000000906465--12-312021Q3false00001559042815805711P3YP1Yqcrh:ValuationTechniqueAppraisalOfCollateralMemberus-gaap:MeasurementInputAppraisedValueMemberqcrh:ValuationTechniqueAppraisalOfCollateralMemberus-gaap:MeasurementInputAppraisedValueMember

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 30, 2021~~March 31, 2022

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

For the transition period from ______to________

Commission file number 0-22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

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

3551 7^th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 736-3580

(Registrant's telephone number, including area code)

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


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

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

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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


Large accelerated filer ☐☒	Accelerated filer ☒☐		Non-accelerated filer ☐
Smaller reporting company ☐		Emerging growth company ☐

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

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

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of ~~November~~May 1, ~~2021,~~2022, the Registrant had outstanding ~~15,596,681~~17,651,425 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021

	(dollars in thousands)				(dollars in thousands)
Assets
Cash and due from banks	$	57,310	$	61,329	$	50,540	$	37,490
Federal funds sold		6,985		9,080		9,635		12,370
Interest-bearing deposits at financial institutions		63,841		86,596		56,755		75,292

Securities held to maturity, at amortized cost, net of allowance for credit losses		484,003		476,165		476,625		472,385
Securities available for sale, at fair value		344,716		361,966		346,686		337,830
Total securities		828,719		838,131		823,311		810,215

Loans receivable held for sale		3,452		3,758		2,968		3,828
Loans/leases receivable held for investment		4,596,278		4,247,371		4,824,900		4,676,304
Gross loans/leases receivable		4,599,730		4,251,129		4,827,868		4,680,132
Less allowance for credit losses		(80,670)		(84,376)		(74,786)		(78,721)
Net loans/leases receivable		4,519,060		4,166,753		4,753,082		4,601,411

Bank-owned life insurance		61,955		60,586		62,770		62,424
Premises and equipment, net		74,993		72,693		80,634		78,530
Restricted investment securities		19,936		18,103		30,722		19,353
Other real estate owned, net		—		20
Goodwill		74,066		74,066		74,066		74,066
Intangibles		9,857		11,381		8,856		9,349
Derivatives		198,393		222,757		107,326		222,220
Other assets		99,393		61,302		118,122		93,412
Total assets	$	6,014,508	$	5,682,797	$	6,175,819	$	6,096,132

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,342,273	$	1,145,378	$	1,275,493	$	1,268,788
Interest-bearing		3,529,555		3,453,759		3,564,196		3,653,984
Total deposits		4,871,828		4,599,137		4,839,689		4,922,772

Short-term borrowings		1,600		5,430		1,190		3,800
Federal Home Loan Bank advances		30,000		15,000		290,000		15,000
Subordinated notes		113,811		118,691		113,890		113,850
Junior subordinated debentures		38,103		37,993		38,190		38,155
Derivatives		201,450		229,270		116,193		225,135
Other liabilities		107,902		83,483		108,743		100,410
Total liabilities		5,364,694		5,089,004		5,507,895		5,419,122


Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 September 2021 and December 2020 - 0 shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 September 2021 - 15,590,428 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding		15,590		15,806
Preferred stock, $1 par value; shares authorized 250,000 March 2022 and December 2021 - 0 shares issued or outstanding						—		—
Common stock, $1 par value; shares authorized 20,000,000 March 2022 - 15,579,605 shares issued and outstanding December 2021 - 15,613,460 shares issued and outstanding						15,580		15,613
Additional paid-in capital		272,964		275,807		272,370		273,768
Retained earnings		360,003		300,804		405,762		386,077
Accumulated other comprehensive income (loss):
Securities available for sale		5,825		9,008		(16,171)		5,925
Derivatives		(4,568)		(7,632)		(9,617)		(4,373)
Total stockholders' equity		649,814		593,793		667,924		677,010
Total liabilities and stockholders' equity	$	6,014,508	$	5,682,797	$	6,175,819	$	6,096,132

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 ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~


	2021		2020		2022		2021

	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	44,858	$	44,768	$	44,196	$	41,333
Securities:
Taxable		2,347		1,938		2,398		2,042
Nontaxable		4,160		3,842		4,150		3,934
Interest-bearing deposits at financial institutions		39		92		35		37
Restricted investment securities		262		249		281		219
Federal funds sold		1		1		2		—
Total interest and dividend income		51,667		50,890		51,062		47,565

Interest expense:
Deposits		3,273		4,484		3,137		3,427
Short-term borrowings		1		11		—		1
Federal Home Loan Bank advances		41		211		82		9
Subordinated notes		1,554		1,031		1,554		1,594
Junior subordinated debentures		569		572		556		559
Total interest expense		5,438		6,309		5,329		5,590
Net interest income		46,229		44,581		45,733		41,975
Provision for credit losses		—		20,342		(2,916)		6,713
Net interest income after provision for loan/lease losses		46,229		24,239
Net interest income after provision for credit losses						48,649		35,262

Noninterest income:
Trust department fees		2,714		2,280		2,963		2,801
Investment advisory and management fees		1,054		1,266		1,036		940
Deposit service fees		1,588		1,403		1,555		1,408
Gains on sales of residential real estate loans, net		954		1,370		493		1,337
Gains on sales of government guaranteed portions of loans, net						19		—
Swap fee income/capital markets revenue		24,885		26,688		6,422		13,557
Securities gains (losses), net		—		1,802
Earnings on bank-owned life insurance		446		502		346		471
Debit card fees		1,085		946		1,007		975
Correspondent banking fees		265		220		277		314
Other		1,661		1,482		1,515		1,686
Total noninterest income		34,652		37,959		15,633		23,489

Noninterest expense:
Salaries and employee benefits		28,207		25,999		23,627		24,847
Occupancy and equipment expense		4,122		3,807		3,937		4,108
Professional and data processing fees		3,568		3,758		3,671		3,443
Acquisition costs						1,851		—
Disposition costs		—		192		—		8
FDIC insurance, other insurance and regulatory fees		1,108		1,301		1,310		1,065
Loan/lease expense		308		403		267		300
Net income from and gains/losses on operations of other real estate		(1,346)		16
Net cost of (income from) and gains/losses on operations of other real estate						(1)		39
Advertising and marketing		1,095		750		761		627
Bank service charges		525		488		541		523
Losses on liability extinguishment		—		1,874
Correspondent banking expense		201		205		199		200
Intangibles amortization		508		531		493		508
Loss on sale of subsidiary		—		305
Other		3,091		1,209		1,669		1,560
Total noninterest expense		41,387		40,838		38,325		37,228
Net income before income taxes		39,494		21,360		25,957		21,523
Federal and state income tax expense		7,929		4,016		2,333		3,541
Net income	$	31,565	$	17,344	$	23,624	$	17,982

Basic earnings per common share	$	2.02	$	1.10	$	1.51	$	1.14
Diluted earnings per common share	$	1.99	$	1.09	$	1.49	$	1.12

Weighted average common shares outstanding		15,635,123		15,767,152		15,625,112		15,803,643
Weighted average common and common equivalent shares outstanding		15,869,798		15,923,578		15,852,256		16,025,548

Cash dividends declared per common share	$	0.06	$	0.06	$	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 COMPREHENSIVE INCOME (UNAUDITED)

~~Nine~~Three Months Ended ~~September 30,~~March 31, 2022 and 2021


	Three Months Ended March 31,
	2022		2021

	(dollars in thousands)

Net income	$	23,624	$	17,982

Other comprehensive income (loss):

Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period before tax		(29,170)		(5,759)

Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		(6,858)		3,153
Less reclassification adjustment for caplet amortization before tax		(221)		(151)
		(6,637)		3,304

Other comprehensive loss, before tax		(35,807)		(2,455)
Tax benefit		(8,467)		(704)
Other comprehensive loss, net of tax		(27,340)		(1,751)

Comprehensive income (loss)	$	(3,716)	$	16,231

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2022 and ~~2020~~2021


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

	(dollars in thousands)

Balance December 31, 2021	$	15,613	$	273,768	$	386,077	$	1,552	$	677,010
Net income		—		—		23,624		—		23,624
Other comprehensive (loss), net of tax		—		—		—		(27,340)		(27,340)
Common cash dividends declared, $0.06 per share		—		—		(939)		—		(939)
Repurchase and cancellation of 77,500 shares of common stock
as a result of a share repurchase program		(77)		(1,338)		(3,000)		—		(4,415)
Stock-based compensation expense		—		751		—		—		751
Issuance of common stock under employee benefit plans		44		(811)		—		—		(767)
Balance, March 31, 2022	$	15,580	$	272,370	$	405,762	$	(25,788)	$	667,924

2021

2020


(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$
128,639

$
130,542

Securities:

Taxable

6,521

5,714

Nontaxable

12,146

10,865

Interest-bearing deposits at financial institutions

110

587

Restricted investment securities

718

795

Federal funds sold

1

19

Total interest and dividend income

148,135

148,522

Interest expense:

Deposits

9,935

19,457

Short-term borrowings

4

81

Federal Home Loan Bank advances

66

1,007

Subordinated notes

4,718

3,019

Junior subordinated debentures

1,692

1,715

Total interest expense

16,415

25,279

Net interest income

131,720

123,243

Provision for credit losses

6,713

48,624

Net interest income after provision for loan/lease losses

125,007

74,619

Noninterest income:

Trust department fees

8,363

6,819

Investment advisory and management fees

3,033

4,392

Deposit service fees

4,488

4,166

Gains on sales of residential real estate loans, net

3,475

3,218

Swap fee income/capitals markets revenue

48,010

53,419

Securities gains (losses), net

(88)

1,867

Earnings on bank-owned life insurance

1,368

1,443

Debit card fees

3,144

2,479

Correspondent banking fees

848

633

Other

4,796

3,345

Total noninterest income

77,437

81,781

Noninterest expenses:

Salaries and employee benefits

76,098

65,822

Occupancy and equipment expense

12,195

11,587

Professional and data processing fees

10,713

10,773

Post-acquisition compensation, transition and integration costs

—

189

Disposition costs

8

626

FDIC insurance, other insurance and regulatory fees

3,159

2,892

Loan/lease expense

1,065

970

Net income from and gains/losses on operations of other real estate

(1,420)

(303)

Advertising and marketing

2,575

1,984

Bank service charges

1,620

1,493

Losses on liability extinguishment

—

2,450

Correspondent banking expense

599

633

Intangibles amortization

1,524

1,628

Goodwill impairment

—

500

Loss on sale of subsidiary

—

305

Other

6,154

3,842

Total noninterest expenses

114,290

105,391

Net income before income taxes

88,154

51,009

Federal and state income tax expense

16,258

8,698

Net income

$
71,896

$
42,311

Basic earnings per common share

$
4.54

$
2.68

Diluted earnings per common share

$
4.48

$
2.65

Weighted average common shares outstanding

15,829,124

15,770,335

Weighted average common and common equivalent shares outstanding

16,058,420

15,945,832

Cash dividends declared per common share

$
0.18

$
0.18


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

	(dollars in thousands)

Balance December 31, 2020	$	15,806	$	275,807	$	300,804	$	1,376	$	593,793
Impact of adoption of ASU 2016-13		—		—		(937)		—		(937)
Net income		—		—		17,982		—		17,982
Other comprehensive loss, net of tax		—		—		—		(1,751)		(1,751)
Common cash dividends declared, $0.06 per share		—		—		(949)		—		(949)
Stock-based compensation expense		—		841		—		—		841
Issuance of common stock under employee benefit plans		38		(298)		—		—		(260)
Balance, March 31, 2021	$	15,844	$	276,350	$	316,900	$	(375)	$	608,719

~~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 and Nine Months Ended September 30, 2021 and 2020~~

Three Months Ended September 30,



2021

2020

(dollars in thousands)

Net income

$
31,565

$
17,344

Other comprehensive loss:

Unrealized gains (losses) on securities available for sale:

Unrealized holding gains (losses) arising during the period before tax

(3,194)

585

Less reclassification adjustment for gains included in net income before tax

—

1,802

(3,194)

(1,217)

Unrealized gains (losses) on derivatives:

Unrealized holding gains (losses) arising during the period before tax

(342)

445

Less reclassification adjustment for caplet amortization before tax

(181)

149

(161)

296

Other comprehensive loss, before tax

(3,355)

(921)

Tax expense

(809)

(307)

Other comprehensive loss, net of tax

(2,546)

(614)

Comprehensive income

$
29,019

$
16,730

Nine Months Ended September 30,

2021

2020

(dollars in thousands)

Net income

$
71,896

$
42,311

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:

Unrealized holding gains (losses) arising during the period before tax

(4,290)

8,467

Less reclassification adjustment for gains (losses) included in net income before tax

(88)

1,867

(4,202)

6,600

Unrealized gains (losses) on derivatives:

Unrealized holding gains (losses) arising during the period before tax

3,383

(7,903)

Less reclassification adjustment for caplet amortization before tax

(495)

(384)

3,878

(7,519)

Other comprehensive loss, before tax

(324)

(919)

Tax expense

(206)

(236)

Other comprehensive loss, net of tax

(118)

(683)

Comprehensive income

$
71,778

$
41,628

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~~)CASH FLOWS (UNAUDITED)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive


Stock

Capital

Earnings

(Loss) Income

Total

(dollars in thousands)

Balance December 31, 2020

$
15,806

$
275,807

$
300,804

$
1,376

$
593,793
Net income

—

—

17,982

—

17,982
Other comprehensive loss, net of tax

—

—

—

(1,751)

(1,751)
Impact of adoption of ASU 2016-13

—

—

(937)

—

(937)
Common cash dividends declared, $0.06 per share

—

—

(949)

—

(949)
Stock-based compensation expense

—

841

—

—

841
Issuance of common stock under employee benefit plans

38

(298)

—

—

(260)
Balance, March 31, 2021

$
15,844

$
276,350

$
316,900

$
(375)

$
608,719
Net income

—

—

22,349

—

22,349
Other comprehensive income, net of tax

—

—

—

4,179

4,179
Common cash dividends declared, $0.06 per share

—

—

(951)

—

(951)
Repurchase and cancellation of 100,000 shares of common stock

as a result of a share repurchase program

(100)

(1,826)

(2,874)

—

(4,800)
Stock-based compensation expense

—

520

—

—

520
Issuance of common stock under employee benefit plans

20

440

—

—

460
Balance, June 30, 2021

$
15,764

$
275,485

$
335,424

$
3,803

$
630,476
Net income

—

—

31,565

—

31,565
Other comprehensive loss, net of tax

—

—

—

(2,546)

(2,546)
Repurchase and cancellation of 193,153 shares of common stock

as a result of a share repurchase program

(193)

(3,134)

(6,040)

—

(9,367)
Common cash dividends declared, $0.06 per share

—

—

(946)

—

(946)
Stock-based compensation expense

—

504

—

—

504
Issuance of common stock under employee benefit plans

19

109

—

—

128
Balance, September 30, 2021

$
15,590

$
272,964

$
360,003

$
1,257

$
649,814


	2022		2021

	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	23,624	$	17,982
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,297		1,331
Provision for credit losses		(2,916)		6,713
Stock-based compensation expense		751		841
Deferred compensation expense accrued		1,026		1,289
Gains on other real estate owned, net		—		(1)
Amortization of premiums on securities, net		336		597
Caplet amortization		221		151
Mark to market gains on unhedged derivatives, net		(906)		(164)
Loans originated for sale		(25,749)		(59,785)
Proceeds on sales of loans		27,121		59,216
Gains on sales of residential real estate loans		(493)		(1,337)
Gains on sales of government guaranteed portions of loans		(19)		—
Gains on sales and disposals of premises and equipment		(10)		(21)
Amortization of intangibles		493		508
Accretion of acquisition fair value adjustments, net		(118)		(504)
Increase in cash value of bank-owned life insurance		(346)		(471)
Increase in other assets		(16,243)		(8,243)
Decrease in other liabilities		(1,123)		(6,959)
Net cash provided by operating activities	$	6,946	$	11,143

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold		2,735		7,730
Net decrease in interest-bearing deposits at financial institutions		18,537		32,890
Proceeds from sales of other real estate owned		—		1
Activity in securities portfolio:
Purchases		(52,403)		(53,567)
Calls, maturities and redemptions		7,213		48,988
Paydowns		10,113		19,308
Sales		—		19,540
Activity in restricted investment securities:
Purchases		(11,389)		(1,680)
Redemptions		20		59
Net increase in loans/leases originated and held for investment		(148,521)		(107,996)
Purchase of premises and equipment		(3,428)		(1,800)
Proceeds from sales of premises and equipment		37		21
Net cash used in investing activities	$	(177,086)	$	(36,506)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts		(83,083)		32,645
Net increase (decrease) in short-term borrowings		(2,610)		1,410
Activity in Federal Home Loan Bank advances:
Net change in short-term and overnight advances		275,000		10,000
Payment of cash dividends on common stock		(935)		(947)
Payment from issuance of common stock, net		(767)		(260)
Repurchase and cancellation of shares		(4,415)		—
Net cash provided by financing activities	$	183,190	$	42,848

Net increase in cash and due from banks		13,050		17,485

Cash and due from banks, beginning		37,490		61,329
Cash and due from banks, ending	$	50,540	$	78,814

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)
Stock-based compensation expense

—

641

—

—

641
Issuance of common stock under employee benefit plans

47

285

—

—

332
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)
Stock-based compensation expense

—

423

—

—

423
Issuance of common stock under employee benefit plans

17

25

—

—

42
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)
Stock-based compensation expense

—

472

—

—

472
Issuance of common stock under employee benefit plans

1

335

—

—

336
Balance, September 30, 2020

$
15,792

$
275,122

$
283,480

$
(1,781)

$
572,613

~~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, 2021 and 2020~~

2021

2020

(dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES





Net income

$
71,896

$
42,311

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





Depreciation

4,087

4,006

Provision for credit losses

6,713

48,624

Stock-based compensation expense

1,865

1,536

Deferred compensation expense accrued

3,288

2,660

Gains on other real estate owned, net

(1,754)

(298)

Amortization of premiums on securities, net

1,506

728

Caplet amortization

495

383

Mark to market gains on unhedged derivatives, net

(74)

—

Securities (gains) losses, net

88

(1,867)

Loans originated for sale

(157,392)

(172,282)

Proceeds on sales of loans

161,173

170,362

Gains on sales of residential real estate loans

(3,475)

(3,218)

Loss on liability extinguishment, net

—

2,450

Losses (gains) on sales and disposals of premises and equipment

1,457

(13)

Amortization of intangibles

1,524

1,628

Accretion of acquisition fair value adjustments, net

(1,251)

(2,194)

Increase in cash value of bank-owned life insurance

(1,369)

(1,443)

Loss on sale of subsidiary/certain assets and liabilities of subsidiary

—

305

Goodwill impairment

—

500

Increase in other assets

(37,630)

(8,351)

Decrease in other liabilities

13,161

43,489

Net cash provided by operating activities

$
64,308

$
129,316

CASH FLOWS FROM INVESTING ACTIVITIES





Net decrease in federal funds sold

2,095

9,270

Net decrease (increase) in interest-bearing deposits at financial institutions

22,755

(154,247)

Proceeds from sales of other real estate owned

4,592

4,353

Activity in securities portfolio:

Purchases

(151,702)

(255,500)

Calls, maturities and redemptions

81,000

38,461

Paydowns

50,177

33,870

Sales

23,874

28,579

Activity in restricted investment securities:





Purchases

(4,280)

(4,600)

Redemptions

2,447

8,843

Proceeds from the liquidation of bank-owned life insurance

—

10,999

Net increase in loans/leases originated and held for investment

(353,616)

(555,315)

Purchase of premises and equipment

(7,866)

(2,250)

Proceeds from sales of premises and equipment

22

94

Net cash transferred In sale of subsidiary

—

(349)

Net cash used in investing activities

$
(330,502)

$
(837,792)

CASH FLOWS FROM FINANCING ACTIVITIES





Net increase in deposit accounts

272,691

731,374

Net increase (decrease) in short-term borrowings

(3,830)

17,007

Activity in Federal Home Loan Bank advances:





Term advances

—

125,000

Calls and maturities

—

(81,600)

Net change in short-term and overnight advances

15,000

(109,300)

Prepayments

—

(55,274)

Prepayments on brokered and public time deposits

—

29,359

Prepayments of subordinated notes

(5,000)

—

Proceeds from subordinated notes

—

50,000

Payment of cash dividends on common stock

(2,847)

(2,831)

Proceeds from issuance of common stock, net

328

1,199

Repurchase and cancellation of shares

(14,167)

(3,780)

Net cash provided by financing activities

$
262,175

$
701,154

Net increase (decrease) in cash and due from banks

(4,019)

(7,322)

Cash and due from banks, beginning

61,329

76,254

Cash and due from banks, ending

$
57,310

$
68,932

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued~~

~~Nine Months Ended September 30, 2021 and 2020~~



Supplemental disclosure of cash flow information, cash payments for:
Interest	$	18,617	$	26,920	$	6,271	$	7,674
Income/franchise taxes		36,987		16,713		38		35

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized losses on securities available for sale and derivative instruments, net		(118)		(683)		(27,340)		(1,751)
Change in retained earnings from adoption of ASU 2016-13						—		(937)
Transfers of loans to other real estate owned		2,812		51		—		153
Due to broker for purchases of securities		—		8,550		7,533		2,568
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities		(25,503)		151,398
Decrease in the fair value of back-to-back interest rate swap assets and liabilities						(119,357)		(100,886)
Dividends payable		946		945		939		949
Consideration received on sale of the Bates Companies		—		1,328

See Notes to Consolidated Financial Statements (Unaudited)

~~Table of Contents~~

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~September 30, 2021~~March 31, 2022

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, ~~2020,~~2021, included in the Company's Annual Report on Form 10-K filed with the SEC on March ~~12, 2021.~~11, 2022. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results expected for the year ending December 31, ~~2021,~~2022, or for any other period.

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



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

119

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of 4 commercial banks: QCBT, CRBT, CSB and SFCB. All are state-chartered commercial banks and all are members of the Federal Reserve system. On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank. The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

~~Recent~~Pending accounting developments: ~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326)~~. Under the standard, assets measured at amortized cost (including loans, leases and HTM securities) are presented at the net amount expected to be collected. Rather than the “incurred” model previously utilized, the standard requires 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 became effective for fiscal years beginning after December 15, 2019, including interim 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 would be required to comply with ASU 2016-13, beginning on the date of CARES Act’s enactment and continuing until the earlier of: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020.

On December 27, 2020, the Consolidated Appropriations Act was established, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022. Based upon guidance from regulators, it was determined the Company could adopt ASU 2016-13 on January 1, 2021, and the Company did adopt on January 1, 2021. The Company has developed a CECL allowance model which calculates allowances over the life of 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 the default framework. The Company utilizes economic and other forecasts over a reasonable and supportable forecast period and then fully reverts back to average historical losses.

Results for reporting periods beginning after December 31, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP, which includes a change in terminology from “Allowance for estimated losses on loans/leases” to “Allowance for credit losses.” The Company adopted the standard using a modified retrospective approach and recorded an after tax decrease to retained earnings of $937 thousand as of January 1, 2021 due to the adoption of ASU 2016-13. This transition adjustment included an $8.1 million decrease in the allowance related to loans and leases, established an ACL on held to maturity debt securities of $183 thousand and established an ACL on OBS credit exposures of $9.1 million. The company did not record an ACL on available for sale securities upon adoption of ASU 2016-13.

The Company elected to not measure an ACL on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. The Company elected not to include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the financial statements and notes included on the following pages of this Form 10-Q.

The Company elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital, because the impact on the capital ratios of the Company and its subsidiary banks was not significant.

~~The following table illustrates the impact of ASU 2016-13 as of January 1, 2021:~~

As Reported

Pre-

Impact of

Under

ASU 2016-13

ASU 2016-13

ASU 2016-13

Adoption

Adoption
Assets:

Allowance for credit losses HTM securities

$
183

$
—

$
183

Loans*:

C&I

—

35,421

(35,421)
C&I - revolving

2,982

—

2,982
C&I - other

29,130

—

29,130
CRE

—

42,161

(42,161)
CRE - owner occupied

8,696

—

8,696
CRE - non owner occupied

11,428

—

11,428
Construction & Land Development

11,999

—

11,999
Multi-family

5,836

—

5,836
Direct financing leases

—

1,764

(1,764)
1-4 family real estate

5,042

—

5,042
Residential real estate

—

3,732

(3,732)
Consumer

1,161

1,298

(137)
Allowance for credit losses on loans

76,274

84,376

(8,102)

Liabilities:

Allowance for credit losses on OBS credit exposures

9,117

—

9,117

* Loan segmentation under ASU 2016-13 follows different methodology where that segmentation is collateral driven, causing certain segments to contain commercial and non-commercial borrowers, whereas pre-ASU 2016-13 segments were borrower driven.

Further discussion contained in this quarterly report regarding the loan and lease portfolio as well as ACL on HTM securities and OBS exposures is only relevant for the year 2021 and forward. Discussion in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 is still applicable for years prior to 2021.

~~Loans receivable, held for sale~~: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.

~~Loans receivable, held for investment~~: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are reported at amortized cost, net of the ACL. Amortized cost is the amount of unpaid principal adjusted for charge-offs, any discounts or premiums, and any deferred fees and/or costs on originated loans. Accrued interest receivable totaled $20 million at September 30, 2021 and was reported in other assets on the consolidated balance sheet. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company discloses the ACL (also known as the allowance) by portfolio segment, and credit quality information, nonaccrual status, and past due status by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its ACL. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 3.

~~The Company’s portfolio segments and class of loans receivable are as follows:~~

●

~~C&I – revolving~~

●

~~C&I – other~~

●

~~CRE – owner occupied~~

●

~~CRE – non-owner occupied~~

●

~~Construction and land development~~

●

~~Multi-family~~

●

~~1-4 family real estate~~

●

~~Consumer~~

~~The Company’s classes of loans receivable are as follows:~~

●

~~C&I – revolving~~

●

~~C&I – other~~

●

~~CRE – owner occupied~~

●

~~CRE – non-owner occupied~~

●

~~Construction and land development~~

●

~~Multi-family~~

●

~~Direct financing leases~~

●

~~1-4 family real estate~~

●

~~Consumer~~

Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio and are included in the C&I other loan segments for ACL. The accounting policies for direct financing leases are disclosed below.

~~Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 31 days or greater.~~

For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist:

●

~~It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan;~~

●

~~When full repayment of principal and interest is not expected;~~

●

~~When the loan is graded “doubtful”;~~

●

~~When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future; or~~

●

~~When foreclosure action is initiated.~~

When a loan is placed on nonaccrual status, income recognition is ceased. Previously recorded but uncollected amounts of interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Generally, cash collected on nonaccrual loans is applied to principal. Should full collection of principal be expected, cash collected on nonaccrual loans can be recognized as interest income.

~~For all classes of loans receivable, nonaccrual loans may be restored to accrual status provided the following criteria are met:~~

●

~~The loan is current, and all principal and interest amounts contractually due have been made;~~

●

~~All principal and interest amounts contractually due, including past due payments, are reasonably assured of repayment within a reasonable period; and~~

●

~~There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms:~~

~~Six months of repayment performance for contractual monthly payments, or~~

~~One year of repayment performance for contractual quarterly or semi-annual payments.~~

~~Direct finance leases receivable, held for investment~~: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 25% of the cost of the related equipment), are

recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment.

Lease income is recognized on the interest method. Residual value is the estimated fair market value of the equipment on lease at the lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.

The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.

~~The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.~~

~~TDRs~~: TDRs exist when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.

~~The following criteria, related to granting a concession, together or separately, create a TDR:~~

●

~~A modification of terms of a debt such as one or a combination of:~~

~~The reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk.~~

~~The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.~~

~~The reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.~~

~~The reduction of accrued interest.~~

●

~~A transfer from the borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan.~~

●

The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position.

~~Allowance~~:

~~Allowance for Credit Losses on Loans and Leases~~

The ACL on loans is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the 8 portfolio segments at which the allowance will be measured. For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Credit losses on loans and leases, for all portfolio segments, are charged against the allowance when management believes the uncollectibility of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions that are expected to exist through the contractual lives of the financial assets and that are reasonable and supportable -- to the identified pools of

financial assets with similar risk characteristics for which the historical loss experience was observed. The Company will immediately and fully revert back to average historical losses when it can no longer develop reasonable and supportable forecasts.

