonresidential Buildings	$	546,384	31	%	$	553,142	32	%	$	613,024	33	%		578,837	29	%	$	593,063	32	%		553,142	32	%		544,337	32	%
Lessors of Residential Buildings		500,871	28	%		465,172	27	%		355,850	19	%
Hotels														71,435	4	%		70,675	4	%		63,720	4	%		61,199	4	%
New Housing For-Sale Builders		56,916	3	%		55,525	3	%		47,276	3	%		47,733	2	%		56,229	3	%		55,525	3	%		45,419	3	%
Hotels		56,573	3	%		63,720	4	%		81,107	4	%
Land Subdivision		53,899	3	%		46,318	3	%		46,042	2	%		46,877	2	%		55,555	3	%		46,318	2	%		46,144	3	%
Nonresidential Property Managers		48,069	3	%		48,059	3	%		65,736	4	%		44,293	2	%		44,887	2	%		48,059	3	%		53,581	3	%
Lessors of Other Real Estate Property		42,260	2	%		39,297	2	%		34,212	2	%		41,883	2	%		40,248	2	%		39,297	2	%		38,492	2	%
Other Activities Related to Real Estate		39,352	2	%		42,060	2	%		29,307	2	%		41,403	2	%		38,044	2	%		42,060	2	%		36,212	2	%
Other *		438,762	25	%		423,103	23	%		581,810	30	%		465,692	24	%		425,435	23	%		423,103	23	%		458,772	27	%
Total CRE Loans	$	1,783,086	100	%	$	1,736,396	100	%	$	1,854,364	100	%	$	1,999,715	100	%	$	1,869,162	100	%	$	1,736,396	99	%	$	1,687,922	100	%

* “Other” consists of all other industries. None of these had concentrations greater than ~~$31.9~~$34.8 million, or approximately ~~1.8%~~1.7% of total CRE loans in the most recent period presented.

The Company's residential real estate loan portfolio includes the following:

●

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

●

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

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

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


													As of September 30,				As of June 30,				As of December 31,				As of September 30,
													2020				2020				2019				2019
													Amount		%		Amount		%		Amount		%		Amount		%

	As of March 31,				As of December 31,				As of March 31,
	2020				2019				2019
	Amount		%		Amount		%		Amount		%
	(dollars in thousands)

													(dollars in thousands)

Trucks, Vans and Vocational Vehicles	$	57,225	25	%	$	55,749	24	%	$	43,489	20	%	$	59,906	25	%	$	59,782	26	%	$	55,749	24	%	$	43,489	19	%
Manufacturing - General														18,914	8	%		16,939	7	%		15,847	7	%		16,952	7	%
Food Processing Equipment		16,703	7	%		16,742	7	%		15,622	7	%		16,219	7	%		16,244	7	%		16,742	7	%		15,622	7	%
Manufacturing - General		16,277	7	%		15,847	7	%		16,952	8	%
Construction - General		15,038	7	%		16,236	7	%		16,295	7	%		14,198	6	%		15,156	7	%		16,236	7	%		16,295	7	%
Marine - Travelifts														12,666	5	%		11,642	5	%		11,556	5	%		11,819	5	%
Computer Hardware		12,142	5	%		11,509	5	%		8,350	4	%		10,930	5	%		11,385	5	%		11,509	5	%		8,350	4	%
Marine - Travelifts		10,908	5	%		11,556	5	%		11,819	5	%
Trailers		9,469	4	%		9,907	4	%		9,603	4	%		9,071	4	%		9,541	4	%		9,907	4	%		9,603	4	%
Other *		90,821	40	%		92,301	41	%		99,181	45	%		93,194	40	%		92,071	39	%		92,301	41	%		107,931	47	%
Total m2 loans and leases	$	228,583	100	%	$	229,847	100	%	$	221,311	100	%	$	235,098	100	%	$	232,760	100	%	$	229,847	100	%	$	230,061	100	%

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

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's loan and lease portfolio.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 are presented as follows:


					Three Months Ended				Nine Months Ended
					September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

	Three Months Ended
	March 31, 2020		March 31, 2019
	(dollars in thousands)

					(dollars in thousands)

Balance, beginning	$	36,001	$	39,847	$	60,827	$	41,104	$	36,001	$	39,847
Reclassification of allowance related to held for sale loans						—		(6,122)		—		(6,122)
Provisions charged to expense		8,367		2,134		20,342		1,584		48,624		5,659
Loans/leases charged off		(2,335)		(1,060)		(1,819)		(741)		(5,604)		(3,953)
Recoveries on loans/leases previously charged off		200		243		232		291		561		685
Balance, ending	$	42,233	$	41,164	$	79,582	$	36,116	$	79,582	$	36,116

The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report on Form ~~10‑K~~10-K for the year ended December 31, 2019, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.

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


	As of

										As of
Internally Assigned Risk Rating *	March 31, 2020			December 31, 2019			March 31, 2019			September 30, 2020			June 30, 2020			December 31, 2019			September 30, 2019
	(dollars in thousands)

										(dollars in thousands)

Special Mention (Rating 6)	$	34,738		$	19,952		$	24,769		$	79,587		$	104,608		$	19,952		$	23,195
Substandard (Rating 7)		36,612			33,649			43,696			70,409			39,855			33,649			31,386
Doubtful (Rating 8)		—			—			—			—			—			—			—
	$	71,350		$	53,601		$	68,465

										$	149,996		$	144,463		$	53,601		$	54,581

Criticized Loans **	$	71,350		$	53,601		$	68,465		$	149,996		$	144,463		$	53,601		$	54,581
Classified Loans ***	$	36,612		$	33,649		$	43,696		$	70,409		$	39,855		$	33,649		$	31,386


Criticized Loans as a % of Total Loans/Leases		1.93	%		1.47	%		1.80	%		3.53	%		3.49	%		1.45	%		1.51	%
Classified Loans as a % of Total Loans/Leases		0.99	%		0.92	%		1.16	%		1.66	%		0.96	%		0.91	%		0.87	%

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

** Criticized loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

*** Classified loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 7 or 8, regardless of performance.

Criticized loans increased ~~33%~~4% and classified loans increased 9%77% from ~~December 31, 2019~~June 30, 2020 to ~~March 31,~~September 30, 2020. Criticized loans increased 180% during the first nine months of 2020 primarily due to loans related to borrowers in industries impacted by COVID-19. Classified loan increased 109% during the first nine months of 2020. The increase in classified loans was primarily due to ~~a few isolated relationships.~~loans related to borrowers in industries impacted by COVID-19. The Company continues its strong focus on improving credit quality in an effort to limit NPLs. See further discussion on industries impacted by COVID-19 in the “Provision for Loan/Lease Losses” section of this report.


