QCR (QCRH) 10-Q 2023 Q3 Quarterly report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023

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

For the transition period from ______to________

Commission file number 0-22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

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

3551 7^th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 736-3580

(Registrant's telephone number, including area code)

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

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

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

Yes ☒      No ☐

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

Yes ☒      No ☐

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

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

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

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

Yes ☐      No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of November 1, 2023, the Registrant had outstanding 16,732,384 shares of common stock, $1.00 par value per share.

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page Number(s)
Part I	FINANCIAL INFORMATION
	Item 1	Consolidated Financial Statements (Unaudited)
		Consolidated Balance Sheets As of September 30, 2023 and December 31, 2022	4
		Consolidated Statements of Income For the Three Months Ended September 30, 2023 and 2022	5
		Consolidated Statements of Income For the Nine Months Ended September 30, 2023 and 2022	6
		Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2023 and 2022	7
		Consolidated Statements of Changes in Stockholders' Equity For the Three and Nine Months Ended September 30, 2023 and 2022	8
		Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2023 and 2022	9
		Notes to Consolidated Financial Statements	11
		Note 1. Summary of Significant Accounting Policies	11
		Note 2. Investment Securities	13
		Note 3. Loans/Leases Receivable	16
		Note 4. Derivatives and Hedging Activities	26
		Note 5. Income Taxes	29
		Note 6. Earnings Per Share	30
		Note 7. Fair Value	30
		Note 8. Business Segment Information	32
		Note 9. Regulatory Capital Requirements	33
		Note 10. Commitments	34
	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations
		Introduction	35
		General	35
		Critical Accounting Policies and Critical Accounting Estimates	35
		Executive Overview	36
		Strategic Financial Metrics	37
		Strategic Developments	38
		GAAP to Non-GAAP Reconciliations	39
		Net Interest Income - (Tax Equivalent Basis)	41
		Results of Operations		45
		Interest Income		45
		Interest Expense		46
		Provision for Credit Losses		46
		Noninterest Income		47

2

		Noninterest Expense	50
		Income Taxes	53
		Financial Condition	53
		Investment Securities	53
		Loans/Leases	54
		Allowance for Credit Losses on Loans/Leases and OBS Exposures	56
		Nonperforming Assets	58
		Deposits	58
		Borrowings	59
		Stockholders' Equity	61
		Liquidity and Capital Resources	61
		Special Note Concerning Forward-Looking Statements	63
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	65
	Item 4	Controls and Procedures	67
Part II	OTHER INFORMATION
	Item 1	Legal Proceedings	68
	Item 1A	Risk Factors	68
	Item 2	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	68
	Item 3	Defaults Upon Senior Securities	68
	Item 4	Mine Safety Disclosures	68
	Item 5	Other Information	68
	Item 6	Exhibits	69
Signatures

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

3

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of September 30, 2023 and December 31, 2022

	September 30,		December 31,
	2023		2022
	(dollars in thousands)
Assets
Cash and due from banks	$	104,265	$	59,723
Federal funds sold		20,300		56,910
Interest-bearing deposits at financial institutions		60,350		67,360
Securities held to maturity, at amortized cost, net of allowance for credit losses		615,115		587,142
Securities available for sale, at fair value		281,279		340,960
Total securities		896,394		928,102
Loans receivable held for sale		278,893		1,480
Loans/leases receivable held for investment		6,327,414		6,137,391
Gross loans/leases receivable		6,606,307		6,138,871
Less allowance for credit losses		(87,669)		(87,706)
Net loans/leases receivable		6,518,638		6,051,165
Bank-owned life insurance		107,389		106,580
Premises and equipment, net		118,943		117,948
Restricted investment securities		43,748		42,501
Other real estate owned, net		120		133
Goodwill		139,027		137,607
Intangibles		14,537		16,759
Derivatives		291,295		177,631
Other assets		225,051		186,418
Total assets	$	8,540,057	$	7,948,837
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,027,791	$	1,262,981
Interest-bearing		5,467,061		4,721,236
Total deposits		6,494,852		5,984,217
Short-term borrowings		470		129,630
Federal Home Loan Bank advances		430,000		415,000
Subordinated notes		232,958		232,662
Junior subordinated debentures		48,698		48,602
Derivatives		320,220		200,701
Other liabilities		184,476		165,301
Total liabilities		7,711,674		7,176,113
Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 September 2023 and December 2022 - no shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 September 2023 - 16,731,646 shares issued and outstanding December 2022 - 16,795,942 shares issued and outstanding		16,732		16,796
Additional paid-in capital		369,833		370,712
Retained earnings		523,142		450,114
Accumulated other comprehensive loss:
Securities available for sale		(55,061)		(44,677)
Derivatives		(26,263)		(20,221)
Total stockholders' equity		828,383		772,724
Total liabilities and stockholders' equity	$	8,540,057	$	7,948,837

See Notes to Consolidated Financial Statements (Unaudited)

4

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended September 30, 2023 and 2022

	2023		2022
	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees:
Taxable	$	73,396	$	58,143
Nontaxable		23,725		11,712
Securities:
Taxable		3,788		3,304
Nontaxable		5,510		4,955
Interest-bearing deposits at financial institutions		1,206		380
Restricted investment securities		659		673
Federal funds sold		284		100
Total interest and dividend income		108,568		79,267
Interest expense:
Deposits		43,575		12,570
Short-term borrowings		10		84
Federal Home Loan Bank advances		5,724		2,584
Other borrowings		—		53
Subordinated notes		3,307		2,518
Junior subordinated debentures		697		689
Total interest expense		53,313		18,498
Net interest income		55,255		60,769
Provision for credit losses		3,806		—
Net interest income after provision for credit losses		51,449		60,769
Noninterest income:
Trust fees		2,863		2,537
Investment advisory and management fees		947		921
Deposit service fees		2,107		2,214
Gains on sales of residential real estate loans, net		476		641
Gains on sales of government guaranteed portions of loans, net		—		50
Capital markets revenue		15,596		10,545
Earnings on bank-owned life insurance		1,807		605
Debit card fees		1,584		1,453
Correspondent banking fees		450		189
Loan related fee income		800		652
Fair value gain (loss) on derivatives		(336)		904
Other		299		384
Total noninterest income		26,593		21,095
Noninterest expense:
Salaries and employee benefits		32,098		29,175
Occupancy and equipment expense		6,228		6,033
Professional and data processing fees		4,456		4,477
Acquisition costs		—		315
Post-acquisition compensation, transition and integration costs		—		62
FDIC insurance, other insurance and regulatory fees		1,721		1,497
Loan/lease expense		826		390
Net cost of and gains/losses on operations of other real estate		3		19
Advertising and marketing		1,429		1,437
Communication and data connectivity		478		639
Supplies		335		289
Bank service charges		605		568
Correspondent banking expense		232		218
Intangibles amortization		691		787
Payment card processing		733		477
Trust expense		432		227
Other		814		1,136
Total noninterest expense		51,081		47,746
Net income before income taxes		26,961		34,118
Federal and state income tax expense		1,840		4,824
Net income	$	25,121	$	29,294
Basic earnings per common share	$	1.50	$	1.73
Diluted earnings per common share	$	1.49	$	1.71
Weighted average common shares outstanding		16,717,303		16,900,968
Weighted average common and common equivalent shares outstanding		16,847,951		17,110,691
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 INCOME (UNAUDITED)