~~A discussion of the risk characteristics and the allowance by each loan portfolio segment follows:~~

For C&I loans, both revolving lines of credit and other C&I, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of C&I loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:

●

~~Ability and stability of current management of the borrower;~~

●

~~Stable earnings with positive financial trends;~~

●

~~Sufficient cash flow to support debt repayment;~~

●

~~Earnings projections based on reasonable assumptions;~~

●

~~Financial strength of the industry and business; and~~

●

~~Value and marketability of collateral.~~

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

~~The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally 7 years with average terms ranging from~~ 3 ~~to 5 years. For low-income housing tax credit permanent loans, the maximum term is generally up to 20 years. For lines of credit, the maximum term is generally 365 days.~~

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

CRE is segmented into the following categories generally based on source of repayment: Owner occupied CRE, non-owner occupied CRE and multi-family. CRE loans are also embedded in the following segments: construction and land development and 1-4 family real estate. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for CRE loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (CRE loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.

~~Multi-family loans provide a source of repayment from rental income.~~

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

Construction loans include any loans to finance the construction of any new residential property, CRE property or major rehabilitation or expansion of existing commercial structures. Construction lending carries a high degree of risk because of the difficulty of protecting the bank against a myriad of pitfalls. The following factors are evaluated when underwriting these types of loans:

●

~~Borrowers/contractors experience and ability is analyzed with the type and size of project being considered.~~

●

~~Financial ability to cover cost overruns.~~

●

~~Reliability and thoroughness of cost projections and reasonable assurance that significant provisions are made for contingencies for soft costs especially interest and operating deficits.~~

●

~~Reliability of the estimate of time to complete the project.~~

The land development portfolio also includes other land loans such as raw land. The raw land component involves considerable risk to the bank and is reserved for the Bank’s most credit worthy borrowers. Land development loans are typically only made to experienced local developers with successful track records.

For all loans the allowance consists of pooled and individually analyzed components. Pooled loan allowances consist of quantitative and qualitative factors and cover loan classes that share similar risk characteristics with other assets in the segmented pool.

~~Quantitative Factors:~~

The quantitative factors are based on the probability of default and loss given default derived from historical net charge-off experience, repayment activity and default, remaining life, and current economic conditions as well as economic outlook.

~~Qualitative Factors:~~

The Company’s allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base loan loss rates.

~~The Company utilizes the following qualitative factors:~~

●

~~National and local economy~~

●

~~Loan volume and trend~~

●

~~Loan quality~~

●

~~Loan policies and procedures~~

●

~~Management and staff experience~~

●

~~Concentrations~~

●

~~Collateral~~

●

~~Loan review system~~

●

~~Regulatory environment and oversight~~

The qualitative adjustments are based on the current condition and applied as a percentage adjustment in addition to the calculated historical loss rates. The adjustment amount can be either positive or negative depending whether or not the current condition is better or worse than the historical average. These adjustments reflect the extent to which the Company expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated.

~~Economic Forecasting:~~

The Company uses reasonable and supportable forecasts over the contractual term of the financial assets for each entity. This measurement is based upon relevant past events, historical experience and current conditions to determine the forecasted data which requires significant judgement. When management no longer has sufficient information to make a reasonable and supportable forecast, the data will then immediately revert back to the average historical performance for each entity.

It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of the Company’s forecasting process, including the length of the forecast period.

Loans are determined to no longer share similar risk characteristics with other assets in the segmented pool when their scheduled payments of principal and interest according to the contractual terms of the loan agreement, have a greater probability of uncollectibility based on current information and events. Such events include past due status of 90 days or more, non-accrual status or classification of a substandard or doubtful risk rating. Factors considered by management in determining risk rating and non-accrual status include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered low quality. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Allowances for these low quality loans are measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Some loans that are determined to no longer share risk characteristics with other assets in the segmented pool, may be deemed collateral dependent. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When it is determined that foreclosure is probable, the collateral’s fair value is used to estimate the financial assets expected credit losses for the current reporting period. This fair value is then reduced by the present value of estimated costs to sell. If it is determined that the asset is collateral-dependent but foreclosure is not probable, an institution can elect to apply the practical expedient to use the collateral’s fair value to estimate the asset’s expected credit loss. The Company is choosing to utilize the practical expedient. When using the practical expedient on a collateral dependent loan where repayment is reliant upon the sale of the collateral, the fair value of that collateral will be adjusted for estimated costs to sell. However if the repayment is dependent on the operations of the company the fair market value less estimated cost to sell cannot be used. Thus the net present value of the cash-flow will be utilized.

~~For non-homogenous loans, the Company utilizes the following internal risk rating scale:~~

~~Highest Quality (Pass) – loans of the highest quality with no credit risk, including those fully secured by subsidiary bank certificates of deposit and U.S. government securities.~~

Superior Quality (Pass) – loans with very strong credit quality. Borrowers have exceptionally strong earnings, liquidity, capital, cash flow coverage, and management ability. Includes loans secured by high quality marketable securities, certificates of deposit from other institutions, and cash value of life insurance. Also includes loans supported by U.S. government, state, or municipal guarantees.

Satisfactory Quality (Pass) – loans with satisfactory credit quality. Established borrowers with satisfactory financial condition, including credit quality, earnings, liquidity, capital and cash flow coverage. Management is capable and experienced. Collateral coverage and guarantor support, if applicable, are more than adequate. Includes loans secured by personal assets and business assets, including equipment, accounts receivable, inventory, and real estate.

Fair Quality (Pass) – loans with moderate but still acceptable credit quality. The primary repayment source remains adequate; however, management’s ability to maintain consistent profitability is unproven or uncertain. Borrowers exhibit acceptable leverage and liquidity. May include new businesses with inexperienced management or unproven performance records in relation to peers, or borrowers operating in highly cyclical or declining industries.

Early Warning (Pass) – loans where the borrowers have generally performed as agreed, however unfavorable financial trends exist or are anticipated. Earnings may be erratic, with marginal cash flow or declining sales. Borrowers reflect leveraged financial condition and/or marginal liquidity. Management may be new and a track record of performance has yet to be developed. Financial information may be incomplete, and reliance on secondary repayment sources may be increasing.

Special Mention – loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left

uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.

Substandard – loans which are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if applicable. These loans have a well-defined weakness or weaknesses which jeopardize repayment according to the contractual terms. There is distinct loss potential if the weaknesses are not corrected. Includes loans with insufficient cash flow coverage which are collateral dependent, other real estate owned, and repossessed assets.

Doubtful – loans which have all the weaknesses inherent in a Substandard loan, with the added characteristic that existing weaknesses make full principal collection, on the basis of current facts, conditions and values, highly doubtful. The possibility of loss is extremely high, but because of pending factors, recognition of a loss is deferred until a more exact status can be determined. All doubtful loans will be placed on non-accrual, with all payments, including principal and interest, applied to principal reduction.

For term C&I and CRE loans greater than $1,000,000, a loan review is required within 15 months of the most recent credit review. The review is completed in enough detail to, at a minimum, validate the risk rating. Additionally, the review shall include an analysis of debt service requirements, covenant compliance, if applicable, and collateral adequacy. The frequency of the review is generally accelerated for loans with poor risk ratings.

The Company’s Loan Quality area performs a documentation review of a sampling of C&I and CRE loans, the primary purpose of which is to ensure the credit is properly documented and closed in accordance with approval authorities and conditions. A review is also performed by the Company’s Internal Audit Department of a sampling of C&I and CRE loans for proper documentation, according to an approved schedule. Validation of the risk rating is also part of Internal Audit’s review (performed by Internal Loan Review). Additionally, over the past several years, the Company has contracted an independent outside third party to review a sampling of C&I and CRE loans. Validation of the risk rating is part of this review as well.

The Company leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed. Direct financing leases are included in the C&I – Other segment and allowance is established in the same manner as C&I loans.

Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in ~~one~~ to five years or fixed rate mortgages that mature in 15 years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.

The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type.

For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans follow the same methodology as commercial loans in terms of evaluation of risk characteristics, other than these may not be risk rated due to homogenous nature.

TDRs follow the same allowance methodology as described above for all loans. Once a loan is classified as a TDR, it will remain a TDR until the loan is paid off, charged off, moved to OREO or restructured into a new note without a concession. TDR status may also be removed if the TDR was restructured in a prior calendar year, is current, accruing interest and shows sustained performance.

~~Allowance for Credit Losses on Off-Balance Sheet Exposures~~

The Company estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by the Company. Management uses an estimated average utilization rate to determine the exposure of default. The allowance on unfunded commitments is calculated using probability of default and loss given default using the same segmentation and qualitative factors used for loans and leases. The allowance for OBS exposures is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheet.

~~Allowance for Credit Losses on Held to Maturity Debt Securities~~

The Company measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information from external sources. The Company’s held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions.

~~Allowance for Credit Losses on Available for Sale Debt Securities~~

ASU 2016-13 modifies the impairment model for available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an available for sale debt security due to credit loss results in recording an ACL to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an ACL, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.

~~The Company did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13.~~

~~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, 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 will 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, arts/entertainment/recreation and retail industries will continue to endure economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, have impacted and are 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. The Company believes that losses have been incurred that are not yet known and anticipates that its asset quality and results of operations could be adversely affected in the future, as described in further detail in this report.

~~Pending accounting developments~~:

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

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

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

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are summarized as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair


Cost*

Gains

(Losses)

Value


(dollars in thousands)
September 30, 2021:









Securities HTM:









Municipal securities

$
483,127

$
47,122

$
(20)

$
530,229

Other securities

1,050

—

—

1,050

$
484,177

$
47,122

$
(20)

$
531,279









Securities AFS:









U.S. treasuries and govt. sponsored agency securities

$
23,616

$
413

$
(340)

$
23,689

Residential mortgage-backed and related securities

97,762

3,627

(645)

100,744

Municipal securities

162,964

4,124

(729)

166,359

Asset-backed securities

29,622

985

—

30,607

Other securities

23,048

299

(30)

23,317

$
337,012

$
9,448

$
(1,744)

$
344,716

Gross

Gross

Amortized

Unrealized

Unrealized

Fair


Cost

Gains

(Losses)

Value

(dollars in thousands)
December 31, 2020:







Securities HTM:







Municipal securities

$
475,115

$
45,360

$
(248)

$
520,227
Other securities

1,050

—

—

1,050

$
476,165

$
45,360

$
(248)

$
521,277








Securities AFS:








U.S. govt. sponsored agency securities

$
14,936

$
447

$
(47)

$
15,336
Residential mortgage-backed and related securities

127,670

5,510

(338)

132,842
Municipal securities

147,241

5,215

(48)

152,408
Asset-backed securities

39,663

1,111

(91)

40,683
Other securities

20,550

147

—

20,697

$
350,060

$
12,430

$
(524)

$
361,966


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

	(dollars in thousands)
March 31, 2022:
Securities HTM:
Municipal securities	$	475,773	$	10,649	$	(3,095)	$	483,327
Other securities		1,050		—		—		1,050
	$	476,823	$	10,649	$	(3,095)	$	484,377

Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	22,655	$	37	$	(1,312)	$	21,380
Residential mortgage-backed and related securities		88,935		207		(2,762)		86,380
Municipal securities		209,052		701		(18,280)		191,473
Asset-backed securities		22,859		449		(76)		23,232
Other securities		24,519		142		(440)		24,221
	$	368,020	$	1,536	$	(22,870)	$	346,686

* HTM securities shown on the balance sheet of ~~$484.0~~$476.6 million represents amortized cost of ~~$484.2~~$476.8 million, net of allowance for credit losses of ~~$174~~$198 thousand as of ~~September 30,~~March 31, 2022.


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

	(dollars in thousands)
December 31, 2021:
Securities HTM:
Municipal securities	$	471,533	$	49,715	$	—	$	521,248
Other securities		1,050		—		(1)		1,049
	$	472,583	$	49,715	$	(1)	$	522,297

Securities AFS:
U.S. govt. sponsored agency securities	$	23,370	$	254	$	(296)	$	23,328
Residential mortgage-backed and related securities		92,431		2,672		(780)		94,323
Municipal securities		163,253		5,228		(215)		168,266
Asset-backed securities		26,372		752		—		27,124
Other securities		24,568		251		(30)		24,789
	$	329,994	$	9,157	$	(1,321)	$	337,830

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

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

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.

2111

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, are summarized as follows:


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

	(dollars in thousands)												(dollars in thousands)
September 30, 2021:
March 31, 2022:
Securities HTM:
Municipal securities	$	14,880	$	(20)	$	—	$	—	$	14,880	$	(20)	$	87,662	$	(3,095)	$	—	$	—	$	87,662	$	(3,095)

Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	9,809	$	(148)	$	3,001	$	(192)	$	12,810	$	(340)	$	13,725	$	(850)	$	2,675	$	(462)	$	16,400	$	(1,312)
Residential mortgage-backed and related securities		18,422		(593)		8,629		(52)		27,051		(645)		40,124		(869)		18,455		(1,893)		58,579		(2,762)
Municipal securities		50,754		(689)		966		(40)		51,720		(729)		139,706		(17,719)		4,914		(561)		144,620		(18,280)
Asset-backed securities														10,853		(76)		—		—		10,853		(76)
Other securities		3,970		(30)		—		—		3,970		(30)		13,267		(440)		—		—		13,267		(440)
	$	82,955	$	(1,460)	$	12,596	$	(284)	$	95,551	$	(1,744)	$	217,675	$	(19,954)	$	26,044	$	(2,916)	$	243,719	$	(22,870)

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, 2020:












Securities HTM:












Municipal securities

$
8,407

$
(248)

$
—

$
—

$
8,407

$
(248)

Securities AFS:












U.S. govt. sponsored agency securities

$
3,199

$
(47)

$
—

$
—

$
3,199

$
(47)
Residential mortgage-backed and related securities

37,549

(338)

—

—

37,549

(338)
Municipal securities

10,110

(48)

—

—

10,110

(48)
Asset-backed securities

6,884

(52)

9,945

(39)

16,829

(91)

$
57,742

$
(485)

$
9,945

$
(39)

$
67,687

$
(524)


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

	(dollars in thousands)
December 31, 2021:
Securities HTM:
Other securities	$	1,049	$	(1)	$	—	$	—	$	1,049	$	(1)

Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	9,802	$	(156)	$	3,035	$	(140)	$	12,837	$	(296)
Residential mortgage-backed and related securities		5,363		(67)		19,406		(713)		24,769		(780)
Municipal securities		13,287		(211)		1,001		(4)		14,288		(215)
Other securities		4,528		(30)		—		—		4,528		(30)
	$	32,980	$	(464)	$	23,442	$	(857)	$	56,422	$	(1,321)

At ~~September 30, 2021,~~March 31, 2022, the investment portfolio included ~~629~~649 securities. Of this number, 91286 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~0.22%~~3.07% of the total amortized cost of the portfolio. Of these 91286 securities, there were 9 19securities 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 September 30, 2021, 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.

On January 1, 2021, the Company adopted ASU 2016-13, which replaced the legacy GAAP OTTI model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021.


	Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021						Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
	Municipal		Other				Municipal		Other				Municipal		Other				Municipal		Other
	securities		securities		Total		securities		securities		Total		securities		securities		Total		securities		securities		Total


Allowance for credit losses:
Beginning balance	$	173	$	1	$	174	$	—	$	—	$	—	$	198	$	—	$	198	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		—		182		1		183		—		—		—		182		1		183
Provision for credit loss expense		—		—		—		(9)		—		(9)		—		—		—		(9)		—		(9)
Balance, ending	$	173	$	1	$	174	$	173	$	1	$	174	$	198	$	—	$	198	$	173	$	1	$	174

There were 0 proceeds or gains/losses from the sales of securities in the first quarter of 2022. There were $19.5 million in proceeds during the first quarter of 2021 with 0 gains/losses from those sales.

2212

The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.

~~All sales of securities for the three and nine months ended September 30, 2021 and September 30, 2020 were securities identified as AFS.~~

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

(dollars in thousands)

Proceeds from sales of securities

$
—

$
22,252

$
23,874

$
28,579

Gross gains from sales of securities

—

1,802

—

1,936

Gross losses from sales of securities

—

—

(88)

(69)

The amortized cost and fair value of securities as of ~~September 30, 2021~~March 31, 2022 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.


	Amortized Cost		Fair Value		Amortized Cost		Fair Value

	(dollars in thousands)				(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,171	$	3,188	$	3,666	$	3,672
Due after one year through five years		26,563		27,189		20,506		20,571
Due after five years		454,443		500,902		452,651		460,134
	$	484,177	$	531,279	$	476,823	$	484,377
Securities AFS:
Due in one year or less	$	1,280	$	1,295	$	5,259	$	5,282
Due after one year through five years		12,409		12,694		5,809		5,878
Due after five years		195,939		199,376		245,158		225,914
		209,628		213,365		256,226		237,074
Residential mortgage-backed and related securities		97,762		100,744		88,935		86,380
Asset-backed securities		29,622		30,607		22,859		23,232
	$	337,012	$	344,716	$	368,020	$	346,686

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


	Amortized Cost		Fair Value		Amortized Cost		Fair Value

	(dollars in thousands)				(dollars in thousands)
Securities HTM:
Municipal securities	$	285,608	$	297,413	$	281,122	$	281,819

Securities AFS:
Municipal securities		157,961		161,122		204,976		187,341
Other securities		23,048		23,317		24,519		24,220
	$	181,009	$	184,439	$	229,495	$	211,561

As of March 31, 2022, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $112.5 million and revenue bonds issued by 174 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $562.3 million. The Company also held investments in general obligation bonds in 22 states, including 7 states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 28 states, including 14 states in which the aggregate fair value exceeded $5.0 million.

As of ~~September 30,~~December 31, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling ~~$115.0~~$114.5 million and revenue bonds issued by ~~168~~165 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$581.6~~$575.0 million. The Company also held investments in general obligation bonds in 20 states, including ~~8 states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 25 states, including 13 states in which the aggregate fair value exceeded $5.0 million.~~

As of December 31, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company also held investments in general obligation bonds in 21 states, including 87 states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 2628 states, including 1213 states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of ~~September 30, 2021~~March 31, 2022 and as of December 31, ~~2020,~~2021, the Company held revenue bonds of 2 issuers, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by the 4 charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of ~~September 30, 2021,~~March 31, 2022, all were 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 ~~September 30, 2021,~~March 31, 2022, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

NOTE 3 – LOANS/LEASES RECEIVABLE

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


	March 31, 2022		December 31, 2021

	(dollars in thousands)

C&I:
C&I - revolving	$	263,441	$	248,483
C&I - other *		1,374,221		1,346,602
		1,637,662		1,595,085

CRE - owner occupied		439,257		421,701
CRE - non-owner occupied		679,898		646,500
Construction and land development		863,116		918,571
Multi-family		711,682		600,412
Direct financing leases**		43,330		45,191
1-4 family real estate***		379,613		377,361
Consumer		73,310		75,311
		4,827,868		4,680,132
Allowance for credit losses		(74,786)		(78,721)
	$	4,753,082	$	4,601,411
** Direct financing leases:
Net minimum lease payments to be received	$	47,410	$	49,362
Estimated unguaranteed residual values of leased assets		165		165
Unearned lease/residual income		(4,245)		(4,336)
		43,330		45,191
Plus deferred lease origination costs, net of fees		484		568
		43,814		45,759
Less allowance for credit losses		(1,465)		(1,546)
	$	42,349	$	44,213

* Includes equipment financing agreements outstanding at m2, totaling $242.5 million and $225.1 million as of March 31, 2022 and December 31, 2021, respectively and PPP loans totaling $6.3 million and $28.2 million as of March 31, 2022 and December 31, 2021, respectively.

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

*** Includes residential real estate loans held for sale totaling $3.0 million and $3.8 million as of March 31, 2022 and December 31, 2021, respectively.

2414

Changes in accretable yield for the loans acquired in mergers and acquisitions are as follows:

~~NOTE 3 – LOANS/LEASES RECEIVABLE~~


	Three months ended
	March 31, 2022		March 31, 2021
	Performing		Performing
	Loans		Loans


Balance at the beginning of the period	$	(1,533)	$	(3,139)
Accretion recognized		161		609
Balance at the end of the period	$	(1,372)	$	(2,530)

The ~~composition~~aging of the loan/lease portfolio by classes of loans/leases as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 is presented as follows:

September 30, 2021

(dollars in thousands)

C&I:

C&I - revolving

$
175,155
C&I - other *

1,465,580

1,640,735


CRE - owner occupied

434,014
CRE - non-owner occupied

644,850
Construction and land development

852,418
Multi-family

529,727
Direct financing leases**

50,237
1-4 family real estate***

376,067
Consumer

71,682

4,599,730
Allowance for credit losses

(80,670)

$
4,519,060
** Direct financing leases:


Net minimum lease payments to be received

$
55,042
Estimated unguaranteed residual values of leased assets

165
Unearned lease/residual income

(4,970)

50,237
Plus deferred lease origination costs, net of fees

652

50,889
Less allowance for credit losses

(1,744)

$
49,145

December 31, 2020

C&I loans*

$
1,726,723
CRE loans


Owner-occupied CRE

496,471
Commercial construction, land development, and other land

541,455
Other non owner-occupied CRE

1,069,703

2,107,629

Direct financing leases **

66,016
Residential real estate loans ***

252,121
Installment and other consumer loans

91,302

4,243,791
Plus deferred loan/lease origination costs, net of fees

7,338

4,251,129
Less allowance

(84,376)

$
4,166,753
** Direct financing leases:


Net minimum lease payments to be received

$
72,940
Estimated unguaranteed residual values of leased assets

239
Unearned lease/residual income

(7,163)

66,016
Plus deferred lease origination costs, net of fees

1,072

67,088
Less allowance

(1,764)

$
65,324


	As of March 31, 2022
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total

	(dollars in thousands)
C&I:
C&I - revolving	$	263,441		$	—		$	—		$	—		$	—	$		263,441
C&I - other		1,370,189			2,083			476			4			1,469			1,374,221
CRE - owner occupied		439,257			—			—			—			—			439,257
CRE - non-owner occupied		679,898			—			—			—			—			679,898
Construction and land development		863,095			—			21			—			—			863,116
Multi-family		711,682			—			—			—			—			711,682
Direct financing leases		42,253			136			121			—			820			43,330
1-4 family real estate		378,032			1,156			—			—			425			379,613
Consumer		73,278			2			—			—			30			73,310
	$	4,821,125		$	3,377		$	618		$	4		$	2,744		$	4,827,868

As a percentage of total loan/lease portfolio		99.86	%		0.07	%		0.01	%		0.00	%		0.06	%		100.00	%


	As of December 31, 2021
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total

	(dollars in thousands)

C&I
C&I - revolving	$	248,483		$	—		$	—		$	—		$	—		$	248,483
C&I - other		1,337,034			859			7,308			1			1,400			1,346,602
CRE - owner occupied		421,701			—			—			—			—			421,701
CRE - non-owner occupied		646,500			—			—			—			—			646,500
Construction and land development		918,498			—			—			—			73			918,571
Multi-family		600,412			—			—			—			—			600,412
Direct financing leases		44,174			10			160			—			847			45,191
1-4 family real estate		374,912			1,325			716			—			408			377,361
Consumer		75,272			8			—			—			31			75,311
	$	4,666,986		$	2,202		$	8,184		$	1		$	2,759		$	4,680,132

As a percentage of total loan/lease portfolio		99.57	%		0.05	%		0.17	%		0.00	%		0.06	%		100.00	%

* Includes equipment financing agreements outstanding at m2, totaling $212.7 million and $171.5 million as of September 30, 2021 and December 31, 2020, respectively and PPP loans totaling $83.6 million and $273.1 million as of September 30, 2021 and December 31, 2020, respectively.

*** Includes residential real estate loans held for sale totaling $3.5 million and $3.8 million as of September 30, 2021 and December 31, 2020, respectively.

2515

~~Changes in accretable yield for acquired loans were as follows:~~

Three months ended September 30, 2021

Nine months ended September 30, 2021


PCI

Performing


PCI

Performing


Loans

Loans

Total

Loans

Loans

Total

(dollars in thousands)

Balance at the beginning of the period

$
—

$
(2,189)

$
(2,189)

$
—

$
(3,139)

$
(3,139)

Accretion recognized

—

505

505

—

1,455

1,455

Balance at the end of the period

$
—

$
(1,684)

$
(1,684)

$
—

$
(1,684)

$
(1,684)

Three months ended September 30, 2020

Nine months ended September 30, 2020


PCI

Performing


PCI

Performing


Loans

Loans

Total

Loans

Loans

Total

(dollars in thousands)

Balance at the beginning of the period

$
(58)

$
(4,935)

$
(4,993)

$
(57)

$
(6,378)

$
(6,435)

Reclassification of nonaccretable discount to accretable

—

—

—

(30)

—

(30)

Accretion recognized

1

941

942

30

2,384

2,414

Balance at the end of the period

$
(57)

$
(3,994)

$
(4,051)

$
(57)

$
(3,994)

$
(4,051)

~~The aging of the loan/lease portfolio~~NPLs by classes of loans/leases as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020 is~~2021 are presented as follows:

As of September 30, 2021

Accruing Past

30-59 Days

60-89 Days

Due 90 Days or

Nonaccrual

Classes of Loans/Leases

Current

Past Due

Past Due

More

Loans/Leases

Total

(dollars in thousands)

C&I:

C&I - revolving

$
175,155

$
—

$
—

$
—

$
—
$

175,155

C&I - other

1,459,194

874

137

14

5,361

1,465,580

CRE - owner occupied

433,361

653

—

—

—

434,014

CRE - non-owner occupied

638,613

—

6,237

—

—

644,850

Construction and land development

852,343

—

—

—

75

852,418

Multi-family

529,727

—

—

—

—

529,727

Direct financing leases

49,215

167

11

—

844

50,237

1-4 family real estate

375,366

96

130

—

475

376,067

Consumer

71,606

13

—

—

63

71,682

$
4,584,580

$
1,803

$
6,515

$
14

$
6,818

$
4,599,730













As a percentage of total loan/lease portfolio

99.67
%

0.04
%

0.14
%

0.00
%

0.15
%

100.00
%


	As of December 31, 2020																		As of March 31, 2022
										Accruing Past									Accruing Past		Nonaccrual		Nonaccrual
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual						Due 90 Days or		Loans/Leases		Loans/Leases				Percentage of
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total			More		with an ACL		without an ACL		Total NPLs		Total NPLs

	(dollars in thousands)																		(dollars in thousands)

C&I	$	1,720,058		$	1,535		$	323		$	—		$	4,807		$	1,726,723
CRE
Owner-occupied CRE		496,459			—			—			—			12			496,471
Commercial construction, land development, and other land		541,455			—			—			—			—			541,455
Other non-owner occupied CRE		1,062,215			—			—			—			7,488			1,069,703
C&I:
C&I - revolving																			$	—	$	—	$	—	$	—	-	%
C&I - other																				4		1,212		257		1,473	53.60
CRE - owner occupied																				—		—		—		—	-
CRE - non-owner occupied																				—		—		—		—	-
Construction and land development																				—		—		—		—	-
Multi-family																				—		—		—		—	-
Direct financing leases		64,918			501			191			—			406			66,016			—		820		—		820	29.84
Residential real estate		249,364			1,512			223			—			1,022			252,121
Installment and other consumer		91,047			43			4			3			205			91,302
1-4 family real estate																				—		425		—		425	15.47
Consumer																				—		30		—		30	1.09
	$	4,225,516		$	3,591		$	741		$	3		$	13,940		$	4,243,791		$	4	$	2,487	$	257	$	2,748	100.00	%

As a percentage of total loan/lease portfolio		99.57	%		0.08	%		0.02	%		0.00	%		0.33	%		100.00	%


	As of December 31, 2021
	Accruing Past		Nonaccrual		Nonaccrual
	Due 90 Days or		Loans/Leases		Loans/Leases				Percentage of
Classes of Loans/Leases	More		with an ACL		without an ACL		Total NPLs		Total NPLs

		(dollars in thousands)

C&I:
C&I - revolving	$	—	$	—	$	—	$	—	-	%
C&I - other		1		1,130		270		1,401	50.77
CRE - owner occupied		—		—		—		—	-
CRE - non-owner occupied		—		—		—		—	-
Construction and land development		—		73		—		73	2.64
Multi-family		—		—		—		—	-
Direct financing leases		—		115		732		847	30.69
1-4 family real estate		—		408		—		408	14.78
Consumer		—		31		—		31	1.12
	$	1	$	1,757	$	1,002	$	2,760	100.00	%

The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2022 and 2021.

Changes in the ACL loans/leases by portfolio segment for the three months ended March 31, 2022 and 2021, respectively, are presented as follows:


	Three Months Ended March 31, 2022
					CRE		CRE		Construction				1-4
	C&I -		C&I -		Owner		Non-Owner		and Land		Multi-		Family
	Revolving		Other*		Occupied		Occupied		Development		Family		Real Estate		Consumer		Total

	(dollars in thousands)

Balance, beginning	$	3,907	$	25,982	$	8,501	$	8,549	$	16,972	$	9,339	$	4,541	$	930	$	78,721
Provision		(288)		(331)		(609)		(820)		(2,301)		997		(387)		(110)		(3,849)
Charge-offs		—		(449)		—		—		—		—		—		(7)		(456)
Recoveries		—		235		5		128		—		—		—		2		370
Balance, ending	$	3,619	$	25,437	$	7,897	$	7,857	$	14,671	$	10,336	$	4,154	$	815	$	74,786

* Included within the C&I – Other column are ACL on leases with a beginning balance of $1.5 million, negative provision of $27 thousand, charge-offs of $114 thousand and recoveries of $60 thousand. ACL on leases was $1.5 million as of March 31, 2022.

