QCR (QCRH) 10-Q 2022 Q1 Quarterly report

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 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 May 1, 2022, the Registrant had outstanding 17,651,425 shares of common stock, $1.00 par value per share.

1

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page Number(s)
Part I	FINANCIAL INFORMATION
	Item 1	Consolidated Financial Statements (Unaudited)
		Consolidated Balance Sheets As of March 31, 2022 and December 31, 2021	4
		Consolidated Statements of Income For the Three Months Ended March 31, 2022 and 2021	5
		Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2022 and 2021	6
		Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2022 and 2021	7
		Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2022 and 2021	8
		Notes to Consolidated Financial Statements	9
		Note 1. Summary of Significant Accounting Policies	9
		Note 2. Investment Securities	11
		Note 3. Loans/Leases Receivable	14
		Note 4. Derivatives and Hedging Activities	23
		Note 5. Income Taxes	25
		Note 6. Earnings Per Share	26
		Note 7. Fair Value	26
		Note 8. Business Segment Information	28
		Note 9. Regulatory Capital Requirements	29
		Note 10. Acquisition	30
	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations
		Introduction	31
		General	31
		Impact of COVID-19	31
		Critical Accounting Policies and Critical Accounting Estimates	32
		Executive Overview	33
		Strategic Financial Metrics	34
		Strategic Developments	35
		GAAP to Non-GAAP Reconciliations	36
		Net Interest Income - (Tax Equivalent Basis)	38
		Results of Operations	40
		Interest Income	40
		Interest Expense	41
		Provision for Credit Losses	41
		Noninterest Income	42
		Noninterest Expense	44
		Income Taxes	45

2

		Financial Condition	46
		Investment Securities	46
		Loans/Leases	47
		Allowance for Credit Losses on Loans/Leases and OBS Exposures	49
		Nonperforming Assets	50
		Deposits	51
		Borrowings	52
��		Stockholders' Equity	53
		Liquidity and Capital Resources	54
		Special Note Concerning Forward-Looking Statements	55
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 4	Controls and Procedures	59
Part II	OTHER INFORMATION		60
	Item 1	Legal Proceedings	60
	Item 1A	Risk Factors	60
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	60
	Item 3	Defaults Upon Senior Securities	60
	Item 4	Mine Safety Disclosures	60
	Item 5	Other Information	60
	Item 6	Exhibits	61
Signatures			62

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

3

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2022 and December 31, 2021

	March 31,		December 31,
	2022		2021
	(dollars in thousands)
Assets
Cash and due from banks	$	50,540	$	37,490
Federal funds sold		9,635		12,370
Interest-bearing deposits at financial institutions		56,755		75,292
Securities held to maturity, at amortized cost, net of allowance for credit losses		476,625		472,385
Securities available for sale, at fair value		346,686		337,830
Total securities		823,311		810,215
Loans receivable held for sale		2,968		3,828
Loans/leases receivable held for investment		4,824,900		4,676,304
Gross loans/leases receivable		4,827,868		4,680,132
Less allowance for credit losses		(74,786)		(78,721)
Net loans/leases receivable		4,753,082		4,601,411
Bank-owned life insurance		62,770		62,424
Premises and equipment, net		80,634		78,530
Restricted investment securities		30,722		19,353
Goodwill		74,066		74,066
Intangibles		8,856		9,349
Derivatives		107,326		222,220
Other assets		118,122		93,412
Total assets	$	6,175,819	$	6,096,132
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,275,493	$	1,268,788
Interest-bearing		3,564,196		3,653,984
Total deposits		4,839,689		4,922,772
Short-term borrowings		1,190		3,800
Federal Home Loan Bank advances		290,000		15,000
Subordinated notes		113,890		113,850
Junior subordinated debentures		38,190		38,155
Derivatives		116,193		225,135
Other liabilities		108,743		100,410
Total liabilities		5,507,895		5,419,122
Stockholders' Equity:
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		272,370		273,768
Retained earnings		405,762		386,077
Accumulated other comprehensive income (loss):
Securities available for sale		(16,171)		5,925
Derivatives		(9,617)		(4,373)
Total stockholders' equity		667,924		677,010
Total liabilities and stockholders' equity	$	6,175,819	$	6,096,132

See Notes to Consolidated Financial Statements (Unaudited)

4

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31, 2022 and 2021

	2022		2021
	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	44,196	$	41,333
Securities:
Taxable		2,398		2,042
Nontaxable		4,150		3,934
Interest-bearing deposits at financial institutions		35		37
Restricted investment securities		281		219
Federal funds sold		2		—
Total interest and dividend income		51,062		47,565
Interest expense:
Deposits		3,137		3,427
Short-term borrowings		—		1
Federal Home Loan Bank advances		82		9
Subordinated notes		1,554		1,594
Junior subordinated debentures		556		559
Total interest expense		5,329		5,590
Net interest income		45,733		41,975
Provision for credit losses		(2,916)		6,713
Net interest income after provision for credit losses		48,649		35,262
Noninterest income:
Trust department fees		2,963		2,801
Investment advisory and management fees		1,036		940
Deposit service fees		1,555		1,408
Gains on sales of residential real estate loans, net		493		1,337
Gains on sales of government guaranteed portions of loans, net		19		—
Swap fee income/capital markets revenue		6,422		13,557
Earnings on bank-owned life insurance		346		471
Debit card fees		1,007		975
Correspondent banking fees		277		314
Other		1,515		1,686
Total noninterest income		15,633		23,489
Noninterest expense:
Salaries and employee benefits		23,627		24,847
Occupancy and equipment expense		3,937		4,108
Professional and data processing fees		3,671		3,443
Acquisition costs		1,851		—
Disposition costs		—		8
FDIC insurance, other insurance and regulatory fees		1,310		1,065
Loan/lease expense		267		300
Net cost of (income from) and gains/losses on operations of other real estate		(1)		39
Advertising and marketing		761		627
Bank service charges		541		523
Correspondent banking expense		199		200
Intangibles amortization		493		508
Other		1,669		1,560
Total noninterest expense		38,325		37,228
Net income before income taxes		25,957		21,523
Federal and state income tax expense		2,333		3,541
Net income	$	23,624	$	17,982
Basic earnings per common share	$	1.51	$	1.14
Diluted earnings per common share	$	1.49	$	1.12
Weighted average common shares outstanding		15,625,112		15,803,643
Weighted average common and common equivalent shares outstanding		15,852,256		16,025,548
Cash dividends declared per common share	$	0.06	$	0.06