	As of
	September 30, 2020		June 30, 2020		December 31, 2019		September 30, 2019
Allowance / Gross Loans/Leases	1.87	%	1.47	%	0.98	%	1.00	%
Allowance / NPLs	424.57	%	463.69	%	403.87	%	401.56	%

As of


March 31, 2020

December 31, 2019


March 31, 2019

Allowance / Gross Loans/Leases

1.14
%
0.98
%

1.08
%

Allowance / NPLs

310.72
%
403.87
%

238.48
%

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Although management believes that the allowance at ~~March 31,~~September 30, 2020 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Based on current economic indicators, the Company increased the economic allocations within the allowance for loan losses calculation. The Company anticipates that the allowance for loan losses as a percent of total loans may increase in future periods based on the belief that the credit quality of the loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

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

NONPERFORMING ASSETS

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




										As of September 30,			As of June 30,			As of December 31,			As of September 30,
										2020			2020			2019			2019



	As of March 31,			As of December 31,			As of March 31,
	2020			2019			2019
	(dollars in thousands)

										(dollars in thousands)

Nonaccrual loans/leases (1) (2)	$	11,628		$	7,902		$	13,406		$	17,597		$	12,099		$	7,902		$	8,231
Accruing loans/leases past due 90 days or more		1,419			33			61			86			99			33			—
TDRs - accruing		545			979			3,794			1,061			920			979			763
Total NPLs		13,592			8,914			17,261			18,744			13,118			8,914			8,994
OREO		3,298			4,129			9,110			125			157			4,129			4,248
Other repossessed assets		45			41			—			110			25			41			—
Total NPAs	$	16,935		$	13,084		$	26,371		$	18,979		$	13,300		$	13,084		$	13,242


NPLs to total loans/leases		0.37	%		0.24	%		0.45	%		0.44	%		0.32	%		0.24	%		0.25	%
NPAs to total loans/leases plus repossessed property		0.46	%		0.35	%		0.69	%		0.45	%		0.32	%		0.35	%		0.37	%
NPAs to total assets		0.32	%		0.27	%		0.52	%		0.32	%		0.24	%		0.27	%		0.27	%

(1)

~~(1)~~

Includes government guaranteed portion of loans, as applicable.

(2)

~~(2)~~

Includes TDRs of ~~$298~~$204 thousand at ~~March 31,~~September 30, 2020, $352 thousand at June 30, 2020, $747 thousand ~~million~~ at December 31, 2019, and ~~$1.5 million~~$933 thousand at ~~March 31,~~September 30, 2019.

NPAs at ~~March 31,~~September 30, 2020 were ~~$16.9~~$19.0 million, up ~~$3.8~~$5.7 million from ~~December 31, 2019~~June 30, 2020 and ~~down $9.5~~up $5.7 million from ~~March 31,~~September 30, 2019. The increase in NPAs in the ~~first~~third quarter of 2020 was primarily due to ~~one borrower relationship. The improvement from prior year was primarily attributed~~several isolated relationships that experienced degradation not directly related to ~~the sale of RB&T.~~

COVID-19. The ratio of NPAs to total assets was 0.32% at ~~March 31,~~September 30, 2020, up from 0.24% at June 30, 2020 and up from 0.27% at ~~December 31, 2019 and down from 0.52% at March 31,~~September 30, 2019.

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

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

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

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Due to the economic impacts of COVID-19, the Company established ~~a Loan Relief Program (“LRP”)~~its LRP for its clients. The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term. Those deferred payments will be added to the end of the original term of the ~~loan.~~loan through a three month extension of the maturity date. The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or ~~interest.~~interest for up to 90 days. The relief from TDR

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020. The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. Since implementing the program, the Company has provided 1,498 bank modifications of loans to commercial and consumer clients totaling $522 million and 953 m2 modifications of loans and leases totaling $53 million for a combined 2,451 modifications totaling $575 million, representing 13.53% of the total loan and lease portfolio. As of September 30, 2020, the majority of customers have resumed regularly scheduled payments with only 238 total loans/leases representing $83 million, or 1.95% of total loans/leases, receiving a second deferral under the LRP.

~~DEPOSITS~~

DEPOSITS

Deposits increased ~~$259.4~~$322.5 million during the ~~first~~third quarter of 2020, primarily due to an increase in interest bearing correspondent deposits, ~~public deposits and short-term~~net of prepayment of large brokered ~~CDs.~~certificates of deposits. The table below presents the composition of the Company's deposit portfolio.


													As of
													September 30, 2020				June 30, 2020				December 31, 2019				September 30, 2019
													Amount		%		Amount		%		Amount		%		Amount		%

	As of
	March 31, 2020				December 31, 2019				March 31, 2019
	Amount		%		Amount		%		Amount		%
	(dollars in thousands)

													(dollars in thousands)

Noninterest bearing demand deposits	$	829,782	20	%	$	777,224	20	%	$	821,599	20	%	$	1,175,085	25	%	$	1,177,482	27	%	$	777,224	20	%	$	782,232	21	%
Interest bearing demand deposits		2,440,907	58	%		2,407,502	61	%		2,334,474	55	%		2,938,194	63	%		2,488,755	57	%		2,407,502	61	%		2,245,557	59	%
Time deposits		617,979	15	%		571,343	15	%		719,286	17	%		499,021	11	%		560,982	13	%		571,343	15	%		536,352	14	%
Brokered deposits		281,810	7	%		154,982	4	%		318,861	8	%		59,968	1	%		122,556	3	%		154,982	4	%		238,100	6	%
	$	4,170,478	100	%	$	3,911,051	100	%	$	4,194,220	100	%
													$	4,672,268	100	%	$	4,349,775	100	%	$	3,911,051	100	%	$	3,802,241	100	%

Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity. During the quarter, the Company had significant core deposit growth mostly from its correspondent banking clients. The outsized deposit growth exceeded the strong loan growth and led to the Company carrying excess liquidity during the quarter. As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits.