Nine Months Ended September 30, 2023 and 2022

	2023		2022
	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees:
Taxable	$	208,449	$	147,366
Nontaxable		60,582		26,489
Securities:
Taxable		10,847		8,792
Nontaxable		15,715		13,750
Interest-bearing deposits at financial institutions		3,151		584
Restricted investment securities		1,677		1,439
Federal funds sold		741		114
Total interest and dividend income		301,162		198,534
Interest expense:
Deposits		111,800		21,231
Short-term borrowings		142		87
Federal Home Loan Bank advances		11,898		3,447
Other borrowings		—		53
Subordinated notes		9,922		5,888
Junior subordinated debentures		2,130		1,926
Total interest expense		135,892		32,632
Net interest income		165,270		165,902
Provision for credit losses		11,340		8,284
Net interest income after provision for loan/lease losses		153,930		157,618
Noninterest income:
Trust fees		8,613		7,997
Investment advisory and management fees		2,812		2,940
Deposit service fees		6,169		5,992
Gains on sales of residential real estate loans, net		1,288		1,943
Gains on sales of government guaranteed portions of loans, net		30		69
Capital markets revenue		55,109		29,971
Securities losses, net		(451)		—
Earnings on bank-owned life insurance		3,352		1,301
Debit card fees		4,639		3,959
Correspondent banking fees		1,197		710
Loan related fee income		2,221		1,814
Fair value gain (loss) on derivatives		(680)		2,242
Other		656		572
Total noninterest income		84,955		59,510
Noninterest expenses:
Salaries and employee benefits		95,560		82,774
Occupancy and equipment expense		18,242		15,948
Professional and data processing fees		12,048		12,513
Acquisition costs		—		4,139
Post-acquisition compensation, transition and integration costs		207		4,858
FDIC insurance, other insurance and regulatory fees		5,022		4,201
Loan/lease expense		2,034		1,418
Net cost of (income from) and gains/losses on operations of other real estate		(64)		77
Advertising and marketing		4,401		3,396
Communication and data connectivity		1,614		1,626
Supplies		921		772
Bank service charges		1,831		1,719
Correspondent banking expense		663		630
Intangibles amortization		2,222		2,067
Payment card processing		1,820		1,365
Trust expense		983		609
Other		2,089		2,207
Total noninterest expenses		149,593		140,319
Net income before income taxes		89,292		76,809
Federal and state income tax expense		8,589		8,649
Net income	$	80,703	$	68,160
Basic earnings per common share	$	4.82	$	4.25
Diluted earnings per common share	$	4.79	$	4.20
Weighted average common shares outstanding		16,731,847		16,030,371
Weighted average common and common equivalent shares outstanding		16,863,203		16,243,921
Cash dividends declared per common share	$	0.18	$	0.18

See Notes to Consolidated Financial Statements (Unaudited)

6

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and Nine Months Ended September 30, 2023 and 2022

	Three Months Ended September 30,
	2023		2022
	(dollars in thousands)
Net income	$	25,121	$	29,294
Other comprehensive loss:
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period before tax		(19,072)		(23,069)
		(19,072)		(23,069)
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(7,019)		(8,955)
Less reclassification adjustment for caplet amortization before tax		(224)		(261)
		(6,795)		(8,694)
Other comprehensive loss, before tax		(25,867)		(31,763)
Tax benefit		(6,452)		(6,980)
Other comprehensive loss, net of tax		(19,415)		(24,783)
Comprehensive income	$	5,706	$	4,511

	Nine Months Ended September 30,
	2023		2022
	(dollars in thousands)
Net income	$	80,703	$	68,160
Other comprehensive loss:
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period before tax		(14,808)		(76,814)
Less reclassification adjusted for impairment losses included in net income before tax		(989)		—
Less reclassification adjustment for sales losses included in net income before tax		(451)		—
		(13,368)		(76,814)
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(9,152)		(23,769)
Less reclassification adjustment for caplet amortization before tax		(638)		(723)
		(8,514)		(23,046)
Other comprehensive loss, before tax		(21,882)		(99,860)
Tax benefit		(5,456)		(23,451)
Other comprehensive loss, net of tax		(16,426)		(76,409)
Comprehensive income (loss)	$	64,277	$	(8,249)

See Notes to Consolidated Financial Statements (Unaudited)

7

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Nine Months Ended September 30, 2023 and 2022

							Accumulated
			Additional				Other
	Common		Paid-In		Retained		Comprehensive
	Stock		Capital		Earnings		(Loss)		Total
	(dollars in thousands)
Balance December 31, 2022	$	16,796	$	370,712	$	450,114	$	(64,898)	$	772,724
Net income		—		—		27,157		—		27,157
Other comprehensive income, net of tax		—		—		—		9,325		9,325
Common cash dividends declared, $0.06 per share		—		—		(1,010)		—		(1,010)
Repurchase and cancellation of 152,500 shares of common stock
as a result of a share repurchase program		(153)		(3,356)		(4,210)		—		(7,719)
Stock-based compensation expense		—		953		—		—		953
Issuance of common stock under employee benefit plans		71		(7)		—		—		64
Balance, March 31, 2023	$	16,714	$	368,302	$	472,051	$	(55,573)	$	801,494
Net income		—		—		28,425		—		28,425
Other comprehensive loss, net of tax		—		—		—		(6,336)		(6,336)
Common cash dividends declared, $0.06 per share		—		—		(1,003)		—		(1,003)
Repurchase and cancellation of 22,500 shares of common stock
as a result of a share repurchase program		(23)		(495)		(449)		—		(967)
Stock-based compensation expense		—		673		—		—		673
Issuance of common stock under employee benefit plans		23		380		—		—		403
Balance, June 30, 2023	$	16,714	$	368,860	$	499,024	$	(61,909)	$	822,689
Net income		—		—		25,121		—		25,121
Other comprehensive loss, net of tax		—		—		—		(19,415)		(19,415)
Common cash dividends declared, $0.06 per share		—		—		(1,003)		—		(1,003)
Stock-based compensation expense		—		527		—		—		527
Issuance of common stock under employee benefit plans		18		446		—		—		464
Balance, September 30, 2023	$	16,732	$	369,833	$	523,142	$	(81,324)	$	828,383

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

See Notes to Consolidated Financial Statements (Unaudited)

8

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 2023 and 2022

	2023		2022
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	80,703	$	68,160
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		6,132		5,699
Provision for credit losses		11,340		8,284
Stock-based compensation expense		2,153		1,678
Deferred compensation expense accrued		4,188		3,027
Gains on other real estate owned, net		(84)		(19)
Amortization of premiums on securities, net		964		939
Caplet amortization		638		723
Fair value (gain) loss on derivatives		680		(2,242)
Securities losses, net		451		—
Loans originated for sale		(55,271)		(82,009)
Proceeds on sales of loans		57,171		88,010
Gains on sales of residential real estate loans		(1,288)		(1,943)
Gains on sales of government guaranteed portions of loans		(30)		(69)
Losses on sales and disposals of premises and equipment		386		520
Amortization of intangibles		2,222		2,067
Accretion of acquisition fair value adjustments, net		(1,501)		(2,893)
Increase in cash value of bank-owned life insurance		(2,221)		(1,301)
Gain on bank-owned life insurance death benefits		(1,131)
Increase in other assets		(34,126)		(33,840)
Decrease in other liabilities		13,973		21,843
Net cash provided by operating activities	$	85,349	$	76,634
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold		36,610		(15,840)
Net decrease in interest-bearing deposits at financial institutions		7,010		49,593
Proceeds from sales of other real estate owned		295		223
Activity in securities portfolio:
Purchases		(102,669)		(173,331)
Calls, maturities and redemptions		76,011		30,597
Paydowns		11,660		27,311
Sales		30,556		111,375
Activity in restricted investment securities:
Purchases		(4,908)		(19,885)
Redemptions		3,661		2,159
Net increase in loans/leases originated and held for investment		(479,757)		(524,877)
Purchase of premises and equipment		(8,023)		(27,119)
Proceeds from sales of premises and equipment		510		413
Purchase of bank-owned life insurance		—		(10,000)
Proceeds from bank-owned life insurance death benefits		2,543		—
Net cash acquired from acquisition		—		144,973
Net cash used in investing activities	$	(426,501)	$	(404,408)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts		510,635		(58,310)
Net increase (decrease) in short-term borrowings		(129,160)		81,380
Activity in Federal Home Loan Bank advances:
Term advances		135,000		—
Net change in short-term and overnight advances		(120,000)		320,000
Prepayments		—		(16,000)
Activity in other borrowings:
Proceeds from other borrowings		—		10,000
Calls, maturities and scheduled principal payments		—		(10,000)
Proceeds from subordinated notes		—		100,000
Payment of cash dividends on common stock		(3,026)		(2,933)
Proceeds from issuance of common stock, net		931		345
Repurchase and cancellation of shares		(8,686)		(47,916)
Net cash provided by financing activities	$	385,694	$	376,566
Net increase in cash and due from banks		44,542		48,792
Cash and due from banks, beginning		59,723		37,490
Cash and due from banks, ending	$	104,265	$	86,282