See Notes to Consolidated Financial Statements (Unaudited)

5

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended 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)

6

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2022 and 2021

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

							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)

7

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31, 2022 and 2021

	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

Supplemental disclosure of cash flow information, cash payments for:
Interest	$	6,271	$	7,674
Income/franchise taxes		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		(27,340)		(1,751)
Change in retained earnings from adoption of ASU 2016-13		—		(937)
Transfers of loans to other real estate owned		—		153
Due to broker for purchases of securities		7,533		2,568
Decrease in the fair value of back-to-back interest rate swap assets and liabilities		(119,357)		(100,886)
Dividends payable		939		949

See Notes to Consolidated Financial Statements (Unaudited)

8

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, 2021, included in the Company's Annual Report on Form 10-K filed with the SEC on March 11, 2022. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

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

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

ACL: Allowance for credit losses AFS: Available for sale	FTEs: Full-time equivalents GAAP: Generally Accepted Accounting Principles
Allowance: Allowance for credit losses	GFED: Guaranty Federal Bancshares
AOCI: Accumulated other comprehensive income (loss)	HTM: Held to maturity
ASC: Accounting Standards Codification	LIBOR: London Inter-Bank Offered Rate
ASU: Accounting Standards Update	LIHTC: Low-income housing tax credit
Bates Companies: Bates Financial Advisors, Inc., Bates	m2: m2 Equipment Finance, LLC
Financial Services, Inc., Bates Securities, Inc. and	NIM: Net interest margin
Bates Financial Group, Inc.	NPA: Nonperforming asset
BOLI: Bank-owned life insurance	NPL: Nonperforming loan
Caps: Interest rate cap derivatives	OBS: Off-balance sheet
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	ROAA: Return on average assets
EBA: Excess balance account	ROAE: Return on average equity
EPS: Earnings per share	SBA: U.S. Small Business Administration
Exchange Act: Securities Exchange Act of 1934, as	SEC: Securities and Exchange Commission
amended	SFCB: Guaranty Bank, formerly known as Springfield First
FASB: Financial Accounting Standards Board	Community Bank
FDIC: Federal Deposit Insurance Corporation	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.

9

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.

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

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

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

10

NOTE 2– INVESTMENT SECURITIES

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

			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 $476.6 million represents amortized cost of $476.8 million, net of allowance for credit losses of $198 thousand as of 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.

11

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

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
March 31, 2022:
Securities HTM:
Municipal securities	$	87,662	$	(3,095)	$	—	$	—	$	87,662	$	(3,095)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	13,725	$	(850)	$	2,675	$	(462)	$	16,400	$	(1,312)
Residential mortgage-backed and related securities		40,124		(869)		18,455		(1,893)		58,579		(2,762)
Municipal securities		139,706		(17,719)		4,914		(561)		144,620		(18,280)
Asset-backed securities		10,853		(76)		—		—		10,853		(76)
Other securities		13,267		(440)		—		—		13,267		(440)
	$	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, 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 March 31, 2022, the investment portfolio included 649 securities. Of this number, 286 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 3.07% of the total amortized cost of the portfolio. Of these 286 securities, there were 19 securities that had an unrealized loss for twelve months or more.

The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the three months ended March 31, 2022 and 2021.

	Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
	Municipal		Other				Municipal		Other
	securities		securities		Total		securities		securities		Total
Allowance for credit losses:
Beginning balance	$	198	$	—	$	198	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		—		182		1		183
Provision for credit loss expense		—		—		—		(9)		—		(9)
Balance, ending	$	198	$	—	$	198	$	173	$	1	$	174

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.

12

The amortized cost and fair value of securities as of 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
	(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,666	$	3,672
Due after one year through five years		20,506		20,571
Due after five years		452,651		460,134
	$	476,823	$	484,377
Securities AFS:
Due in one year or less	$	5,259	$	5,282
Due after one year through five years		5,809		5,878
Due after five years		245,158		225,914
		256,226		237,074
Residential mortgage-backed and related securities		88,935		86,380
Asset-backed securities		22,859		23,232
	$	368,020	$	346,686

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

	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Municipal securities	$	281,122	$	281,819
Securities AFS:
Municipal securities		204,976		187,341
Other securities		24,519		24,220
	$	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 December 31, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $114.5 million and revenue bonds issued by 165 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.0 million. The Company also held investments in general obligation bonds in 20 states, including 7 states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 28 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2022 and as of December 31, 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.

13

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 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 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.

14

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

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

	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	%

15

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

	As of March 31, 2022
	Accruing Past		Nonaccrual		Nonaccrual
	Due 90 Days or		Loans/Leases		Loans/Leases				Percentage of
Classes of Loans/Leases	More		with an ACL		without an ACL		Total NPLs		Total NPLs
	(dollars in thousands)
C&I:
C&I - revolving	$	—	$	—	$	—	$	—	-	%
C&I - other		4		1,212		257		1,473	53.60
CRE - owner occupied		—		—		—		—	-
CRE - non-owner occupied		—		—		—		—	-
Construction and land development		—		—		—		—	-
Multi-family		—		—		—		—	-
Direct financing leases		—		820		—		820	29.84
1-4 family real estate		—		425		—		425	15.47
Consumer		—		30		—		30	1.09
	$	4	$	2,487	$	257	$	2,748	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.