2616

~~NPLs by classes of loans/leases as of September 30, 2021 and December 31, 2020 are presented as follows:~~

As of September 30, 2021

Accruing Past

Nonaccrual

Nonaccrual

Due 90 Days or

Loans/Leases

Loans/Leases

Percentage of

Classes of Loans/Leases

More

with an ACL

without an ACL

Total NPLs

Total NPLs

(dollars in thousands)

C&I:

C&I - revolving

$
—

$
—

$
—

$
—

-
%
C&I - other

14

5,024

337

5,375

78.68

CRE - owner occupied

—

—

—

—

-

CRE - non-owner occupied

—

—

—

—

-

Construction and land development

—

75

—

75

1.10

Multi-family

—

—

—

—

-

Direct financing leases

—

112

732

844

12.35

1-4 family real estate

—

475

—

475

6.95

Consumer

—

63

—

63

0.92

$
14

$
5,749

$
1,069

$
6,832

100.00
%

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

As of December 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

$
—

$
4,807

$
606

$
5,413

36.87
%
CRE











Owner-occupied CRE

—

12

—

12

0.08
%
Commercial construction, land development, and other land

—

—

—

—

-
%
Other non-owner occupied CRE

—

7,488

—

7,488

50.99
%
Direct financing leases

—

406

135

541

3.68
%
Residential real estate

—

1,022

—

1,022

6.96
%
Installment and other consumer

3

205

—

208

1.42
%

$
3

$
13,940

$
741

$
14,684

100.00
%


	Three Months Ended March 31, 2021
									CRE		CRE		Construction				Direct		Residential		1-4
			C&I -		C&I -				Owner		Non-Owner		and Land		Multi-		Financing		Real		Family
	C&I		Revolving		Other*		CRE		Occupied		Occupied		Development		Family		Leases		Estate		Real Estate		Consumer		Total

	(dollars in thousands)

Balance, beginning	$	35,421	$	—	$	—	$	42,161	$	—	$	—	$	—	$	—	$	1,764	$	3,732	$	—	$	1,298	$	84,376
Adoption of ASU 2016-13		(35,421)		2,982		29,130		(42,161)		8,696		11,428		11,999		5,836		(1,764)		(3,732)		5,042		(137)		(8,102)
Provision		—		565		4,549		—		451		(286)		328		442		—		—		161		(217)		5,993
Charge-offs		—		—		(668)		—		—		—		—		—		—		—		(44)		(1)		(713)
Recoveries		—		—		156		—		—		13		—		—		—		—		6		102		277
Balance, ending	$	—	$	3,547	$	33,167	$	—	$	9,147	$	11,155	$	12,327	$	6,278	$	—	$	—	$	5,165	$	1,045	$	81,831

* ~~Nonaccrual~~Included within the C&I – Other column are ACL on leases with adoption impact of $685 thousand, provision of $135 thousand, charge-offs of $198 thousand and recoveries of $76 thousand. ACL on leases was $2.2 million as of March 31, 2021.

The composition of the ACL loans/leases ~~included $984~~by portfolio segment based on evaluation method are as follows:


	As of March 31, 2022
	Amortized Cost of Loans Receivable						Allowance for Credit Losses
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total

	(dollars in thousands)
C&I :
C&I - revolving	$	2,801	$	260,640	$	263,441	$	181	$	3,438	$	3,619
C&I - other*		14,806		1,402,745		1,417,551		2,185		23,252		25,437
		17,607		1,663,385		1,680,992		2,366		26,690		29,056
CRE - owner occupied		3,567		435,690		439,257		1,253		6,644		7,897
CRE - non-owner occupied		24,765		655,133		679,898		—		7,857		7,857
Construction and land development		10,362		852,754		863,116		1		14,670		14,671
Multi-family		—		711,682		711,682		—		10,336		10,336
1-4 family real estate		3,166		376,447		379,613		361		3,793		4,154
Consumer		385		72,925		73,310		47		768		815
	$	59,852	$	4,768,016	$	4,827,868	$	4,028	$	70,758	$	74,786

* Included within the C&I – Other category are leases individually evaluated of $820 thousand with a related allowance for credit losses of ~~TDRs, including $836~~$128 thousand ~~in CRE loans, $100~~and leases collectively evaluated of $42.5 million with a related allowance for credit losses of $1.5 million.


	As of December 31, 2021
	Amortized Cost of Loans Receivable						Allowance for Credit Losses
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total

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

* Included within the C&I – Other category are leases individually evaluated of $847 thousand ~~in direct financing~~with a related allowance for credit losses of $35 thousand and leases ~~$48 thousand in installment loans.~~collectively evaluated of $44.4 million with a related allowance for credit losses of $1.5 million.

2717

~~Changes in the ACL-loans/leases by portfolio segment for the three and nine months ended September 30, 2021 and 2020, respectively, are presented as follows:~~

Three Months Ended September 30, 2021

CRE

CRE

Construction

Direct

Residential

1-4

C&I -

C&I -

Owner

Non-Owner

and Land

Multi-

Financing

Real

Family


C&I

Revolving

Other*

CRE

Occupied

Occupied

Development

Family

Leases

Estate

Real Estate

Consumer

Total

(dollars in thousands)

Balance, beginning

$
—

$
3,177

$
32,325

$
—

$
8,020

$
8,911

$
13,640

$
6,977

$
—

$
—

$
4,925

$
919

$
78,894
Provision

—

(262)

(276)

—

(62)

25

2,141

923

—

—

(558)

(36)

1,895
Charge-offs

—

—

(283)

—

—

—

—

—

—

—

—

(4)

(287)
Recoveries

—

—

109

—

4

50

—

—

—

—

—

5

168
Balance, ending

$
—

$
2,915

$
31,875

$
—

$
7,962

$
8,986

$
15,781

$
7,900

$
—

$
—

$
4,367

$
884

$
80,670

Nine Months Ended September 30, 2021

CRE -

CRE -

Construction

Direct

Residential

C&I -

C&I -

Owner

Non-Owner

and Land

Multi

Financing

Real

1-4


C&I

Revolving

Other**

CRE

Occupied

Occupied

Development

Family

Leases

Estate

Family

Consumer

Total

(dollars in thousands)

Balance, beginning

$
35,421

$
—

$
—

$
42,161

$
—

$
—

$
—

$
—

$
1,764

$
3,732

$
—

$
1,298

$
84,376
Adoption of ASU 2016-13

(35,421)

2,982

29,130

(42,161)

8,696

11,428

11,999

5,836

(1,764)

(3,732)

5,042

(137)

(8,102)
Provision

—

(67)

4,271

—

(732)

(637)

3,782

2,214

—

—

(502)

(582)

7,747
Charge-offs

—

—

(1,949)

—

—

(1,876)

—

(150)

—

—

(690)

(9)

(4,674)
Recoveries

—

—

423

—

(2)

71

—

—

—

—

517

314

1,323
Balance, ending

$
—

$
2,915

$
31,875

$
—

$
7,962

$
8,986

$
15,781

$
7,900

$
—

$
—

$
4,367

$
884

$
80,670

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

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

Three Months Ended September 30, 2020

Direct Financing

Residential Real

Installment and


C&I

CRE

Leases

Estate

Other Consumer

Total

(dollars in thousands)

Balance, beginning

$
25,748

$
29,123

$
1,639

$
3,010

$
1,307

$
60,827
Provision

9,008

10,428

608

253

45

20,342
Charge-offs

(1,079)

(362)

(358)

—

(20)

(1,819)
Recoveries

150

64

13

—

5

232
Balance, ending

$
33,827

$
39,253

$
1,902

$
3,263

$
1,337

$
79,582

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

The ~~composition~~following table presents the amortized cost basis of collateral dependent loans, by the ~~ACL-loans/leases by portfolio segment based on evaluation method~~primary collateral type, which are individually evaluated to determine expected credit losses as ~~follows:~~of March 31, 2022 and December 31, 2021:


	As of September 30, 2021
	Amortized Cost of Loans Receivable						Allowance for Credit Losses						As of March 31, 2022
	Individually		Collectively				Individually		Collectively						Non
	Evaluated for		Evaluated for				Evaluated for		Evaluated for				Commercial		Owner-Occupied		Owner Occupied
	Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total		Assets		Real Estate		Real Estate		Securities		Equipment		Other		Total

	(dollars in thousands)												(dollars in thousands)
C&I :
C & I:
C&I - revolving	$	2,650	$	172,505	$	175,155	$	188	$	2,727	$	2,915	$	2,681	$	—	$	—	$	—	$	120	$	—	$	2,801
C&I - other*		26,124		1,489,693		1,515,817		3,173		28,702		31,875		1,427		—		2,467		128		8,412		2,372		14,806
		28,774		1,662,198		1,690,972		3,361		31,429		34,790		4,108		—		2,467		128		8,532		2,372		17,607
CRE - owner occupied		3,883		430,131		434,014		287		7,675		7,962		—		—		3,567		—		—		—		3,567
CRE - non-owner occupied		19,183		625,667		644,850		—		8,986		8,986		—		24,765		—		—		—		—		24,765
Construction and land development		10,507		841,911		852,418		12		15,769		15,781		—		10,362		—		—		—		—		10,362
Multi-family		—		529,727		529,727		—		7,900		7,900		—		—		—		—		—		—		—
1-4 family real estate		1,527		374,540		376,067		203		4,164		4,367		—		804		2,362		—		—		—		3,166
Consumer		227		71,455		71,682		28		856		884		—		1		376		—		—		8		385
	$	64,101	$	4,535,629	$	4,599,730	$	3,891	$	76,779	$	80,670	$	4,108	$	35,932	$	8,772	$	128	$	8,532	$	2,380	$	59,852

* Included within the C&I – Other category are leases individually evaluated of ~~$844~~$820 thousand with ~~a related allowance for credit losses~~primary collateral of ~~$34 thousand and~~equipment.


	As of December 31, 2021
			Non
	Commercial		Owner-Occupied		Owner Occupied
	Assets		Real Estate		Real Estate		Securities		Equipment		Other		Total

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

* Included within the C&I – Other category are leases ~~collectively~~individually evaluated of ~~$49.4 million~~$847 thousand with ~~a related allowance for credit losses~~primary collateral of ~~$1.7 million.~~equipment.

Information for impaired loans/leases prior to adoption of ASU 2016-13 on January 1, 2021, 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.

~~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:~~

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

~~Loans/leases, by classes~~For certain C&I loans, all CRE loans, certain construction and land development loans, all multifamily loans and certain 1-4 family residential loans, the Company’s credit quality indicator consists of ~~financing receivable, considered to be impaired as~~internally assigned risk ratings. Each such loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of ~~and for~~ the ~~three months ended September 30, 2020 are presented as follows:~~loan.

Three Months Ended September 30, 2020



Interest Income

Average

Recognized for

Recorded

Interest Income

Cash Payments
Classes of Loans/Leases

Investment

Recognized

Received

Impaired Loans/Leases with No Specific Allowance Recorded:






C&I

$
1,825

$
11

$
11
CRE

Owner-Occupied CRE

292

—

—
Commercial Construction, Land Development, and Other Land

—

—

—
Other Non Owner-Occupied CRE

668

7

7
Direct Financing Leases

953

6

6
Residential Real Estate

512

—

—
Installment and Other Consumer

146

—

—

$
4,396

$
24

$
24






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

9,757

—

—
Direct Financing Leases

—

—

—
Residential Real Estate

260

—

—
Installment and Other Consumer

77

—

—

$
10,094

$
—

$
—






Total Impaired Loans/Leases:






C&I

$
1,825

$
11

$
11
CRE






Owner-Occupied CRE

292

—

—
Commercial Construction, Land Development, and Other Land

—

—

—
Other Non Owner-Occupied CRE

10,425

7

7
Direct Financing Leases

953

6

6
Residential Real Estate

772

—

—
Installment and Other Consumer

223

—

—

$
14,490

$
24

$
24

3018

~~Loans/leases,~~The following tables show the credit quality indicator of loans by ~~classes~~class of ~~financing~~ receivable ~~considered to be impaired~~and year of origination as of ~~December~~March 31, ~~2020 are presented as~~

~~follows:~~2022:

December 31, 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

$
1,361

$
1,441

$
—

$
1,002

$
33

$
33
CRE



Owner-occupied CRE

—

—

—

—

—

—
Commercial construction, land development, and other land

—

—

—

—

—

—
Other non-owner occupied CRE

1,133

1,933

—

494

29

29
Direct financing leases

578

578

—

483

17

17
Residential real estate

719

719

—

476

—

—
Installment and other consumer

133

133

—

121

—

—

$
3,924

$
4,804

$
—

$
2,576

$
79

$
79












Impaired Loans/Leases with Specific Allowance Recorded:










C&I

$
4,020

$
4,020

$
650

$
1,555

$
—

$
—
CRE



Owner-occupied CRE

—

—

—

—

—

—
Commercial construction, land development, and other land

—

—

—

—

—

—
Other non-owner occupied CRE

6,354

6,354

1,938

5,726

—

—
Direct financing leases

—

—

—

—

—

—
Residential real estate

258

258

20

227

—

—
Installment and other consumer

72

72

72

70

—

—

$
10,704

$
10,704

$
2,680

$
7,578

$
—

$
—












Total Impaired Loans/Leases:












C&I

$
5,381

$
5,461

$
650

$
2,557

$
33

$
33
CRE












Owner-occupied CRE

—

—

—

—

—

—
Commercial construction, land development, and other land

—

—

—

—

—

—
Other non-owner occupied CRE

7,487

8,287

1,938

6,220

29

29
Direct financing leases

578

578

—

483

17

17
Residential real estate

977

977

20

703

—

—
Installment and other consumer

205

205

72

191

—

—

$
14,628

$
15,508

$
2,680

$
10,154

$
79

$
79


	As of March 31, 2022
	Term Loans
	Amortized Cost Basis by Origination Year
													Revolving
													Loans
Internally Assigned													Amortized
Risk Rating	2022		2021		2020		2019		2018		Prior		Cost Basis		Total

	(dollars in thousands)
C&I - revolving
Pass (Ratings 1 through 5)	$	—	$	—	$	—	$	—	$	—	$	—	$	260,449	$	260,449
Special Mention (Rating 6)		—		—		—		—		—		—		191		191
Substandard (Rating 7)		—		—		—		—		—		—		2,801		2,801
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	263,441	$	263,441

C&I - other
Pass (Ratings 1 through 5)	$	134,078	$	329,424	$	317,610	$	127,119	$	79,548	$	127,637	$	—	$	1,115,416
Special Mention (Rating 6)		255		3,578		7		25		—		329		—		4,194
Substandard (Rating 7)		—		2,519		2,969		6,107		377		99		—		12,071
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - other	$	134,333	$	335,521	$	320,586	$	133,251	$	79,925	$	128,065	$	—	$	1,131,681

CRE - owner occupied
Pass (Ratings 1 through 5)	$	41,459	$	99,653	$	140,078	$	49,753	$	31,419	$	59,392	$	10,745	$	432,499
Special Mention (Rating 6)		56		—		—		—		148		2,987		—		3,191
Substandard (Rating 7)		576		—		—		1,246		1,229		516		—		3,567
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	42,091	$	99,653	$	140,078	$	50,999	$	32,796	$	62,895	$	10,745	$	439,257

CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	70,649	$	164,063	$	149,524	$	83,183	$	65,477	$	72,195	$	3,417	$	608,508
Special Mention (Rating 6)		1,169		4,873		18,713		1,780		12,150		7,951		—		46,636
Substandard (Rating 7)		—		1,054		6,240		15,476		1,048		936		—		24,754
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	71,818	$	169,990	$	174,477	$	100,439	$	78,675	$	81,082	$	3,417	$	679,898

Construction and land development
Pass (Ratings 1 through 5)	$	67,369	$	366,918	$	246,856	$	95,054	$	34,661	$	452	$	15,112	$	826,422
Special Mention (Rating 6)		800		7,070		717		—		—		—		—		8,587
Substandard (Rating 7)		—		10,362		—		—		—		—		—		10,362
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Construction and land development	$	68,169	$	384,350	$	247,573	$	95,054	$	34,661	$	452	$	15,112	$	845,371

Multi-family
Pass (Ratings 1 through 5)	$	45,350	$	252,544	$	196,255	$	97,500	$	106,138	$	11,329	$	2,515	$	711,631
Special Mention (Rating 6)		—		51		—		—		—		—		—		51
Substandard (Rating 7)		—		—		—		—		—		—		—		—
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Multi-family	$	45,350	$	252,595	$	196,255	$	97,500	$	106,138	$	11,329	$	2,515	$	711,682

1-4 family real estate
Pass (Ratings 1 through 5)	$	14,717	$	43,640	$	22,315	$	14,481	$	6,154	$	7,755	$	2,159	$	111,221
Special Mention (Rating 6)		—		329		223		—		220		—		—		772
Substandard (Rating 7)		—		—		177		—		430		198		—		805
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	14,717	$	43,969	$	22,715	$	14,481	$	6,804	$	7,953	$	2,159	$	112,798

Consumer
Pass (Ratings 1 through 5)	$	—	$	984	$	473	$	100	$	210	$	780	$	2,915	$	5,462
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		—		—		131		—		—		131
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Consumer	$	—	$	984	$	473	$	100	$	341	$	780	$	2,915	$	5,593

Total	$	376,478	$	1,287,062	$	1,102,157	$	491,824	$	339,340	$	292,556	$	300,304	$	4,189,721

Impaired loans/leases prior to adoption of ASU 2016-13 and those individually evaluated under ASU 2016-13 for which no allowance has been provided have adequate collateral, based on management’s current estimates.

3119

~~The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses:~~

As of September 30, 2021

Non

Commercial

Owner-Occupied

Owner Occupied

Assets

Real Estate

Real Estate

Securities

Equipment

Other

Total

(dollars in thousands)
C & I:

C&I - revolving

$
2,400

$
—

$
—

$
—

$
250

$
—

$
2,650

C&I - other*

746

—

2,530

145

22,404

299

26,124

3,146

—

2,530

145

22,654

299

28,774

CRE - owner occupied

—

—

3,883

—

—

—

3,883

CRE - non-owner occupied

—

19,183

—

—

—

—

19,183

Construction and land development

—

10,431

76

—

—

—

10,507

Multi-family

—

—

—

—

—

—

—

1-4 family real estate

—

—

1,527

—

—

—

1,527

Consumer

—

—

207

—

—

20

227

$
3,146

$
29,614

$
8,223

$
145

$
22,654

$
319

$
64,101

* Included within the C&I – Other category are leases individually evaluated of $844 thousand with primary collateral of equipment.

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

For certain C&I loans (including equipment financing agreements and direct financing leases), certain construction and land development, certain 1-4 family real estate loans, and all consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Prior to adoption of ASU 2016-13, this included C&I equipment financing agreements, direct financing leases, residential real estate loans, and installment and other consumer loans. Delinquency status is updated daily by the Company’s loan system.


	As of March 31, 2022
	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
Delinquency Status *	2022		2021		2020		2019		2018		Prior		Cost Basis		Total

	(dollars in thousands)
C&I - other
Performing	$	90,552	$	92,958	$	37,588	$	14,734	$	4,689	$	755	$	—	$	241,276
Nonperforming		—		1,021		157		86		—		—		—		1,264
Total C&I - other	$	90,552	$	93,979	$	37,745	$	14,820	$	4,689	$	755	$	—	$	242,540

Direct financing leases
Performing	$	15,181	$	6,535	$	8,554	$	6,874	$	4,093	$	1,273	$	—	$	42,510
Nonperforming		—		801		19		—		—		—		—		820
Total Direct financing leases	$	15,181	$	7,336	$	8,573	$	6,874	$	4,093	$	1,273	$	—	$	43,330

Construction and land development
Performing	$	5,626	$	10,768	$	707	$	—	$	484	$	—	$	160	$	17,745
Nonperforming		—		—		—		—		—		—		—		—
Total Construction and land development	$	5,626	$	10,768	$	707	$	—	$	484	$	—	$	160	$	17,745

1-4 family real estate
Performing	$	19,739	$	92,023	$	77,036	$	18,020	$	10,009	$	49,489	$	74	$	266,390
Nonperforming		—		—		—		—		96		329		—		425
Total 1-4 family real estate	$	19,739	$	92,023	$	77,036	$	18,020	$	10,105	$	49,818	$	74	$	266,815

Consumer
Performing	$	2,048	$	3,834	$	3,733	$	1,816	$	1,460	$	1,489	$	53,307	$	67,687
Nonperforming		—		—		—		14		—		16		—		30
Total Consumer	$	2,048	$	3,834	$	3,733	$	1,830	$	1,460	$	1,505	$	53,307	$	67,717

Total	$	133,146	$	207,940	$	127,794	$	41,544	$	20,831	$	53,351	$	53,541	$	638,147

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

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of ~~September 30,~~December 31, 2021:


	As of September 30, 2021																As of December 31, 2021
	Term Loans																Term Loans
	Amortized Cost Basis by Origination Year																Amortized Cost Basis by Origination Year
													Revolving																Revolving
													Loans																Loans
Internally Assigned													Amortized																Amortized
Risk Rating	2021		2020		2019		2018		2017		Prior		Cost Basis		Total		2021		2020		2019		2018		2017		Prior		Cost Basis		Total

	(dollars in thousands)																(dollars in thousands)
C&I - revolving
Pass (Ratings 1 through 5)	$	—	$	—	$	—	$	—	$	—	$	—	$	171,646	$	171,646	$	—	$	—	$	—	$	—	$	—	$	—	$	245,212	$	245,212
Special Mention (Rating 6)		—		—		—		—		—		—		859		859		—		—		—		—		—		—		633		633
Substandard (Rating 7)		—		—		—		—		—		—		2,650		2,650		—		—		—		—		—		—		2,638		2,638
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	175,155	$	175,155	$	—	$	—	$	—	$	—	$	—	$	—	$	248,483	$	248,483

C&I - other
Pass (Ratings 1 through 5)	$	389,930	$	414,997	$	158,888	$	109,194	$	91,950	$	58,973	$	—	$	1,223,932	$	391,532	$	362,256	$	133,678	$	82,177	$	83,419	$	53,310	$	—	$	1,106,372
Special Mention (Rating 6)		3,572		381		—		67		381		1,263		—		5,664		3,580		373		349		—		336		2		—		4,640
Substandard (Rating 7)		411		6,439		15,945		355		59		50		—		23,259		506		2,366		7,138		396		55		46		—		10,507
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total C&I - other	$	393,913	$	421,817	$	174,833	$	109,616	$	92,390	$	60,286	$	—	$	1,252,855	$	395,618	$	364,995	$	141,165	$	82,573	$	83,810	$	53,358	$	—	$	1,121,519

CRE - owner occupied
Pass (Ratings 1 through 5)	$	99,294	$	154,383	$	57,484	$	30,136	$	19,636	$	52,166	$	12,616	$	425,715	$	118,014	$	143,045	$	47,660	$	30,523	$	17,038	$	46,185	$	11,477	$	413,942
Special Mention (Rating 6)		889		—		177		237		1,875		1,234		—		4,412		637		—		—		233		1,846		1,202		—		3,918
Substandard (Rating 7)		197		—		1,913		1,250		527		—		—		3,887		—		—		2,080		1,239		522		—		—		3,841
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	100,380	$	154,383	$	59,574	$	31,623	$	22,038	$	53,400	$	12,616	$	434,014	$	118,651	$	143,045	$	49,740	$	31,995	$	19,406	$	47,387	$	11,477	$	421,701

CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	142,226	$	168,609	$	90,613	$	67,934	$	62,429	$	38,946	$	8,336	$	579,093	$	176,813	$	145,712	$	88,697	$	63,849	$	55,752	$	28,808	$	8,592	$	568,223
Special Mention (Rating 6)		6,807		15,462		2,226		12,299		4,144		5,627		19		46,584		7,295		20,881		1,802		12,230		5,494		5,580		—		53,282
Substandard (Rating 7)		386		628		15,605		1,126		950		—		478		19,173		1,105		6,297		15,563		1,087		943		—		—		24,995
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	149,419	$	184,699	$	108,444	$	81,359	$	67,523	$	44,573	$	8,833	$	644,850	$	185,213	$	172,890	$	106,062	$	77,166	$	62,189	$	34,388	$	8,592	$	646,500

Construction and land development
Pass (Ratings 1 through 5)	$	304,504	$	244,267	$	155,738	$	110,633	$	4,904	$	182	$	6,860	$	827,088	$	394,045	$	248,360	$	126,941	$	106,790	$	3,012	$	—	$	13,277	$	892,425
Special Mention (Rating 6)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		10,433		—		—		—		—		10,433		10,362		—		—		—		—		—		—		10,362
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total Construction and land development	$	304,504	$	244,267	$	166,171	$	110,633	$	4,904	$	182	$	6,860	$	837,521	$	404,407	$	248,360	$	126,941	$	106,790	$	3,012	$	—	$	13,277	$	902,787

Multi-family
Pass (Ratings 1 through 5)	$	191,982	$	203,030	$	69,276	$	48,093	$	5,719	$	8,638	$	2,989	$	529,727	$	266,120	$	197,224	$	74,033	$	47,486	$	5,609	$	7,376	$	2,564	$	600,412
Special Mention (Rating 6)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total Multi-family	$	191,982	$	203,030	$	69,276	$	48,093	$	5,719	$	8,638	$	2,989	$	529,727	$	266,120	$	197,224	$	74,033	$	47,486	$	5,609	$	7,376	$	2,564	$	600,412

1-4 family real estate
Pass (Ratings 1 through 5)	$	34,087	$	30,604	$	18,906	$	8,462	$	6,001	$	6,744	$	6,267	$	111,071	$	47,097	$	24,029	$	16,188	$	7,569	$	5,845	$	5,213	$	3,079	$	109,020
Special Mention (Rating 6)		37		179		—		545		354		—		—		1,115		37		—		—		—		—		—		—		37
Substandard (Rating 7)		—		—		—		—		—		—		—		—		—		178		—		437		201		—		—		816
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	34,124	$	30,783	$	18,906	$	9,007	$	6,355	$	6,744	$	6,267	$	112,186	$	47,134	$	24,207	$	16,188	$	8,006	$	6,046	$	5,213	$	3,079	$	109,873

Consumer
Pass (Ratings 1 through 5)																	$	1,558	$	487	$	108	$	216	$	—	$	824	$	2,031	$	5,224
Special Mention (Rating 6)																		—		—		—		—		—		—		—		—
Substandard (Rating 7)																		—		—		—		137		—		—		—		137
Doubtful (Rating 8)																		—		—		—		—		—		—		—		—
Total Consumer																	$	1,558	$	487	$	108	$	353	$	—	$	824	$	2,031	$	5,361

Total	$	1,174,322	$	1,238,979	$	597,204	$	390,331	$	198,929	$	173,823	$	212,720	$	3,986,308	$	1,418,701	$	1,151,208	$	514,237	$	354,369	$	180,072	$	148,546	$	289,503	$	4,056,636

3321




	As of December 31, 2021
	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
Delinquency Status *	2021		2020		2019		2018		2017		Prior		Cost Basis		Total

	(dollars in thousands)
C&I - other
Performing	$	117,163	$	54,261	$	33,390	$	14,274	$	4,200	$	455	$	—	$	223,743
Nonperforming		95		177		644		368		42		14		—		1,340
Total C&I - other	$	117,258	$	54,438	$	34,034	$	14,642	$	4,242	$	469	$	—	$	225,083

Direct financing leases
Performing	$	6,690	$	12,130	$	11,638	$	9,235	$	3,695	$	956	$	—	$	44,344
Nonperforming		—		732		—		52		18		45		—		847
Total Direct financing leases	$	6,690	$	12,862	$	11,638	$	9,287	$	3,713	$	1,001	$	—	$	45,191

Construction and land development
Performing	$	12,857	$	2,080	$	—	$	494	$	—	$	—	$	280	$	15,711
Nonperforming		—		—		—		—		73		—		—		73
Total Construction and land development	$	12,857	$	2,080	$	—	$	494	$	73	$	—	$	280	$	15,784

1-4 family real estate
Performing	$	104,005	$	78,713	$	19,001	$	10,784	$	10,533	$	43,976	$	68	$	267,080
Nonperforming		—		—		—		106		—		302		—		408
Total 1-4 family real estate	$	104,005	$	78,713	$	19,001	$	10,890	$	10,533	$	44,278	$	68	$	267,488

Consumer
Performing	$	4,891	$	4,020	$	2,114	$	1,660	$	593	$	1,230	$	55,411	$	69,919
Nonperforming		—		—		15		—		15		1		—		31
Total Consumer	$	4,891	$	4,020	$	2,129	$	1,660	$	608	$	1,231	$	55,411	$	69,950

Total	$	245,701	$	152,113	$	66,802	$	36,973	$	19,169	$	46,979	$	55,759	$	623,496

As of March 31, 2022 and December 31, 2021, TDRs totaled $120 thousand and $494 thousand, respectively.