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

~~BORROWINGS~~66

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

BORROWINGS

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


							As of
							September 30, 2020		June 30, 2020		December 31, 2019		September 30, 2019

	As of
	March 31, 2020		December 31, 2019		March 31, 2019
	(dollars in thousands)

							(dollars in thousands)

Overnight repurchase agreements	$	10,690	$	2,193	$	3,056	$	—	$	2,368	$	2,193	$	2,421
Federal funds purchased		2,377		11,230		12,830		30,430		22,450		11,230		16,105
Overnight federal reserve borrowings		30,000		—		—		—		100,000		—		—
	$	43,067	$	13,423	$	15,886
							$	30,430	$	124,818	$	13,423	$	18,526

The Company's federal funds purchased and Federal Reserve borrowings fluctuate based on the short-term funding needs of the Company's subsidiary banks. ~~The Company borrowed $30.0 million at the end of March to build on balance sheet liquidity in an abundance of caution as a response to the COVID-19 pandemic.~~

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

The table below presents the Company's term and overnight FHLB advances.


	As of
	September 30, 2020		June 30, 2020		December 31, 2019		September 30, 2019
	(dollars in thousands)

Term FHLB advances	$	40,000	$	90,000	$	50,000	$	60,000
Overnight FHLB advances		—		55,000		109,300		135,800
	$	40,000	$	145,000	$	159,300	$	195,800

FHLB advances decreased $105.0 million in the current quarter compared to the prior quarter due to the increase in core deposits that allowed for overnight and term FHLB advances to mature without renewal.

The Company renewed its revolving credit note in the second quarter of 2020. At renewal, the line amount was increased from $20.0 million to $25.0 million. The interest on the revolving line of credit is now calculated at a rate per annum equal to the greater of (a) Prime less 0.50% and (b) 3.00% per annum. Prior to the renewal, the interest on the revolving line of credit was calculated at the effective LIBOR rate plus 2.25% per annum. The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries. There was no outstanding balance on the revolving line of credit at September 30, 2020.

On September 14, 2020, the Company completed a private offering of $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 15, 2030. The subordinated notes, which qualify as Tier 2 capital for the Company, will bear interest at a fixed rate of 5.125% per year, from and including September 14, 2020 to, but excluding September 15, 2025 or earlier redemption. From and including September 15, 2025 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then three-month Term SOFR, plus 500 basis points. Interest on the subordinated notes is payable quarterly, commencing on December 15, 2020. 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 15, 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. The

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~The table below presents the Company's term and overnight FHLB advances.~~

As of


March 31, 2020


December 31, 2019

March 31, 2019

(dollars in thousands)

Term FHLB advances

$
55,000

$
50,000

$
66,380
Overnight FHLB advances

40,000

109,300

59,800

$
95,000

$
159,300

$
126,180

~~FHLB advances decreased $64.3 million in the current quarter, as compared to the prior quarter due to the increased levels of deposits.~~

~~The~~ Company had subordinated notes totaling ~~$68.5~~$118.6 million as of ~~March~~September 30, 2020, up from $68.4 million as of December 31, ~~2020.~~ 2019.

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

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).


	March 31, 2020				December 31, 2019
			Weighted				Weighted
			Average				Average

									September 30, 2020				December 31, 2019
											Weighted				Weighted
											Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate
	(dollars in thousands)
									(dollars in thousands)
Year ending December 31:
2020	$	295,455	0.94	%	$	200,110	0.85	%	$	99,968	0.27	%	$	200,110	0.85	%
2021		32,955	1.47			43,887	1.82			—	—			43,887	1.82
2022		28,400	1.65			50,285	1.79			—	—			50,285	1.79
2023		20,000	1.84			20,000	1.84			—	—			20,000	1.84
Total Wholesale Funding	$	376,810	1.09	%	$	314,282	1.20	%	$	99,968	0.27	%	$	314,282	1.20	%

During the first ~~three~~nine months of 2020, wholesale funding ~~increased $62.5~~decreased $214.3 million as the Company ~~accessed short-term brokered CDs~~grew core deposits to build on balance sheet liquidity ~~in an abundance~~and the Company used a portion of ~~caution as a response~~that excess liquidity to ~~the COVID-19 pandemic.~~prepay FHLB advances and brokered certificates of deposits.

STOCKHOLDERS' EQUITY

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


										As of
										September 30, 2020			June 30, 2020			December 31, 2019			September 30, 2019

	As of
	March 31, 2020			December 31, 2019			March 31, 2019
	(dollars in thousands)

										(dollars in thousands)

Common stock	$	15,774		$	15,828		$	15,755		$	15,792		$	15,791		$	15,828		$	15,790
Additional paid in capital		273,867			274,785			271,673			275,122			274,315			274,785			273,475
Retained earnings		254,287			245,836			204,179			283,480			267,081			245,836			230,892
AOCI (loss)		(4,789)			(1,098)			(3,200)			(1,781)			(1,167)			(1,098)			(414)
Total stockholders' equity	$	539,139		$	535,351		$	488,407		$	572,613		$	556,020		$	535,351		$	519,743


TCE / TA ratio (non-GAAP)		8.76	%		9.25	%		7.92	%		8.42	%		8.48	%		9.25	%		8.20	%

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

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

Capital was impacted by several atypical factors this quarter. First, the Company repurchased approximately 101,000 shares of its common stock during the quarter at a total cost of $3.8 million. Second, AOCI declined $3.7 million during the quarter for mark-to-market adjustments on interest rate caps and an interest rate swap on trust preferred securities partially offset by an increase in net unrealized gains on AFS securities portfolio. Furthermore asAs it relates to the Company’s TCE/TA, the Company experienced modest net dilution as TCE/TA fell slightly from ~~9.25%~~8.48% to ~~8.76%~~8.42%, which was primarily driven by an inflated balance sheet at quarter-end. ~~Specifically, the balance sheet was inflated by mark-to-market gross ups on the commercial loan swap portfolio and the previously mentioned excess liquidity. As~~Excluding the impact of ~~COVID-19 on~~PPP loans, the ~~economy escalated in mid-March, the Company suspended the stock repurchase program and has focused on preserving capital and growing tangible book value.~~adjusted TCE/TA at September 30, 2020 was 8.89% (non-GAAP).