16

	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

*   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 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 $128 thousand 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 with a related allowance for credit losses of $35 thousand and leases collectively evaluated of $44.4 million with a related allowance for credit losses of $1.5 million.

17

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 March 31, 2022 and December 31, 2021:

	As of March 31, 2022
			Non
	Commercial		Owner-Occupied		Owner Occupied
	Assets		Real Estate		Real Estate		Securities		Equipment		Other		Total
	(dollars in thousands)
C & I:
C&I - revolving	$	2,681	$	—	$	—	$	—	$	120	$	—	$	2,801
C&I - other*		1,427		—		2,467		128		8,412		2,372		14,806
		4,108		—		2,467		128		8,532		2,372		17,607
CRE - owner occupied		—		—		3,567		—		—		—		3,567
CRE - non-owner occupied		—		24,765		—		—		—		—		24,765
Construction and land development		—		10,362		—		—		—		—		10,362
Multi-family		—		—		—		—		—		—		—
1-4 family real estate		—		804		2,362		—		—		—		3,166
Consumer		—		1		376		—		—		8		385
	$	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 $820 thousand with primary collateral of 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 individually evaluated of $847 thousand with primary collateral of equipment.

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

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

18

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of March 31, 2022:

	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

19

	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.

20

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

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

21

	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

22

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)

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

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

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		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

23

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

			Balance Sheet							Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		March 31, 2022		December 31, 2021
(dollars in thousands)
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
				$	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
Hedged Item	Effective Date		Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		March 31, 2022		December 31, 2021
		(dollars in thousands)
QCR Holdings Statutory Trust II	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	3.86	%	5.85	%		(300)		(828)
QCR Holdings Statutory Trust V	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	3.10	%	5.17	%		(112)		(309)
Community National Statutory Trust III	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	2.58	%	4.75	%		(168)		(463)
					$	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 financial institution. Additionally, the Company receives an upfront, non-refundable fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty.  Because the Company acts as an intermediary for the customer, changes in the fair 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:

		March 31, 2022			December 31, 2021
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	2,069,977	$	101,698	$	2,024,599	$	221,055
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	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 March 31, 2022 and March 31, 2021 are as follows:

	Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
	Interest and		Interest		Interest and		Interest
	Dividend Income		Expense		Dividend Income		Expense
	(dollars in thousands)
Income and expense line items presented in the consolidated statements of income	$	51,062	$	5,329	$	47,565	$	5,590
The effects of cash flow hedging:
Gain (loss) on cash flow hedges:
Interest rate caps on deposits		-		221		-		151
Interest rate swaps on variable rate loans		471		-		-		-
Interest rate swaps on junior subordinated debentures		-		267		-		269

24

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:

	March 31, 2022		December 31, 2021
	(dollars in thousands)
Cash	$	4,193	$	21,100
U.S treasuries and govt. sponsored agency securities		3,518		3,555
Municipal securities		123,763		139,166
Residential mortgage-backed and related securities		59,683		65,104
	$	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 manages financial institution counterparty credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits.  The agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps.  

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

NOTE 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 months ended March 31, 2022 and March 31, 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	%

25

NOTE 6 - EARNINGS PER SHARE

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

		Three months ended
		March 31,
		2022		2021
	(dollars in thousands, except share data)
Net income	$	23,624	$	17,982
Basic EPS	$	1.51	$	1.14
Diluted EPS	$	1.49	$	1.12
Weighted average common shares outstanding		15,625,112		15,803,643
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan		227,144		221,905
Weighted average common and common equivalent shares outstanding		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 March 31, 2022 and December 31, 2021:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
March 31, 2022:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	21,380	$	—	$	21,380	$	—
Residential mortgage-backed and related securities		86,380		—		86,380		—
Municipal securities		191,473		—		191,473		—
Asset-backed securities		23,232		—		23,232		—
Other securities		24,221		—		24,221		—
Derivatives		107,326		—		107,326		—
Total assets measured at fair value	$	454,012	$	—	$	454,012	$	—
Derivatives	$	116,193	$	—	$	116,193	$	—
Total liabilities measured at fair value	$	116,193	$	—	$	116,193	$	—
December 31, 2021:
Securities AFS:
U.S. govt. sponsored agency securities	$	23,328	$	—	$	23,328	$	—
Residential mortgage-backed and related securities		94,323		—		94,323		—
Municipal securities		168,266		—		168,266		—
Asset-backed securities		27,124		—		27,124		—
Other securities		24,789		—		24,789		—
Derivatives		222,220		—		222,220		—
Total assets measured at fair value	$	560,050	$	—	$	560,050	$	—
Derivatives	$	225,135	$	—	$	225,135	$	—
Total liabilities measured at fair value	$	225,135	$	—	$	225,135	$	—

26

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 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 and 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 March 31, 2022 and December 31, 2021:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
March 31, 2022:
Loans/leases evaluated individually	$	19,913	$	—	$	—	$	19,913
December 31, 2021:
Loans/leases evaluated individually	$	6,618	$	—	$	—	$	6,618

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

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

	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	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	%	to	-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 tables above are fair values before the adjustment for disposal or selling costs.