There were 0 TDRs restructured during the first three months of 2022 or 2021. For the three months ended March 31, 2022 and March 31, 2021, NaN of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. There were no TDRs that were restructured and charged off for the three months ended March 31, 2022.

Changes in the ACL for OBS exposures for the three months ended March 31, 2022 and 2021 are presented as follows:


	Three Months Ended
	March 31, 2022		March 31, 2021

	(dollars in thousands)

Balance, beginning	$	6,886	$	—
Impact of adopting ASU 2016-13		—		9,117
Provisions credited to expense		933		729
Balance, ending	$	7,819	$	9,846

As of September 30, 2021

Term Loans

Amortized Cost Basis by Origination Year

Revolving

Loans

Amortized

Delinquency Status *

2021

2020

2019

2018

2017

Prior

Cost Basis

Total

(dollars in thousands)
C&I - other

Performing

$
90,454

$
59,480

$
38,136

$
17,435

$
5,160

$
515

$
—

$
211,180
Nonperforming

90

236

722

435

47

15

—

1,545
Total C&I - other

$
90,544

$
59,716

$
38,858

$
17,870

$
5,207

$
530

$
—

$
212,725

Direct financing leases

Performing

$
5,448

$
13,473

$
13,211

$
10,874

$
5,026

$
1,361

$
—

$
49,393
Nonperforming

—

732

—

41

23

48

—

844
Total Direct financing leases

$
5,448

$
14,205

$
13,211

$
10,915

$
5,049

$
1,409

$
—

$
50,237

Construction and land development

Performing

$
7,131

$
6,697

$
212

$
502

$
—

$
—

$
280

$
14,822
Nonperforming

—

—

—

—

75

—

—

75
Total Construction and land development

$
7,131

$
6,697

$
212

$
502

$
75

$
—

$
280

$
14,897

1-4 family real estate

Performing

$
85,172

$
82,206

$
20,469

$
12,210

$
12,232

$
51,088

$
28

$
263,405
Nonperforming

—

—

72

—

—

404

—

476
Total 1-4 family real estate

$
85,172

$
82,206

$
20,541

$
12,210

$
12,232

$
51,492

$
28

$
263,881

Consumer

Performing

$
4,218

$
6,190

$
2,517

$
2,132

$
674

$
2,391

$
53,497

$
71,619
Nonperforming

45

—

—

—

16

2

—

63
Total Consumer

$
4,263

$
6,190

$
2,517

$
2,132

$
690

$
2,393

$
53,497

$
71,682

Total

$
192,558

$
169,014

$
75,339

$
43,629

$
23,253

$
55,824

$
53,805

$
613,422

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

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


	March 31, 2022		December 31, 2021

	(dollars in thousands)
Assets:
Interest rate caps - hedged	$	4,484	$	927
Interest rate caps		1,144		238
Interest rate swaps		101,698		221,055
	$	107,326	$	222,220

Liabilities:
Interest rate swaps - hedged	$	(14,495)	$	(4,080)
Interest rate swaps		(101,698)		(221,055)
	$	(116,193)	$	(225,135)

* Performing = loans/leases accruingThe Company uses interest rate swap and ~~less than 90 days past due. Nonperforming = loans/leases~~cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.

The Company has entered into interest rate caps to hedge against the risk of rising interest rates on ~~nonaccrual~~liabilities. The liabilities consist of $300.0 million of deposits and ~~accruing loans/leases that~~the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and the Prime Rate. The interest rate caps are ~~greater than or equal to 90 days past due.~~

~~For each class~~designated as cash flow hedges in accordance with ASC 815. An initial premium of ~~financing receivable,~~$3.5 million was paid upfront for the ~~following table presents~~caps executed. The details of the ~~recorded investment by credit quality indicator~~interest rate caps are as ~~of December 31, 2020:~~follows:

As of December 31, 2020

CRE

Non-Owner Occupied

Commercial

Construction,

Land

Owner-Occupied

Development,

As a % of

Internally Assigned Risk Rating

C&I

CRE

and Other Land

Other CRE

Total

Total

(dollars in thousands)

Pass (Ratings 1 through 5)

$
1,506,578

$
488,478

$
530,297

$
999,931

$
3,525,284

96.25
%
Special Mention (Rating 6)

23,929

3,087

680

43,785

71,481

1.95
%
Substandard (Rating 7)

24,710

4,906

10,478

25,987

66,081

1.80
%
Doubtful (Rating 8)

—

—

—

—

—

—
%

$
1,555,217

$
496,471

$
541,455

$
1,069,703

$
3,662,846

100.00
%


																Balance Sheet					Fair Value as of
Hedged Item														Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		March 31, 2022		December 31, 2021
(dollars in thousands)													(dollars in thousands)

Deposits														1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.75	%	$	48	$	5
Deposits														1/1/2020	1/1/2023	Derivatives - Assets		50,000	1.57			97		11
Deposits														1/1/2020	1/1/2023	Derivatives - Assets		25,000	1.80			48		5
Deposits														1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.75			355		60
Deposits														1/1/2020	1/1/2024	Derivatives - Assets		50,000	1.57			723		125
Deposits														1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.80			361		62
Deposits														1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.75			695		161
Deposits														1/1/2020	1/1/2025	Derivatives - Assets		50,000	1.57			1,438		332
Deposits														1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.80			719		166
																	$	300,000			$	4,484	$	927
	As of December 31, 2020
			Direct Financing		Residential Real		Installment and				As a % of
Delinquency Status *	C&I		Leases		Estate		Other Consumer		Total		Total

	(dollars in thousands)

Performing	$	170,712	$	65,475	$	251,099	$	91,094	$	578,380	99.56	%
Nonperforming		794		541		1,022		208		2,565	0.44	%
	$	171,506	$	66,016	$	252,121	$	91,302	$	580,945	100.00	%

* Prior to Adoption of ASU 2016-13: Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leasesFor derivative instruments that are ~~greater than or equal to 90 days past due, and accruing TDRs.~~designated as unhedged, the change in fair value of the derivative instrument is recognized into current earnings. The details of the unhedged interest rate caps are as follows:


		Balance Sheet					Fair Value as of
Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		March 31, 2022		December 31, 2021

(dollars in thousands)

1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.90	%	$	41	$	3
2/1/2020	2/1/2024	Derivatives - Assets		25,000	1.90			369		62
3/1/2020	3/1/2025	Derivatives - Assets		25,000	1.90			734		173
			$	75,000			$	1,144	$	238

3423

~~As of September 30, 2021 and December 31, 2020, TDRs totaled $591 thousand 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 nine months ended September 30, 2021 and during the three and nine months ended September 30, 2020. There were 0 loans restructured during the three months ended September 30, 2021. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

For the three months ended September 30, 2021

For the nine months ended September 30, 2021




Pre-

Post-





Pre-

Post-


Number of

Modification

Modification

Number of

Modification

Modification

Loans/

Recorded

Recorded

Specific

Loans/

Recorded

Recorded

Specific

Classes of Loans/Leases

Leases

Investment

Investment

Allowance

Leases

Investment

Investment

Allowance

(dollars in thousands)

CONCESSION - Extension of Maturity

















1-4 family real estate

—

$
—

$
—

$
—

1

$
2,532

$
2,532

$
—

















CONCESSION - Interest Rate Adjusted Below Market

















1-4 family real estate

—

$
—

$
—

$
—

1

$
54

$
54

$
6

Consumer

—

—

—

—

1

13

13

6

—

$
—

$
—

$
—

2

$
67

$
67

$
12

TOTAL

—

$
—

$
—

$
—

3

$
2,599

$
2,599

$
12

For the three months ended September 30, 2020

For the nine months ended September 30, 2020




Pre-

Post-





Pre-

Post-


Number of

Modification

Modification

Number of

Modification

Modification

Loans/

Recorded

Recorded

Specific

Loans/

Recorded

Recorded

Specific

Classes of Loans/Leases

Leases

Investment

Investment

Allowance

Leases

Investment

Investment

Allowance

(dollars in thousands)

CONCESSION - Significant Payment Delay

















C&I

3

$
197

$
197

$
—

5

$
308

$
308

$
—

Direct financing leases

—

—

—

—

3

145

145

—

3

$
197

$
197

$
—

8

$
453

$
453

$
—

TOTAL

3

$
197

$
197

$
—

8

$
453

$
453

$
—

Of the loans restructured during the nine months ended September 30, 2021, 1 with a post-modification recorded investment totaling $54 thousand was on nonaccrual and of the loans restructured during the three and nine months ended September 30, 2020, none were on nonaccrual.

For the three and nine months ended September 30, 2021, NaN 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.

For the three months ended September 30, 2020, 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. This TDR was a lease restructured in the fourth quarter of 2019 with a pre-modification balance totaling $32 thousand. For the nine months ended 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 three months ended September 30, 2020 as well as a lease that was restructured in the fourth quarter of 2019 with pre-modification balance totaling $55 thousand and a commercial loan that was restructured in the fourth quarter of 2019 with a pre-modification balance of $48 thousand.

~~Not included in the table above are 10 TDRs that were restructured and charged off for the nine months ended September 30, 2020, totaling $482 thousand.~~

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. The regulators clarified that this guidance may continue to be applied in 2021.

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 (1) related to COVID-19, (2) executed on a loan that was not more than 30 days past due as of December 31, 2019 and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the termination of the National Emergency or (B) 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. As of September 30, 2021, there were 0 bank modifications and 8 m2 modifications of loans and leases totaling $2.9 million, representing 0.06% of the total loan and lease portfolio, that were on deferral as of such date.

On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended the debt relief program to the earlier of 60 days after the national emergency termination date or January 1, 2022. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.

The adoption of ASU 2016-13 required an allowance for OBS exposures, specifically on unfunded commitments. Changes in the ACL for OBS exposures for the three and nine months ended September 30, 2021 and 2020 are presented as follows:

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

(dollars in thousands)

Balance, beginning
$
9,987

$
—

$
—

$
—
Impact of adopting ASU 2016-13

—

—

9,117

—
Provisions credited to expense

(1,895)

—

(1,025)

—
Balance, ending
$
8,092

$
—

$
8,092

$
—

~~NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES~~

~~Derivatives are summarized as follows as of September 30, 2021 and December 31, 2020:~~

September 30, 2021

December 31, 2020

(dollars in thousands)
Assets:

Interest rate caps - hedged

$
517

$
259
Interest rate caps

141

67
Interest rate swaps - hedged

807

—
Interest rate swaps

196,928

222,431

$
198,393

$
222,757

Liabilities:

Interest rate swaps - hedged

$
(4,522)

$
(6,839)
Interest rate swaps

(196,928)

(222,431)

$
(201,450)

$
(229,270)

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

Balance Sheet

Fair Value as of

Hedged Item

Effective Date

Maturity Date

Location

Notional Amount

Strike Rate

September 30, 2021

December 31, 2020

(dollars in thousands)

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

$
25,000

1.75
%

$
1

$
3

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

50,000

1.57

2

5

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

25,000

1.80

1

3

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

25,000

1.75

26

15

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

50,000

1.57

53

31

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

25,000

1.80

26

15

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

25,000

1.75

101

46

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

50,000

1.57

205

94

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

25,000

1.80

102

47

$
300,000

$
517

$
259

In December 2020, the Company redesignated 3 of its interest rate caps, which had been purchased in 2019 for $800 thousand. The caps, which were designated as cash flow hedges at the time of purchase, were redesignated as unhedged. For derivative instruments that are designated as unhedged, the change in fair value of the derivative instrument is recognized into current earnings. The details of the unhedged interest rate caps are as follows:

Balance Sheet

Fair Value as of

Effective Date

Maturity Date

Location

Notional Amount

Strike Rate

September 30, 2021

December 31, 2020

(dollars in thousands)

1/1/2020

1/1/2023

Derivatives - Assets

$
25,000

1.90
%

$
1

$
2

2/1/2020

2/1/2024

Derivatives - Assets

25,000

1.90

26

15

3/1/2020

3/1/2025

Derivatives - Assets

25,000

1.90

114

50

$
75,000

$
141

$
67

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


				Balance Sheet							Fair Value as of							Balance Sheet							Fair Value as of
Hedged Item		Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2021		December 31, 2020			Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		March 31, 2022		December 31, 2021
(dollars in thousands)	(dollars in thousands)														(dollars in thousands)
QCBT - Loans		7/1/2021	7/1/2031	Derivatives - Assets		35,000	1.40	%	2.81	%		192		N/A
CRBT - Loans		7/1/2021	7/1/2031	Derivatives - Assets		50,000	1.40	%	2.81	%		274		N/A
CSB - Loans		7/1/2021	7/1/2031	Derivatives - Assets		40,000	1.40	%	2.81	%		204		N/A
SFCB - Loans		7/1/2021	7/1/2031	Derivatives - Assets		25,000	1.40	%	2.81	%		137		N/A

Loans																7/1/2021	7/1/2031	Derivatives - Liabilities		35,000	1.40	%	0.23	%		(2,387)		(17)
Loans																7/1/2021	7/1/2031	Derivatives - Liabilities		50,000	1.40	%	0.23	%		(3,411)		(25)
Loans																7/1/2021	7/1/2031	Derivatives - Liabilities		40,000	1.40	%	0.23	%		(2,742)		(34)
Loans																7/1/2021	7/1/2031	Derivatives - Liabilities		25,000	1.40	%	0.23	%		(1,705)		(13)
Loans																4/1/2022	4/1/2027	Derivatives - Liabilities		15,000	1.91	%	N/A			(281)		N/A
Loans																4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	N/A			(938)		N/A
Loans																4/1/2022	4/1/2027	Derivatives - Liabilities		35,000	1.91	%	N/A			(656)		N/A
Loans																4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	N/A			(939)		N/A
					$	150,000					$	807	$	N/A					$	300,000					$	(13,059)	$	(89)

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


			Balance Sheet							Fair Value as of							Balance Sheet							Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2021		December 31, 2020		Effective Date		Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		March 31, 2022		December 31, 2021
(dollars in thousands)

															(dollars in thousands)

QCR Holdings Statutory Trust II	9/30/2018	9/30/2028	Derivatives - Liabilities		10,000	2.98	%	5.85	%		(1,169)		(1,767)	9/30/2018		9/30/2028	Derivatives - Liabilities		10,000	3.86	%	5.85	%		(375)		(1,035)
QCR Holdings Statutory Trust III	9/30/2018	9/30/2028	Derivatives - Liabilities		8,000	2.98	%	5.85	%		(936)		(1,414)	9/30/2018		9/30/2028	Derivatives - Liabilities		8,000	3.86	%	5.85	%		(300)		(828)
QCR Holdings Statutory Trust V	7/7/2018	7/7/2028	Derivatives - Liabilities		10,000	1.68	%	4.54	%		(1,135)		(1,721)	7/7/2018		7/7/2028	Derivatives - Liabilities		10,000	1.79	%	4.54	%		(350)		(996)
Community National Statutory Trust II	9/20/2018	9/20/2028	Derivatives - Liabilities		3,000	2.29	%	5.17	%		(350)		(529)	9/20/2018		9/20/2028	Derivatives - Liabilities		3,000	3.10	%	5.17	%		(112)		(309)
Community National Statutory Trust III	9/15//2018	9/15/2028	Derivatives - Liabilities		3,500	1.87	%	4.75	%		(408)		(616)	9/15//2018		9/15/2028	Derivatives - Liabilities		3,500	2.58	%	4.75	%		(131)		(360)
Guaranty Bankshares Statutory Trust I	9/15/2018	9/15/2028	Derivatives - Liabilities		4,500	1.87	%	4.75	%		(524)		(792)	9/15/2018		9/15/2028	Derivatives - Liabilities		4,500	2.58	%	4.75	%		(168)		(463)
				$	39,000					$	(4,522)	$	(6,839)					$	39,000					$	(1,436)	$	(3,991)

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~~third-party financial ~~institution counterparty.~~institution. Additionally, the Company receives an upfront, non-refundable 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, 2021			December 31, 2020					March 31, 2022			December 31, 2021
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value

	(dollars in thousands)								(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	3,609,566	$	196,928	$	1,539,602	$	222,431	$	2,069,977	$	101,698	$	2,024,599	$	221,055
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	3,609,566	$	196,928	$	1,539,602	$	222,431	$	2,069,977	$	101,698	$	2,024,599	$	221,055

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and September 30, 2020~~ are as follows:

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

Interest and

Interest

Interest and

Interest

Dividend Income

Expense

Dividend Income

Expense

(dollars in thousands)
Income and expense line items presented in the consolidated statements of income

$
51,667

$
5,438

$
50,890

$
6,309

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

-

-

-

79

Interest rate swap on variable rate loans

502

-

-

-

Interest rate cap on deposits

-

181

-

128

~~The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the nine months ended September 30, 2021 and September 30, 2020 are as follows:~~


	Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020				Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
	Interest and		Interest		Interest and		Interest		Interest and		Interest		Interest and		Interest
	Dividend Income		Expense		Dividend Income		Expense		Dividend Income		Expense		Dividend Income		Expense

	(dollars in thousands)								(dollars in thousands)
Income and expense line items presented in the consolidated statements of income	$	148,135	$	16,415	$	148,522	$	25,279	$	51,062	$	5,329	$	47,565	$	5,590

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		-		-		-		114
Interest rate swap on variable rate loans		502		-		-		-
Interest rate cap on deposits		-		495		-		336



Interest rate caps on deposits										-		221		-		151
Interest rate swaps on variable rate loans										471		-		-		-
Interest rate swaps on junior subordinated debentures										-		267		-		269

3824

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, 2021		December 31, 2020		March 31, 2022		December 31, 2021

	(dollars in thousands)				(dollars in thousands)

Cash	$	13,220	$	45,719	$	4,193	$	21,100
U.S treasuries and govt. sponsored agency securities		3,579		3,628		3,518		3,555
Municipal securities		69,397		85,937		123,763		139,166
Residential mortgage-backed and related securities		122,606		89,646		59,683		65,104
	$	208,802	$	224,930	$	191,157	$	228,925

The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. Additionally, the Company ~~enters~~manages financial institution counterparty credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The ~~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/customer counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company underwrites the combination of the base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values. ~~For the~~The majority of the Company’s swapped loan portfolio ~~the loan-to-value~~consists of loans on projects, with loan-to-values including the potential swap exposure that is below 65%. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

NOTE 5 – INCOME TAXES

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income is as follows for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020:~~March 31, 2021:


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,								For the Three Months Ended March 31,
	2021				2020				2021				2020				2022				2021
			% of				% of				% of				% of				% of				% of
			Pretax				Pretax				Pretax				Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income

	(dollars in thousands)																(dollars in thousands)

Computed "expected" tax expense	$	8,293	21.0	%	$	4,486	21.0	%	$	18,512	21.0	%	$	10,712	21.0	%	$	5,451	21.0	%	$	4,520	21.0	%
Tax exempt income, net		(2,032)	(5.1)			(1,350)	(6.3)			(5,553)	(6.3)			(3,822)	(7.5)			(2,222)	(8.6)			(1,719)	(8.0)
Bank-owned life insurance		(93)	(0.2)			(101)	(0.5)			(287)	(0.3)			(271)	(0.5)			(73)	(0.3)			(99)	(0.5)
State income taxes, net of federal benefit, current year		1,799	4.6			1,003	4.7			4,070	4.6			2,456	4.8			1,291	5.0			1,024	4.8
Provision adjustment from accounting method change																		(1,181)	(4.5)			—	—
Tax credits		(57)	(0.1)			(116)	(0.5)			(171)	(0.2)			(348)	(0.7)			(242)	(0.9)			(57)	(0.3)
Income from tax credit equity investments																		(301)	(1.2)			—	—
Acquisition costs																		130	0.5			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(107)	(0.3)			14	0.1			(311)	(0.4)			(248)	(0.5)			(434)	(1.7)			(164)	(0.8)
Other		126	0.2			80	0.4			(2)	—			219	0.5			(86)	(0.3)			36	0.2
Federal and state income tax expense	$	7,929	20.1	%	$	4,016	18.9	%	$	16,258	18.4	%	$	8,698	17.1	%	$	2,333	9.0	%	$	3,541	16.4	%

3925

NOTE 6 - EARNINGS PER SHARE

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


		Three months ended			Nine months ended					Three months ended
		September 30,			September 30,					March 31,
		2021		2020		2021		2020		2022		2021

	(dollars in thousands, except share data)								(dollars in thousands, except share data)

Net income	$	31,565	$	17,344	$	71,896	$	42,311	$	23,624	$	17,982


Basic EPS	$	2.02	$	1.10	$	4.54	$	2.68	$	1.51	$	1.14
Diluted EPS	$	1.99	$	1.09	$	4.48	$	2.65	$	1.49	$	1.12

Weighted average common shares outstanding		15,635,123		15,767,152		15,829,124		15,770,335		15,625,112		15,803,643
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan		234,675		156,426		229,296		175,497		227,144		221,905
Weighted average common and common equivalent shares outstanding		15,869,798		15,923,578		16,058,420		15,945,832		15,852,256		16,025,548

NOTE 7 – FAIR VALUE

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

●

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

●

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

●

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

Assets and liabilities measured at fair value on a recurring basis comprise the following at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant						Quoted Prices		Significant
			in Active		Other		Significant				in Active		Other		Significant
			Markets for		Observable		Unobservable				Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs				Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)

	(dollars in thousands)								(dollars in thousands)
September 30, 2021:
March 31, 2022:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	23,689	$	—	$	23,689	$	—	$	21,380	$	—	$	21,380	$	—
Residential mortgage-backed and related securities		100,744		—		100,744		—		86,380		—		86,380		—
Municipal securities		166,359		—		166,359		—		191,473		—		191,473		—
Asset-backed securities		30,607		—		30,607		—		23,232		—		23,232		—
Other securities		23,317		—		23,317		—		24,221		—		24,221		—
Derivatives		198,393		—		198,393		—		107,326		—		107,326		—
Total assets measured at fair value	$	543,109	$	—	$	543,109	$	—	$	454,012	$	—	$	454,012	$	—

Derivatives	$	201,450	$	—	$	201,450	$	—	$	116,193	$	—	$	116,193	$	—
Total liabilities measured at fair value	$	201,450	$	—	$	201,450	$	—	$	116,193	$	—	$	116,193	$	—


December 31, 2020:
December 31, 2021:
Securities AFS:
U.S. govt. sponsored agency securities	$	15,336	$	—	$	15,336	$	—	$	23,328	$	—	$	23,328	$	—
Residential mortgage-backed and related securities		132,842		—		132,842		—		94,323		—		94,323		—
Municipal securities		152,408		—		152,408		—		168,266		—		168,266		—
Asset-backed securities		40,683		—		40,683		—		27,124		—		27,124		—
Other securities		20,697		—		20,697		—		24,789		—		24,789		—
Derivatives		222,757		—		222,757		—		222,220		—		222,220		—
Total assets measured at fair value	$	584,723	$	—	$	584,723	$	—	$	560,050	$	—	$	560,050	$	—

Derivatives	$	229,270	$	—	$	229,270	$	—	$	225,135	$	—	$	225,135	$	—
Total liabilities measured at fair value	$	229,270	$	—	$	229,270	$	—	$	225,135	$	—	$	225,135	$	—

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

Interest rate caps are used for the purpose of hedging interest rate ~~risk.~~risk on deposits. 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).

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

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

Interest rate swaps are also executed for select commercial customers. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

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

Assets measured at fair value on a non-recurring basis comprise the following at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant						Quoted Prices		Significant
			in Active		Other		Significant				in Active		Other		Significant
			Markets for		Observable		Unobservable				Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs				Identical Assets		Inputs		Inputs
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3

	(dollars in thousands)								(dollars in thousands)

September 30, 2021:
March 31, 2022:
Loans/leases evaluated individually	$	65,027	$	—	$	—	$	65,027	$	19,913	$	—	$	—	$	19,913
OREO		—		—		—		—
	$	65,027	$	—	$	—	$	65,027
December 31, 2021:
Loans/leases evaluated individually									$	6,618	$	—	$	—	$	6,618

December 31, 2020:
Loans/leases evaluated individually	$	9,926	$	—	$	—	$	9,926
OREO		22		—		—		22
	$	9,948	$	—	$	—	$	9,948

~~The increase in loans/leases evaluated individually is due to the change in ACL methodology with the adoption of ASU 2016-13 as well as the downgrading of one large relationship.~~

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

~~OREO~~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

March 31,

December 31,

2022

2021

Valuation Technique

Unobservable Input

Range

(dollars in thousands)

Loans/leases evaluated individually

19,913

6,618

Appraisal of collateral

Appraisal adjustments

-10.00

-30.00

For the loans/leases evaluated individually, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the ~~table~~tables above ~~consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at~~are fair values before the ~~estimated fair value of the property, less~~adjustment for 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.~~selling costs.

4227

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

Quantitative Information about Level Fair Value Measurements

Fair Value

Fair Value

September 30,

December 31,


2021

2020

Valuation Technique

Unobservable Input

Range

(dollars in thousands)

Loans/leases evaluated individually

$
65,027

$
9,926

Appraisal of collateral

Appraisal adjustments

-10.00
%
to

-30.00
%
OREO

—

22

Appraisal of collateral

Appraisal adjustments

0.00
%
to

-35.00
%

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

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

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


	Fair Value	As of September 30, 2021				As of December 31, 2020				Fair Value	As of March 31, 2022				As of December 31, 2021
	Hierarchy	Carrying		Estimated		Carrying		Estimated		Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value		Level	Value		Fair Value		Value		Fair Value

		(dollars in thousands)									(dollars in thousands)

Cash and due from banks	Level 1	$	57,310	$	57,310	$	61,329	$	61,329	Level 1	$	50,540	$	50,540	$	37,490	$	37,490
Federal funds sold	Level 2		6,985		6,985		9,080		9,080	Level 2		9,635		9,635		12,370		12,370
Interest-bearing deposits at financial institutions	Level 2		63,841		63,841		86,596		86,596	Level 2		56,755		56,755		75,292		75,292
Investment securities:
HTM	Level 2		484,003		531,279		476,165		521,277	Level 2		476,625		484,377		472,385		522,297
AFS	Level 2		344,716		344,716		361,966		361,966	Level 2		346,686		346,686		337,830		337,830
Loans/leases receivable, net	Level 3		60,210		65,027		9,191		9,926	Level 3		18,438		19,913		6,128		6,618
Loans/leases receivable, net	Level 2		4,458,850		4,361,433		4,157,562		4,112,735	Level 2		4,734,644		4,670,679		4,595,283		4,478,899
Derivatives	Level 2		198,393		198,393		222,757		222,757	Level 2		107,326		107,326		222,220		222,220

Deposits:
Nonmaturity deposits	Level 2		4,426,844		4,426,844		4,138,478		4,138,478	Level 2		4,454,329		4,454,329		4,501,424		4,501,424
Time deposits	Level 2		444,984		440,549		460,659		465,681	Level 2		385,360		376,546		421,348		419,453
Short-term borrowings	Level 2		1,600		1,600		5,430		5,430	Level 2		1,190		1,190		3,800		3,800
FHLB advances	Level 2		30,000		30,000		15,000		14,998	Level 2		290,000		290,000		15,000		15,000
Subordinated notes	Level 2		113,811		116,321		118,691		112,406	Level 2		113,890		116,113		113,850		116,203
Junior subordinated debentures	Level 2		38,103		30,912		37,993		30,618	Level 2		38,190		31,350		38,155		31,072
Derivatives	Level 2		201,450		201,450		229,270		229,270	Level 2		116,193		116,193		225,135		225,135

NOTE 8 – BUSINESS SEGMENT INFORMATION

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

The ~~Company's~~Company’s Commercial Banking business is geographically divided by markets into the operating segments which are the 4 subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, and SFCB. Each of these operating segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

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

Selected financial information on the Company's business segments is presented as follows as of and for the three months ended March 31, 2022 and 2021:


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

	(dollars in thousands)
Three Months Ended March 31, 2022
Total revenue	$	22,480	$	25,211	$	11,316	$	7,844	$	28,912	$	(29,068)	$	66,695
Net interest income		17,314		14,323		9,331		6,528		(2,109)		346		45,733
Provision for credit losses		(1,259)		(770)		(385)		(502)		—		—		(2,916)
Net income (loss) from continuing operations		9,970		11,129		4,126		3,104		23,827		(28,532)		23,624
Goodwill		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		1,583		2,497		4,776		—		—		8,856
Total assets		2,195,894		1,947,737		1,184,708		956,345		839,362		(948,227)		6,175,819

Three Months Ended March 31, 2021
Total revenue	$	21,284	$	30,357	$	10,423	$	8,746	$	23,223	$	(22,979)	$	71,054
Net interest income		15,786		13,606		8,368		6,069		(2,102)		248		41,975
Provision for loan/lease losses		2,112		2,184		1,366		1,051		—		—		6,713
Net income (loss) from continuing operations		7,164		11,396		2,062		2,269		17,948		(22,857)		17,982
Goodwill		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		2,067		3,143		5,663		—		—		10,873
Total assets		2,101,634		1,847,070		1,041,861		818,605		791,254		(955,277)		5,645,147

4328

~~Selected financial information on the Company's business segments is presented as follows as of and for the three and nine months ended September 30, 2021 and 2020.~~

Commercial Banking

Intercompany

Consolidated


QCBT

CRBT

CSB

SFCB

All other

Eliminations

Total

(dollars in thousands)
Three Months Ended September 30, 2021





Total revenue

$
22,630

$
41,415

$
11,445

$
10,886

$
36,749

$
(36,806)

$
86,319
Net interest income

16,862

14,784

9,303

7,058

(2,121)

343

46,229
Provision for credit losses

247

(733)

596

(110)

—

—

—
Net income (loss) from continuing operations

8,704

19,730

3,243

4,590

31,740

(36,442)

31,565
Goodwill

3,223

14,980

9,888

45,975

—

—

74,066
Intangibles

—

1,824

2,816

5,217

—

—

9,857
Total assets

2,106,631

2,019,018

1,140,933

880,143

828,808

(961,025)

6,014,508









Three Months Ended September 30, 2020













Total revenue

$
22,971

$
44,164

$
11,159

$
10,266

$
22,128

$
(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

3,273

13,437

1,888

2,869

17,360

(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

Nine Months Ended September 30, 2021













Total revenue

$
65,590

$
98,270

$
32,677

$
28,813

$
86,699

$
(86,477)

$
225,572
Net interest income

48,800

42,395

26,343

19,606

(6,342)

918

131,720
Provision for loan/lease losses

2,495

759

2,718

741

—

—

6,713
Net income (loss)

24,547

42,271

8,414

10,544

72,008

(85,888)

71,896
Goodwill

3,223

14,980

9,888

45,975

—

—

74,066
Intangibles

—

1,824

2,816

5,217

—

—

9,857
Total assets

2,106,631

2,019,018

1,140,933

880,143

828,808

(961,025)

6,014,508











Nine Months Ended September 30, 2020













Total revenue

$
66,370

$
102,548

$
31,234

$
28,490

$
57,003

$
(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) from continuing operations

12,995

30,941

3,523

6,714

42,295

(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

NOTE 9 – REGULATORY CAPITAL REQUIREMENTS

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

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain OBS items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of ~~September 30,~~March 31, 2022 and December 31, 2021 are presented in the following tables (dollars in thousands). As of March 31, 2022 and December 31, 2021, each of the subsidiary banks met such capital requirements to be “well capitalized”.