9

	2023		2022
	(dollars in thousands)
Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest	$	(258,779)	$	32,046
Income/franchise taxes		2,214		107
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale and derivative instruments, net		(16,426)		(76,409)
Increase in fair value of fair value hedges		3,997		—
Transfers of loans to other real estate owned		218		326
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities		110,641		(48,195)
Dividends payable		1,003		1,012
Transfer of loans to loans held for sale		277,995		—
Measurement period adjustment to goodwill		1,420		—
Supplemental disclosure of cash flow information for acquisitions:
Fair value of assets acquired:
Cash and due from banks	$	—	$	171,844
Interest-bearing deposits at financial institutions		—		17,134
Securities		—		143,017
Loans receivable, net		—		801,697
Bank-owned life insurance		—		32,100
Premises and equipment, net		—		16,257
Restricted investment securities		—		2,220
Other real estate owned		—		55
Intangibles		—		10,264
Other assets		—		23,685
Total assets acquired	$	—	$	1,218,273
Fair value of liabilities assumed:
Deposits	$	—	$	1,076,573
FHLB advances		—		16,000
Subordinated debentures		—		19,621
Junior subordinated debentures		—		10,310
Other liabilities		—		15,225
Total liabilities assumed		—		1,137,729
Net assets acquired	$	—	$	80,544
Consideration paid:
Cash paid *	$	—	$	26,871
Common stock		—		117,214
Total consideration paid		—		144,085
Goodwill	$	—	$	63,541
*Net cash acquired at closing totaled $145.0 million for acquisition of Guaranty Bank in 2022.

See Notes to Consolidated Financial Statements (Unaudited)

10

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2023

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, 2022, included in the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2023. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended September 30, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023, 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	GFED: Guaranty Federal Bancshares, Inc.
Allowance: Allowance for credit losses	HTM: Held to maturity
AOCI: Accumulated other comprehensive income (loss)	LIBOR: London Inter-Bank Offered Rate
ASC: Accounting Standards Codification	LIHTC: Low-income housing tax credit
ASU: Accounting Standards Update	m2: m2 Equipment Finance, LLC
BOLI: Bank-owned life insurance	NIM: Net interest margin
Caps: Interest rate cap derivatives	NPA: Nonperforming asset
CECL: Current Expected Credit Losses	NPL: Nonperforming loan
Community National: Community National Bancorporation	OBS: Off-balance sheet
Company: QCR Holdings, Inc.	OREO: Other real estate owned
COVID-19: Coronavirus Disease 2019	OTTI: Other-than-temporary impairment
CRBT: Cedar Rapids Bank & Trust Company	PCAOB: Public Company Accounting Oversight Board
CRE: Commercial real estate	PCD: Purchase credit deteriorated loan
CSB: Community State Bank	PCI: Purchased credit impaired
C&I: Commercial and industrial	PPP: Paycheck Protection Program
EBA: Excess balance account	Provision: Provision for credit losses
EPS: Earnings per share	QCBT: Quad City Bank & Trust Company
Exchange Act: Securities Exchange Act of 1934, as	ROAA: Return on average assets
amended	ROAE: Return on average equity
FASB: Financial Accounting Standards Board	SEC: Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation	SFCB: Springfield First Community Bank
Federal Reserve: Board of Governors of the Federal	SFG: Specialty Finance Group
Reserve System	SOFR: Secured Overnight Financing Rate
FHLB: Federal Home Loan Bank	TA: Tangible Assets
FRB: Federal Reserve Bank of Chicago	TBV: Tangible book value
Guaranty: Guaranty Bank, formerly known as Springfield First	TCE: Tangible common equity
Community Bank	TDRs: Troubled debt restructurings
	TEY: Tax equivalent yield

11

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

The acquisition of GFED, the holding company of GB, headquartered in Springfield, Missouri, occurred on April 1, 2022 and on April 2, 2022, GB was merged into SFCB, the Company’s Springfield-based charter.  The combined bank changed its name to Guaranty Bank. The financial results for the periods since the acquisition and merger are included in this report.  See Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for additional information about the acquisition and merger.

Recent 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.  In December 2022, in response to the postponement of the cessation date of LIBOR, the FASB issued ASU 2022-06 which defers the sunset date of the ASU 2020-4 guidance to December 31, 2024, after which entities will no longer be permitted to apply the relief.

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 include 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.  This transition occurred prior to the expiration of published LIBOR rates on June 30, 2023 and did not have a significant impact on 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.  This standard was adopted on January 1, 2023 and did not have a significant impact on the Company’s financial statements.

In March 2023, the FASB issued ASU 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a Consensus of the Emerging Issues Task Force).” Under the standard, the accounting guidance expands use of the proportional amortization method of accounting to equity investments in tax credit programs beyond those in LIHTC programs.  The ASU also prescribes specific information reporting entities must disclose about tax credit investments each period. The ASU is effective for reporting periods beginning after December 31, 2023, for public business entities, with all other entities having an extra year to adopt.  Entities will have the option of applying the ASU using either a modified retrospective or retrospective adoption approach.  For some changes related to existing LIHTC investments, prospective application is permitted. The standard is not expected to have a significant impact on the Company’s financial statements.

Reclassifications: Certain amounts in the prior year’s Consolidated Financial Statements have been reclassified, with no effect on net income or stockholders’ equity, to conform with the current period presentation.

12

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of September 30, 2023 and December 31, 2022 are summarized as follows:

			Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
	Cost		(Losses)		Gains		(Losses)		Value
	(dollars in thousands)
September 30, 2023:
Securities HTM:
Municipal securities	$	614,245	$	(180)	$	2,448	$	(92,718)	$	523,795
Other securities		1,050		—		—		(26)		1,024
	$	615,295	$	(180)	$	2,448	$	(92,744)	$	524,819
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	19,130	$	—	$	13	$	(3,141)	$	16,002
Residential mortgage-backed and related securities		66,433		—		—		(8,487)		57,946
Municipal securities		207,318		—		—		(57,546)		149,772
Asset-backed securities		16,226		—		144		(44)		16,326
Other securities		46,531		(989)		2		(4,311)		41,233
	$	355,638	$	(989)	$	159	$	(73,529)	$	281,279

			Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
	Cost		(Losses)		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2022:
Securities HTM:
Municipal securities	$	586,272	$	(180)	$	5,292	$	(56,798)	$	534,586
Other securities		1,050		—		—		—		1,050
	$	587,322	$	(180)	$	5,292	$	(56,798)	$	535,636
Securities AFS:
U.S. govt. sponsored agency securities	$	19,745	$	—	$	19	$	(2,783)	$	16,981
Residential mortgage-backed and related securities		73,438		—		—		(7,223)		66,215
Municipal securities		239,812		—		66		(46,700)		193,178
Asset-backed securities		18,885		—		48		(205)		18,728
Other securities		48,631		—		27		(2,800)		45,858
	$	400,511	$	—	$	160	$	(59,711)	$	340,960

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.