27

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three months ended March 31, 2022 and 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 March 31, 2022				As of December 31, 2021
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value
		(dollars in thousands)
Cash and due from banks	Level 1	$	50,540	$	50,540	$	37,490	$	37,490
Federal funds sold	Level 2		9,635		9,635		12,370		12,370
Interest-bearing deposits at financial institutions	Level 2		56,755		56,755		75,292		75,292
Investment securities:
HTM	Level 2		476,625		484,377		472,385		522,297
AFS	Level 2		346,686		346,686		337,830		337,830
Loans/leases receivable, net	Level 3		18,438		19,913		6,128		6,618
Loans/leases receivable, net	Level 2		4,734,644		4,670,679		4,595,283		4,478,899
Derivatives	Level 2		107,326		107,326		222,220		222,220
Deposits:
Nonmaturity deposits	Level 2		4,454,329		4,454,329		4,501,424		4,501,424
Time deposits	Level 2		385,360		376,546		421,348		419,453
Short-term borrowings	Level 2		1,190		1,190		3,800		3,800
FHLB advances	Level 2		290,000		290,000		15,000		15,000
Subordinated notes	Level 2		113,890		116,113		113,850		116,203
Junior subordinated debentures	Level 2		38,190		31,350		38,155		31,072
Derivatives	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 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

28

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 March 31, 2022 and December 31, 2021, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

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

29

										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

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.

30

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending 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-nine years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries.  As of March 31, 2022, the Company had $6.2 billion in consolidated assets, including $4.8 billion in net loans/leases, and $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 months ended 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 Business

The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and results of operations will depend on future developments that cannot be predicted, including the duration and scope of the pandemic.  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 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 has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and any recession that has occurred or may as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

CRITICAL ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

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

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

GOODWILL

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

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

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

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

FAIR VALUE OF SECURITIES

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

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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 $24.4 million, with adjusted diluted EPS of $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
	March 31, 2022		December 31, 2021		March 31, 2021
	(dollars in thousands)
Net interest income	$	45,733	$	46,513	$	41,975
Provision for credit losses		(2,916)		(3,227)		6,713
Noninterest income		15,633		22,985		23,489
Noninterest expense		38,325		39,412		37,228
Federal and state income tax expense		2,333		6,304		3,541
Net income	$	23,624	$	27,009	$	17,982

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

● Net interest income in the first quarter of 2022 decreased 2% compared to the fourth quarter of 2021 due entirely to lower PPP loan forgiveness fees.  Net interest income increased 9% when comparing the first three months of 2022 to the same period of the prior year. The increase was due to strong loan growth, an expanding net interest margin, well managed expenses and continued strong credit quality.  The Company had success maintaining earning asset yield while moving cost of funds lower which helped to drive NIM expansion.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

● Provision expense in the first quarter of 2022 decreased $311 thousand compared to the fourth quarter of 2021.    Provision expense decreased $9.6 million when comparing the first three months of 2022 to the same period in the prior year. The decrease was primarily due to continued strong credit quality and a corresponding reduction in the qualitative factor related to the pandemic.  

● Noninterest income in the first quarter of 2022 decreased $7.4 million or 32% compared to the fourth quarter of 2021. Noninterest income decreased $7.9 million or 33% compared to the first quarter of 2021. The decrease was primarily due to lower capital markets revenue from swap fee income due to client project delays caused by ongoing supply chain disruptions and inflationary pressures.

● Noninterest expense decreased $1.1 million or 3% in the first quarter of 2022 compared to the fourth quarter of 2021. This decrease was primarily due to lower salary and benefits expense of $1.2 million, the result of a decrease in variable compensation related to lower than expected capital markets revenue from swap fee income. Noninterest expense increased $1.1 million or 3% compared to the first quarter of 2021.  The increase was primarily due to acquisition costs of $1.9 million associated with the acquisition of GFED.  See Note 10 of the Consolidated Financial Statements for further discussion.

STRATEGIC FINANCIAL METRICS

The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics 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, 2021. The Company's long-term strategic financial metrics are as follows:

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

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

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

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

			Year to Date*
Strategic Financial Metric*	Key Metric	Target	March 31, 2022			December 31, 2021			March 31, 2021
Loan and lease growth organically **	Loans and leases growth	> 9% annually		14.6	%		16.9	%		14.0	%
Fee income growth	Fee income growth	> 6% annually		(41.3)	%		(10.1)	%		(15.9)	%
Improve operational efficiencies and hold noninterest expense growth	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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

STRATEGIC DEVELOPMENTS

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

● The Company grew loans and leases in the first quarter of 2022 by 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 188 downstream banks with average total noninterest bearing deposits of $356.3 million and average total interest-bearing deposits of $264.5 million during the first quarter of 2022. By comparison, the Company acted as the correspondent bank for 188 downstream banks with average total noninterest bearing deposits of $327.0 million and average total interest-bearing deposits of $398.2 million during the first quarter of 2021. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

● The Company 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 $6.4 million for the quarter.  Capital markets revenue from swap fees averaged $15.2 million per quarter for the year 2021 and $16.9 million for the last eight quarters.

● In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management decreased by $389.3 million in the first quarter of 2022 due to market value fluctuations.  There were 97 new relationships added in the first quarter of 2022 totaling $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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

GAAP TO NON-GAAP RECONCILIATIONS

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

● 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

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

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

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

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

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

Loan growth annualized, excluding PPP loans, is a ratio that management utilizes to compare the Company to its peers. The Company’s management believes this financial measure is important to investors as total loans and leases for the quarters ended March 31, 2021 were materially higher due to the addition of PPP 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
GAAP TO NON-GAAP	March 31,			December 31,			March 31,
RECONCILIATIONS	2022			2021			2021
		(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	667,924		$	677,010		$	608,719
Less: Intangible assets		82,922			83,415			84,939
TCE (non-GAAP)	$	585,002		$	593,595		$	523,780
Total assets (GAAP)	$	6,175,819		$	6,096,132		$	5,645,147
Less: Intangible assets		82,922			83,415			84,939
TA (non-GAAP)	$	6,092,897		$	6,012,717		$	5,560,208
TCE/TA ratio (non-GAAP)		9.60	%		9.87	%		9.42	%