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged ~~$133.4~~$321.7 million during the third quarter of 2020 and $327.9 million during the first ~~quarter~~nine months of 2020. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The Company ~~believes there could be potential stresses on~~has been able to access available funding sources to address liquidity ~~management as a direct result of~~needs during the COVID-19 ~~pandemic and the Company's participation in the PPP. As customers manage their own liquidity stress,~~pandemic. In addition, the Company ~~could experience an increase in the utilization of existing lines of credit. The Federal Reserve Bank~~ has ~~provided a lending facility that will allow the Company, if desired,~~been able to ~~obtain funding specifically for loans that the Company makes under~~pledge the PPP ~~which will allow the Company~~loans to ~~retain existing sources of liquidity for traditional operations. PPP loans will be pledged as collateral on the Company's borrowings under~~ the Federal Reserve ~~Bank's lending facility~~.as part of its operational line of credit.

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 ~~March 31,~~September 30, 2020, the subsidiary banks had 2628 lines of credit totaling ~~$370.2~~$749.9 million, of which ~~$36.7~~$293.9 million was secured and ~~$333.5~~$456.0 million was unsecured. At ~~March 31,~~September 30, 2020, the ~~$340.2~~Company had $749.9 million of the ~~$370.2~~$749.9 million ~~was~~ available.

At December 31, 2019, the subsidiary banks had 27 lines of credit totaling $380.6 million, of which $45.3 million was secured and $335.3 million was unsecured. At December 31, 2019, the full $380.6 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a ~~$20.0~~$25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, ~~2020.~~2021. At ~~March 31,~~September 30, 2020, the full ~~$20.0~~$25.0 million was available.

As of ~~March 31,~~September 30, 2020, the Company had ~~$541.0~~$849.6 million in average correspondent banking deposits spread over ~~195~~192 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 $837.8 million during the first nine months of 2020, compared to $235.1 million for the same period of 2019. The net decrease in federal funds sold was $9.3 million for the first nine months of 2020, compared to a net decrease of $17.1 million for the same period of 2019. The net increase in interest-bearing deposits at financial institutions was $154.2 million for the first nine months of 2020, compared to a net increase of $57.2 million for the same period of 2019. Proceeds from calls, maturities, and paydowns of securities were $72.3 million for the first nine months of 2020, compared to $45.7 million for the same period of 2019. Purchases of securities used cash of $255.5 million for the first nine months of 2020, compared to $28.1 million for the same period of 2019. Proceeds from sales of securities were $28.6 million for the first nine months of 2020, compared to $33.1 million in proceed from sales of securities for the first nine months of 2019. The net increase in loans/leases used cash of $555.3 million for the first nine months of 2020 compared to $237.3 million for the same period of 2019.

Financing activities provided cash of $701.2 million for the first nine months of 2020, compared to $206.1 million for same period of 2019. Net increases in deposits totaled $731.4 million for the first nine months of 2020, compared to $277.0 million for the same period of 2019. During the first nine months of 2020, the Company's short-term borrowings increased

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~Investing activities used cash of $133.5~~$17.0 million, ~~during the first three months of 2020,~~ compared to ~~$112.2~~a decrease in short-term borrowings of $9.1 million for the same period of 2019. ~~The net decrease in federal funds sold was $5.1~~Long-term FHLB advances increased $125.0 million ~~for~~during the first ~~three~~nine months of 2020, compared to a net decrease of $24.5 million for the same period of 2019. The net decrease in interest-bearing deposits at financial institutions was $54.1 million for the first three months of 2020, compared to a net increase of $81.0 million for the same period of 2019. Proceeds from calls, maturities, and paydowns of securities were $13.1 million for the first three months of 2020, compared to $14.9 million for the same period of 2019. Purchases of securities used cash of $83.4 million for the first three months of 2020, compared to $4.1 million for the same period of 2019. There were no proceeds from sales of securities for the first three months of 2020 or 2019. The net increase in loans/leases used cash of $15.6 million for the first three months of 2020 compared to $65.8 million for the same period of 2019.

Financing activities provided cash of $220.4 million for the first three months of 2020, compared to $94.6 million for same period of 2019. Net increases in deposits totaled $259.3 million for the first three months of 2020, compared to $217.3 million for the same period of 2019. During the first three months of 2020, the Company's short-term borrowings increased $29.6 million, compared to $12.9$25.0 million for the same period of 2019. In the first ~~three~~nine months of 2020, the Company decreased short-term and overnight FHLB advances by $109.3 million. ~~There were no maturities~~Maturities and principal payments on FHLB term advances totaled $81.6 million in the first ~~three~~nine months of 2020. Prepayments of FHLB advances totaled $55.3 million in the first nine months of 2020. In the first ~~three~~nine months of 2019, the Company decreased short-term and overnight FHLB advances by ~~$130.4 million and decreased other borrowings by $12.9~~$16.0 million. Maturities and principal payments on FHLB term advances totaled $35.0 million and on other borrowings totaled ~~$47.3~~$20.99 million in the first ~~three~~nine months of 2019. Prepayments on FHLB term advances totaled $33.2 million and on other borrowings totaled $46.3 million in the first nine months of 2019. Prepayments on brokered and public time deposits totaled $29.4 million during the first nine months of 2020. During the first ~~three~~nine months of 2020, proceeds from subordinated notes were $50.0 million. During the first nine months of 2019, proceeds from subordinated notes were $63.4 million.

Total cash provided by operating activities was ~~$6.6~~$129.3 million for the first ~~three~~nine months of 2020, compared to ~~$8.6~~$46.1 million for the same period of 2019.