										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio

	( dollars in thousands)
As of March 31, 2022:
Company:
Total risk-based capital	$	836,493	14.50	%	$	461,539	>	8.00	%	$	605,770	>	10.50	%	$	576,924	>	10.00	%
Tier 1 risk-based capital		650,356	11.27			346,154	>	6.00			490,385	>	8.50			461,539	>	8.00
Tier 1 leverage		650,356	10.78			241,343	>	4.00			241,343	>	4.00			301,679	>	5.00
Common equity Tier 1		612,166	10.61			259,616	>	4.50			403,847	>	7.00			375,000	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	259,332	13.42	%	$	154,616	>	8.00	%	$	202,934	>	10.50	%	$	193,270	>	10.00	%
Tier 1 risk-based capital		235,098	12.16			115,962	>	6.00			164,280	>	8.50			154,616	>	8.00
Tier 1 leverage		235,098	10.81			86,996	>	4.00			86,996	>	4.00			108,745	>	5.00
Common equity Tier 1		235,098	12.16			86,972	>	4.50			135,289	>	7.00			125,626	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	269,223	14.18	%	$	151,921	>	8.00	%	$	199,396	>	10.50	%	$	189,901	>	10.00	%
Tier 1 risk-based capital		245,509	12.93			113,941	>	6.00			161,416	>	8.50			151,921	>	8.00
Tier 1 leverage		245,509	12.36			79,428	>	4.00			79,428	>	4.00			99,285	>	5.00
Common equity Tier 1		245,509	12.93			85,456	>	4.50			132,921	>	7.00			123,436	>	6.50
Community State Bank:
Total risk-based capital	$	128,273	11.81	%	$	86,889	>	8.00	%	$	114,042	>	10.50	%	$	108,612	>	10.00	%
Tier 1 risk-based capital		114,660	10.56			65,167	>	6.00			92,320	>	8.50			86,889	>	8.00
Tier 1 leverage		114,660	10.00			45,868	>	4.00			45,868	>	4.00			57,336	>	5.00
Common equity Tier 1		114,660	10.56			48,875	>	4.50			76,028	>	7.00			70,597	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	104,588	12.91	%	$	64,795	>	8.00	%	$	85,043	>	10.50	%	$	80,994	>	10.00	%
Tier 1 risk-based capital		94,945	11.72			48,596	>	6.00			68,845	>	8.50			64,795	>	8.00
Tier 1 leverage		94,945	11.21			33,886	>	4.00			33,886	>	4.00			42,357	>	5.00
Common equity Tier 1		94,945	11.72			36,447	>	4.50			56,696	>	7.00			52,646	>	6.50

4429


										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio

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

December 31, 2020 are presented in the following tables (dollars in thousands). As of September 30, 2021 and December 31, 2020, 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 September 30, 2021:

Company:

Total risk-based capital

$
785,424

14.64
%
$
429,282
>
8.00
%
$
563,433
>
10.50
%
$
536,603
>
10.00
%
Tier 1 risk-based capital

604,268

11.26

321,962
>
6.00

456,113
>
8.50

429,282
>
8.00

Tier 1 leverage

604,268

10.28

235,118
>
4.00

235,118
>
4.00

293,897
>
5.00

Common equity Tier 1

566,165

10.55

241,471
>
4.50

375,622
>
7.00

348,792
>
6.50

Quad City Bank & Trust:







Total risk-based capital

$
237,936

13.07
%
$
145,613
>
8.00
%
$
191,117
>
10.50
%
$
182,017
>
10.00
%
Tier 1 risk-based capital

215,059

11.82

109,210
>
6.00

154,714
>
8.50

145,613
>
8.00

Tier 1 leverage

215,059

10.33

83,257
>
4.00

83,257
>
4.00

104,071
>
5.00

Common equity Tier 1

215,059

11.82

81,907
>
4.50

127,412
>
7.00

118,311
>
6.50

Cedar Rapids Bank & Trust:







Total risk-based capital

$
264,015

14.39
%
$
146,780
>
8.00
%
$
192,649
>
10.50
%
$
183,475
>
10.00
%
Tier 1 risk-based capital

241,037

13.14

110,085
>
6.00

155,954
>
8.50

146,780
>
8.00

Tier 1 leverage

241,037

12.20

79,004
>
4.00

79,004
>
4.00

98,755
>
5.00

Common equity Tier 1

241,037

13.14

82,564
>
4.50

128,433
>
7.00

119,259
>
6.50

Community State Bank:







Total risk-based capital

$
118,637

11.69
%
$
81,208
>
8.00
%
$
106,585
>
10.50
%
$
101,510
>
10.00
%
Tier 1 risk-based capital

105,894

10.43

60,906
>
6.00

86,283
>
8.50

81,208
>
8.00

Tier 1 leverage

105,894

9.80

43,204
>
4.00

43,204
>
4.00

54,005
>
5.00

Common equity Tier 1

105,894

10.43

45,679
>
4.50

71,057
>
7.00

65,981
>
6.50

Springfield First Community Bank:







Total risk-based capital

$
96,864

12.77
%
$
60,706
>
8.00
%
$
79,676
>
10.50
%
$
75,882
>
10.00
%
Tier 1 risk-based capital

87,367

11.51

45,529
>
6.00

64,500
>
8.50

60,706
>
8.00

Tier 1 leverage

87,367

10.67

32,751
>
4.00

32,751
>
4.00

40,939
>
5.00

Common equity Tier 1

87,367

11.51

34,147
>
4.50

53,117
>
7.00

49,223
>
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, 2020:

Company:

Total risk-based capital

$
721,004

14.95
%
$
385,832
>
8.00
%
$
506,404
>
10.50
%
$
482,290
>
10.00
%
Tier 1 risk-based capital

546,729

11.34

289,374
>
6.00

409,946
>
8.50

385,832
>
8.00

Tier 1 leverage

546,729

9.49

230,345
>
4.00

230,345
>
4.00

287,931
>
5.00

Common equity Tier 1

508,736

10.55

217,030
>
4.50

337,603
>
7.00

313,488
>
6.50

Quad City Bank & Trust:







Total risk-based capital

$
213,608

12.24
%
$
139,581
>
8.00
%
$
183,200
>
10.50
%
$
174,477
>
10.00
%
Tier 1 risk-based capital

191,693

10.99

104,686
>
6.00

148,305
>
8.50

139,581
>
8.00

Tier 1 leverage

191,693

8.48

90,430
>
4.00

90,430
>
4.00

113,038
>
5.00

Common equity Tier 1

191,693

10.99

78,514
>
4.50

122,134
>
7.00

113,410
>
6.50

Cedar Rapids Bank & Trust:







Total risk-based capital

$
217,227

13.14
%
$
132,269
>
8.00
%
$
173,603
>
10.50
%
$
165,336
>
10.00
%
Tier 1 risk-based capital

196,438

11.88

99,202
>
6.00

140,536
>
8.50

132,269
>
8.00

Tier 1 leverage

196,438

10.01

78,535
>
4.00

78,535
>
4.00

98,169
>
5.00

Common equity Tier 1

196,438

11.88

74,401
>
4.50

115,735
>
7.00

107,469
>
6.50

Community State Bank:







Total risk-based capital

$
108,040

12.69
%
$
68,117
>
8.00
%
$
89,404
>
10.50
%
$
85,146
>
10.00
%
Tier 1 risk-based capital

97,350

11.43

51,088
>
6.00

72,374
>
8.50

68,117
>
8.00

Tier 1 leverage

97,350

10.27

37,930
>
4.00

37,930
>
4.00

47,412
>
5.00

Common equity Tier 1

97,350

11.43

38,316
>
4.50

59,602
>
7.00

55,345
>
6.50

Springfield First Community Bank:







Total risk-based capital

$
90,334

14.35
%
$
50,357
>
8.00
%
$
66,094
>
10.50
%
$
62,947
>
10.00
%
Tier 1 risk-based capital

77,668

12.34

37,768
>
6.00

53,505
>
8.50

50,357
>
8.00

Tier 1 leverage

77,668

10.87

28,575
>
4.00

28,575
>
4.00

35,719
>
5.00

Common equity Tier 1

77,668

12.34

28,326
>
4.50

44,063
>
7.00

40,915
>
6.50

NOTE 10 –ACQUISITION

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

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

As of the acquisition date, GFED had $1.2 billion in assets, $821 million in loans and $1.1 billion in deposits. The Company is in the process of determining the fair value of the individual assets and liabilities purchased/assumed, including goodwill and core deposit intangible.

Acquisition costs totaled $1.9 million in the first quarter of 2022. These acquisition costs are primarily comprised of legal, accounting and other professional expenses.

4530

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three ~~and nine~~ months ending ~~September 30, 2021.~~March 31, 2022. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. Page locations and specific sections and notes that are referred to in this discussion are listed in the table of contents.

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

GENERAL

The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past ~~twenty-eight~~twenty-nine years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of ~~September 30, 2021,~~March 31, 2022, the Company had ~~$6.0~~$6.2 billion in consolidated assets, including ~~$4.5~~$4.8 billion in net loans/leases, and ~~$4.9~~$4.8 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger. On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank. The financial results of GFED are not included in this report.

IMPACT OF COVID-19

The progression of the COVID-19 pandemic in the United States has had an impact on the Company’s financial condition and results of operations as of and for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022 and could continue to 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~~Business

The ~~Company offers commercial~~extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and ~~consumer banking products and services primarily in Iowa, Missouri and Illinois. Each~~results of ~~these three states has taken different steps to reopen since COVID-19 thrust~~operations will depend on future developments that cannot be predicted, including the ~~country into lockdown starting in March 2020. The continuation~~duration and scope of ~~re-openings in each jurisdiction are subject to change, delay and setbacks based on ongoing regional monitoring of~~ the pandemic.

~~Effects~~The direct or indirect impact on employees, customers, counterparties, and service providers, as well as other market participants, is likely to continue through 2022 as the world attempts to continue to gain control over the virus and emerging variants. The impact that the virus continues to have on global markets, the economy, the Company’s ~~Business~~market areas, business restrictions, and employment is ongoing as a projected return to pre-pandemic operating conditions is unknown.

The Company currently expects that the economic impact from COVID-19 will continue for some time 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 and the specific developments referred to above could have an on-going impact on its business. In particular, the Company anticipates that a portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries couldhas subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic ~~challenges,~~impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and ~~could adversely affect their ability~~any recession that has occurred or may as a global pandemic may have, nor are there historical indicators to ~~repay existing indebtedness,~~rely on in terms of how markets will react, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, may impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. Asas a result, the ~~Company anticipates that its asset quality~~ultimate impact of the pandemic is highly uncertain and ~~results of operations could be adversely affected, as described in further detail below.~~

subject to change.

4631

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

CRITICAL ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

The ~~Company’s Response~~

~~As previously disclosed,~~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 ~~Company has taken numerous steps~~financial effects of transactions and events that have already occurred. The preparation of financial statements, in ~~response~~conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the ~~COVID-19 pandemic, including~~determination of the ~~following:~~allowance, impairment of goodwill and the fair value of financial instruments.

●

The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of September 30, 2021 there were no bank and eight m2 modifications of loans and leases totaling $2.9 million representing 0.06% of the total loan and lease portfolio, that were currently on deferral.

●

The Company has processed 2,633 loans for a total of $484 million as of September 30, 2021 under the PPP. PPP loans are included in the C&I - other category of loans in Note 3 of the Consolidated Financial Statements and total $83.6 million at September 30, 2021 compared to $273.1 million at December 31, 2020.

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

~~EXECUTIVE OVERVIEW~~GOODWILL

The Company ~~reported net income~~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 ~~$31.6 million and diluted EPS~~a reporting unit below its carrying amount. A more detailed discussion of ~~$1.99~~this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the ~~quarter~~year ended ~~September 30,~~December 31, 2021. ~~By comparison, for the quarter ended June~~

As of November 30, 2021 the ~~Company reported net income of $22.3 million~~Company’s management performed an annual assessment at the reporting unit level and ~~diluted EPS of $1.39. For the quarter ended September 30, 2020, the Company reported net income of $17.3 million, and diluted EPS of $1.09. For the nine months ended September 30,~~determined no goodwill impairment existed.

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

On January 1, 2021, the Company ~~reported net income~~adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic326),” which replaces the incurred loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures to be calculated using a current expected credit loss methodology. A more detailed discussion of ~~$71.9 million, and diluted EPS of $4.48. By comparison,~~this critical accounting policy can be found in the Company’s Annual Report on Form 10-K for the ~~nine months~~year ended ~~September 30, 2020, the Company reported net income of $42.3 million and diluted EPS of $2.65.~~December 31, 2021.

~~The third quarter of 2021 was also highlighted by the following results and events:~~

●

~~Record net income of $31.6 million, or $1.99 per diluted share;~~

●

~~NIM increased 8 basis points and Adjusted NIM (TEY)(non-GAAP) increased by 9 basis points to 3.36% and 3.53%, respectively;~~

●

~~Adjusted net interest income (non-GAAP) increased by $2.8 million, or 6.2%;~~

●

~~Annualized traditional loan and lease growth (non-GAAP) of 23.0% for the quarter and 18.0% year-to-date, excluding SBA PPP loans;~~

●

~~Annualized core deposit growth of 15.6% for the quarter;~~

●

~~Nonperforming assets improved by 32% for the quarter and now represent only 0.11% of total assets; and~~

●

~~ACL for loans/leases to total loans/leases of 1.79%, excluding PPP loans (non-GAAP).~~

~~Following~~

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

For the three months ended

For the nine months ended

September 30, 2021

June 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

(dollars in thousands)

Net income

$
31,565

$
22,349

$
17,344

$
71,896

$
42,311

Diluted earnings per common share

$
1.99

$
1.39

$
1.09

$
4.48

$
2.65

Weighted average common and common equivalent shares outstanding

15,869,798

16,045,239

15,923,578

16,058,420

15,945,832

FAIR VALUE OF SECURITIES

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

4732

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

EXECUTIVE OVERVIEW

The Company reported net income of $23.6 million and diluted EPS of $1.49 for the quarter ended March 31, 2022. By comparison, for the quarter ended December 31, 2021 the Company reported net income of $27.0 million and diluted EPS of $1.71. For the quarter ended March 31, 2021, the Company reported net income of $18.0 million, and diluted EPS of $1.12.

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

●

Adjusted net income (non-GAAP) of $24.4 million, or $1.54 per diluted share;

●

NIM of 3.30% and Adjusted NIM (TEY)(non-GAAP) of 3.50%:

●

Annualized loan and lease growth (non-GAAP) of 14.6% for the quarter, excluding SBA PPP loans (non-GAAP);

●

Nonperforming assets improved slightly during the quarter and represent a record low 0.04% of total assets; and

●

ACL to total loans/leases of 1.55%.

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


	For the three months ended
	March 31, 2022		December 31, 2021		March 31, 2021

	(dollars in thousands)

Net income	$	23,624	$	27,009	$	17,982

Diluted earnings per common share	$	1.49	$	1.71	$	1.12

Weighted average common and common equivalent shares outstanding		15,852,256		15,838,246		16,025,548

The Company reported adjusted net income (non-GAAP) of ~~$31.6~~$24.4 million, with adjusted diluted EPS of ~~$1.99.~~$1.54. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the three months ended excludes a number of non-recurring items, after-tax, most significantly $1.5 million of acquisition costs.

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				For the three months ended
	September 30, 2021		June 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		March 31, 2022		December 31, 2021		March 31, 2021

	(dollars in thousands)										(dollars in thousands)

Net interest income	$	46,229	$	43,516	$	44,581	$	131,720	$	123,243	$	45,733	$	46,513	$	41,975
Provision for credit losses		—		—		20,342		6,713		48,624		(2,916)		(3,227)		6,713
Noninterest income		34,652		19,296		37,959		77,437		81,781		15,633		22,985		23,489
Noninterest expense		41,387		35,675		40,838		114,290		105,391		38,325		39,412		37,228
Federal and state income tax expense		7,929		4,788		4,016		16,258		8,698		2,333		6,304		3,541
Net income	$	31,565	$	22,349	$	17,344	$	71,896	$	42,311	$	23,624	$	27,009	$	17,982

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

●

Net interest income in the ~~third~~first quarter of 2022 decreased 2% compared to the fourth quarter of 2021 ~~increased 6% compared~~due entirely to ~~the second quarter of 2021.~~lower PPP loan forgiveness fees. Net interest income increased ~~4% compared to the third quarter of 2020 and 7%~~9% when comparing the first ~~nine~~three months of ~~2021~~2022 to the same period of the prior year. The increase was due to strong loan growth, ~~funded by core deposit growth while maintaining modest excess liquidity.~~an expanding net interest margin, well managed expenses and continued strong credit quality. The Company had success ~~holding on to~~maintaining earning asset yield while moving cost of funds lower which helped to drive NIM expansion.

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●

~~There was no provision~~Provision expense in the ~~third or second~~first quarter of 2022 decreased $311 thousand compared to the fourth quarter of 2021. Provision expense decreased ~~$41.9~~$9.6 million when comparing the first ~~nine~~three months of ~~2021~~2022 to the same period in the prior year. The decrease was primarily due to continued strong credit quality and a corresponding reduction in ~~NPLs and improving economic conditions. The provision amounts for prior years were calculated under different accounting standards due~~the qualitative factor related to the ~~adoption of CECL on January 1, 2021. See the Provision for Credit Losses section of this report for additional details.~~pandemic.

●

Noninterest income in the ~~third~~first quarter of ~~2021 increased $15.4~~2022 decreased $7.4 million or ~~80%~~32% compared to the ~~second~~fourth quarter of 2021. Noninterest income decreased ~~$3.3~~$7.9 million or 9%33% compared to the ~~third~~first quarter of ~~2020 and decreased $4.3 million or 5% when comparing the first nine months of 2021 to the same period of the prior year.~~2021. The ~~increase in the third quarter of 2021~~decrease was primarily due to lower capital markets revenue from swap fee ~~income/capital market revenue for certain loans that closed in the third quarter that were scheduled to close in the second quarter~~income due to ~~factors outside of the Company’s control.~~client project delays caused by ongoing supply chain disruptions and inflationary pressures.

●

Noninterest expense ~~increased $5.7~~decreased $1.1 million or ~~16%~~3% in the ~~third~~first quarter of ~~2021~~2022 compared to the ~~second~~fourth quarter of 2021. This ~~increase~~decrease was primarily due to ~~several factors but was primarily the result of higher~~lower salary and benefits expense of ~~$5.2~~$1.2 million, ~~driven by higher incentive~~the result of a decrease in variable compensation ~~and commission expense in the quarter due~~related to ~~higher~~lower than expected capital markets revenue from swap fee income/capital market revenue and higher incentive compensation accruals. In addition, there was a $1.2 million increase in net income from and gains/losses on operations of other real estate due to the sale of one large other real estate owned property.income. Noninterest expense increased ~~$549 thousand~~$1.1 million or 1%3% compared to the ~~third~~first quarter of ~~2020 and increased $8.9 million or 8% when comparing the first nine months of 2021 to the same period in the prior year.~~2021. The increase was primarily due to ~~increased incentive compensation~~acquisition costs of $1.9 million associated with ~~improved financial performance~~the acquisition of GFED. See Note 10 of the ~~Company.~~Consolidated Financial Statements for further discussion.

STRATEGIC FINANCIAL METRICS

The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the

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Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. The Company's long-term strategic financial metrics are as follows:

●

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

●

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

●

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

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


			Year to Date*											Year to Date*
Strategic Financial Metric*	Key Metric	Target	September 30, 2021			June 30, 2021			September 30, 2020			Key Metric	Target	March 31, 2022			December 31, 2021			March 31, 2021
Loan and lease growth organically **	Loans and leases growth	> 9% annually		18.0	%		14.7	%		11.5	%	Loans and leases growth	> 9% annually		14.6	%		16.9	%		14.0	%
Fee income growth	Fee income growth	> 6% annually		(7.5)	%		(23.3)	%		61.1	%	Fee income growth	> 6% annually		(41.3)	%		(10.1)	%		(15.9)	%
Improve operational efficiencies and hold noninterest expense growth	Noninterest expense growth	< 5% annually		3.3	%		(1.0)	%		(5.3)	%	Noninterest expense growth	< 5% annually		(4.1)	%		4.0	%		1.2	%

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

** Loan and lease growth excludes PPP loans.

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

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STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the ~~third~~first quarter of ~~2021~~2022 to support its corporate strategy:

●

The Company grew loans and leases ~~organically~~ in the ~~third~~first quarter of ~~2021~~2022 by ~~23.0%~~14.6% on an annualized basis, excluding PPP loans (non-GAAP), driven by both our specialty finance group and our traditional commercial lending and leasing business.

●

Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states currently served – Iowa, Wisconsin, Missouri and Illinois. The Company acted as the correspondent bank for ~~186~~188 downstream banks with average total noninterest bearing deposits of ~~$350.0~~$356.3 million and average total ~~interest bearing~~interest-bearing deposits of ~~$317.5~~$264.5 million during the ~~nine months~~first quarter of ~~2021.~~2022. By comparison, the Company acted as the correspondent bank for ~~192~~188 downstream banks with average total noninterest bearing deposits of ~~$307.0~~$327.0 million and average total ~~interest bearing~~interest-bearing deposits of ~~$542.6~~$398.2 million during the ~~nine months~~first quarter of ~~2020.~~2021. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

●

~~As a result of the low interest rate environment, the~~The Company is focused on executing interest rate swaps on select commercial loans, including LIHTC permanent loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as appropriate for the borrowers and the Company. Future levels of capital markets revenue from swap fee income are dependent upon prevailing interest rates. Capital markets revenue from swap fee income totaled ~~$24.9~~$6.4 million for the ~~quarter, which benefited from a number of swap transactions that were scheduled to close in the second quarter carrying over into the third~~ quarter. Capital markets revenue from swap fees averaged ~~$16~~$15.2 million per quarter for the ~~first nine months of~~year 2021 and ~~$16.3~~

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$16.9 million for the last eight quarters. ~~Future levels of swap fee income/capital markets revenue are somewhat dependent upon prevailing interest rates.~~

●

Noninterest expense for the first nine months of 2021 totaled $114.3 million as compared to $105.4 million in the first nine months of 2020. Salaries and employee benefits for the first nine months of 2021 were up 15.6% from the same period of the prior year primarily due to the higher incentive compensation due to strong financial results.

●

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~~decreased by ~~$687.5~~$389.3 million in the first ~~nine months~~quarter of ~~2021.~~2022 due to market value fluctuations. There were ~~233~~97 new relationships added in the first ~~nine months~~quarter of ~~2021~~2022 totaling ~~$319.0~~$80.6 million of new assets under management. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

●

Noninterest expense for the first quarter of 2022 totaled $38.3 million as compared to $37.2 million in the first quarter of 2021. The increase was due to $1.9 million of acquisition costs in 2022 related to the acquisition of GFED as discussed in the Company’s financial statements and the accompanying notes.

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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”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio”~~, “ACL 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;

●

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

●

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

●

~~ACL to total loans and leases excluding PPP loans and loan~~Loan growth annualized excluding PPP loans ~~are~~is reconciled to ~~ACL 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 quarters ended September 30, 2021 and June 30, 2021 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.

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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.

~~ACL to total loans and leases, excluding PPP loans, and loan~~Loan growth annualized, excluding PPP loans, ~~are ratios~~is a ratio that management utilizes to compare the Company to its peers. The Company’s management believes ~~these~~this financial ~~measures are~~measure is important to investors as total loans and leases for the quarters ended ~~September 30, 2021 and June 30,~~March 31, 2021 were materially higher due to the addition of PPP ~~loans which are guaranteed by the government and therefore do not necessitate an increase in ACL.~~loans. By excluding the PPP loans, the investor is provided a better comparison to prior periods for analysis.