13

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2023 and December 31, 2022, are summarized in the tables below. Securities available-for-sale, for which an allowance for credit losses has been provided, are not included in these disclosures.

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
September 30, 2023:
Securities HTM:
Municipal securities	$	235,313	$	(20,751)	$	237,690	$	(71,967)	$	473,003	$	(92,718)
Other securities		523		(26)		—		—		523		(26)
	$	235,836	$	(20,777)	$	237,690	$	(71,967)	$	473,526	$	(92,744)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	1,649	$	(1)	$	13,377	$	(3,140)	$	15,026	$	(3,141)
Residential mortgage-backed and related securities		77		(1)		57,869		(8,486)		57,946		(8,487)
Municipal securities		1,067		(38)		148,159		(57,508)		149,226		(57,546)
Asset-backed securities		—		—		10,521		(44)		10,521		(44)
Other securities		3,823		(427)		34,190		(3,884)		38,013		(4,311)
	$	6,616	$	(467)	$	264,116	$	(73,062)	$	270,732	$	(73,529)

	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, 2022:
Securities HTM:
Municipal securities	$	347,651	$	(56,798)	$	—	$	—	$	347,651	$	(56,798)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	5,138	$	(326)	$	10,591	$	(2,457)	$	15,729	$	(2,783)
Residential mortgage-backed and related securities		48,469		(3,327)		17,690		(3,896)		66,159		(7,223)
Municipal securities		178,172		(42,661)		9,809		(4,039)		187,981		(46,700)
Asset-backed securities		13,684		(205)		—		—		13,684		(205)
Other securities		35,206		(2,404)		4,122		(396)		39,328		(2,800)
	$	280,669	$	(48,923)	$	42,212	$	(10,788)	$	322,881	$	(59,711)

At September 30, 2023, the investment portfolio included 644 securities. Of this number, 621 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 17.1% of the total amortized cost of the portfolio. Of these 621 securities, there were 480 securities that had an unrealized loss for twelve months or more due to the current rate environment.  

For the quarter ended March 31, 2023, the Company’s impairment evaluation determined that one publicly traded debt security experienced a decline in fair value due to credit quality, rather than market factors. As a result, the Company recognized a credit loss expense of $989 thousand in the first quarter and established an ACL on the related AFS security. For the quarters ended June 30, 2023 and September 30, 2023, there has been no change to the ACL on the related AFS security.  

The following table presents the activity in the allowance for credit losses for held to maturity and available for sale securities by major security type for the three and nine months ended September 30, 2023 and 2022.

	Three Months Ended						Nine Months Ended
	September 30, 2023				September 30, 2022		September 30, 2023				September 30, 2022
	Securities HTM		Securities AFS		Securities HTM		Securities HTM			Securities AFS	Securities HTM
	Municipal		Corporate		Municipal		Municipal			Corporate	Municipal
	securities		securities		securities		securities			securities	securities
	(dollars in thousands)
Allowance for credit losses:
Beginning balance	$	180	$	989	$	198	$	180	$	—	$	198
Provision for credit loss expense		—		—		—		—		989		—
Balance, ending	$	180	$	989	$	198	$	180	$	989	$	198

14

There were no sales of securities for the three months ended September 30, 2023 and 2022. All sales of securities for the nine months ended September 30, 2023 and 2022 were securities identified as AFS.

	Nine Months Ended
	September 30, 2023		September 30, 2022
Proceeds from sales of securities	$	30,568	$	111,375
Gross gains from sales of securities		56		—
Gross losses from sales of securities		(507)		—

The amortized cost and fair value of securities as of September 30, 2023 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	$	1,907	$	1,882
Due after one year through five years		27,159		27,700
Due after five years		586,229		495,237
	$	615,295	$	524,819
Securities AFS:
Due in one year or less	$	3,160	$	3,146
Due after one year through five years		14,338		12,239
Due after five years		255,481		191,622
		272,979		207,007
Residential mortgage-backed and related securities		66,433		57,946
Asset-backed securities		16,226		16,326
	$	355,638	$	281,279

Portions of the U.S. government sponsored agency securities and municipal securities as of September 30, 2023, 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	$	230,493	$	194,222
Securities AFS:
Municipal securities		205,747		148,235
Other securities		45,577		40,277
	$	251,324	$	188,512

As of September 30, 2023, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 81 issuers with fair values totaling $80.4 million and revenue bonds, issued by 166 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $593.2 million. The Company also held investments in general obligation bonds in 18 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 30 states, including 14 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2022, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 118 issuers with fair values totaling $110.6 million and revenue bonds, issued by 181 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $617.2 million. The Company also held investments in general obligation bonds in 22 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 29 states, including 12 states in which the aggregate fair value exceeded $5.0 million.

15

Both general obligation and revenue bonds are diversified across many issuers. As of September 30, 2023 and as of December 31, 2022, the Company held revenue bonds of two issuers, both located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuers’ financial conditions are strong and the sources of repayment are diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to the Company’s loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of September 30, 2023, all were within policy limitations approved by the Company’s board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of September 30, 2023, 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 September 30, 2023 and December 31, 2022 is presented as follows:

	September 30, 2023		December 31, 2022
	(dollars in thousands)
C&I:
C&I - revolving	$	299,588	$	296,869
C&I - other * / **		1,487,568		1,451,693
		1,787,156		1,748,562
CRE - owner occupied		610,618		629,367
CRE - non-owner occupied		955,552		963,239
Construction and land development**		1,394,054		1,192,061
Multi-family**		1,156,980		963,803
Direct financing leases***		34,401		31,889
1-4 family real estate****		539,931		499,529
Consumer		127,615		110,421
		6,606,307		6,138,871
Allowance for credit losses		(87,669)		(87,706)
	$	6,518,638	$	6,051,165
*** Direct financing leases:
Net minimum lease payments to be received	$	38,729	$	34,754
Estimated unguaranteed residual values of leased assets		165		165
Unearned lease/residual income		(4,493)		(3,030)
		34,401		31,889
Plus deferred lease origination costs, net of fees		100		226
		34,501		32,115
Less allowance for credit losses		(1,081)		(970)
	$	33,420	$	31,145

*      Includes equipment financing agreements outstanding at m2, totaling $306.6 million and $278.0 million as of September 30, 2023 and December 31, 2022, respectively.

**     As of September 30, 2023, there were C&I – other, construction and land development and multi-family loans held for sale in preparation for securitization totaling $278.0 million. The balances in these loan classes as of September 30, 2023 were $359 thousand, $12.7 million and $265.0 million, respectively. There were no loans held for sale in preparation for securitization at December 31, 2022.

***   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 held for sale totaling $898 thousand and $1.5 million as of September 30, 2023 and December 31, 2022, respectively.

16

Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $31.3 million and $24.3 million at September 30, 2023 and December 31, 2022, respectively, and was included in other assets on the consolidated balance sheets.