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

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.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

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

●

The strength of the local, state, and national economy (including the impact of the 2020 presidential election and the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulation).

●

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

●

Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB (including the new CECL impairment standards, that will change how the Company estimates credit losses when implemented).

●

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

●

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

●

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

●

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

●

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

●

The loss of key executives or employees.

●

Changes in consumer spending.

●

The costs, effects and outcomes of existing or future litigation.

●

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

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form ~~10‑K~~10-K for the year ended December 31, 2019.

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Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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

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 March 31,		As of December 31,		As of December 31,

									NET INTEREST INCOME EXPOSURE in YEAR 1
											As of September 30,		As of December 31,		As of December 31,
INTEREST RATE SCENARIO	POLICY LIMIT		2020		2019		2018		POLICY LIMIT		2020		2019		2018


100 basis point downward shift	(10.0)	%	0.7	%	0.5	%	0.7	%	(10.0)	%	0.3	%	0.5	%	0.7	%
200 basis point upward shift	(10.0)	%	(2.3)	%	1.2	%	(2.7)	%	(10.0)	%	2.1	%	1.2	%	(2.7)	%
300 basis point upward shock	(25.0)	%	(0.3)	%	4.9	%	(9.0)	%	(25.0)	%	11.4	%	4.9	%	(9.0)	%

The simulation is ~~well~~ 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 ~~March 31,~~September 30, 2020 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

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

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)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) promulgated under the Exchange Act of 1934) as of ~~March 31,~~September 30, 2020. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

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

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

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

Item 1A Risk Factors

In addition to the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the following risk factors apply to the Company:

The outbreak of COVID-19 has adversely impacted, or an outbreak of other highly infectious or contagious diseases could adversely impact, certain industries in which the Company’s customers operate and could impair their ability to fulfill their obligations to the Company. Further, the spread of the outbreak is expected to leadled to an economic recession and other severe disruptions in the U.S. economy and ~~may disrupt~~has adversely disrupted banking and other financial activity and industries in the areas in which the Company ~~operates~~operates. As a result, we are seeing the impact of COVID-19 on our business, and we believe that it could be significant, adverse and potentially ~~create widespread business continuity issues for~~material.

Currently, COVID-19 is continuing to spread through the ~~Company.~~

United States and the world. The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. The Company is starting to see the impact from COVID-19 on its business, and its believes that it may be significant, adverse and potentially material. Currently, COVID-19 is spreading through the United States and the world. The resulting concerns on the part of the U.S. and global populations have ~~created the threat of~~resulted in a ~~recession,~~recessionary environment, reduced economic activity and caused a significant ~~correction~~volatility in the global stock markets. The Company ~~expects that it may experience significant~~has experienced disruptions across the Company’s business due to these effects, leading to decreased earnings and ~~significant~~ slowdowns in loan ~~collections or loan defaults.~~

COVID-19 may impact businesses’ and consumers’ financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of the Company’s borrowers are in or have exposure to the hotel, restaurant, entertainment, long-term healthcare and retail industries and/or are located in areas that are quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on the Company’s direct lease financing, commercial real estate and consumer loan portfolios. A prolonged quarantine or stay-at-home order would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.collections.

The outbreak of COVID-19 ~~or an outbreak of other highly infectious or contagious diseases may result~~has resulted in a ~~decrease~~decline in our ~~customers’~~clients’ businesses, a decrease in consumer confidence, ~~and business generally,~~ an increase in unemployment orand a disruption in the services provided by ~~the Company’s~~our vendors. ~~Disruptions~~Continued disruption to ~~the Company’s customers~~our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, declines in assets under management and wealth management revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy. Although the U.S. government has introduced a number of programs designed to soften the impact of COVID-19 on small businesses, once these programs expire, our borrowers may not be able to satisfy their financial obligations to us.

COVID-19 has impacted and will likely continue to impact businesses’ and consumers’ financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of the Company’s borrowers are in or have exposure to the hotel, restaurant, arts/entertainment/recreation and retail industries and are located in areas that are or were quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on the Company’s direct lease financing, commercial real estate and consumer loan portfolios. Any new or prolonged quarantine or stay-at-home orders would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

As a result of the COVID-19 pandemic we may experience adverse financial consequences due to a number of other factors, including, but not limited to:

●

increased unemployment and decreased consumer confidence and business generally, leading to an increased risk of delinquencies, defaults and foreclosures;

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●

ratings downgrades, credit deterioration and defaults in many industries, including hotel, restaurant, transportation, long-term healthcare, retail and commercial real estate, which may lead to increased provision expense;

●

a sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets;

●

as a result of the decline in the Federal Reserve’s target federal funds rate to near 0% (or possibly below 0% in the future), the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and reducing net income;

●

a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill and other intangible assets that could result in an impairment charge being recorded for that period, and adversely impact our results of operations and the ability of our subsidiary banks to pay dividends to us;

●

the negative effect on earnings resulting from the subsidiary banks modifying loans and agreeing to loan payment deferrals due to the COVID-19 crisis;

●

a decrease in fees for customer services;

●

a reduction in the value of the assets that the Company manages or otherwise administers or services for others, affecting related fee income and demand for the Company’s services;

●

increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to our business continuity plan;

●

the potential for reduced liquidity and its negative effect on our capital and leverage ratios;

●

federal and state taxes may increase, including as a result of the effects of the pandemic on governmental budgets, which could reduce our net income;

●

FDIC premiums could increase if the agency experiences additional resolution costs;

●

increased cyber and payment fraud risk due to increased online and remote activity; and

●

other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it.

Overall, we believe that the economic impact from COVID-19 may be severe and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 as a global pandemic may have, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.

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The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business and results of operations.

On March 27, 2020, President Trump signed into law the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. In addition to implementing the programs contemplated by the CARES Act, the federal bank regulatory agencies have issued a steady stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation:

●

requiring banks to focus on business continuity and pandemic planning;

●

adding pandemic scenarios to stress testing;

●

encouraging bank use of capital buffers and reserves in lending programs;

●

permitting certain regulatory reporting extensions;

●

reducing margin requirements on swaps;

●

permitting certain otherwise prohibited investments in investment funds;

●

issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and

●

providing credit under the CRA for certain pandemic-related loans, investments and public service.