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

	For the Quarter Ended
	March 31,			December 31,			March 31,
	2022			2021			2021
	(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	23,624		$	27,009		$	17,982
Less non-core items (post-tax) (*):
Income:
Mark to market gains on unhedged derivatives, net		715			77			129
Total non-core income (non-GAAP)	$	715		$	77		$	129
Expense:
Disposition costs		—			3			7
Acquisition costs		1,462			493		$	—
Separation agreement		—			—			734
Total non-core expense (non-GAAP)	$	1,462		$	496		$	741
Adjusted net income (non-GAAP)	$	24,371		$	27,428		$	18,594
ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	24,371		$	27,428		$	18,594
Weighted average common shares outstanding		15,625,112			15,582,276			15,803,643
Weighted average common and common equivalent shares outstanding		15,852,256			15,838,246			16,025,548
Adjusted EPS (non-GAAP):
Basic	$	1.56		$	1.76		$	1.18
Diluted	$	1.54		$	1.73		$	1.16
ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	24,371		$	27,428		$	18,594
Average Assets	$	6,115,127		$	6,121,446		$	5,668,850
Adjusted ROAA (non-GAAP)		1.59	%		1.79	%		1.31	%
ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	45,733		$	46,513		$	41,975
Plus: Tax equivalent adjustment		2,933			2,800			2,267
Net interest income - tax equivalent (non-GAAP)	$	48,666		$	49,313		$	44,242
Less: Acquisition accounting net accretion		118			88			504
Adjusted net interest income		48,548			49,225			43,738
Average earning assets	$	5,625,813		$	5,602,222		$	5,218,198
NIM (GAAP)		3.30	%		3.29	%		3.26	%
NIM (TEY) (non-GAAP)		3.50	%		3.50	%		3.43	%
Adjusted NIM (TEY) (non-GAAP)		3.50	%		3.49	%		3.40	%
EFFICIENCY RATIO
Noninterest expense (GAAP)	$	38,325		$	39,412		$	37,228
Net interest income (GAAP)	$	45,733		$	46,513		$	41,975
Noninterest income (GAAP)		15,633			22,985			23,489
Total income	$	61,366		$	69,498		$	65,464
Efficiency ratio (noninterest expense/total income) (non-GAAP)		62.45	%		56.71	%		56.87	%
LOAN GROWTH, EXCLUDING PPP LOANS
Total loans and leases	$	4,827,868		$	4,680,132		$	4,361,051
Less: PPP loans		6,340			28,181			243,860
Total loans and leases, excluding PPP loans	$	4,821,528		$	4,651,951		$	4,117,191
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%.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a tax equivalent basis, increased 10% to $48.7 million for the quarter ended March 31, 2022 compared to the same 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 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.

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

	Tax Equivalent Basis						GAAP
	For the Quarter Ended						For the Quarter Ended
	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
	2022		2021		2021		2022		2021		2021
Average Yield on Interest-Earning Assets	3.88	%	3.89	%	3.86	%	3.63	%	3.71	%	3.65	%
Average Cost of Interest-Bearing Liabilities	0.56	%	0.57	%	0.63	%	0.55	%	0.57	%	0.62	%
Net Interest Spread	3.32	%	3.32	%	3.23	%	3.08	%	3.14	%	3.03	%
NIM (TEY) (Non-GAAP)	3.50	%	3.50	%	3.43	%	3.30	%	3.29	%	3.26	%
NIM Excluding Acquisition Accounting Net Accretion	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
	March 31,		December 31,		March 31,
	2022		2021		2021
	(dollars in thousands)
Acquisition Accounting Net Accretion in NIM	118	$	88	$	504

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

	For the Three Months Ended March 31,
	2022								2021
				Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	4,564		$	2		0.15	%	$	1,847		$	1		0.05	%
Interest-bearing deposits at financial institutions		69,328			35		0.20	%		116,446			37		0.13	%
Investment securities (1)		802,260			7,682		3.83	%		810,059			7,050		3.48	%
Restricted investment securities		22,183			281		5.06	%		18,064			219		4.84	%
Gross loans/leases receivable (1) (2) (3)		4,727,478			45,995		3.95	%		4,271,782			42,525		4.04	%
Total interest earning assets		5,625,813			53,995		3.88	%		5,218,198			49,832		3.86	%
Noninterest-earning assets:
Cash and due from banks		53,684								66,627
Premises and equipment		79,501								73,170
Less allowance		(78,899)								(86,418)
Other		435,028								397,273
Total assets	$	6,115,127							$	5,668,850
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	3,228,083			2,338		0.29	%	$	2,981,306			1,986		0.27	%
Time deposits		398,897			799		0.81	%		448,035			1,441		1.30	%
Short-term borrowings		1,951			—		0.05	%		7,141			1		0.07	%
FHLB advances		85,778			82		0.38	%		13,078			9		0.28	%
Subordinated notes		113,868			1,554		5.46	%		118,706			1,594		5.37	%
Junior subordinated debentures		38,171			556		5.83	%		38,007			559		5.88	%
Total interest-bearing liabilities		3,866,748			5,329		0.56	%		3,606,273			5,590		0.63	%
Noninterest-bearing demand deposits		1,276,374								1,199,548
Other noninterest-bearing liabilities		287,879								259,017
Total liabilities		5,431,001								5,064,838
Stockholders' equity		684,126								604,012
Total liabilities and stockholders' equity	$	6,115,127							$	5,668,850
Net interest income				$	48,666							$	44,242
Net interest spread							3.32	%							3.23	%
Net interest margin							3.30	%							3.26	%
Net interest margin (TEY)(Non-GAAP)							3.50	%							3.43	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.50	%							3.40	%
Ratio of average interest-earning assets to average interest-bearing liabilities		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.