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


	As of									As of
GAAP TO NON-GAAP	September 30,			June 30,			September 30,			March 31,			December 31,			March 31,
RECONCILIATIONS	2021			2021			2020			2022			2021			2021

		(dollars in thousands, except per share data)									(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	649,814		$	630,476		$	572,613		$	667,924		$	677,010		$	608,719
Less: Intangible assets		83,923			84,431			85,968			82,922			83,415			84,939
TCE (non-GAAP)	$	565,891		$	546,045		$	486,645		$	585,002		$	593,595		$	523,780

Total assets (GAAP)	$	6,014,508		$	5,805,165		$	5,864,560		$	6,175,819		$	6,096,132		$	5,645,147
Less: Intangible assets		83,923			84,431			85,968			82,922			83,415			84,939
TA (non-GAAP)	$	5,930,585		$	5,720,734		$	5,778,592		$	6,092,897		$	6,012,717		$	5,560,208

TCE/TA ratio (non-GAAP)		9.54	%		9.55	%		8.42	%		9.60	%		9.87	%		9.42	%


TCE/TA RATIO EXCLUDING PPP LOANS
Stockholders' equity (GAAP)	$	649,814		$	630,476		$	572,613
Less: PPP loan interest income (post-tax)		12,297			10,788			4,934
Less: Intangible assets		83,923			84,431			85,968
TCE (non-GAAP)	$	553,594		$	535,257		$	481,711

Total assets (GAAP)	$	6,014,508		$	5,805,165		$	5,864,560
Less: PPP loans		83,575			147,506			357,506
Less: Intangible assets		83,923			84,431			85,968
TA (non-GAAP)	$	5,847,010		$	5,573,228		$	5,421,086

TCE/TA ratio excluding PPP loans (non-GAAP)		9.47	%		9.60	%		8.89	%

5136

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	For the Quarter Ended									For the Nine Months Ended						For the Quarter Ended
	September 30,			June 30,			September 30,			September 30,			September 30,			March 31,			December 31,			March 31,
	2021			2021			2020			2021			2020			2022			2021			2021

	(dollars in thousands, except per share data)															(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	31,565		$	22,349		$	17,344		$	71,896		$	42,311		$	23,624		$	27,009		$	17,982
Less non-core items (post-tax) (*):
Income:
Securities gains (losses), net	$	—		$	(69)		$	1,424		$	(69)		$	1,475
Mark to market gains (losses) on unhedged derivatives, net		(13)			(58)			—			58			—
Gain on sale of loan	$	28		$	—		$	—			28			—
Mark to market gains on unhedged derivatives, net																	715			77			129
Total non-core income (non-GAAP)	$	15		$	(127)		$	1,424		$	17		$	1,475		$	715		$	77		$	129
Expense:
Losses on liability extinguishment	$	—		$	—		$	1,480		$	—		$	1,936
Goodwill impairment		—			—			—			—			500
Disposition costs		—			—			152			7			495			—			3			7
Post-acquisition compensation, transition and integration costs		—			—			(25)			—			149
Acquisition costs																	1,462			493		$	—
Separation agreement		—			—			—			734			—			—			—			734
Loss on sale of subsidiary		—			—			212			—			212
Total non-core expense (non-GAAP)	$	—		$	—		$	1,819		$	741		$	3,291		$	1,462		$	496		$	741


Adjusted net income (non-GAAP)	$	31,550		$	22,476		$	17,739		$	72,620		$	44,127		$	24,371		$	27,428		$	18,594

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	31,550		$	22,476		$	17,739		$	72,620		$	44,127		$	24,371		$	27,428		$	18,594

Weighted average common shares outstanding		15,635,123			15,813,932			15,767,152			15,829,124			15,770,335			15,625,112			15,582,276			15,803,643
Weighted average common and common equivalent shares outstanding		15,869,768			16,045,239			15,923,578			16,058,420			15,945,832			15,852,256			15,838,246			16,025,548

Adjusted EPS (non-GAAP):
Basic	$	2.02		$	1.42		$	1.13		$	4.59		$	2.80		$	1.56		$	1.76		$	1.18
Diluted	$	1.99		$	1.40		$	1.11		$	4.52		$	2.77		$	1.54		$	1.73		$	1.16

ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	31,550		$	22,476		$	17,739		$	72,620		$	44,127		$	24,371		$	27,428		$	18,594

Average Assets	$	5,960,336		$	5,739,067		$	5,820,555		$	5,789,753		$	5,524,087		$	6,115,127		$	6,121,446		$	5,668,850

Adjusted ROAA (annualized) (non-GAAP)		2.12	%		1.57	%		1.22	%		1.67	%		1.07	%
Adjusted ROAA (non-GAAP)																	1.59	%		1.79	%		1.31	%

ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	46,229		$	43,516		$	44,581		$	131,720		$	123,243		$	45,733		$	46,513		$	41,975
Plus: Tax equivalent adjustment		2,708			2,444			1,942			7,411			5,587			2,933			2,800			2,267
Net interest income - tax equivalent (non-GAAP)	$	48,937		$	45,960		$	46,523		$	139,131		$	128,830		$	48,666		$	49,313		$	44,242
Less: Acquisition accounting net accretion		456			291			833			1,251			2,194			118			88			504
Adjusted net interest income		48,481			45,669			45,690			137,880			126,636			48,548			49,225			43,738

Average earning assets	$	5,451,571		$	5,320,881		$	5,278,298		$	5,330,338		$	4,998,352		$	5,625,813		$	5,602,222		$	5,218,198

NIM (GAAP)		3.36	%		3.28	%		3.36	%		3.30	%		3.29	%		3.30	%		3.29	%		3.26	%
NIM (TEY) (non-GAAP)		3.56	%		3.46	%		3.51	%		3.49	%		3.44	%		3.50	%		3.50	%		3.43	%
Adjusted NIM (TEY) (non-GAAP)		3.53	%		3.44	%		3.44	%		3.46	%		3.38	%		3.50	%		3.49	%		3.40	%

EFFICIENCY RATIO
Noninterest expense (GAAP)	$	41,387		$	35,675		$	40,838		$	114,290		$	105,391		$	38,325		$	39,412		$	37,228

Net interest income (GAAP)	$	46,229		$	43,516		$	44,581		$	131,720		$	123,243		$	45,733		$	46,513		$	41,975
Noninterest income (GAAP)		34,652			19,296			37,959			77,437			81,781			15,633			22,985			23,489
Total income	$	80,881		$	62,812		$	82,540		$	209,157		$	205,024		$	61,366		$	69,498		$	65,464

Efficiency ratio (noninterest expense/total income) (non-GAAP)		51.17	%		56.80	%		49.48	%		54.64	%		51.40	%		62.45	%		56.71	%		56.87	%

ACL TO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS
ACL	$	80,670		$	78,894		$	79,582		$	80,670		$	79,582

LOAN GROWTH, EXCLUDING PPP LOANS
Total loans and leases	$	4,599,730		$	4,417,705		$	4,247,977		$	4,599,730		$	4,247,977		$	4,827,868		$	4,680,132		$	4,361,051
Less: PPP loans		83,575			147,506			357,506			83,575			357,506			6,340			28,181			243,860
Total loans and leases, excluding PPP loans	$	4,516,155		$	4,270,199		$	3,890,471		$	4,516,155		$	3,890,471		$	4,821,528		$	4,651,951		$	4,117,191

ACL to total loans and leases, excluding PPP loans		1.79	%		1.85	%		2.05	%		1.79	%		2.05	%

LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS
Total loans and leases	$	4,599,730		$	4,417,705		$	4,247,977		$	4,599,730		$	4,247,977
Less: PPP loans		83,575			147,506			357,506			83,575			357,506
Total loans and leases, excluding PPP loans	$	4,516,155		$	4,270,199		$	3,890,471		$	4,516,155		$	3,890,471

Loan growth annualized, excluding PPP loans		23.04	%		14.87	%		11.45	%		16.08	%		16.28	%
Loan growth, excluding PPP loans																	14.58	%		12.03	%		14.00	%

* 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/loss on sale of subsidiary which has an estimated effective tax rate of 30.5%.

~~NET INTEREST INCOME - (TAX EQUIVALENT BASIS)~~

Net interest income, on a tax equivalent basis, increased 5% to $48.9 million for the quarter ended September 30, 2021 compared to the same quarter of the prior year and increased 8% to $139.1 million for the nine months ended September 30, 2021 as compared to the same period of the prior year. Net interest income, on a GAAP basis, increased 4% for the quarter ended September 30, 2021 compared to the same quarter of the prior year, and increased 7% for the nine months

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NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a tax equivalent basis, increased 10% to $48.7 million for the quarter ended ~~September 30, 2021~~March 31, 2022 compared to the same ~~period~~quarter of the prior year. Net interest income, on a GAAP basis, increased 9% to $45.7 million for the quarter ended March 31, 2022 compared to the same quarter of the prior year. Net interest income improved due to ~~the following factors:~~lower sequential PPP loan forgiveness fees, a favorable mix in our interest earning assets, lower deposit costs and a rotation of excess liquidity into higher average loan/lease balances.

●

~~Strong organic loan and deposit growth;~~

●

~~Significant growth in PPP loans in 2020 and 2021;~~

●

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

●

~~Reduction in cost of funds.~~

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

Tax Equivalent Basis

GAAP

For the Quarter Ended

For the Quarter Ended

September 30,

June 30,

September 30,

September 30,

June 30,

September 30,

2021

2021

2020

2021

2021

2020

Average Yield on Interest-Earning Assets

3.96
%

3.87
%

3.99
%

3.79
%

3.68
%

3.86
%

Average Cost of Interest-Bearing Liabilities

0.58
%

0.60
%

0.66
%

0.59
%

0.60
%

0.67
%

Net Interest Spread

3.38
%

3.27
%

3.33
%

3.21
%

3.08
%

3.19
%

NIM (TEY) (Non-GAAP)

3.56
%

3.46
%

3.51
%

3.36
%

3.28
%

3.36
%

NIM Excluding Acquisition Accounting Net Accretion

3.53
%

3.44
%

3.44
%

3.38
%

3.27
%

3.36
%


	Tax Equivalent Basis				GAAP				Tax Equivalent Basis						GAAP
	For the Nine Months Ended				For the Nine Months Ended				For the Quarter Ended						For the Quarter Ended
	September 30,		September 30,		September 30,		September 30,		March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
	2021		2020		2021		2020		2022		2021		2021		2022		2021		2021
Average Yield on Interest-Earning Assets	3.90	%	4.12	%	3.71	%	3.96	%	3.88	%	3.89	%	3.86	%	3.63	%	3.71	%	3.65	%
Average Cost of Interest-Bearing Liabilities	0.60	%	0.91	%	0.60	%	0.67	%	0.56	%	0.57	%	0.63	%	0.55	%	0.57	%	0.62	%
Net Interest Spread	3.30	%	3.21	%	3.11	%	3.29	%	3.32	%	3.32	%	3.23	%	3.08	%	3.14	%	3.03	%
NIM (TEY) (Non-GAAP)	3.49	%	3.44	%	3.30	%	3.29	%	3.50	%	3.50	%	3.43	%	3.30	%	3.29	%	3.26	%
NIM Excluding Acquisition Accounting Net Accretion	3.46	%	3.38	%	3.26	%	3.24	%	3.50	%	3.49	%	3.40	%	3.25	%	3.32	%	3.21	%

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

For the Quarter Ended

For the Nine Months Ended

For the Quarter Ended

September 30,

June 30,

September 30,

March 31,

December 31,

March 31,

2021

2020

2021

2020

2022

2021

(dollars in thousands)

Acquisition Accounting Net Accretion in NIM

456

291

833

1,251

2,194

118

504

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

5338

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~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 2021 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,																For the Three Months Ended March 31,
	2021								2020								2022								2021
				Interest		Average						Interest		Average						Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost

	(dollars in thousands)																(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	3,030		$	1		0.10	%	$	2,205		$	1		0.18	%	$	4,564		$	2		0.15	%	$	1,847		$	1		0.05	%
Interest-bearing deposits at financial institutions		99,024			39		0.16	%		321,679			92		0.11	%		69,328			35		0.20	%		116,446			37		0.13	%
Investment securities (1)		799,471			7,646		3.82	%		749,425			6,836		3.66	%		802,260			7,682		3.83	%		810,059			7,050		3.48	%
Restricted investment securities		20,910			262		4.97	%		19,714			249		4.94	%		22,183			281		5.06	%		18,064			219		4.84	%
Gross loans/leases receivable (1) (2) (3)		4,529,136			46,427		4.07	%		4,185,275			45,654		4.34	%		4,727,478			45,995		3.95	%		4,271,782			42,525		4.04	%
Total interest earning assets		5,451,571			54,375		3.96	%		5,278,298			52,832		3.99	%		5,625,813			53,995		3.88	%		5,218,198			49,832		3.86	%

Noninterest-earning assets:
Cash and due from banks		55,359								75,480								53,684								66,627
Premises and equipment		75,712								72,618								79,501								73,170
Less allowance		(78,884)								(61,892)								(78,899)								(86,418)
Other		456,578								456,051								435,028								397,273
Total assets	$	5,960,336							$	5,820,555							$	6,115,127							$	5,668,850

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	3,041,941			2,183		0.28	%	$	2,932,988			2,086		0.28	%	$	3,228,083			2,338		0.29	%	$	2,981,306			1,986		0.27	%
Time deposits		461,210			1,090		0.94	%		638,031			2,399		1.50	%		398,897			799		0.81	%		448,035			1,441		1.30	%
Short-term borrowings		6,858			1		0.10	%		26,996			11		0.17	%		1,951			—		0.05	%		7,141			1		0.07	%
FHLB advances		54,293			41		0.30	%		57,078			211		1.45	%		85,778			82		0.38	%		13,078			9		0.28	%
Subordinated notes		113,789			1,554		5.46	%		77,783			1,031		5.30	%		113,868			1,554		5.46	%		118,706			1,594		5.37	%
Junior subordinated debentures		38,084			569		5.84	%		37,936			571		5.89	%		38,171			556		5.83	%		38,007			559		5.88	%
Total interest-bearing liabilities		3,716,175			5,438		0.58	%		3,770,812			6,309		0.66	%		3,866,748			5,329		0.56	%		3,606,273			5,590		0.63	%

Noninterest-bearing demand deposits		1,276,725								1,155,862								1,276,374								1,199,548
Other noninterest-bearing liabilities		313,250								318,890								287,879								259,017
Total liabilities		5,306,150								5,245,564								5,431,001								5,064,838

Stockholders' equity		654,186								574,991								684,126								604,012
Total liabilities and stockholders' equity	$	5,960,336							$	5,820,555							$	6,115,127							$	5,668,850
Net interest income				$	48,937							$	46,523							$	48,666							$	44,242
Net interest spread							3.38	%							3.33	%							3.32	%							3.23	%
Net interest margin							3.36	%							3.36	%							3.30	%							3.26	%
Net interest margin (TEY)(Non-GAAP)							3.56	%							3.51	%							3.50	%							3.43	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.53	%							3.44	%							3.50	%							3.40	%
Ratio of average interest-earning assets to average interest-bearing liabilities		146.70	%							139.98	%							145.49	%							144.70	%

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

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

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

5439

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended ~~September 30, 2021~~March 31, 2022

Inc./(Dec.)

Components

from

of Change (1)


Prior Period (1)

Rate

Volume

2021 vs. 2020

(dollars in thousands)

INTEREST INCOME







Federal funds sold

$
—

$
(1)

$
1

Interest-bearing deposits at financial institutions

(53)

168

(221)

Investment securities (2)

810

320

490

Restricted investment securities

13

1

12

Gross loans/leases receivable (2) (3)

773

(12,517)

13,290

Total change in interest income

1,543

(12,029)

13,572

INTEREST EXPENSE







Interest-bearing deposits

97

(113)

210

Time deposits

(1,309)

(750)

(559)

Short-term borrowings

(10)

(4)

(6)

Federal Home Loan Bank advances

(170)

(160)

(10)

Subordinated notes

523

—

523

Junior subordinated debentures

(2)

(14)

12

Total change in interest expense

(871)

(1,041)

170

Total change in net interest income

$
2,414

$
(10,988)

$
13,402

~~(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.~~

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

For the Nine Months Ended September 30,

2021

2020

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

$
1,503

$
1

0.13
%

$
2,795

$
19

0.89
%
Interest-bearing deposits at financial institutions

101,225

110

0.15
%

327,902

587

0.24
%
Investment securities (1)

802,715

21,989

3.65
%

688,985

19,567

3.78
%
Restricted investment securities

19,540

718

4.85
%

20,767

795

5.03
%
Gross loans/leases receivable (1) (2) (3)

4,405,355

132,728

4.03
%

3,957,903

133,141

4.49
%
Total interest earning assets

5,330,338

155,546

3.90
%

4,998,352

154,109

4.12
%

Noninterest-earning assets:













Cash and due from banks

61,579

85,655

Premises and equipment, net

74,413

73,298

Less allowance for estimated losses on loans/leases

(81,941)

(46,978)

Other

405,364

413,760

Total assets

$
5,789,753

$
5,524,087

LIABILITIES AND STOCKHOLDERS' EQUITY













Interest-bearing liabilities:













Interest-bearing demand deposits

$
3,000,766

6,219

0.28
%

$
2,718,613

9,920

0.49
%
Time deposits

449,996

3,716

1.10
%

743,746

9,537

1.71
%
Short-term borrowings

7,560

4

0.08
%

23,804

81

0.45
%
Federal Home Loan Bank advances

29,875

66

0.29
%

87,920

1,007

1.50
%
Subordinated notes

115,927

4,718

5.43
%

71,582

3,019

5.63
%
Junior subordinated debentures

38,045

1,692

5.86
%

37,894

1,715

5.95
%
Total interest-bearing liabilities

3,642,169

16,415

0.60
%

3,683,559

25,279

0.91
%

Noninterest-bearing demand deposits

1,255,957

1,009,970

Other noninterest-bearing liabilities

264,044

271,639

Total liabilities

5,162,170

4,965,168

Stockholders' equity

627,583

558,919

Total liabilities and stockholders' equity

$
5,789,753

$
5,524,087

Net interest income

$
139,131

$
128,830

Net interest spread

3.30
%

3.21
%
Net interest margin

3.30
%

3.29
%
Net interest margin (TEY)(Non-GAAP)

3.49
%

3.44
%
Adjusted net interest margin (TEY)(Non-GAAP)

3.46
%

3.38
%
Ratio of average interest earning assets to average interest-bearing liabilities

146.35
%

135.69
%

~~(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.~~

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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



Analysis of Changes of Interest Income/Interest Expense
For the nine months ended September 30, 2021

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

	2021 vs. 2020						2022 vs. 2021
	(dollars in thousands)						(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	(18)	$	(12)	$	(6)	$	1	$	1	$	—
Interest-bearing deposits at other financial institutions		(477)		(167)		(310)
Interest-bearing deposits at financial institutions								(2)		69		(71)
Investment securities (2)		2,422		(1,065)		3,487		632		632		—
Restricted investment securities		(77)		(29)		(48)		62		10		52
Gross loans/leases receivable (2) (3)		(413)		(19,381)		18,968		3,470		(5,762)		9,232
Total change in interest income		1,437		(20,654)		22,091		4,163		(5,050)		9,213

INTEREST EXPENSE
Interest-bearing demand deposits		(3,701)		(5,186)		1,485
Interest-bearing deposits
Time deposits		(5,821)		(2,767)		(3,054)		352		165		187
Short-term borrowings		(77)		(42)		(35)		(642)		(498)		(144)
Federal Home Loan Bank advances		(941)		(518)		(423)		(1)		—		(1)
Other borrowings								73		5		68
Subordinated notes		1,699		—		1,699		(40)		—		(40)
Junior subordinated debentures		(23)		—		(23)		(3)		(15)		12
Total change in interest expense		(8,864)		(8,513)		(351)		(261)		(343)		82

Total change in net interest income	$	10,301	$	(12,141)	$	22,442	$	4,424	$	(4,707)	$	9,131

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

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

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

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

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

~~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~~RESULTS OF OPERATIONS

INTEREST INCOME

Interest income (tax equivalent) increased 8%, comparing the first quarter of 2022 to the same period of 2021. This was primarily due to an increase in the yield of average securities and volume of average loans/leases partially offset by a decline in yields on loans/leases. Average gross loans and leases increased 11% when comparing the quarter ended March 31, 2022 to March 31, 2021.

The Company ~~records all assets~~intends to continue to grow quality loans and ~~liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum,~~leases as well as its private placement tax-exempt securities portfolio 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~~maximize yield while minimizing credit and interest rate risk.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

~~As of November 30, 2020 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.~~

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.

~~There was no occurrence of a triggering event during the three and nine months ended September 30, 2021, therefore no impairment test of goodwill was performed as of September 30, 2021.~~

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

~~On January 1, 2021, the Company adopted ASU 2016-13, “~~~~Financial Instruments – Credit Losses (Topic326)~~,” which replaces the incurred loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures to be calculated using a current expected credit loss methodology.

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 Note 1 to the Consolidated Financial Statements for September 30, 2021.

The Company believes that COVID-19 pandemic losses have been incurred that are not yet known and this could have an adverse effect on the Company’s ACL in the future. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes individually analyzed loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the ACL.

Although management believes the level of the ACL as of September 30, 2021 was adequate to absorb losses inherent in the loan/lease portfolio and OBS exposures, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

~~RESULTS OF OPERATIONS~~

~~INTEREST INCOME~~

Interest income increased 2%, comparing the third quarter of 2021 to the same period of 2020, and was unchanged when comparing the first nine months of 2021 to the same period of 2020. This was primarily due to an increase in the volume of average securities and average loans/leases offset by a decline in yields on loans/leases. Average gross loans and leases increased 8%, while average investment securities increased 7%, when comparing the quarter ended September 30, 2021 to September 30, 2020. Average gross loans and leases increased 11%, while average investment securities increased 17%, when comparing the nine months ended September 30, 2021 to September 30, 2020.

~~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 (tax equivalent) for the ~~third~~first quarter of ~~2021~~2022 decreased ~~14%~~5% from the ~~third~~first quarter of ~~2020, and decreased 35% comparing the first nine months of 2021 to the same period of 2020.~~2021. The Company has grown organically at a significant pace over the past several ~~years. Core~~years and core deposit growth has funded ~~loan growth and has allowed the Company to prepay higher cost brokered deposits and FHLB advances.~~that growth. The cost of funds on the Company’s average interest-bearing liabilities declined

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

in conjunction with the declining rate environment. The Company’s cost of funds was ~~0.58%~~0.56% for the quarter ended ~~September 30, 2021,~~March 31, 2022, which was down from ~~0.66%~~0.63% for the quarter ended ~~September 30, 2020. The Company’s cost of funds was 0.60% for the nine months ended September 30, 2021, which was down from 0.91% for the nine months ended September 30, 2020.~~ March 31, 2021.

The Company's management intends to continue to ~~minimize its level~~shift the mix of funding from wholesale funds ~~with a focus on well-priced~~to 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.

PROVISION FOR CREDIT LOSSES

The ACL is established through provision expense to provide an estimated ACL. The following table shows the components of the provision for credit losses for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,		September 30,		September 30,		September 30,		March 31,		March 31,
	2021		2020		2021		2020		2022		2021

	(dollars in thousands)				(dollars in thousands)				(dollars in thousands)

Provision for credit losses - loans and leases ~~(1)~~	$	1,895	$	20,342	$	7,747	$	48,624	$	(3,849)	$	5,993
Provision for credit losses - off-balance sheet exposures ~~(2)~~		(1,895)		N/A		(1,025)		N/A		933		729
Provision for credit losses - held to maturity securities ~~(3)~~		—		N/A		(9)		N/A		—		(9)
Total provision for credit losses	$	—	$	20,342	$	6,713	$	48,624	$	(2,916)	$	6,713

~~(1)~~

~~2021 and years forward are evaluated using ASU 2016-13 and years prior to 2021 were calculated under an incurred loss model.~~

~~(2)~~

~~Prior to adoption of ASU 2016-13 on January 1, 2021, there were no requirements to record provision for off-balance sheet exposures.~~

~~(3)~~

~~Prior to the adoption of ASU 2016-13 on January 1, 2021, there was no requirement to record provision for credit losses for held to maturity securities.~~

The Company’s total provision for credit losses was ~~zero~~a negative $2.9 million for the ~~third~~first quarter of 2022, compared to $6.7 million for the first quarter of 2021, ~~compared~~primarily due to ~~$20.3 million for the third quarter of 2020. Provision for the first nine months of 2021 totaled $6.7 million, which was down from $48.6 million~~continued strong asset quality and a corresponding reduction in the ~~first nine months of 2020.~~qualitative factor related to the pandemic. The adoption of ASU 2016-13 now requires an allowance on ~~held to maturity~~HTM debt securities and OBS exposures, specifically unfunded commitments. For the ~~nine months ended September 30, 2021, the~~first quarter of 2022, there was no provision related to HTM debt securities. The provision related to HTM debt securities in the first quarter of 2021 was negative due to the decrease in the balance of those HTM debt securities. For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, the provision related to OBS was ~~negative~~$933 thousand, compared to $729 thousand for the three months ended March 31, 2021. The increase was due to the ~~decrease~~increase in the balance of those OBS exposures with increase of line of credit usage. In the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, loans/leases saw a decrease in provision from the same periods in the prior year. The decrease in provision on loans and leases was substantially driven by continued strong asset quality and decreased qualitative allocations in response to improving economic conditions related to the effects of COVID-19.

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

The Company had an ACL on loans/leases of ~~1.75%~~1.55% of total gross loans/leases at ~~September 30, 2021,~~March 31, 2022, compared to ~~1.79%~~1.68% of total gross loans/leases at ~~June 30,~~December 31, 2021 and ~~1.87%~~1.88% at ~~September 30, 2020. Management evaluates~~March 31, 2021.

Additional discussion of the Company's allowance ~~needed on the acquired loans factoring~~can be found in the ~~remaining discount, which was $1.7 million and $4.0 million at September 30, 2021 and September 30, 2020, respectively.~~

“Financial Condition” section of this Report.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~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 September 30,

2021

% of Total Gross

Amount

Loans and Leases

(dollars in thousands)

Hotels
$
78,478

1.71
%
Restaurants (full service and limited service only)

24,465

0.53

Arts, Entertainment and Recreation

25,551

0.55

$
128,494

2.79
%

~~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 ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

Three Months Ended

September 30,

September 30,


2021

2020

$ Change

% Change

(dollars in thousands)

Trust department fees

$
2,714

$
2,280

$
434

19.0
%

Investment advisory and management fees

1,054

1,266

(212)

(16.7)

Deposit service fees

1,588

1,403

185

13.2

Gains on sales of residential real estate loans, net

954

1,370

(416)

(30.4)

Swap fee income/capital markets revenue

24,885

26,688

(1,803)

(6.8)

Securities gains (losses), net

—

1,802

(1,802)

(100.0)

Earnings on bank-owned life insurance

446

502

(56)

(11.2)

Debit card fees

1,085

946

139

14.7

Correspondent banking fees

265

220

45

20.5

Other

1,661

1,482

179

12.1

Total noninterest income

$
34,652

$
37,959

$
(3,307)

(8.7)
%

Nine Months Ended

September 30,

September 30,


2021

2020

$ Change

% Change

(dollars in thousands)

Trust department fees

$
8,363

$
6,819

$
1,544

22.6
%

Investment advisory and management fees

3,033

4,392

(1,359)

(30.9)

Deposit service fees

4,488

4,166

322

7.7

Gains on sales of residential real estate loans, net

3,475

3,218

257

8.0

Swap fee income/capital markets revenue

48,010

53,419

(5,409)

(10.1)

Securities gains (losses), net

(88)

1,867

(1,955)

(104.7)

Earnings on bank-owned life insurance

1,368

1,443

(75)

(5.2)

Debit card fees

3,144

2,479

665

26.8

Correspondent banking fees

848

633

215

34.0

Other

4,796

3,345

1,451

43.4

Total noninterest income

$
77,437

$
81,781

$
(4,344)

(5.3)
%


	Three Months Ended
	March 31,		March 31,
	2022		2021		$ Change		% Change

	(dollars in thousands)

Trust department fees	$	2,963	$	2,801	$	162	5.8	%
Investment advisory and management fees		1,036		940		96	10.2
Deposit service fees		1,555		1,408		147	10.4
Gains on sales of residential real estate loans, net		493		1,337		(844)	(63.1)
Gains on sales of government guaranteed portions of loans, net		19		—		19	100.0
Swap fee income/capital markets revenue		6,422		13,557		(7,135)	(52.6)
Earnings on bank-owned life insurance		346		471		(125)	(26.5)
Debit card fees		1,007		975		32	3.3
Correspondent banking fees		277		314		(37)	(11.8)
Other		1,515		1,686		(171)	(10.1)
Total noninterest income	$	15,633	$	23,489	$	(7,856)	(33.4)	%

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~third~~ first quarter of ~~2021~~2022 due to market volatility but increased by ~~$687.5~~$192.1 million ~~in the first nine months of~~since March 31, 2021. 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. Trust department fees increased ~~19%~~6%, comparing the ~~third~~first quarter of ~~2021~~2022 to the same period of the prior ~~year and they increased 23% when comparing the first nine months of 2021 to the same period of 2020.~~year. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

Investment advisory and management fees ~~decreased 17%~~increased 10%, comparing the ~~third~~first quarter of ~~2021~~2022 to the same period of the prior ~~year and decreased 31% when comparing the first nine months of 2021 to the same period of 2020.~~year. 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 sale of the Bates Companies in August 2020 negatively impacted the results compared to 2020. Excluding the impact of the Bates Companies sale, investment advisory and management fees increased 80% when comparing the first nine months of 2021 to the same period of 2020.

Deposit service fees increased ~~13% comparing the third quarter of 2021 to the same period of the prior year, and increased 8% when~~10% comparing the first ~~nine months~~quarter of ~~2021~~2022 to the same period of the prior year. This increase was primarily due to higher transactional volume due to improving 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, decreased ~~30% when comparing the third quarter of 2021 to the same period of the prior year, but increased 8%~~63% when comparing the first ~~nine months~~quarter of ~~2021~~2022 to the same period of the prior year. The ~~increase~~decrease was primarily due to ~~increased~~decreased residential real estate purchase and the refinancing of residential real estate loans with ~~lower~~higher interest rates in ~~the first nine months of 2021.~~2022.