Changes in discounts on acquired loans for the three and nine months ended September 30, 2023 and 2022, respectively, are presented as follows:

	For the Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
	Performing		Performing			Performing	Performing
	Loans		Loans		Loans		Loans
	(dollars in thousands)
Balance at the beginning of the period	$	(5,104)	$	(12,989)	$	(6,088)	$	(1,533)
Discount added at acquisition		—		—		—		(13,381)
Accretion recognized		540		1,148		1,524		3,073
Balance at the end of the period	$	(4,564)	$	(11,841)	$	(4,564)	$	(11,841)

The aging of the loan/lease portfolio by classes of loans/leases as of September 30, 2023 and December 31, 2022 is presented as follows:

	As of September 30, 2023
										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	$	299,588		$	—		$	—		$	—		$	—	$		299,588
C&I - other		1,464,582			6,609			6,155			—			10,222			1,487,568
CRE - owner occupied		606,998			133			—			—			3,487			610,618
CRE - non-owner occupied		950,286			88			—			—			5,178			955,552
Construction and land development		1,389,601			—			—			—			4,453			1,394,054
Multi-family		1,148,808			—			—			—			8,172		��	1,156,980
Direct financing leases		33,694			315			151			—			241			34,401
1-4 family real estate		537,271			—			405			—			2,255			539,931
Consumer		126,983			20			52			—			560			127,615
	$	6,557,811		$	7,165		$	6,763		$	—		$	34,568		$	6,606,307
As a percentage of total loan/lease portfolio		99.27	%		0.11	%		0.10	%		—	%		0.52	%		100.00	%

	As of December 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	$	296,869		$	—		$	—		$	—		$	—		$	296,869
C&I - other		1,442,629			4,800			1,124			5			3,135			1,451,693
CRE - owner occupied		625,611			1,166			—			—			2,590			629,367
CRE - non-owner occupied		962,444			421			—			—			374			963,239
Construction and land development		1,191,929			—			—			—			132			1,192,061
Multi-family		963,803			—			—			—			—			963,803
Direct financing leases		31,557			141			56			—			135			31,889
1-4 family real estate		495,936			1,030			517			—			2,046			499,529
Consumer		110,041			27			—			—			353			110,421
	$	6,120,819		$	7,585		$	1,697		$	5		$	8,765		$	6,138,871
As a percentage of total loan/lease portfolio		99.71	%		0.12	%		0.03	%		0.00	%		0.14	%		100.00	%

17

NPLs by classes of loans/leases as of September 30, 2023 and December 31, 2022 are presented as follows:

	As of September 30, 2023
	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		—		7,521		2,701		10,222	29.57
CRE - owner occupied		—		1,225		2,262		3,487	10.09
CRE - non-owner occupied		—		2,040		3,138		5,178	14.98
Construction and land development		—		1,930		2,523		4,453	12.88
Multi-family		—		—		8,172		8,172	23.64
Direct financing leases		—		152		89		241	0.70
1-4 family real estate		—		1,861		394		2,255	6.52
Consumer		—		560		—		560	1.62
	$	—	$	15,289	$	19,279	$	34,568	100.00	%

	As of December 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		5		2,775		360		3,140	35.80
CRE - owner occupied		—		1,738		852		2,590	29.53
CRE - non-owner occupied		—		68		306		374	4.26
Construction and land development		—		132		—		132	1.51
Multi-family		—		—		—		—	-
Direct financing leases		—		80		55		135	1.54
1-4 family real estate		—		1,641		405		2,046	23.33
Consumer		—		353		—		353	4.03
	$	5	$	6,787	$	1,978	$	8,770	100.00	%

The Company did not recognize any interest income on nonaccrual loans during the three and nine months ended September 30, 2023 and 2022.

Changes in the ACL loans/leases by portfolio segment for the three and nine months ended September 30, 2023 and 2022, respectively, are presented as follows:

	Three Months Ended September 30, 2023
					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	$	4,101	$	27,162	$	8,731	$	11,968	$	15,888	$	11,229	$	5,213	$	1,505	$	85,797
Change in ACL for writedown of LHFS to fair value		—		—		—		—		—		175		—		—		175
Provision		368		1,111		192		(313)		992		875		(45)		80		3,260
Charge-offs		—		(1,734)		(14)		—		(38)		—		—		(30)		(1,816)
Recoveries		—		215		3		26		—		—		—		9		253
Balance, ending	$	4,469	$	26,754	$	8,912	$	11,681	$	16,842	$	12,279	$	5,168	$	1,564	$	87,669

18

	Nine Months Ended September 30, 2023
					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	$	4,457	$	27,753	$	9,965	$	11,749	$	14,262	$	13,186	$	4,963	$	1,371	$	87,706
Change in ACL for writedown of LHFS to fair value		—		(5)		—		—		(147)		(3,659)		—		—		(3,811)
Provision		12		3,986		(834)		(99)		2,777		2,752		200		237		9,031
Charge-offs		—		(5,709)		(222)		—		(50)		—		—		(57)		(6,038)
Recoveries		—		729		3		31		—		—		5		13		781
Balance, ending	$	4,469	$	26,754	$	8,912	$	11,681	$	16,842	$	12,279	$	5,168	$	1,564	$	87,669

*   Included within the C&I – Other column are ACL on leases with a beginning balance of $1.0 million, provision of $165 thousand, charge-offs of $133 thousand and recoveries of $43 thousand. ACL on leases was $1.1 million as of September 30, 2023.

**   Included within the C&I – Other column are ACL on leases with a beginning balance of $970 thousand, provision of $224 thousand, charge-offs of $186 thousand and recoveries of $73 thousand. ACL on leases was $1.1 million as of September 30, 2023.

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

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

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

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

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

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

	As of September 30, 2023
	Amortized Cost of Loans Receivable						Allowance for Credit Losses
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total
	(dollars in thousands)
C&I :
C&I - revolving	$	3,358	$	296,230	$	299,588	$	944	$	3,525	$	4,469
C&I - other*		19,468		1,502,501		1,521,969		2,380		24,374		26,754
		22,826		1,798,731		1,821,557		3,324		27,899		31,223
CRE - owner occupied		23,952		586,666		610,618		2,844		6,068		8,912
CRE - non-owner occupied		20,456		935,096		955,552		836		10,845		11,681
Construction and land development		4,453		1,389,601		1,394,054		307		16,535		16,842
Multi-family		9,539		1,147,441		1,156,980		427		11,852		12,279
1-4 family real estate		2,906		537,025		539,931		253		4,915		5,168
Consumer		717		126,898		127,615		72		1,492		1,564
	$	84,849	$	6,521,458	$	6,606,307	$	8,063	$	79,606	$	87,669

19

*   Included within the C&I – Other category are leases individually evaluated of $241 thousand with a related allowance for credit losses of $55 thousand and leases collectively evaluated of $34.2 million with a related allowance for credit losses of $1.0 million.

	As of December 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	$	3,386	$	293,483	$	296,869	$	961	$	3,496	$	4,457
C&I - other*		9,358		1,474,224		1,483,582		1,445		26,308		27,753
		12,744		1,767,707		1,780,451		2,406		29,804		32,210
CRE - owner occupied		24,880		604,487		629,367		2,853		7,112		9,965
CRE - non-owner occupied		21,588		941,651		963,239		869		10,880		11,749
Construction and land development		10,394		1,181,667		1,192,061		13		14,249		14,262
Multi-family		1,302		962,501		963,803		395		12,791		13,186
1-4 family real estate		3,177		496,352		499,529		317		4,646		4,963
Consumer		741		109,680		110,421		75		1,296		1,371
	$	74,826	$	6,064,045	$	6,138,871	$	6,928	$	80,778	$	87,706

*   Included within the C&I – Other category are leases individually evaluated of $135 thousand with a related allowance for credit losses of $24 thousand and leases collectively evaluated of $31.8 million with a related allowance for credit losses of $946 thousand.