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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 March 31, 2022

	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume
	2022 vs. 2021
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	1	$	1	$	—
Interest-bearing deposits at financial institutions		(2)		69		(71)
Investment securities (2)		632		632		—
Restricted investment securities		62		10		52
Gross loans/leases receivable (2) (3)		3,470		(5,762)		9,232
Total change in interest income		4,163		(5,050)		9,213
INTEREST EXPENSE
Interest-bearing deposits
Time deposits		352		165		187
Short-term borrowings		(642)		(498)		(144)
Federal Home Loan Bank advances		(1)		—		(1)
Other borrowings		73		5		68
Subordinated notes		(40)		—		(40)
Junior subordinated debentures		(3)		(15)		12
Total change in interest expense		(261)		(343)		82
Total change in net interest income	$	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, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income.  Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.

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

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income (tax equivalent) increased 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 intends to continue to grow quality loans and leases as well as its private placement tax-exempt securities portfolio to maximize yield while minimizing credit and interest rate risk.

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INTEREST EXPENSE

Interest expense (tax equivalent) for the first quarter of 2022 decreased 5% from the first quarter of 2021.  The Company has grown organically at a significant pace over the past several years and core deposit growth has funded that growth.  The cost of funds on the Company’s average interest-bearing liabilities declined in conjunction with the declining rate environment. The Company’s cost of funds was 0.56% for the quarter ended March 31, 2022, which was down from 0.63% for the quarter ended March 31, 2021.

The Company's management intends to continue to shift the mix of funding from wholesale funds 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 months ended March 31, 2022 and 2021.

	Three Months Ended
	March 31,		March 31,
	2022		2021
	(dollars in thousands)
Provision for credit losses - loans and leases	$	(3,849)	$	5,993
Provision for credit losses - off-balance sheet exposures		933		729
Provision for credit losses - held to maturity securities		—		(9)
Total provision for credit losses	$	(2,916)	$	6,713

The Company’s total provision for credit losses was a negative $2.9 million for the first quarter of 2022, compared to $6.7 million for the first quarter of 2021, primarily due to continued strong asset quality and a corresponding reduction in the qualitative factor related to the pandemic. The adoption of ASU 2016-13 now requires an allowance on HTM debt securities and OBS exposures, specifically unfunded commitments. For 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 months ended March 31, 2022, the provision related to OBS was $933 thousand, compared to $729 thousand for the three months ended March 31, 2021.  The increase was due to the increase in the balance of those OBS exposures with increase of line of credit usage. In the three months ended 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 1.55% of total gross loans/leases at March 31, 2022, compared to 1.68% of total gross loans/leases at December 31, 2021 and 1.88% at March 31, 2021.  

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

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NONINTEREST INCOME

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

	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)	%

In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management decreased by $389.3 million in the first quarter of 2022 due to market volatility but increased by $192.1 million 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 6%, comparing the first quarter of 2022 to the same period of the prior 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 increased 10%, comparing the first quarter of 2022 to the same period of the prior 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.

Deposit service fees increased 10% comparing the first quarter of 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 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 63% when comparing the first quarter of 2022 to the same period of the prior year. The decrease was primarily due to decreased residential real estate purchase and the refinancing of residential real estate loans with higher interest rates in 2022.

The Company has grown its interest rate swap program significantly over the past several years.  The Company’s interest rate swap program consists of back-to-back interest rate swaps with two types of commercial borrowers: (1) traditional commercial loans of a certain minimum size and sophistication, and (2) LIHTC permanent loans.  Most of the growth has been in the latter category as the Company has grown relationships with strong LIHTC developers with many years of experience.  The LIHTC industry is strong and growing with an increased need for affordable housing.  The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent upon the pricing. Swap fee income/capital markets revenue totaled $6.4 million for the first quarter of 2022, compared to $13.6 million for the first quarter of 2021. Swap fee income relative to the

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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 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 swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate depending on the interest rate environment.

There were no securities gains or losses for the three months ended March 31, 2022 or March 31, 2021.  

Earnings on BOLI decreased 27% comparing the first quarter of 2022 to the first quarter of 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 3% comparing the first quarter of 2022 to the first quarter of the prior 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 decreased 12% comparing the first quarter of 2022 to the first quarter of the prior 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.  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 188 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income decreased 10% comparing the first quarter of 2022 to the first quarter of the prior year.  The decrease was primarily due to lower equity investment income and lower gains on disposal of leased assets in the first quarter of 2022 as compared to the first quarter of 2021.

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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 decreased 4% comparing the first quarter of 2022 to the same period of the prior year. The decrease was due to lower repair and maintenance costs.

Professional and data processing fees increased 7% comparing both the first quarter of 2022 to the same period in 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 acquisition costs incurred in the first quarter of 2021.  The acquisition costs, which were primarily legal, accounting and other professional fees, relate to the acquisition of GFED as discussed in Note 10 of the consolidated financial statements.

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

FDIC insurance, other insurance and regulatory fee expense increased 23%, comparing the first quarter of 2022 to the first quarter of 2021.  The increase in expense was due to an increase in the asset size of the Company in 2021, which increased the Company’s rates.

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Loan/lease expense decreased 11% when comparing the first quarter of 2022 to the same quarter of 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 thousand for the first quarter of 2022, compared to net cost from and gains/losses on operations of other real estate of $39 thousand for the first quarter of 2021.

Advertising and marketing expense increased 21% comparing the first quarter of 2022 to the first quarter of 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 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 3% when comparing the first quarter of 2022 to the same quarter of 2021.  As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses are expected to also increase.

Correspondent banking expense decreased 1% when comparing the first quarter of 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 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 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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The effective tax rate for the quarter ended March 31, 2022 was 9.0%, which was a decrease from the effective tax rate of 16.4% for the quarter ended March 31, 2021. The decrease was primarily due to a $1.2 million provision adjustment from an accounting method change and excess tax benefit on stock compensation in the first quarter of 2022.