~~As a result of the low~~The Company has grown its interest rate ~~environment and its continued focus across all subsidiary banks,~~swap program significantly over the ~~Company was able to execute numerous~~past several years. The Company’s interest rate swap program consists of back-to-back interest rate swaps ~~on select~~with two types of commercial borrowers: (1) traditional commercial loans ~~including tax credit project~~of a certain minimum size and sophistication, and (2) LIHTC permanent loans. Most of the growth has been in the latter category as the Company has grown relationships with strong LIHTC developers with many years of experience. The LIHTC industry is strong and growing with an increased need for affordable housing. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent upon the pricing. 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. CapitalSwap fee income/capital markets revenue totaled ~~$24.9 million for the third quarter of 2021, compared to $26.7 million for the third quarter of 2020. Capital markets revenue totaled $48.0~~$6.4 million for the first ~~nine months~~quarter of ~~2021,~~2022, compared to ~~$53.4~~$13.6 million for the first ~~nine~~quarter of 2021. Swap fee income relative to the

Table of Contents

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

increase in notional amount of the non-hedging interest rate swap contracts was 14.1% for the three months ended March 31, 2022 and 10.1% for the same period of ~~2020.~~the prior year. The decrease was primarily due to project delays caused by ongoing supply chain disruptions and inflationary pressures. In the traditional commercial portfolio, the pricing is more competitive and the duration is shorter as compared to the LIHTC permanent loans. The mix of loans with interest rate swaps continued to be heavily weighted towards LIHTC permanent loans. Future levels of ~~capital markets revenue~~swap fee income are ~~somewhat~~ dependent upon ~~prevailing~~the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate depending on the interest ~~rates.~~rate environment.

There were no securities gains or losses for the three months ended ~~September 30,~~March 31, 2022 or March 31, 2021. Securities losses totaled $88 thousand for the nine months ended September 30, 2021. By comparison, securities gains totaled $1.8 million and $1.9 million for the three and nine months ended September 30, 2020, respectively.

Earnings on BOLI decreased ~~11% comparing the third quarter of 2021 to the third quarter of 2020 and decreased 5%~~27% comparing the first ~~nine months~~quarter of ~~2021~~2022 to the ~~same period~~first quarter of ~~2020.~~2021. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity markets. 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 ~~15%~~3% comparing the ~~third~~first quarter of ~~2021~~2022 to the ~~third~~first quarter of the prior ~~year, and increased 27% comparing the first nine~~

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~months of 2021 to the same period of 2020.~~year. 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 deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees ~~increased 21%~~decreased 12% comparing the ~~third~~first quarter of ~~2021~~2022 to the ~~third~~first quarter of the prior ~~year, and increased 34% comparing the first nine months of 2021 to the same period of 2020.~~year. 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. ~~Correspondent bank deposit volumes are higher on average in 2021 than in 2020 which is driving the higher fee income.~~ 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 ~~186~~188 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income ~~increased 12%~~decreased 10% comparing the ~~third~~first quarter of ~~2021~~2022 to the ~~third~~first quarter of the prior ~~year, and increased 43% comparing the first nine months of 2021 to the same period of 2020.~~year. The ~~increase in the third quarter and first nine months of 2021~~decrease was primarily due to lower equity investment income and lower gains on disposal of leased ~~assets.~~

assets in the first quarter of 2022 as compared to the first quarter of 2021.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~NONINTEREST EXPENSE~~

~~The following tables set forth the various categories of noninterest expense for the three and nine months ended September 30, 2021 and 2020.~~

Three Months Ended

September 30,

September 30,


2021

2020

$ Change

% Change

(dollars in thousands)

Salaries and employee benefits

$
28,207

$
25,999

$
2,208

8.5
%

Occupancy and equipment expense

4,122

3,807

315

8.3

Professional and data processing fees

3,568

3,758

(190)

(5.1)

Disposition costs

—

192

(192)

(100.0)

FDIC insurance, other insurance and regulatory fees

1,108

1,301

(193)

(14.8)

Loan/lease expense

308

403

(95)

(23.6)

Net (income from) and gains/losses on operations of other real estate

(1,346)

16

(1,362)

(8,512.5)

Advertising and marketing

1,095

750

345

46.0

Bank service charges

525

488

37

7.6

Loss on liability extinguishment

—

1,874

(1,874)

(100.0)

Correspondent banking expense

201

205

(4)

(2.0)

Intangibles amortization

508

531

(23)

(4.3)

Loss on sale of subsidiary

—

305

(305)

(100.0)

Other

3,091

1,209

1,882

155.7

Total noninterest expense

$
41,387

$
40,838

$
549

1.3
%

Nine Months Ended

September 30,

September 30,


2021

2020

$ Change

% Change

(dollars in thousands)

Salaries and employee benefits

$
76,098

$
65,822

$
10,276

15.6
%

Occupancy and equipment expense

12,195

11,587

608

5.2

Professional and data processing fees

10,713

10,773

(60)

(0.6)

Post-acquisition compensation, transition and integration costs

—

189

(189)

(100.0)

Disposition costs

8

626

(618)

(98.7)

FDIC insurance, other insurance and regulatory fees

3,159

2,892

267

9.2

Loan/lease expense

1,065

970

95

9.8

Net (income from) and gains/losses on operations of other real estate

(1,420)

(303)

(1,117)

368.6

Advertising and marketing

2,575

1,984

591

29.8

Bank service charges

1,620

1,493

127

8.5

Losses on liability extinguishment, net

—

2,450

(2,450)

(100.0)

Correspondent banking expense

599

633

(34)

(5.4)

Intangibles amortization

1,524

1,628

(104)

(6.4)

Goodwill Impairment

—

500

(500)

(100.0)

Loss on sale of subsidiary

—

305

(305)

(100.0)

Other

6,154

3,842

2,312

60.2

Total noninterest expense

$
114,290

$
105,391

$
8,899

8.4
%

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges relating to acquisitions, dispositions and goodwill impairment impacted expense in 2021 and 2020.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the third quarter of 2020 to the third quarter of 2021 by 9%, and increased from the first nine months of 2020 to the first nine months of 2021 by 16%. The increased expense was primarily related to increased incentive compensation driven by strong financial results.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three months ended March 31, 2022 and 2021.


	Three Months Ended
	March 31,		March 31,
	2022		2021		$ Change		% Change

	(dollars in thousands)

Salaries and employee benefits	$	23,627	$	24,847	$	(1,220)	(4.9)	%
Occupancy and equipment expense		3,937		4,108		(171)	(4.2)
Professional and data processing fees		3,671		3,443		228	6.6
Acquisition costs		1,851		—		1,851	100.0
Disposition costs		—		8		(8)	(100.0)
FDIC insurance, other insurance and regulatory fees		1,310		1,065		245	23.0
Loan/lease expense		267		300		(33)	(11.0)
Net cost of (income from) and gains/losses on operations of other real estate		(1)		39		(40)	(102.6)
Advertising and marketing		761		627		134	21.4
Bank service charges		541		523		18	3.4
Correspondent banking expense		199		200		(1)	(0.5)
Intangibles amortization		493		508		(15)	(3.0)
Other		1,669		1,560		109	7.0
Total noninterest expense	$	38,325	$	37,228	$	1,097	2.9	%

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

Salaries and employee benefits, which is the largest component of noninterest expense, decreased from the first quarter of 2021 to the first quarter of 2022 by 5%. The decreased expense was primarily related to lower performance compensation from swap fee income/capital markets revenue.

Occupancy and equipment expense ~~increased 8%~~decreased 4% comparing the ~~third~~first quarter of ~~2021~~2022 to the same period of the prior ~~year, and increased 5% comparing the first nine months of 2021 to the same period of 2020.~~year. The ~~increase~~decrease was due to ~~higher investments for information technology and~~lower repair and maintenance costs.

Professional and data processing fees ~~decreased 5%~~increased 7% comparing both the ~~third~~first quarter of ~~2021~~2022 to the same period in ~~2020, and decreased 1% comparing the first nine months of 2021 to the same period of 2020.~~2021. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis.

Acquisition costs totaled $1.9 million in the first quarter of 2022. There were no ~~post-acquisition~~acquisition costs incurred in the ~~three and nine months~~first quarter of 2021. ~~Post-acquisition~~The acquisition costs, ~~totaled $189 thousand for~~which were primarily legal, accounting and other professional fees, relate to the ~~first nine months~~acquisition of ~~2020. These costs were comprised primarily~~GFED as discussed in Note 10 of ~~personnel costs, IT integration and data conversion costs related to previous mergers/acquisitions.~~the consolidated financial statements.

There were no disposition costs for the ~~third~~first quarter of ~~2021~~2022 and there were $8 thousand for the first ~~nine months~~quarter of 2021. ~~Disposition costs totaled $192 thousand for the third quarter of 2020 and $626 thousand for the first nine months of 2020.~~ The costs were comprised primarily of legal, accounting ~~personnel costs~~ and ~~IT deconversion~~personnel costs related to the sale of the Bates Companies in the third quarter of ~~2020 and the sale of RB&T in the fourth quarter of 2019.~~2020.

FDIC insurance, other insurance and regulatory fee expense ~~decreased 15%~~increased 23%, comparing the ~~third~~first quarter of ~~2021~~2022 to the ~~third~~first quarter of ~~2020, and increased 9% comparing the first nine months of 2021 to the same period of 2020.~~2021. The increase in expense was due to an increase in the asset size of the Company in ~~2020 and~~ 2021, ~~as well as FDIC insurance assessment credits applied in 2020.~~which increased the Company’s rates.

Table of Contents

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Loan/lease expense decreased ~~24%~~11% when comparing the ~~third~~first quarter of ~~2021~~2022 to the same quarter of ~~2020, and increased 10% comparing the first nine months of 2021 to the same period of the prior year.~~2021. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from and gains/losses on operations of other real estate totaled ~~$1.3 million~~$1 thousand for the ~~third~~first quarter of ~~2021,~~2022, compared to net ~~expense~~cost from and gains/losses on operations of other real estate of ~~$16 thousand for the third quarter of 2020. Net income from and gains/losses on operations of other real estate totaled $1.4 million for the first nine months of 2021, compared to $303~~$39 thousand for the first ~~nine months of 2020. The increase in the third~~ quarter of ~~2021 was due primarily to the sale of one commercial other real estate property.~~2021.

Advertising and marketing expense increased ~~46% comparing the third quarter of 2021 to the third quarter of 2020, and increased 30%~~21% comparing the first ~~nine months~~quarter of ~~2021~~2022 to the ~~same period~~first quarter of ~~2020.~~2021. The increase in expense was primarily due to the return to more normal operations during the second half of 2021 and first quarter of 2022 after improvements in the general environment due to COVID-19 as compared to ~~2020.~~the first quarter of 2021.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 8%3% when comparing the ~~third~~first quarter of ~~2021~~2022 to the same quarter of ~~2020, and increased 9% when comparing the first nine months of 2021 to the same period of 2020.~~2021. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses isare expected to also increase.

There were no losses on liability extinguishment during the three and nine months of 2021. Losses on liability extinguishment were $1.9 million for the third quarter of 2020 and $2.5 million for the first nine months of 2020. These losses relate to the prepayment of certain FHLB advances.

Correspondent banking expense decreased ~~2% when comparing the third quarter of 2021 to the third quarter of 2020 and decreased 5%~~1% when comparing the first ~~nine months~~quarter of ~~2021~~2022 to the first quarter of 2021. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

Intangibles amortization expense decreased 3% when comparing the first quarter of 2022 to the same ~~period~~quarter of 2021. These expenses naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.

Other noninterest expense increased 7% when comparing the first quarter of 2022 to the first quarter of 2021 primarily due to increased travel. Also included in other noninterest expense are other items such as subscriptions, sales and use tax and expenses related to wealth management.

INCOME TAXES

In the first quarter of 2022, the Company incurred income tax expense of $2.3 million. Following is a reconciliation of the ~~prior year. These are direct costs~~expected income tax expense to the income tax expense included in the consolidated statements of income for the three months ended March 31, 2022 and 2021.


	For the Three Months Ended March 31,
	2022				2021
			% of				% of
			Pretax				Pretax
	Amount		Income		Amount		Income

	(dollars in thousands)

Computed "expected" tax expense	$	5,451	21.0	%	$	4,520	21.0	%
Tax exempt income, net		(2,222)	(8.6)			(1,719)	(8.0)
Bank-owned life insurance		(73)	(0.3)			(99)	(0.5)
State income taxes, net of federal benefit, current year		1,291	5.0			1,024	4.8
Provision adjustment from accounting method change		(1,181)	(4.5)			—	—
Tax credits		(242)	(0.9)			(57)	(0.3)
Income from tax credit equity investments		(301)	(1.2)			—	—
Acquisition costs		130	0.5			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(434)	(1.7)			(164)	(0.8)
Other		(86)	(0.3)			36	0.2
Federal and state income tax expense	$	2,333	9.0	%	$	3,541	16.4	%

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~~incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.~~

Intangibles amortization expense decreased 4% when comparing the third quarter of 2021 to the same quarter of 2020 and decreased 6% when comparing the first nine months of 2021 to the same period of the prior year. These expenses naturally decrease unless there is an addition to intangible assets.

There was no goodwill impairment expense in the three and nine months ended September 30, 2021. Goodwill impairment expense totaled $0 and $500 thousand for the three and nine months ended September 30, 2020 related to the sale of the Bates Companies.

There was no loss on sale of subsidiary in the first three and nine months of 2021. 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.

Other noninterest expense increased 156% when comparing the third quarter of 2021 to the third quarter of 2020 and increased 60% when comparing the first nine months of 2021 to the same period of the prior year. The increase was due primarily to the write-off of certain fixed assets which resulted in a $1.4 million loss on disposal of fixed assets.

~~INCOME TAXES~~

In the third quarter of 2021, the Company incurred income tax expense of $7.9 million. During the first nine months of the year, the Company incurred income tax expense of $16.3 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and nine months ended September 30, 2021 and 2020.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2021

2020

2021

2020

% of

% of

% of

% of

Pretax

Pretax

Pretax

Pretax


Amount

Income

Amount

Income


Amount

Income

Amount

Income

(dollars in thousands)

Computed "expected" tax expense

$
8,293

21.0
%
$
4,486

21.0
%

$
18,512

21.0
%
$
10,712

21.0
%

Tax exempt income, net

(2,032)

(5.1)

(1,350)

(6.3)

(5,553)

(6.3)

(3,822)

(7.5)

Bank-owned life insurance

(93)

(0.2)

(101)

(0.5)

(287)

(0.3)

(271)

(0.5)

State income taxes, net of federal benefit, current year

1,799

4.6

1,003

4.7

4,070

4.6

2,456

4.8

Tax credits

(57)

(0.1)

(116)

(0.5)

(171)

(0.2)

(348)

(0.7)

Excess tax benefit on stock options exercised and restricted stock awards vested

(107)

(0.3)

14

0.1

(311)

(0.4)

(248)

(0.5)

Other

126

0.2

80

0.4

(2)

—

219

0.5

Federal and state income tax expense

$
7,929

20.1
%
$
4,016

18.9
%

$
16,258

18.4
%
$
8,698

17.1
%

The effective tax rate for the quarter ended ~~September 30, 2021~~March 31, 2022 was ~~20.1%~~9.0%, which was ~~an increase~~a decrease from the effective tax rate of ~~18.8%~~16.4% for the quarter ended ~~September 30, 2020.~~March 31, 2021. The ~~effective tax rate for the nine months ended September 30, 2021~~decrease was ~~18.4%, which was an increase from the effective tax rate of 17.1% for the nine months ended September 30, 2020. The increase for both periods was~~primarily due to ~~increased levels~~a $1.2 million provision adjustment from an accounting method change and excess tax benefit on stock compensation in the first quarter of ~~taxable income as compared to tax exempt income.~~2022.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

FINANCIAL CONDITION

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


	As of																As of
	September 30, 2021				June 30, 2021				December 31, 2020				September 30, 2020				March 31, 2022				December 31, 2021				March 31, 2021
	(dollars in thousands)																(dollars in thousands)

	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	128,136	2	%	$	144,378	2	%	$	157,005	3	%	$	371,600	6	%	$	116,930	2	%	$	125,152	2	%	$	133,870	2	%
Securities		828,719	14	%		810,445	14	%		838,131	15	%		782,088	13	%		823,311	13	%		810,215	13	%		799,825	14	%
Net loans/leases		4,519,060	75	%		4,338,811	76	%		4,166,753	73	%		4,168,395	72	%		4,753,082	77	%		4,601,411	75	%		4,279,220	77	%
Derivatives		198,393	3	%		193,395	3	%		222,757	4	%		236,381	4	%		107,326	2	%		222,220	4	%		122,668	2	%
Other assets		340,200	6	%		318,136	5	%		298,151	5	%		306,096	5	%		375,170	6	%		337,134	6	%		309,564	5	%
Total assets	$	6,014,508	100	%	$	5,805,165	100	%	$	5,682,797	100	%	$	5,864,560	100	%	$	6,175,819	100	%	$	6,096,132	100	%	$	5,645,147	100	%

Total deposits	$	4,871,828	81	%	$	4,688,935	81	%	$	4,599,137	82	%	$	4,672,268	79	%	$	4,839,689	78	%	$	4,922,772	80	%	$	4,631,782	82	%
Total borrowings		183,514	3	%		198,908	3	%		177,114	3	%		226,962	4	%		443,270	7	%		170,805	3	%		188,601	3	%
Derivatives		201,450	3	%		196,092	3	%		229,270	4	%		244,510	4	%		116,193	2	%		225,135	4	%		125,863	2	%
Other liabilities		107,902	2	%		90,754	2	%		83,483	1	%		148,207	3	%		108,743	2	%		100,410	2	%		90,182	2	%
Total stockholders' equity		649,814	11	%		630,476	11	%		593,793	10	%		572,613	10	%		667,924	11	%		677,010	11	%		608,719	11	%
Total liabilities and stockholders' equity	$	6,014,508	100	%	$	5,805,165	100	%	$	5,682,797	100	%	$	5,864,560	100	%	$	6,175,819	100	%	$	6,096,132	100	%	$	5,645,147	100	%

During the ~~third~~first quarter of ~~2021,~~2022, the Company's total assets increased ~~$209.3~~$79.7 million, or 4%1% from ~~June 30,~~December 31, 2021, to a total of ~~$6.0~~$6.2 billion. The Company’s net loans/leases increased ~~$180.2~~$151.7 million in the ~~third~~first quarter of ~~2021.~~2022. Total deposits ~~increased $182.9~~decreased $83.1 million in the ~~third~~first quarter of ~~2021~~2022 primarily due to ~~an increase~~a decrease in interest-bearing demand deposits and time deposits. Borrowings ~~decreased $15.4~~increased $272.5 million in the ~~third~~first quarter of ~~2021~~2022 which consisted primarily of ~~a decrease~~an increase in FHLB overnight borrowings of ~~$10.0~~$275.0 million.

INVESTMENT SECURITIES

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

6646

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	As of																				As of
	September 30, 2021					June 30, 2021					December 31, 2020					September 30, 2020					March 31, 2022					December 31, 2021					March 31, 2021
	Amount			%		Amount			%		Amount			%		Amount			%		Amount			%		Amount			%		Amount			%

	(dollars in thousands)																				(dollars in thousands)
															��
U.S. treasuries and govt. sponsored agency securities	$	23,689		3	%	$	14,670		2	%	$	15,336		2	%	$	18,437		2	%	$	21,380		3	%	$	23,328		3	%	$	14,581		2	%
Municipal securities		649,312		78	%		641,430		79	%		627,523		75	%		569,075		73	%		667,048		81	%		639,601		79	%		614,476		76	%
Residential mortgage-backed and related securities		100,744		12	%		106,138		13	%		132,842		16	%		134,147		17	%		86,380		10	%		94,323		12	%		118,052		15	%
Asset-backed securities		30,607		4	%		31,779		4	%		40,683		4	%		40,665		5	%		23,232		3	%		27,124		3	%		39,815		5	%
Other securities		24,367		3	%		16,428		2	%		21,747		3	%		19,764		3	%		25,271		3	%		25,839		3	%		12,901		2	%
	$	828,719		100	%	$	810,445		100	%	$	838,131		100	%	$	782,088		100	%	$	823,311		100	%	$	810,215		100	%	$	799,825		100	%

Securities as a % of Total Assets		13.78	%				13.96	%				14.75	%				13.34	%
Net Unrealized Gains as a % of Amortized Cost		6.67	%				7.63	%				6.90	%				4.62	%
Securities as a % of total assets																						13.33	%				13.29	%				14.17	%
Net unrealized gains (losses) as a % of Amortized Cost																						(1.63)	%				7.17	%				5.59	%
Duration (in years)		8.2					8.1					7.0					6.6					7.9					8.2					7.6
Yield on investment securities (tax equivalent)		3.82	%				3.66	%				3.74	%				3.66	%				3.83	%				3.66	%				3.48	%

At January 1, 2021, the Company adopted ASU 2016-13, which requires an allowance for credit losses related to HTM securities. Additionally, ASU 2016-13 replaced the legacy GAAP OTTI model with a credit loss model. The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies”Due to the ~~consolidated financial statement included~~sharp increase in ~~this Form 10-Q, for a discussion~~intermediate and long-term interest rates during the first quarter ended March 31, 2022, the valuation of the ~~impact~~Company’s AFS portfolio declined significantly. As a result, the Company’s net unrealized gain as a percentage of ~~the adoption~~amortized cost changed from 7.17% as of ~~ASU 2016-13.~~December 31, 2021 to a net unrealized loss as a percentage of amortized cost of -1.63% as of March 31, 2022.

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

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 ~~23%~~14.6% on an annualized basis during the ~~third~~first quarter of ~~2021.~~2022. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables. ~~Adoption of ASU 2016-13 resulted in a change in loans and lease segments and those segments for years prior to 2021 are shown in a separate table.~~

As of

September 30, 2021

June 30, 2021


Amount

%


Amount

%


(dollars in thousands)

C&I - revolving

$
175,155

4
%

$
182,882

4
%

C&I - other *

1,465,580

32
%

1,505,384

34
%

CRE - owner occupied

434,014

9
%

427,734

10
%

CRE - non-owner occupied

644,850

14
%

618,879

14
%

Construction and land development

852,418

19
%

708,289

16
%

Multi-family

529,727

11
%

466,804

10
%

Direct financing leases

50,237

1
%

56,153

1
%

1-4 family real estate

376,067

8
%

382,142

9
%

Consumer

71,682

2
%

69,438

2
%

Total loans/leases

$
4,599,730

100
%

$
4,417,705

100
%

Less allowance

(80,670)

(78,894)

Net loans/leases

$
4,519,060

$
4,338,811

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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


									As of
	December 31, 2020				September 30, 2020				March 31, 2022				December 31, 2021				March 31, 2021
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%

									(dollars in thousands)

C&I loans*	$	1,726,723	41	%	$	1,823,049	43	%
CRE loans		2,107,629	50	%		1,999,715	47	%
C&I - revolving									$	263,441	5	%	$	248,483	5	%	$	168,842	4	%
C&I - other *										1,374,221	28	%		1,346,602	29			1,616,144	37
CRE - owner occupied										439,257	9	%		421,701	9			461,272	11
CRE - non-owner occupied										679,898	14	%		646,500	14			610,582	14
Construction and land development										863,116	18	%		918,571	20			607,798	14
Multi-family										711,682	15	%		600,412	12			396,272	9
Direct financing leases		66,016	1	%		73,011	2	%		43,330	1	%		45,191	1			60,134	1
Residential real estate loans		252,121	6	%		245,032	6	%
Installment and other consumer loans		91,302	2	%		102,471	2	%
1-4 family real estate										379,613	8	%		377,361	8			368,927	8
Consumer										73,310	2	%		75,311	2			71,080	2
Total loans/leases	$	4,243,791	100	%	$	4,243,278	100	%	$	4,827,868	100	%	$	4,680,132	100	%	$	4,361,051	100	%
Plus deferred loan/lease origination costs, net of fees		7,338				4,699
Less allowance		(84,376)				(79,582)				(74,786)				(78,721)				(81,831)
Net loans/leases	$	4,166,753			$	4,168,395			$	4,753,082			$	4,601,411			$	4,279,220

*Includes PPP loans totaling ~~$83.6~~$6.3 million, ~~$147.5 million, $273.1~~$28.2 million and ~~$357.5~~$243.9 million as of ~~September 30, 2021, June 30, 2021,~~March 31, 2022, December 31, ~~2020~~2021 and ~~September 30, 2020,~~March 31, 2021, 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 because owner-occupied loans are generally considered to have less risk. As of ~~September 30, 2021~~March 31, 2022 and ~~June 30,~~December 31, 2021, approximately ~~17%~~22% and 19% of the CRE loan portfolio was ~~owner-occupied.~~owner-occupied, respectively.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Following is a listing of significant industries within the Company's CRE loan portfolio. These include loans in the following portfolio segments as of ~~September 30, 2021:~~March 31, 2022: CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate.

As of September 30,

As of June 30,

As of December 31,

As of September 30,

2021

2021

2020

2020


Amount

%


Amount

%


Amount

%


Amount

%

(dollars in thousands)

Lessors of Residential Buildings

$
1,194,234

46
%

$
1,002,902

43
%

$
786,066

37
%

$
661,562

33
%

Lessors of Nonresidential Buildings

569,477

22
%

557,786

24
%

567,759

27
%

578,837

29
%

Hotels

75,212

3
%

75,850

3
%

72,718

4
%

71,435

4
%

New Housing For-Sale Builders

56,936

2
%

56,143

2
%

45,619

2
%

47,733

2
%

Lessors of Other Real Estate Property

50,576

2
%

41,707

2
%

39,344

2
%

46,877

2
%

Other Activities Related to Real Estate

41,185

2
%

39,057

2
%

41,197

2
%

41,883

2
%

New Single-Family Housing Construction

40,426

2
%

42,919

2
%

29,559

1
%

37,797

2
%

Nonresidential Property Managers

39,195

2
%

39,502

2
%

46,764

2
%

44,293

2
%

Other *

491,057

19
%

472,090

19
%

478,603

23
%

469,298

24
%

Total CRE Loans

$
2,558,298

100
%

$
2,327,956

100
%

$
2,107,629

100
%

$
1,999,715

100
%


	As of March 31,				As of December 31,				As of March 31,
	2022				2021				2021
	Amount		%		Amount		%		Amount		%

	(dollars in thousands)

Lessors of Residential Buildings	$	1,383,986	49	%	$	1,316,851	49	%	$	845,547	39	%
Lessors of Nonresidential Buildings		578,399	20	%		557,859	21	%		573,026	26	%
Hotels		71,448	3	%		73,639	3	%		67,072	3	%
New Housing For-Sale Builders		71,285	3	%		61,028	2	%		46,867	2	%
Lessors of Other Real Estate Property		63,759	2	%		60,605	2	%		39,580	2	%
Other Activities Related to Real Estate		42,035	2	%		42,507	2	%		43,411	2	%
Other *		578,094	21	%		568,784	21	%		566,699	26	%
Total CRE Loans	$	2,789,006	100	%	$	2,681,273	100	%	$	2,182,202	100	%

* “Other” consists of all other industries. None of these had concentrations greater than ~~$36.4~~$39.1 million, or approximately 1.4% of total CRE loans in the most recent period presented.