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses as of September 30, 2023 and December 31, 2022:

	As of September 30, 2023
					Non
	Commercial		Owner-occupied		Owner-Occupied		Owner Occupied
	Assets		CRE		Real Estate		Real Estate		Securities		Equipment		Other		Total
	(dollars in thousands)
C & I:
C&I - revolving	$	3,253	$	—	$	—	$	—	$	—	$	105	$	—	$	3,358
C&I - other*		631		—		—		—		5,533		12,916		388		19,468
		3,884		—		—		—		5,533		13,021		388		22,826
CRE - owner occupied		—		23,888		—		64		—		—		—		23,952
CRE - non-owner occupied		—		—		20,456		—		—		—		—		20,456
Construction and land development		—		150		4,303		—		—		—		—		4,453
Multi-family		—		—		9,539		—		—		—		—		9,539
1-4 family real estate		—		—		27		2,879		—		—		—		2,906
Consumer		—		—		119		526		—		—		72		717
	$	3,884	$	24,038	$	34,444	$	3,469	$	5,533	$	13,021	$	460	$	84,849

*   Included within the C&I – Other category are leases individually evaluated of $241 thousand with primary collateral of equipment.

	As of December 31, 2022
					Non
	Commercial		Owner-occupied		Owner-Occupied		Owner Occupied
	Assets		CRE		Real Estate		Real Estate		Securities		Equipment		Other		Total
	(dollars in thousands)
C & I:
C&I - revolving	$	3,281	$	—	$	—	$	—	$	—	$	105	$	—	$	3,386
C&I - other*		1,589		210		—		—		108		7,289		162		9,358
		4,870		210		—		—		108		7,394		162		12,744
CRE - owner occupied		—		24,814		—		66		—		—		—		24,880
CRE - non-owner occupied		—		—		21,588		—		—		—		—		21,588
Construction and land development		—		—		10,394		—		—		—		—		10,394
Multi-family		—		—		1,302		—		—		—		—		1,302
1-4 family real estate		—		—		33		3,144		—		—		—		3,177
Consumer		—		—		120		608		—		—		13		741
	$	4,870	$	25,024	$	33,437	$	3,818	$	108	$	7,394	$	175	$	74,826

*   Included within the C&I – Other category are leases individually evaluated of $135 thousand with primary collateral of equipment.

20

For certain C&I loans, all CRE loans, certain construction and land development loans, all multifamily loans, certain 1-4 family residential loans and certain consumer 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 certain 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.

21

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of September 30, 2023:

	As of September 30, 2023
	Term Loans
	Amortized Cost Basis by Origination Year
													Revolving
													Loans
Internally Assigned													Amortized
Risk Rating	2023		2022		2021		2020		2019		Prior		Cost Basis		Total
	(dollars in thousands)
C&I - revolving
Pass (Ratings 1 through 5)	$	—	$	—	$	—	$	—	$	—	$	—	$	272,848	$	272,848
Special Mention (Rating 6)		—		—		—		—		—		—		23,632		23,632
Substandard (Rating 7)		—		—		—		—		—		—		3,108		3,108
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	299,588	$	299,588
C&I - other
Pass (Ratings 1 through 5)	$	372,511	$	318,783	$	156,021	$	85,298	$	69,736	$	139,089	$	—	$	1,141,438
Special Mention (Rating 6)		12,149		8,936		4,225		3,757		801		321		—		30,189
Substandard (Rating 7)		101		123		250		—		3,152		5,675		—		9,301
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - other	$	384,761	$	327,842	$	160,496	$	89,055	$	73,689	$	145,085	$	—	$	1,180,928
CRE - owner occupied
Pass (Ratings 1 through 5)	$	71,080	$	130,033	$	148,170	$	112,315	$	30,875	$	62,220	$	11,670	$	566,363
Special Mention (Rating 6)		5,046		720		8,873		5,820		470		386		871		22,186
Substandard (Rating 7)		1,945		711		1,044		16,045		1,186		1,138		—		22,069
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	78,071	$	131,464	$	158,087	$	134,180	$	32,531	$	63,744	$	12,541	$	610,618
CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	107,668	$	290,689	$	199,435	$	131,797	$	74,778	$	84,855	$	6,412	$	895,634
Special Mention (Rating 6)		12,623		59		250		17,277		2,385		6,868		—		39,462
Substandard (Rating 7)		3,919		1,331		—		157		14,996		—		53		20,456
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	124,210	$	292,079	$	199,685	$	149,231	$	92,159	$	91,723	$	6,465	$	955,552
																���
Construction and land development
Pass (Ratings 1 through 5)	$	353,940	$	491,807	$	286,614	$	187,894	$	8,686	$	8,083	$	26,905	$	1,363,929
Special Mention (Rating 6)		—		—		10,109		—		—		—		—		10,109
Substandard (Rating 7)		413		2,773		1,267		—		—		—		—		4,453
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Construction and land development	$	354,353	$	494,580	$	297,990	$	187,894	$	8,686	$	8,083	$	26,905	$	1,378,491
Multi-family
Pass (Ratings 1 through 5)	$	246,633	$	224,208	$	239,039	$	230,271	$	110,450	$	95,149	$	96	$	1,145,846
Special Mention (Rating 6)		1,595		—		—		—		—		—		—		1,595
Substandard (Rating 7)		—		—		8,208		1,331		—		—		—		9,539
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Multi-family	$	248,228	$	224,208	$	247,247	$	231,602	$	110,450	$	95,149	$	96	$	1,156,980
1-4 family real estate
Pass (Ratings 1 through 5)	$	55,287	$	48,557	$	53,234	$	26,292	$	11,171	$	6,963	$	3,606	$	205,110
Special Mention (Rating 6)		29		—		—		—		—		—		—		29
Substandard (Rating 7)		25		—		—		—		2		—		—		27
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	55,341	$	48,557	$	53,234	$	26,292	$	11,173	$	6,963	$	3,606	$	205,166
Consumer
Pass (Ratings 1 through 5)	$	89	$	416	$	373	$	447	$	24	$	727	$	8,279	$	10,355
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		43		280		—		—		—		93		—		416
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Consumer	$	132	$	696	$	373	$	447	$	24	$	820	$	8,279	$	10,771
Total	$	1,245,096	$	1,519,426	$	1,117,112	$	818,701	$	328,712	$	411,567	$	357,480	$	5,798,094

22

	As of September 30, 2023
	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
Delinquency Status *	2023		2022		2021		2020		2019		Prior		Cost Basis		Total
	(dollars in thousands)
C&I - other
Performing	$	113,677	$	116,539	$	47,024	$	15,549	$	3,665	$	326	$	—	$	296,780
Nonperforming		616		6,437		2,442		293		67		5		—		9,860
Total C&I - other	$	114,293	$	122,976	$	49,466	$	15,842	$	3,732	$	331	$	—	$	306,640
Construction and land development
Performing	$	13,912	$	1,306	$	274	$	10	$	2	$	59	$	—	$	15,563
Nonperforming		—		—		—		—		—		—		—		—
Total Construction and land development	$	13,912	$	1,306	$	274	$	10	$	2	$	59	$	—	$	15,563
Direct financing leases
Performing	$	12,138	$	12,548	$	3,706	$	3,248	$	2,075	$	445	$	—	$	34,160
Nonperforming		—		16		22		187		16		—		—		241
Total Direct financing leases	$	12,138	$	12,564	$	3,728	$	3,435	$	2,091	$	445	$	—	$	34,401
1-4 family real estate
Performing	$	56,490	$	58,926	$	80,455	$	69,330	$	15,705	$	51,527	$	80	$	332,513
Nonperforming		—		219		642		418		327		646		—		2,252
Total 1-4 family real estate	$	56,490	$	59,145	$	81,097	$	69,748	$	16,032	$	52,173	$	80	$	334,765
Consumer
Performing	$	15,252	$	10,104	$	2,562	$	2,973	$	710	$	1,310	$	83,653	$	116,564
Nonperforming		—		5		21		13		—		187		54		280
Total Consumer	$	15,252	$	10,109	$	2,583	$	2,986	$	710	$	1,497	$	83,707	$	116,844
Total	$	212,085	$	206,100	$	137,148	$	92,021	$	22,567	$	54,505	$	83,787	$	808,213