FINANCIAL CONDITION

	As of
	March 31, 2022				December 31, 2021				March 31, 2021
	(dollars in thousands)
	Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	116,930	2	%	$	125,152	2	%	$	133,870	2	%
Securities		823,311	13	%		810,215	13	%		799,825	14	%
Net loans/leases		4,753,082	77	%		4,601,411	75	%		4,279,220	77	%
Derivatives		107,326	2	%		222,220	4	%		122,668	2	%
Other assets		375,170	6	%		337,134	6	%		309,564	5	%
Total assets	$	6,175,819	100	%	$	6,096,132	100	%	$	5,645,147	100	%
Total deposits	$	4,839,689	78	%	$	4,922,772	80	%	$	4,631,782	82	%
Total borrowings		443,270	7	%		170,805	3	%		188,601	3	%
Derivatives		116,193	2	%		225,135	4	%		125,863	2	%
Other liabilities		108,743	2	%		100,410	2	%		90,182	2	%
Total stockholders' equity		667,924	11	%		677,010	11	%		608,719	11	%
Total liabilities and stockholders' equity	$	6,175,819	100	%	$	6,096,132	100	%	$	5,645,147	100	%

During the first quarter of 2022, the Company's total assets increased $79.7 million, or 1% from December 31, 2021, to a total of $6.2 billion. The Company’s net loans/leases increased $151.7 million in the first quarter of 2022. Total deposits decreased $83.1 million in the first quarter of 2022 primarily due to a decrease in interest-bearing demand deposits and time deposits.  Borrowings increased $272.5 million in the first quarter of 2022 which consisted primarily of an increase in FHLB overnight borrowings of $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 majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company's existing markets) and require a thorough underwriting process before investment and are generated by our specialty finance group.

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

	As of
	March 31, 2022					December 31, 2021					March 31, 2021
	Amount			%		Amount			%		Amount			%
	(dollars in thousands)
U.S. treasuries and govt. sponsored agency securities	$	21,380		3	%	$	23,328		3	%	$	14,581		2	%
Municipal securities		667,048		81	%		639,601		79	%		614,476		76	%
Residential mortgage-backed and related securities		86,380		10	%		94,323		12	%		118,052		15	%
Asset-backed securities		23,232		3	%		27,124		3	%		39,815		5	%
Other securities		25,271		3	%		25,839		3	%		12,901		2	%
	$	823,311		100	%	$	810,215		100	%	$	799,825		100	%
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)		7.9					8.2					7.6
Yield on investment securities (tax equivalent)		3.83	%				3.66	%				3.48	%

Due to the sharp increase in intermediate and long-term interest rates during the first quarter ended March 31, 2022, the valuation of the Company’s AFS portfolio declined significantly. As a result, the Company’s net unrealized gain as a percentage of amortized cost changed from 7.17% as of December 31, 2021 to a net unrealized loss as a percentage of amortized cost of -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 14.6% on an annualized basis during the first quarter of 2022.  The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables.

	As of
	March 31, 2022				December 31, 2021				March 31, 2021
	Amount		%		Amount		%		Amount		%
	(dollars in thousands)
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		43,330	1	%		45,191	1			60,134	1
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	$	4,827,868	100	%	$	4,680,132	100	%	$	4,361,051	100	%
Less allowance		(74,786)				(78,721)				(81,831)
Net loans/leases	$	4,753,082			$	4,601,411			$	4,279,220

*Includes PPP loans totaling $6.3 million, $28.2 million and $243.9 million as of March 31, 2022, December 31, 2021 and 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 March 31, 2022 and December 31, 2021, approximately 22% and 19% of the CRE loan portfolio was owner-occupied, respectively.

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Following is a listing of significant industries within the Company's CRE loan portfolio.  These include loans in the following portfolio segments as of 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 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 $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.

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 March 31,				As of December 31,				As of March 31,
	2022				2021				2021
	Amount		%		Amount		%		Amount		%
	(dollars in thousands)
Trucks, Vans and Vocational Vehicles	$	70,241	25	%	$	69,392	26	%	$	63,643	25	%
Manufacturing - General		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		14,846	5	%		14,907	6	%		14,873	6	%
Freightliners		14,224	5	%		10,386	4	%		1,231	1	%
Construction - General		13,851	5	%		13,560	5	%		13,128	5	%
Tractor		12,858	4	%		10,508	4	%		6,739	3	%
Computer Hardware		10,792	4	%		11,223	4	%		11,942	5	%
Other *		100,493	35	%		95,648	35	%		97,429	39	%
Total m2 loans and leases	$	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.

48

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

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

Changes in the ACL for loans/leases for the three 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	$	78,721	$	84,376
Impact of adopting ASU 2016-13		—		(8,102)
Provision		(3,849)		5,993
Charge-offs		(456)		(713)
Recoveries		370		277
Balance, ending	$	74,786	$	81,831

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

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

	As of
Internally Assigned Risk Rating *	March 31, 2022			December 31, 2021			March 31, 2021
	(dollars in thousands)
Special Mention (Rating 6)	$	63,622		$	62,510		$	53,466
Substandard (Rating 7)		54,491			53,296			84,982
Doubtful (Rating 8)		—			—			—
	$	118,113		$	115,806		$	138,448
Criticized Loans **	$	118,113		$	115,806		$	138,448
Classified Loans ***	$	54,491		$	53,296		$	84,982
Criticized Loans as a % of Total Loans/Leases		2.45	%		2.47	%		3.17	%
Classified Loans as a % of Total Loans/Leases		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.