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

●

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

●

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

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

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


	As of September 30,				As of June 30,				As of December 31,				As of September 30,				As of March 31,				As of December 31,				As of March 31,
	2021				2021				2020				2020				2022				2021				2021
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%

	(dollars in thousands)																(dollars in thousands)

Trucks, Vans and Vocational Vehicles	$	68,387	26	%	$	65,063	25	%	$	61,044	26	%	$	59,906	26	%	$	70,241	25	%	$	69,392	26	%	$	63,643	25	%
Manufacturing - General		18,274	7	%		18,474	7	%		18,599	8	%		18,914	8	%		17,350	6	%		17,320	6	%		18,196	7	%
Trailers																		15,702	6	%		12,832	5	%		10,109	4	%
Marine - Travelifts																		15,513	5	%		14,498	5	%		12,188	5	%
Food Processing Equipment		14,717	6	%		14,569	6	%		16,110	7	%		16,219	7	%		14,846	5	%		14,907	6	%		14,873	6	%
Marine - Travelifts		14,629	6	%		13,279	5	%		12,682	5	%		12,266	5	%
Freightliners																		14,224	5	%		10,386	4	%		1,231	1	%
Construction - General		12,482	5	%		12,918	5	%		14,052	6	%		14,198	6	%		13,851	5	%		13,560	5	%		13,128	5	%
Tractor																		12,858	4	%		10,508	4	%		6,739	3	%
Computer Hardware		11,781	4	%		12,745	5	%		10,790	4	%		10,930	5	%		10,792	4	%		11,223	4	%		11,942	5	%
Trailers		11,308	4	%		10,715	4	%		9,008	4	%		9,071	4	%
Tractor		9,188	3	%		8,478	3	%		3,679	2	%		—	—	%
Other *		102,196	39	%		102,279	40	%		91,558	38	%		93,194	40	%		100,493	35	%		95,648	35	%		97,429	39	%
Total m2 loans and leases	$	262,962	100	%	$	258,520	100	%	$	237,522	100	%	$	234,698	101	%	$	285,870	100	%	$	270,274	100	%	$	249,478	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.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

~~On January 1, 2021, the Company adopted ASU 2016-13, "~~~~Financial Instruments - Credit Losses (Topic 326),"~~ ~~which replaces the incurred loss methodology with the CECL methodology. Additionally, CECL required an ACL for OBS exposures to be calculated using a current expected credit loss methodology.~~

The adequacy of the ACL was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate ACL was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, 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.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

Changes in the ACL for loans/leases for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ are presented as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		March 31, 2022		March 31, 2021

	(dollars in thousands)								(dollars in thousands)

Balance, beginning	$	78,894	$	60,827	$	84,376	$	36,001	$	78,721	$	84,376
Impact of adopting ASU 2016-13		—		—		(8,102)		—		—		(8,102)
Provision		1,895		20,342		7,747		48,624		(3,849)		5,993
Charge-offs		(287)		(1,819)		(4,674)		(5,604)		(456)		(713)
Recoveries		168		232		1,323		561		370		277
Balance, ending	$	80,670	$	79,582	$	80,670	$	79,582	$	74,786	$	81,831

Changes in the ACL for OBS exposures for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ are presented as follows:

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

(dollars in thousands)

Balance, beginning (1)
$
9,987

$
—

$
—

$
—
Impact of adopting ASU 2016-13

—

—

9,117

—
Provisions credited to expense

(1,895)

—

(1,025)

—
Balance, ending
$
8,092

$
—

$
8,092

$
—

~~(1) Prior to the adoption of ASU 2016-13, the Company did not calculate an ACL for OBS exposures, and therefore prior periods have not been shown in this table.~~

The ACL for OBS exposures totaled $9.1 million after the adoption of CECL on January 1, 2021. Prior to January 1, 2021, the allowance for OBS exposures was not required. The Company recorded negative $1.9 million and negative $1.0 million of provision for credit losses related to OBS exposures, specifically unfunded commitments, in the third quarter of 2021 and first nine months of 2021, respectively. At September 30, 2021, the allowance for OBS exposures was $8.1 million.


	Three Months Ended
	March 31, 2022		March 31, 2021

	(dollars in thousands)

Balance, beginning	$	6,886	$	—
Impact of adopting ASU 2016-13		—		9,117
Provisions credited to expense		933		729
Balance, ending	$	7,819	$	9,846

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


	As of												As of
Internally Assigned Risk Rating *	September 30, 2021			June 30, 2021			December 31, 2020			September 30, 2020			March 31, 2022			December 31, 2021			March 31, 2021

	(dollars in thousands)												(dollars in thousands)

Special Mention (Rating 6)	$	58,634		$	51,613		$	71,482		$	79,587		$	63,622		$	62,510		$	53,466
Substandard (Rating 7)		59,402			79,719			66,081			70,409			54,491			53,296			84,982
Doubtful (Rating 8)		—			—			—			—			—			—			—
	$	118,036		$	131,332		$	137,563		$	149,996		$	118,113		$	115,806		$	138,448

Criticized Loans **	$	118,036		$	131,332		$	137,563		$	149,996		$	118,113		$	115,806		$	138,448
Classified Loans ***	$	59,402		$	79,719		$	66,081		$	70,409		$	54,491		$	53,296		$	84,982

Criticized Loans as a % of Total Loans/Leases		2.57	%		2.97	%		3.24	%		3.53	%		2.45	%		2.47	%		3.17	%
Classified Loans as a % of Total Loans/Leases		1.29	%		1.80	%		1.55	%		1.66	%		1.13	%		1.14	%		1.95	%

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

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

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Criticized loans ~~decreased 10%~~increased 2% and classified loans ~~decreased 25%~~increased 2% from ~~June 30,~~December 31, 2021 to ~~September 30, 2021.~~March 31, 2022. 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								As of
	September 30, 2021		June 30, 2021		December 31, 2020		September 30, 2020		March 31, 2022		December 31, 2021		March 31, 2021
ACL on loans/leases / Gross loans/leases	1.75	%	1.79	%	1.98	%	1.87	%	1.55	%	1.68	%	1.88	%
ACL on loans/leases / NPLs	1,180.77	%	952.02	%	605.15	%	450.05	%	2,721.47	%	2,825.21	%	590.28	%

Although management believes that the ACL at ~~September 30, 2021~~March 31, 2022 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Based on current economic indicators, the Company increased the economic allocations within the ACL calculation. The Company anticipates that the ACL as a percent of total loans may increase in future periods based on the belief that theprovision for credit ~~quality of the loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic.~~losses. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

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

NONPERFORMING ASSETS

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




	As of September 30,			As of June 30,			As of December 31,			As of September 30,			As of March 31,			As of December 31,			As of March 31,
	2021			2021			2020			2020			2022			2021			2021

	(dollars in thousands)												(dollars in thousands)

Nonaccrual loans/leases (1) (2)	$	6,818		$	8,230		$	13,940		$	17,597
Nonaccrual loans/leases (1)													$	2,744		$	2,759		$	13,863
Accruing loans/leases past due 90 days or more		14			57			3			86			4			1			—
Total NPLs		6,832			8,287			13,943			17,683			2,748			2,760			13,863
OREO		—			1,820			20			125			—			—			173
Other repossessed assets		—			—			135			110			—			—			50
Total NPAs	$	6,832		$	10,107		$	14,098		$	17,918		$	2,748		$	2,760		$	14,086


NPLs to total loans/leases		0.15	%		0.19	%		0.35	%		0.42	%		0.06	%		0.06	%		0.32	%
NPAs to total loans/leases plus repossessed property		0.15	%		0.23	%		0.35	%		0.42	%		0.06	%		0.06	%		0.32	%
NPAs to total assets		0.11	%		0.17	%		0.25	%		0.32	%		0.04	%		0.05	%		0.25	%
Nonccrual loans/leases to total loans/leases														0.06			0.06	%		0.32	%
ACL to nonaccrual loans														2,725.44	%		2,853.24	%		590.28	%

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

~~(2)~~

~~Includes TDRs of $152 thousand at September 30, 2021, $2.7 million at June 30, 2021, $984 thousand at December 31, 2020 and $204 thousand at September 30, 2020.~~

NPAs at ~~September 30,~~March 31, 2022 and December 31, 2021 were ~~$6.8~~$2.7 million, down ~~$3.3~~$11.3 million from ~~June 30, 2021, and down $11.1 million from September 30, 2020.~~March 31, 2021. The ratio of NPAs to total assets was ~~0.11%~~0.04% at ~~September 30, 2021,~~March 31, 2022, down from ~~0.17%~~0.05% at ~~June 30,~~December 31, 2021, and down from ~~0.32%~~0.25% at ~~September 30, 2020.~~March 31, 2021.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

OREO is carried at the lower of carrying amount or fair value less costs to sell. ~~Increase in OREO was from a single property.~~

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

Due to the economic impacts of COVID-19, the Company established its LRP for its clients. The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term. Those deferred payments will be added to the end of the original term of the loan through a three month extension of the maturity date. The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest for up to 90 days. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020. On December 27, 2020, this relief was extended to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022. The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. The Company implemented its LRP offerings to extend qualifying customers’ payments for 90 days. As of September 30, 2021, there were no Bank modifications and eight m2 modifications of loans and leases totaling $2.9 million representing 0.06% of the total loan and lease portfolio currently on deferral. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.

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. The regulators have clarified that this guidance may continue to be applied in 2021.

~~DEPOSITS~~

Deposits increased $182.9 million during the third quarter of 2021, primarily due to increases in both noninterest bearing and interest bearing deposits. The table below presents the composition of the Company's deposit portfolio.

As of

September 30, 2021


June 30, 2021


December 31, 2020

September 30, 2020


Amount

%


Amount

%


Amount

%


Amount

%

(dollars in thousands)

Noninterest bearing demand deposits

$
1,342,273

28
%

$
1,258,885

27
%

$
1,145,378

25
%

$
1,175,085

25
%

Interest bearing demand deposits

3,086,711

63
%

2,976,696

63
%

2,987,469

65
%

2,938,194

63
%

Time deposits

441,743

9
%

452,171

10
%

460,659

10
%

499,021

11
%

Brokered deposits

1,101

0
%

1,183

0
%

5,631

0
%

59,968

1
%

$
4,871,828

100
%

$
4,688,935

100
%

$
4,599,137

100
%

$
4,672,268

100
%

Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity. During the quarter, the Company had core deposit growth mostly from its noninterest bearing and interest bearing demand deposits. As a result

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

DEPOSITS

Deposits decreased $83.1 million during the first quarter of 2022, driven by typical seasonality with our commercial client base and further rotation from time deposits to interest-bearing demand deposits.

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


	As of
	March 31, 2022				December 31, 2021				March 31, 2021
	Amount		%		Amount		%		Amount		%

	(dollars in thousands)

Noninterest bearing demand deposits	$	1,275,493	26	%	$	1,268,788	26	%	$	1,269,578	27	%
Interest bearing demand deposits		3,181,685	66	%		3,232,633	65	%		2,916,054	63	%
Time deposits		382,268	8	%		421,348	9	%		445,067	10	%
Brokered deposits		243	0	%		3	0	%		1,084	0	%
	$	4,839,689	100	%	$	4,922,772	100	%	$	4,631,782	100	%

The Company has been successful in growing its noninterest-bearing deposit portfolio over the past several years, growing average balances 21% in 2021. Balances can fluctuate a great deal due to large customer and correspondent bank activity. During the past year, the Company had significant core deposit growth mostly from its correspondent banking clients. As a result of strong core deposit growth, ~~since September 2020,~~ the Company reduced its reliance on higher cost CDs and brokered deposits.

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

●

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

●

Money market deposits which represent some excess liquidity, and

●

The correspondent banks’ EBA at the FRB.

The Company has modified the structure and interest rates paid for those correspondent bank deposits on the balance sheet which are the noninterest-bearing deposits and the money market deposits. This has led to more of the correspondent bank portfolio’s excess liquidity to shift to the EBAs at the FRB which is managed by the Company, but is off the Company’s balance sheet. On average, over the past two years, the correspondent banks’ EBA portfolio ranges from $1.3 billion to $1.5 billion which is approximately $1 billion more than pre-pandemic levels.

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

BORROWINGS

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


	As of								As of
	September 30, 2021		June 30, 2021		December 31, 2020		September 30, 2020		March 31, 2022		December 31, 2021		March 31, 2021

	(dollars in thousands)								(dollars in thousands)

Federal funds purchased	$	1,600	$	7,070	$	5,430	$	30,430	$	1,190	$	3,800	$	6,840

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

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

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


	As of								As of
	September 30, 2021		June 30, 2021		December 31, 2020		September 30, 2020		March 31, 2022		December 31, 2021		March 31, 2021
	(dollars in thousands)								(dollars in thousands)

Term FHLB advances	$	—	$	—	$	—	$	40,000
Overnight FHLB advances		30,000		40,000		15,000		—	$	290,000	$	15,000	$	25,000
	$	30,000	$	40,000	$	15,000	$	40,000

FHLB advances ~~decreased $10.0~~(all overnight) increased $275.0 million in the current quarter compared to the prior quarter due to ~~temporary changes~~strong loan growth and a decrease in ~~liquidity.~~core deposits driven by typical seasonality with our commercial client base.

The Company renewed its revolving credit note in the second quarter of 2021. At renewal, the line amount was $25.0 million. Interest on the revolving line of credit was calculated at the effective Prime 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, 2021.~~March 31, 2022.

The Company had subordinated notes totaling ~~$113.8~~$113.9 million as of ~~September 30, 2021~~both March 31, 2022 and ~~June 30,~~December 31, 2021. The Company prepaid $5.0 million in subordinated debt in the second quarter of 2021 with no gain/loss.

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

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	September 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
			Weighted				Weighted				Weighted				Weighted
			Average				Average				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:
2021	$	31,101	0.29	%	$	20,631	0.21	%
2022		—	—			—	—		$	290,243	0.53	%	$	15,003	0.31	%
2023		—	—			—	—			—	—			—	—
2024		—	—			—	—			—	—			—	—
2025										—	—			—	—
Total Wholesale Funding	$	31,101	0.29	%	$	20,631	0.21	%	$	290,243	0.53	%	$	15,003	0.31	%

During the first ~~nine months~~quarter of ~~2021,~~2022, wholesale funding, primarily overnight FHLB advances, increased ~~$10.5~~$275.2 million due to ~~temporary changes in liquidity, $15.0 million of which was overnight FHLB advances offset by decrease in brokered deposits of $4.5 million.~~strong loan growth and decreased deposits.

STOCKHOLDERS' EQUITY

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


	As of												As of
	September 30, 2021			June 30, 2021			December 31, 2020			September 30, 2020			March 31, 2022			December 31, 2021			March 31, 2021

	(dollars in thousands)												(dollars in thousands)

Common stock	$	15,590		$	15,764		$	15,806		$	15,792		$	15,580		$	15,613		$	15,844
Additional paid in capital		272,964			275,485			275,807			275,122			272,370			273,768			276,350
Retained earnings		360,003			335,424			300,804			283,480			405,762			386,077			316,900
AOCI (loss)		1,257			3,803			1,376			(1,781)
AOCI														(25,788)			1,552			(375)
Total stockholders' equity	$	649,814		$	630,476		$	593,793		$	572,613		$	667,924		$	677,010		$	608,719

TCE / TA ratio (non-GAAP)		9.54	%		9.55	%		9.08	%		8.42	%		9.60	%		9.87	%		9.42	%

* 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.

~~Excluding~~Due to the ~~impact~~sharp increase in intermediate and long-term interest rates, the valuation of ~~PPP loans,~~ the ~~adjusted TCE/TA at September 30, 2021~~Company’s AFS securities portfolio and certain hedged financial instruments declined significantly. The valuation change, net of taxes, that flows through the Company’s AOCI was ~~9.47% (non-GAAP).~~ a net decline of $27.3 million for the first quarter of 2022.

On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. As of March 31, 2022, the Company has purchased 471,585 shares under the program and all shares purchased have been retired.

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 ~~$102.1 million during the third quarter of 2021 and $102.7~~$73.9 million during the first ~~nine months~~quarter of ~~2021.~~2022. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The Company has been able to access available funding sources to address liquidity needs during the COVID-19 pandemic. In addition, the Company has been able to pledge the PPP loans to the Federal Reserve as part of its operational line of credit.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

At ~~September 30,~~March 31, 2022, the subsidiary banks had 27 lines of credit totaling $482.5 million, of which $31.5 million was secured and $451.0 million was unsecured. At March 31, 2022, the full $451.0 million was available.

At December 31, 2021, the subsidiary banks had 31 lines of credit totaling ~~$560.6~~$517.7 million, of which ~~$104.6 million was secured and $456.0 million was unsecured. At September 30, 2021, the full $560.6 million was available.~~

~~At December 31, 2020, the subsidiary banks had 28 lines of credit totaling $743.1 million, of which $287.1~~$61.7 million was secured and $456.0 million was unsecured. At December 31, ~~2020,~~2021, the full ~~$743.1~~$517.7 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2022. At ~~September 30, 2021,~~March 31, 2022, the full $25.0 million was available.

As of ~~September 30, 2021,~~March 31, 2022, the Company had ~~$667.4~~$620.8 million in average correspondent banking deposits spread over ~~186~~188 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 ~~$330.5~~$177.1 million during the first ~~nine months~~quarter of ~~2021,~~2022, compared to ~~$837.8~~$36.5 million for the same period of ~~2020.~~2021. The net decrease in interest-bearing deposits at financial institutions was ~~$22.8~~$18.5 million for the first ~~nine months~~quarter of ~~2021,~~2022, compared to a net increase of ~~$154.2~~$32.9 million for the same period of ~~2020.~~2021. Proceeds from calls, maturities, and paydowns of securities were ~~$131.1~~$17.3 million for the first ~~nine~~three months of ~~2021,~~2022, compared to ~~$72.3~~$68.3 million for the same period of ~~2020.~~2021. Purchases of securities used cash of ~~$151.7~~$52.4 million for the first ~~nine~~three months of ~~2021,~~2022, compared to ~~$255.5~~$53.6 million for the same period of ~~2020.~~2021. There were no proceeds from the sales of securities in the first three months of 2022. Proceeds from sales of securities were ~~$23.8~~$19.5 million for the first ~~nine~~three months of ~~2021, compared to $28.6 million for the same period of 2020.~~2021. The net increase in loans/leases used cash of ~~$353.6~~$148.5 million for the first ~~nine~~three months of ~~2021~~2022 compared to ~~$555.3~~$108.0 million for the same period of ~~2020.~~2021.

Financing activities provided cash of ~~$262.2~~$183.2 million for the first ~~nine~~three months of ~~2021,~~2022, compared to ~~$701.2~~$42.8 million for same period of ~~2020.~~2021. Net increases in deposits totaled ~~$272.7~~$83.1 million for the first ~~nine~~three months of ~~2021,~~2022, compared to ~~$731.4~~$32.6 million for the same period of ~~2020.~~2021. During the first ~~nine~~three months of ~~2021,~~2022, the Company's short-term borrowings decreased ~~$3.8~~$2.6 million, compared to an increase in short-term borrowings of ~~$17.0~~$1.4 million for the same period of ~~2020.~~2021. There were no long-term FHLB advances during the first ~~nine~~three months of 2022 and 2021. There were no maturities and principal payments on FHLB term advances in the first ~~nine~~three months of 2022 and 2021. Net increase in overnight advances totaled ~~$15.0~~$275.0 million for the first ~~nine~~three months of ~~2021.~~2022. In the first ~~nine~~three months of ~~2020,~~2021, the Company ~~decreased short-term and~~increased overnight FHLB advances by ~~$16.0~~$10.0 million. ~~Prepayments on brokered and public time deposits totaled $29.4 million during the first nine months~~

Table of ~~2020. Prepayment of subordinated notes totaled $5.0 million during the first nine months of 2021.~~Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Total cash provided by operating activities was ~~$64.3~~$6.9 million for the first ~~nine~~three months of ~~2021,~~2022, compared to ~~$129.3~~$11.1 million for the same period of ~~2020.~~2021.

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

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

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

●

The strength of the local, state, and national and international economies (including ~~the impact~~effects of ~~the current presidential administration)~~inflationary pressures and supply chain constraints).

●

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

●

Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the ~~PCAOB, including FASB’s CECL impairment standards.~~PCAOB.

●

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

●

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

●

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

●

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

●

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

●

The loss of key executives or employees.

●

~~The costs, effects and~~Changes in consumer spending.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

●

Unexpected outcomes of existing or ~~future litigation.~~new litigation involving the Company.

●

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

●

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

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

7656

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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.

7757

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Part I

Item 3

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


	NET INTEREST INCOME EXPOSURE in YEAR 1								NET INTEREST INCOME EXPOSURE in YEAR 1
			As of September 30,		As of December 31,		As of December 31,				As of March 31,		As of December 31,		As of December 31,
INTEREST RATE SCENARIO	POLICY LIMIT		2021		2020		2019		POLICY LIMIT		2022		2021		2020

100 basis point downward shift	(10.0)	%	(0.1)	%	—	%	0.5	%	(10.0)	%	(0.8)	%	(0.1)	%	—	%
200 basis point upward shift	(10.0)	%	2.1	%	2.5	%	1.2	%	(10.0)	%	0.9	%	3.1	%	2.5	%
300 basis point upward shock	(30.0)	%	9.4	%	10.3	%	4.9	%	(30.0)	%	6.2	%	11.6	%	10.3	%

The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at ~~September 30, 2021~~March 31, 2022 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

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

7858

Table of Contents

Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of ~~September 30, 2021.~~March 31, 2022. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

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

7959

Table of Contents

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

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

Item 1A Risk Factors

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

On 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 program was paused for a period of time during the pandemic and then restarted ~~on May 24, 2021.~~in March 2022. All shares repurchased under the share repurchase program during the ~~second and third~~first quarter were retired.


			Total number of shares	Maximum number			Total number of shares	Maximum number
			purchased as part of	of shares that may yet			purchased as part of	of shares that may yet
	Total number of	Average price	publicly announced	be purchased under	Total number of	Average price	publicly announced	be purchased under
Period	shares purchased	paid per share	plans or programs	the plans or programs	shares purchased	paid per share	plans or programs	the plans or programs

July 1-31, 2021	84,000	47.21	284,932	515,068
August 1-31, 2021	84,904	49.32	369,836	430,164
September 1-30, 2021	24,249	49.82	394,085	405,915
January 1-31, 2022					—	—	—	405,915
February 1-28, 2022					—	—	—	405,915
March 1-31, 2022					77,500	$ 56.98	77,500	328,415
Total					77,500	$ 56.98	77,500	328,415

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

8060

Table of Contents

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6 Exhibits



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

31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020;~~2021; (ii) Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020;~~March 31, 2021; (iii) Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020;~~March 31, 2021; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020;~~March 31, 2021; (v) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020;~~March 31, 2021; and (vi) Notes to the Consolidated Financial Statements.
104	Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101.

8161

Table of Contents

SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)



Date	~~November 5, 2021~~May 9, 2022	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer


Date	~~November 5, 2021~~May 9, 2022	/s/ Todd A. Gipple
		Todd A. Gipple, President
		Chief Operating Officer
		Chief Financial Officer


Date	~~November 5, 2021~~May 9, 2022	/s/ Nick W. Anderson
		Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)

8262


			Page Number(s)
Part I	FINANCIAL INFORMATION

	Item 1	Consolidated Financial Statements (Unaudited)

		Consolidated Balance Sheets As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	4

		Consolidated Statements of Income For the Three Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	5

		Consolidated Statements of Comprehensive Income
		For the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	6

		Consolidated Statements of ~~Comprehensive Income~~Changes in Stockholders' Equity For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	7

		Consolidated Statements of ~~Changes in Stockholders' Equity~~Cash Flows For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	8

		Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2021 and 2020	9

		Notes to Consolidated Financial Statements	119

		Note 1. Summary of Significant Accounting Policies	119
		Note 2. Investment Securities	2111
		Note 3. Loans/Leases Receivable	2514
		Note 4. Derivatives and Hedging Activities	3623
		Note 5. Income Taxes	3925
		Note 6. Earnings Per Share	4026
		Note 7. Fair Value	4126
		Note 8. Business Segment Information	4328
		Note 9. Regulatory Capital Requirements	4429
		Note 10. Acquisition	30

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

		Introduction	4631
		General	4631
		Impact of COVID-19	4631
		Critical Accounting Policies and Critical Accounting Estimates	32
		Executive Overview	4733
		Strategic Financial Metrics	4834
		Strategic Developments	4935
		GAAP to Non-GAAP Reconciliations	5036
		Net Interest Income - (Tax Equivalent Basis)	52
		~~Critical Accounting Policies~~	57
		~~Goodwill~~	57
		~~Allowance for Credit Losses~~	5838
		Results of Operations	5840
		Interest Income	5840
		Interest Expense	5841
		Provision for Credit Losses	41
		Noninterest Income	42
		Noninterest Expense	44
		Income Taxes	45

		~~Provision for Credit Losses~~	59
		~~Noninterest Income~~	60
		~~Noninterest Expense~~	63
		~~Income Taxes~~	65
		Financial Condition	6646
		Investment Securities	6646
		Loans/Leases	6747
		Allowance for Credit Losses on Loans/Leases and OBS Exposures	6949
		Nonperforming Assets	7150
		Deposits	7251
		Borrowings	7352
��		Stockholders' Equity	7453
		Liquidity and Capital Resources	7454
		Special Note Concerning Forward-Looking Statements	7655

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	7757

	Item 4	Controls and Procedures	7959

Part II	OTHER INFORMATION		8060

	Item 1	Legal Proceedings	8060

	Item 1A	Risk Factors	8060

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	8060

	Item 3	Defaults Upon Senior Securities	8060

	Item 4	Mine Safety Disclosures	8060

	Item 5	Other Information	8060

	Item 6	Exhibits	8161

Signatures			8262


	Three Months Ended September 30,
	2021		2020

	(dollars in thousands)

Net income	$	31,565	$	17,344

Other comprehensive loss:

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		(3,194)		585
Less reclassification adjustment for gains included in net income before tax		—		1,802
		(3,194)		(1,217)

Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		(342)		445
Less reclassification adjustment for caplet amortization before tax		(181)		149
		(161)		296

Other comprehensive loss, before tax		(3,355)		(921)
Tax expense		(809)		(307)
Other comprehensive loss, net of tax		(2,546)		(614)

Comprehensive income	$	29,019	$	16,730


	Nine Months Ended September 30,
	2021		2020

	(dollars in thousands)

Net income	$	71,896	$	42,311

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		(4,290)		8,467
Less reclassification adjustment for gains (losses) included in net income before tax		(88)		1,867
		(4,202)		6,600
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		3,383		(7,903)
Less reclassification adjustment for caplet amortization before tax		(495)		(384)
		3,878		(7,519)

Other comprehensive loss, before tax		(324)		(919)
Tax expense		(206)		(236)
Other comprehensive loss, net of tax		(118)		(683)

Comprehensive income	$	71,778	$	41,628


	As Reported		Pre-		Impact of
	Under		ASU 2016-13		ASU 2016-13
	ASU 2016-13		Adoption		Adoption
Assets:
Allowance for credit losses HTM securities	$	183	$	—	$	183

Loans*:
C&I		—		35,421		(35,421)
C&I - revolving		2,982		—		2,982
C&I - other		29,130		—		29,130
CRE		—		42,161		(42,161)
CRE - owner occupied		8,696		—		8,696
CRE - non owner occupied		11,428		—		11,428
Construction & Land Development		11,999		—		11,999
Multi-family		5,836		—		5,836
Direct financing leases		—		1,764		(1,764)
1-4 family real estate		5,042		—		5,042
Residential real estate		—		3,732		(3,732)
Consumer		1,161		1,298		(137)
Allowance for credit losses on loans		76,274		84,376		(8,102)

Liabilities:
Allowance for credit losses on OBS credit exposures		9,117		—		9,117


	Three months ended September 30, 2021						Nine months ended September 30, 2021
	PCI		Performing				PCI		Performing
	Loans		Loans		Total		Loans		Loans		Total

	(dollars in thousands)

Balance at the beginning of the period	$	—	$	(2,189)	$	(2,189)	$	—	$	(3,139)	$	(3,139)
Accretion recognized		—		505		505		—		1,455		1,455
Balance at the end of the period	$	—	$	(1,684)	$	(1,684)	$	—	$	(1,684)	$	(1,684)


	Nine Months Ended September 30, 2021
									CRE -		CRE -		Construction				Direct		Residential
			C&I -		C&I -				Owner		Non-Owner		and Land			Multi	Financing		Real			1-4
	C&I		Revolving		Other**		CRE		Occupied		Occupied		Development		Family		Leases		Estate		Family		Consumer		Total

	(dollars in thousands)

Balance, beginning	$	35,421	$	—	$	—	$	42,161	$	—	$	—	$	—	$	—	$	1,764	$	3,732	$	—	$	1,298	$	84,376
Adoption of ASU 2016-13		(35,421)		2,982		29,130		(42,161)		8,696		11,428		11,999		5,836		(1,764)		(3,732)		5,042		(137)		(8,102)
Provision		—		(67)		4,271		—		(732)		(637)		3,782		2,214		—		—		(502)		(582)		7,747
Charge-offs		—		—		(1,949)		—		—		(1,876)		—		(150)		—		—		(690)		(9)		(4,674)
Recoveries		—		—		423		—		(2)		71		—		—		—		—		517		314		1,323
Balance, ending	$	—	$	2,915	$	31,875	$	—	$	7,962	$	8,986	$	15,781	$	7,900	$	—	$	—	$	4,367	$	884	$	80,670


											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



	As of December 31, 2020
			CRE
					Non-Owner Occupied
					Commercial
					Construction,
					Land
			Owner-Occupied		Development,						As a % of
Internally Assigned Risk Rating	C&I		CRE		and Other Land		Other CRE		Total		Total

	(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,506,578	$	488,478	$	530,297	$	999,931	$	3,525,284	96.25	%
Special Mention (Rating 6)		23,929		3,087		680		43,785		71,481	1.95	%
Substandard (Rating 7)		24,710		4,906		10,478		25,987		66,081	1.80	%
Doubtful (Rating 8)		—		—		—		—		—	—	%
	$	1,555,217	$	496,471	$	541,455	$	1,069,703	$	3,662,846	100.00	%


	As of September 30,
	2021
			% of Total Gross
	Amount		Loans and Leases

	(dollars in thousands)

Hotels	$	78,478	1.71	%
Restaurants (full service and limited service only)		24,465	0.53
Arts, Entertainment and Recreation		25,551	0.55
	$	128,494	2.79	%