The COVID-19 pandemic has significantly affected the financial markets, and the Federal Reserve has taken a number of actions in response. In March 2020, the Federal Reserve dramatically reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability. The Federal Reserve also launched the Main Street Lending Program, which will offer deferred interest on four-year loans to small and mid-sized businesses. The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies, programs and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material adverse effect on our business and results of operations.

COVID-19 has disrupted banking and other financial activities in the areas in which we operate and could potentially create widespread business continuity issues for us.

The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it couldCOVID-19 pandemic has negatively ~~impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact~~impacted the ability of ~~the Company’s~~our employees and ~~customers~~clients to engage in banking and other

~~Table of Contents~~

financial transactions in the geographic ~~areas~~area in which ~~the Company operates~~we operate and could create widespread business continuity issues for ~~the Company. The Company~~us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of aan outbreak or escalation of the COVID-19 ~~outbreak~~pandemic in ~~its~~our market ~~areas.~~area, including because of illness, quarantines, government actions or other restrictions in connection with the COVID-19 pandemic. Although ~~the Company has~~we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

~~The Company believes that the economic impact from COVID-19 will be severe and could have a material and adverse impact on~~ Further, we rely upon our third-party vendors to conduct business and ~~that~~to process, record,

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and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could ~~result in significant losses in its loan portfolio, all of which would adversely and materially~~negatively impact ~~the Company’s earnings and capital.~~our ability to serve our clients.

As a participating lender in the PPP, the Company and the subsidiary banks are subject to additional risks of litigation from ~~their~~our customers or other parties regarding ~~the~~our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

~~On March 27, 2020, President Trump signed the~~The CARES Act ~~which~~ included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The subsidiary banks are participating as lenders in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Although Congress ~~has~~ authorized an additional $310 billion funding for PPP ~~loans; however, it~~loans, the program was closed on August 8, 2020 prior to the exhaustion of these additional funds. It is unknown ~~if and when this the additional authorized amount will be exhausted and~~ whether Congress will again authorize additional PPP loan funding.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the ~~PPP.~~PPP and claims related to agent fees. The Company and the subsidiary banks may be exposed to the risk of similar litigation, from both customers and ~~non‑customers~~non-customers that approached the banks regarding PPP loans, regarding their process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the subsidiary banks and is not resolved in a manner favorable to the Company or the banks, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The subsidiary banks also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the banks, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The ~~share repurchase program~~Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic. ~~The~~It is undecided whether or when the Company will resume the repurchase of shares under this program in the future. All shares repurchased under the share repurchase program were ~~retired after purchased.~~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, 2020	—	—	100,932	699,068
August 1-31, 2020	—	—	100,932	699,068
September 1-30, 2020	—	—	100,932	699,068

Total number of shares

Maximum number

purchased as part of

of shares that may yet

Total number of

Average price

publicly announced

be purchased under

Period

shares purchased

paid per share

plans or programs

the plans or programs

January 1-31, 2020

—

$
—

—

800,000

February 1-29, 2020

35,732

40.09

35,732

764,268

March 1-31, 2020

65,200

35.96

100,932

699,068

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6 Exhibits



31.1	Certification of Chief Executive Officer Pursuant to Rule ~~13a‑14(a)~~13a-14(a)/~~15d‑14(a)~~15d-14(a).

31.2	Certification of Chief Financial Officer Pursuant to Rule ~~13a‑14(a)~~13a-14(a)/~~15d‑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 ~~March 31,~~September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the three and nine months ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019; (v) Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019; and (vi) Notes to the Consolidated Financial Statements.
104	Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101.

6880

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~~SIGNATURES~~

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	~~May 8,~~November 6, 2020	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer


Date	~~May 8,~~November 6, 2020	/s/ Todd A. Gipple
		Todd A. Gipple, President
		Chief Operating Officer
		Chief Financial Officer


Date	~~May 8,~~November 6, 2020	/s/ Nick W. Anderson
		Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)

6981


			Page Number(s)
Part I	FINANCIAL INFORMATION

	Item 1	Consolidated Financial Statements (Unaudited)

		Consolidated Balance Sheets As of ~~March 31,~~September 30, 2020 and December 31, 2019	4

		Consolidated Statements of Income For the Three Months Ended ~~March 31,~~September 30, 2020 and 2019	5


		Consolidated Statements of Income
		For the Nine Months Ended September 30, 2020 and 2019	6

		Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and 2019	6
			7

		Consolidated Statements of Changes in Stockholders' Equity For the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and 2019	7
			8

		Consolidated Statements of Cash Flows For the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2020 and 2019	8
			10

		Notes to Consolidated Financial Statements	10
			12

		Note 1. Summary of Significant Accounting Policies	10 12
		Note 2. Investment Securities	12 14
		Note 3. Loans/Leases Receivable	16 18
		Note 4. Derivatives and Hedging Activities	25
		~~Note 5. Earnings Per Share~~	26
		~~Note 6. Fair Value~~	27
		~~Note 7. Business Segment Information~~	29
		~~Note 8. Regulatory Capital Requirements~~	30
		~~Note 9. Subsequent Event~~	32

		~~Item 2~~Note 5. Subordinated Notes	31
		Note 6. Earnings Per Share	32
		Note 7. Fair Value	34
		Note 8. Business Segment Information	35
		Note 9. Regulatory Capital Requirements	35
		Note 10. Sale of Subsidiary	37

	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations

		Introduction	33 38
		General	33 38
		Impact of COVID-19	33 38
		Executive Overview	37 42
		Strategic Financial Metrics	38 44
		Strategic Developments	39 44
		GAAP to Non-GAAP Reconciliations	40 45
		Net Interest Income - (Tax Equivalent Basis)	42 48
		Critical Accounting Policies	44 52
		Goodwill	44 52
		Allowance for Loan and Lease Losses	45 53