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

The following table shows the gross charge-offs of loans and leases by class of receivable and year of origination for the three and nine months ended September 30, 2023:

	Three Months Ended September 30, 2023														Nine Months Ended September 30, 2023
	Gross Charge-off by Origination Year														Gross Charge-off by Origination Year
Classes of Loans/Leases	2023		2022		2021		2020		2019		Prior		Total		2023		2022		2021		2020		2019		Prior		Total
	(dollars in thousands)														(dollars in thousands)
C&I:
C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
C&I - other		41		1,130		192		204		5		29		1,601		41		2,990		1,063		1,053		238		138		5,523
CRE - owner occupied		—		—		—		—		—		14		14		—		—		208		—		—		14		222
CRE - non-owner occupied		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Construction and land development		—		38		—		—		—		—		38		—		50		—		—		—		—		50
Multi-family		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Direct financing leases		—		34		55		41		3		—		133		—		71		55		41		18		1		186
1-4 family real estate		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Consumer		—		22		7		1		—		—		30		—		41		10		1		5		—		57
	$	41	$	1,224	$	254	$	246	$	8	$	43	$	1,816	$	41	$	3,152	$	1,336	$	1,095	$	261	$	153	$	6,038

23

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

	As of December 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)	$	—	$	—	$	—	$	—	$	—	$	—	$	275,888	$	275,888
Special Mention (Rating 6)		—		—		—		—		—		—		17,595		17,595
Substandard (Rating 7)		—		—		—		—		—		—		3,386		3,386
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	296,869	$	296,869
C&I - other
Pass (Ratings 1 through 5)	$	496,445	$	279,412	$	127,803	$	87,054	$	59,675	$	105,184	$	—	$	1,155,573
Special Mention (Rating 6)		9,542		679		901		723		—		308		—		12,153
Substandard (Rating 7)		187		125		661		4,535		310		106		—		5,924
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - other	$	506,174	$	280,216	$	129,365	$	92,312	$	59,985	$	105,598	$	—	$	1,173,650
CRE - owner occupied
Pass (Ratings 1 through 5)	$	146,211	$	182,440	$	142,596	$	33,571	$	27,088	$	45,993	$	13,460	$	591,359
Special Mention (Rating 6)		6,190		—		6,379		484		—		1,346		269		14,668
Substandard (Rating 7)		3,750		171		16,336		1,396		1,197		490		—		23,340
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	156,151	$	182,611	$	165,311	$	35,451	$	28,285	$	47,829	$	13,729	$	629,367
CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	310,163	$	221,953	$	173,478	$	89,337	$	56,898	$	40,923	$	7,510	$	900,262
Special Mention (Rating 6)		2,824		882		18,920		—		12,917		6,198		—		41,741
Substandard (Rating 7)		5,651		—		157		15,217		—		—		211		21,236
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	318,638	$	222,835	$	192,555	$	104,554	$	69,815	$	47,121	$	7,721	$	963,239
Construction and land development
Pass (Ratings 1 through 5)	$	479,016	$	330,434	$	240,778	$	31,607	$	30,300	$	—	$	29,647	$	1,141,782
Special Mention (Rating 6)		1,465		9,200		—		—		—		—		—		10,665
Substandard (Rating 7)		132		10,262		—		—		—		—		—		10,394
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Construction and land development	$	480,613	$	349,896	$	240,778	$	31,607	$	30,300	$	—	$	29,647	$	1,162,841
Multi-family
Pass (Ratings 1 through 5)	$	237,839	$	254,056	$	224,920	$	134,378	$	99,695	$	7,875	$	2,227	$	960,990
Special Mention (Rating 6)		—		44		—		1,467		—		—		—		1,511
Substandard (Rating 7)		—		—		1,302		—		—		—		—		1,302
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Multi-family	$	237,839	$	254,100	$	226,222	$	135,845	$	99,695	$	7,875	$	2,227	$	963,803
1-4 family real estate
Pass (Ratings 1 through 5)	$	61,953	$	57,731	$	33,737	$	12,687	$	5,813	$	6,002	$	5,855	$	183,778
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		28		—		—		5		—		—		—		33
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	61,981	$	57,731	$	33,737	$	12,692	$	5,813	$	6,002	$	5,855	$	183,811
Consumer
Pass (Ratings 1 through 5)	$	511	$	801	$	493	$	122	$	254	$	621	$	10,226	$	13,028
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		282		—		12		—		112		—		—		406
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Consumer	$	793	$	801	$	505	$	122	$	366	$	621	$	10,226	$	13,434
Total	$	1,762,189	$	1,348,190	$	988,473	$	412,583	$	294,259	$	215,046	$	366,274	$	5,387,014

24

	As of December 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	$	170,180	$	69,694	$	25,540	$	8,066	$	1,804	$	79	$	—	$	275,363
Nonperforming		1,110		1,320		155		95		—		—		—		2,680
Total C&I - other	$	171,290	$	71,014	$	25,695	$	8,161	$	1,804	$	79	$	—	$	278,043
Direct financing leases
Performing	$	14,578	$	5,172	$	5,700	$	4,398	$	1,536	$	370	$	—	$	31,754
Nonperforming		—		32		88		7		8		—		—		135
Total Direct financing leases	$	14,578	$	5,204	$	5,788	$	4,405	$	1,544	$	370	$	—	$	31,889
Construction and land development
Performing	$	28,785	$	360	$	10	$	3	$	62	$	—	$	—	$	29,220
Nonperforming		—		—		—		—		—		—		—		—
Total Construction and land development	$	28,785	$	360	$	10	$	3	$	62	$	—	$	—	$	29,220
1-4 family real estate
Performing	$	69,094	$	92,762	$	75,153	$	17,089	$	11,381	$	48,136	$	90	$	313,705
Nonperforming		267		524		487		279		8		448		—		2,013
Total 1-4 family real estate	$	69,361	$	93,286	$	75,640	$	17,368	$	11,389	$	48,584	$	90	$	315,718
Consumer
Performing	$	14,685	$	3,844	$	3,717	$	1,123	$	1,140	$	1,325	$	70,974	$	96,808
Nonperforming		7		—		—		—		3		59		110		179
Total Consumer	$	14,692	$	3,844	$	3,717	$	1,123	$	1,143	$	1,384	$	71,084	$	96,987
Total	$	298,706	$	173,708	$	110,850	$	31,060	$	15,942	$	50,417	$	71,174	$	751,857

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

The following table shows the amortized cost basis of the loans and leases modified to borrowers experiencing financial difficulty by class of receivable and type of concession granted for the three and nine months ended September 30, 2023.

	For the three months ended				For the nine months ended
	September 30, 2023				September 30, 2023
	Amortized Cost				Amortized Cost
	Payment		% of Class of		Payment		% of Class of
Classes of Loans/Leases	Delay		Receivable		Delay		Receivable
	(dollars in thousands)
Direct Financing Leases	$	90	—	%	$	325	1	%

At September 30, 2023, there were no commitments to extend credit to any of the borrowers experiencing financial difficulty.

There were no loans to borrowers experiencing financial difficulty that had a payment default during the three and nine months ended September 30, 2023, that had been modified in the twelve-month period prior to the default.