49

Part I

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Criticized loans increased 2% and classified loans increased 2% from December 31, 2021 to March 31, 2022. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

	As of
	March 31, 2022		December 31, 2021		March 31, 2021
ACL on loans/leases / Gross loans/leases	1.55	%	1.68	%	1.88	%
ACL on loans/leases / NPLs	2,721.47	%	2,825.21	%	590.28	%

Although management believes that the ACL at 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 for credit losses.  Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

See Note 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 March 31,			As of December 31,			As of March 31,
	2022			2021			2021
	(dollars in thousands)
Nonaccrual loans/leases (1)	$	2,744		$	2,759		$	13,863
Accruing loans/leases past due 90 days or more		4			1			—
Total NPLs		2,748			2,760			13,863
OREO		—			—			173
Other repossessed assets		—			—			50
Total NPAs	$	2,748		$	2,760		$	14,086
NPLs to total loans/leases		0.06	%		0.06	%		0.32	%
NPAs to total loans/leases plus repossessed property		0.06	%		0.06	%		0.32	%
NPAs to total assets		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.

NPAs at March 31, 2022 and December 31, 2021 were $2.7 million, down $11.3 million from March 31, 2021.  The ratio of NPAs to total assets was 0.04% at March 31, 2022, down from 0.05% at December 31, 2021, and down from 0.25% at March 31, 2021.

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

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

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

50

Part I

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, 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.

51

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
	March 31, 2022		December 31, 2021		March 31, 2021
	(dollars in thousands)
Federal funds purchased	$	1,190	$	3,800	$	6,840

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

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

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

	As of
	March 31, 2022		December 31, 2021		March 31, 2021
	(dollars in thousands)
Overnight FHLB advances	$	290,000	$	15,000	$	25,000

FHLB advances (all overnight) increased $275.0 million in the current quarter compared to the prior quarter due to strong loan growth and a decrease in 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 March 31, 2022.

The Company had subordinated notes totaling $113.9 million as of both March 31, 2022 and 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.

52

Part I

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).

	March 31, 2022				December 31, 2021
			Weighted				Weighted
			Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate
	(dollars in thousands)
Year ending December 31:
2022	$	290,243	0.53	%	$	15,003	0.31	%
2023		—	—			—	—
2024		—	—			—	—
2025		—	—			—	—
Total Wholesale Funding	$	290,243	0.53	%	$	15,003	0.31	%

During the first quarter of 2022, wholesale funding, primarily overnight FHLB advances, increased $275.2 million due to strong loan growth and decreased deposits.

STOCKHOLDERS' EQUITY

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

	As of
	March 31, 2022			December 31, 2021			March 31, 2021
	(dollars in thousands)
Common stock	$	15,580		$	15,613		$	15,844
Additional paid in capital		272,370			273,768			276,350
Retained earnings		405,762			386,077			316,900
AOCI		(25,788)			1,552			(375)
Total stockholders' equity	$	667,924		$	677,010		$	608,719
TCE / TA ratio (non-GAAP)		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.

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

53

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

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

At 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 $517.7 million, of which $61.7 million was secured and $456.0 million was unsecured. At December 31, 2021, the full $517.7 million was available.

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

As of March 31, 2022, the Company had $620.8 million in average correspondent banking deposits spread over 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 $177.1 million during the first quarter of 2022, compared to $36.5 million for the same period of 2021. The net decrease in interest-bearing deposits at financial institutions was $18.5 million for the first quarter of 2022, compared to a net increase of $32.9 million for the same period of 2021. Proceeds from calls, maturities, and paydowns of securities were $17.3 million for the first three months of 2022, compared to $68.3 million for the same period of 2021. Purchases of securities used cash of $52.4 million for the first three months of 2022, compared to $53.6 million for the same period of 2021. There were no proceeds from the sales of securities in the first three months of 2022.  Proceeds from sales of securities were $19.5 million for the first three months of  2021.  The net increase in loans/leases used cash of $148.5 million for the first three months of 2022 compared to $108.0 million for the same period of 2021.

Financing activities provided cash of $183.2 million for the first three months of 2022, compared to $42.8 million for same period of 2021. Net increases in deposits totaled $83.1 million for the first three months of 2022, compared to $32.6 million for the same period of 2021. During the first three months of 2022, the Company's short-term borrowings decreased $2.6 million, compared to an increase in short-term borrowings of $1.4 million for the same period of 2021. There were no long-term FHLB advances during the first three months of 2022 and 2021.  There were no maturities and principal payments on FHLB term advances in the first three months of 2022 and 2021. Net increase in overnight advances totaled $275.0 million for the first three months of 2022.  In the first three months of 2021, the Company increased overnight FHLB advances by $10.0 million.  

54

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Refer to Note 9 of the Consolidated Financial Statements for additional information regarding regulatory capital.

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

● The loss of key executives or employees.

● Changes in consumer spending.

55

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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

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

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

56

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.

57

Part I

Item 3

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

	NET INTEREST INCOME EXPOSURE in YEAR 1
			As of March 31,		As of December 31,		As of December 31,
INTEREST RATE SCENARIO	POLICY LIMIT		2022		2021		2020
100 basis point downward shift	(10.0)	%	(0.8)	%	(0.1)	%	—	%
200 basis point upward shift	(10.0)	%	0.9	%	3.1	%	2.5	%
300 basis point upward shock	(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 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.

58

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 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.

59

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1           Legal Proceedings

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

Item 1A        Risk Factors

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

Item 2           Unregistered Sales of Equity Securities and Use of Proceeds

On 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 in March 2022. All shares repurchased under the share repurchase program during the first quarter were retired.

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

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6           Exhibits

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/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 March 31, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three months ended March 31, 2022 and March 31, 2021; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and March 31, 2021; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2022 and March 31, 2021; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 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.

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SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)

Date	May 9, 2022	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer
Date	May 9, 2022	/s/ Todd A. Gipple
		Todd A. Gipple, President
		Chief Operating Officer
		Chief Financial Officer
Date	May 9, 2022	/s/ Nick W. Anderson
		Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)

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