		Results of Operations	53
		~~Results of Operations~~	45
		Interest Income	45
		~~Interest Expense~~	53
		Interest Expense	53
		Provision for Loan/Lease Losses	46 54
		Noninterest Income	47 55
		Noninterest Expense	49 58
		Income Taxes	51 60
		Financial Condition	52 61
		Investment Securities	52 61
		Loans/Leases	53 62
		Allowance for Estimated Losses on Loans/Leases	55 64
		Nonperforming Assets	56 65
		Deposits	57 66
		Borrowings	57 67
		Stockholders' Equity	58 68
		Liquidity and Capital Resources	59 69
		Special Note Concerning Forward-Looking Statements	60
			70

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	62
			72

	Item 4	Controls and Procedures	64 74

Part II	OTHER INFORMATION		65
			75
	~~Item 1~~	~~Legal Proceedings~~	65

	Item 1A1	~~Risk Factors~~Legal Proceedings	65
			75

	Item 21A	Risk Factors	75

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	67
			79

	Item 3	Defaults Upon Senior Securities	67
			79
	~~Item 4~~	~~Mine Safety Disclosures~~	67

	Item 54	~~Other Information~~Mine Safety Disclosures	67
			79

	Item 65	~~Exhibits~~Other Information	68 79

	Item 6	Exhibits	80

Signatures			69 81


	Three Months Ended March 31,
	2020		2019
	(dollars in thousands)

Net income	$	11,228	$	12,918

Other comprehensive income (loss):

Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period before tax		2,481		4,144
		2,481		4,144
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(7,161)		(1,162)
Less reclassification adjustment for caplet amortization before tax		(110)		(157)
		(7,051)		(1,005)

Other comprehensive income (loss), before tax		(4,570)		3,139
Tax expense (benefit)		(879)		795
Other comprehensive income (loss), net of tax		(3,691)		2,344

Comprehensive income	$	7,537	$	15,262


							Accumulated
			Additional				Other
	Common		Paid-In		Retained		Comprehensive
	Stock		Capital		Earnings		(Loss)		Total
	(dollars in thousands)

Balance December 31, 2019	$	15,828	$	274,785	$	245,836	$	(1,098)	$	535,351
Net income		—		—		11,228		—		11,228
Other comprehensive income, net of tax		—		—		—		(3,691)		(3,691)
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)
Repurchase and cancellation of 100,932 shares of common stock
as a result of a share repurchase program		(101)		(1,844)		(1,835)		—		(3,780)
Issuance of 5,553 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		6		208		—		—		214
Issuance of 31,729 shares of common stock as a result of
stock options exercised		32		274		—		—		306
Stock-based compensation expense		—		641		—		—		641
Restricted stock awards and restricted stock units- 10,300 shares
of common stock , net of restricted stock units
withheld for payment for taxes		10		(8)		—		—		2
Exchange of 1,012 shares of common stock in connection
with payroll taxes for restricted stock and in connection
with stock options exercised		(1)		(189)		—		—		(190)
Balance, March 31, 2020	$	15,774	$	273,867	$	254,287	$	(4,789)	$	539,139



Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest	$	11,534	$	14,146
Income/franchise taxes		(2,134)		(590)

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net		(3,691)		2,344
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised		(190)		(152)
Transfers of loans to other real estate owned		—		158
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities		110,545		13,882
Dividends payable		942		942


	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,016	$	3,023
Due after one year through five years		34,967		35,545
Due after five years		393,300		411,833
	$	431,283	$	450,401
Securities AFS:
Due in one year or less	$	1,370	$	1,387
Due after one year through five years		15,804		16,131
Due after five years		82,056		84,418
		99,230		101,936
Residential mortgage-backed and related securities		116,768		122,853
Asset-backed securities		31,076		28,499
	$	247,074	$	253,288


			Balance Sheet					Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		March 31, 2020		December 31, 2019
(dollars in thousands)

Deposits	1/1/2020	1/1/2023	Other Assets	$	25,000	1.75	%	$	18	$	112
Deposits	1/1/2020	1/1/2023	Other Assets		50,000	1.57			35		218
Deposits	1/1/2020	1/1/2023	Other Assets		25,000	1.90			16		96
Deposits	1/1/2020	1/1/2023	Other Assets		25,000	1.80			17		109
Deposits	1/1/2020	1/1/2024	Other Assets		25,000	1.75			47		214
Deposits	1/1/2020	1/1/2024	Other Assets		50,000	1.57			85		401
Deposits	2/1/2020	2/1/2024	Other Assets		25,000	1.90			44		202
Deposits	1/1/2020	1/1/2024	Other Assets		25,000	1.80			42		201
Deposits	1/1/2020	1/1/2025	Other Assets		25,000	1.75			94		337
Deposits	1/1/2020	1/1/2025	Other Assets		50,000	1.57			171		617
Deposits	3/1/2020	3/1/2025	Other Assets		25,000	1.90			94		332
Deposits	1/1/2020	1/1/2025	Other Assets		25,000	1.80			86		309
				$	375,000			$	749	$	3,148


			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)
March 31, 2020:
Securities AFS:
U.S. govt. sponsored agency securities	$	19,457	$	—	$	19,457	$	—
Residential mortgage-backed and related securities		122,853		—		122,853		—
Municipal securities		63,431		—		63,431		—
Asset-backed securities		28,499				28,499
Other securities		19,048		—		19,048		—
Derivatives		195,973		—		195,973		—
Total assets measured at fair value	$	449,261	$	—	$	449,261	$	—

Derivatives	$	203,744	$	—	$	203,744	$	—
Total liabilities measured at fair value	$	203,744	$	—	$	203,744	$	—


December 31, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	20,078	$	—	$	20,078	$	—
Residential mortgage-backed and related securities		120,587		—		120,587		—
Municipal securities		48,257		—		48,257		—
Asset-backed securities		16,887				16,887
Other securities		4,886		—		4,886		—
Derivatives		87,827		—		87,827		—
Total assets measured at fair value	$	298,522	$	—	$	298,522	$	—

Derivatives	$	88,437	$	—	$	88,437	$	—
Total liabilities measured at fair value	$	88,437	$	—	$	88,437	$	—


	Commercial Banking								Wealth				Intercompany		Consolidated
	QCBT		CRBT		CSB		SFC Bank		Management		All other		Eliminations		Total
	(dollars in thousands)
Three Months Ended March 31, 2020
Total revenue	$	19,499	$	21,995	$	10,051	$	8,691	$	4,039	$	15,618	$	(15,715)	$	64,178
Net interest income		14,428		11,386		7,500		5,642		—		(1,488)		230		37,698
Provision		3,183		2,250		1,964		970		—		—		—		8,367
Net income (loss) from continuing operations		4,903		6,377		1,038		2,207		821		11,137		(15,255)		11,228
Goodwill		3,223		14,980		9,888		45,975		—		182		—		74,248
Intangibles		—		2,560		3,812		6,573		—		1,476		—		14,421
Total assets		1,914,785		1,719,773		863,903		708,735		—		695,511		(670,632)		5,232,075


Three Months Ended March 31, 2019
Total revenue	$	18,544	$	19,244	$	9,270	$	7,288	$	4,229	$	20,178	$	(14,658)	$	64,095
Net interest income		12,139		10,407		6,966		5,227		—		2,169		—		36,908
Credit loss expense		1,020		425		150		500		—		39		—		2,134
Net income (loss)		4,185		5,100		2,157		1,653		1,158		13,115		(14,450)		12,918
Goodwill		3,223		14,980		9,888		45,975		—		3,806		—		77,872
Intangibles		—		3,061		4,501		7,501		—		1,855		—		16,918
Total assets		1,660,374		1,446,637		785,076		638,542		—		1,137,465		(601,432)		5,066,662


										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2020:
Company:
Total risk-based capital	$	601,259	13.54	%	$	355,226	>	8.00	%	$	466,233	>	10.50	%	$	444,032	>	10.00	%
Tier 1 risk-based capital		495,455	11.16			266,419	>	6.00			377,427	>	8.50			355,226	>	8.00
Tier 1 leverage		495,455	10.19			194,477	>	4.00			194,477	>	4.00			243,097	>	5.00
Common equity Tier 1		457,578	10.31			199,814	>	4.50			310,822	>	7.00			288,621	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	191,590	12.03	%	$	127,429	>	8.00	%	$	167,251	>	10.50	%	$	159,287	>	10.00	%
Tier 1 risk-based capital		175,861	11.04			95,572	>	6.00			135,394	>	8.50			127,429	>	8.00
Tier 1 leverage		175,861	10.07			69,825	>	4.00			69,825	>	4.00			87,282	>	5.00
Common equity Tier 1		175,861	11.04			71,679	>	4.50			111,501	>	7.00			103,536	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	184,319	12.21	%	$	120,785	>	8.00	%	$	158,531	>	10.50	%	$	150,982	>	10.00	%
Tier 1 risk-based capital		168,693	11.17			90,589	>	6.00			128,334	>	8.50			120,785	>	8.00
Tier 1 leverage		168,693	10.53			64,084	>	4.00			64,084	>	4.00			80,105	>	5.00
Common equity Tier 1		168,693	11.17			67,942	>	4.50			105,687	>	7.00			98,138	>	6.50
Community State Bank:
Total risk-based capital	$	94,289	12.59	%	$	59,930	>	8.00	%	$	78,658	>	10.50	%	$	74,912	>	10.00	%
Tier 1 risk-based capital		86,636	11.57			44,947	>	6.00			63,675	>	8.50			59,930	>	8.00
Tier 1 leverage		86,636	10.25			33,808	>	4.00			33,808	>	4.00			42,261	>	5.00
Common equity Tier 1		86,636	11.57			33,710	>	4.50			52,439	>	7.00			48,693	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	74,501	12.49	%	$	47,723	>	8.00	%	$	62,636	>	10.50	%	$	59,654	>	10.00	%
Tier 1 risk-based capital		66,392	11.13			35,792	>	6.00			50,706	>	8.50			47,723	>	8.00
Tier 1 leverage		66,392	10.43			25,470	>	4.00			25,470	>	4.00			31,838	>	5.00
Common equity Tier 1		66,392	11.13			26,844	>	4.50			41,758	>	7.00			38,775	>	6.50


	For the three months ended
	March 31, 2020		December 31, 2019		March 31, 2019
	(dollars in thousands)

Net income	$	11,228	$	15,891	$	12,918

Diluted earnings per common share	$	0.70	$	0.99	$	0.81

Weighted average common and common equivalent shares outstanding		16,011,456		16,033,043		15,922,940


	As of
GAAP TO NON-GAAP	March 31,			December 31,			March 31,
RECONCILIATIONS	2020			2019			2019
		(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	539,139		$	535,351		$	488,407
Less: Intangible assets		88,669			89,718			94,790
TCE (non-GAAP)	$	450,470		$	445,633		$	393,617

Total assets (GAAP)	$	5,232,075		$	4,909,050		$	5,066,662
Less: Intangible assets		88,669			89,718			94,790
TA (non-GAAP)	$	5,143,406		$	4,819,332		$	4,971,872

TCE/TA ratio (non-GAAP)		8.76	%		9.25	%		7.92	%


	As of March 31,
	2020
			% of Total Gross
	Amount		Loans and Leases
	(dollars in thousands)

Construction	$	282,117	7.62	%
Retail and Lessors of Property Secured by Retail Property, excluding Automotive		201,998	5.45
Manufacturing		138,782	3.75
Wholesale		105,880	2.86
Hotel		66,129	1.79
Nursing & Senior Care		65,644	1.77
Restaurants and Lessors of Property Secured by Restaurant Property		52,172	1.41
Arts & Entertainment		23,589	0.64
Educational Services		19,956	0.54
	$	956,267	25.81	%


				Total number of shares	Maximum number
				purchased as part of	of shares that may yet
	Total number of		Average price	publicly announced	be purchased under
Period	shares purchased		paid per share	plans or programs	the plans or programs

January 1-31, 2020	—	$	—	—	800,000
February 1-29, 2020	35,732		40.09	35,732	764,268
March 1-31, 2020	65,200		35.96	100,932	699,068