The Company closely monitors the performance of the loans and leases that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. None of these loan or lease modifications were past due as of September 30, 2023.

Changes in the ACL for OBS exposures for the three and nine months ended September 30, 2023 and 2022 are presented as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
	(dollars in thousands)
Balance, beginning	$	6,326	$	6,878	$	5,552	$	6,886
Provisions (credited) to expense		546		(331)		1,320		(339)
Balance, ending	$	6,872	$	6,547	$	6,872	$	6,547

25

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

Derivatives are summarized as follows as of September 30, 2023 and December 31, 2022:

	September 30, 2023		December 31, 2022
	(dollars in thousands)
Assets:
Hedged Derivatives
Cash Flow Hedges
Interest rate caps	$	5,196	$	8,327
Interest rate swaps		3,334		477
Fair Value Hedges
Interest rate swaps		3,977		—
Unhedged Derivatives
Interest rate caps		1,533		2,213
Interest rate swaps		277,255		166,614
	$	291,295	$	177,631
Liabilities:
Hedged Derivatives
Cash Flow Hedges
Interest rate swaps		(42,095)		(33,824)
Interest rate collars		(870)		(263)
Unhedged Derivatives
Interest rate swaps		(277,255)		(166,614)
	$	(320,220)	$	(200,701)

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

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

			Balance Sheet					Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		September 30, 2023		December 31, 2022
(dollars in thousands)
Deposits	1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.75	%	$	-	$	(50)
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.75	%		157		714
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		50,000	1.57	%		474		1,566
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.80	%		237		783
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.75	%		1,010		1,264
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		50,000	1.57	%		2,212		2,700
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.80	%		1,106		1,350
				$	225,000			$	5,196	$	8,327

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

				Balance Sheet							Fair Value as of
Hedged Item	Effective Date		Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2023		December 31, 2022
		(dollars in thousands)
QCR Holdings Statutory Trust II	9/30/2018		9/30/2028	Derivatives - Assets	$	10,000	8.51	%	5.85	%	$	710	$	464
QCR Holdings Statutory Trust III	9/30/2018		9/30/2028	Derivatives - Assets		8,000	8.51	%	5.85	%		568		372
QCR Holdings Statutory Trust V	7/7/2018		7/7/2028	Derivatives - Assets		10,000	7.12	%	4.54	%		691		459
Community National Statutory Trust II	9/20/2018		9/20/2028	Derivatives - Assets		3,000	7.83	%	5.17	%		212		140
Community National Statutory Trust III	9/15/2018		9/15/2028	Derivatives - Assets		3,500	7.42	%	4.75	%		247		163
Guaranty Bankshares Statutory Trust I	9/15/2018		9/15/2028	Derivatives - Assets		4,500	7.42	%	4.75	%		318		209
Guaranty Statutory Trust II*	5/23/2019		2/23/2026	Derivatives - Assets		10,310	7.09	%	4.09	%		588		477
					$	49,310					$	3,334	$	2,284
* Acquired on 4/1/2022 with GFED acquisition.

26

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

			Balance Sheet							Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2023		December 31, 2022
(dollars in thousands)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities	$	35,000	1.40	%	5.31	%	$	(6,776)	$	(5,646)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		50,000	1.40	%	5.31	%		(9,680)		(8,066)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		40,000	1.40	%	5.31	%		(7,755)		(6,464)
Loans	10/1/2022	7/1/2031	Derivatives - Liabilities		25,000	1.30	%	5.31	%		(4,877)		(4,018)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		15,000	1.91	%	5.31	%		(1,301)		(1,144)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	5.31	%		(4,335)		(3,812)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		35,000	1.91	%	5.31	%		(3,035)		(2,669)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	5.31	%		(4,336)		(3,812)
				$	300,000					$	(42,095)	$	(35,631)

The Company uses interest rate collars in an effort to manage future interest rate exposure on variable rate loans.  The collar hedging strategy stabilizes interest rate fluctuations by setting both a floor and a cap.  The collar is designated as a cash flow hedge in accordance with ASC 815. The details of the interest rate collars are as follows:

										Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Cap Strike Rate		Floor Strike Rate		September 30, 2023		December 31, 2022
Loans	10/1/2022	10/1/2026	Derivatives - Liabilities	$	50,000	4.40	%	2.44	%	$	(870)	$	(263)

The Company has entered into interest rate swaps to hedge against the risk of rising rates on loans.  The interest rate swaps are designated as fair value hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:

			Balance Sheet							Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2023		December 31, 2022
(dollars in thousands)
Loans	7/12/2023	2/1/2026	Derivatives - Assets	$	25,000	5.31	%	4.38	%	$	204	$	N/A
Loans	7/12/2023	8/1/2026	Derivatives - Assets		30,000	5.31	%	4.21	%		304		N/A
Loans	7/12/2023	2/1/2027	Derivatives - Assets		32,500	5.31	%	4.08	%		409		N/A
Loans	7/12/2023	8/1/2027	Derivatives - Assets		32,500	5.31	%	3.98	%		488		N/A
Loans	7/12/2023	2/1/2028	Derivatives - Assets		30,000	5.31	%	3.90	%		532		N/A
Loans	7/12/2023	2/1/2026	Derivatives - Assets		15,000	5.31	%	4.38	%		123		N/A
Loans	7/12/2023	8/1/2026	Derivatives - Assets		15,000	5.31	%	4.21	%		152		N/A
Loans	7/12/2023	2/1/2027	Derivatives - Assets		15,000	5.31	%	4.08	%		189		N/A
Loans	7/12/2023	8/1/2027	Derivatives - Assets		15,000	5.31	%	3.98	%		225		N/A
Loans	7/12/2023	2/1/2028	Derivatives - Assets		15,000	5.31	%	3.90	%		267		N/A
Loans	7/12/2023	8/1/2025	Derivatives - Assets		15,000	5.31	%	4.60	%		90		N/A
Loans	7/12/2023	2/1/2026	Derivatives - Assets		20,000	5.31	%	4.38	%		163		N/A
Loans	7/12/2023	8/1/2026	Derivatives - Assets		20,000	5.31	%	4.21	%		203		N/A
Loans	7/12/2023	2/1/2027	Derivatives - Assets		20,000	5.31	%	4.08	%		252		N/A
Loans	7/12/2023	8/1/2027	Derivatives - Assets		25,000	5.31	%	3.98	%		376		N/A
				$	325,000					$	3,977	$	N/A

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.  Changes in fair values of derivative financial instruments accounted for as fair value hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of interest income/expense.

27

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

		Balance Sheet					Fair Value as of
Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		September 30, 2023		December 31, 2022
(dollars in thousands)
1/1/2020	1/3/2023	Derivatives - Assets	$	25,000	1.90	%	$	-	$	3
2/1/2020	2/1/2024	Derivatives - Assets		25,000	1.90	%		310		822
3/1/2020	3/3/2025	Derivatives - Assets		25,000	1.90	%		1,223		1,388
			$	75,000			$	1,533	$	2,213

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:

		September 30, 2023			December 31, 2022
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	2,967,392	$	277,255	$	2,528,949	$	166,614
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	2,967,392	$	277,255	$	2,528,949	$	166,614

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three and nine months ended September 30, 2023 and 2022 are as follows:

	Three Months Ended September 30, 2023				Three Months Ended September 30, 2022
	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	$	108,568	$	53,313	$	79,267	$	18,498
The effects of cash flow hedging:
Gain on interest rate caps on deposits		-		(2,066)		-		(263)
Gain on interest rate swaps on junior subordinated debentures		-		(328)		-		73
Loss on interest rate swaps and collars on loans		(2,495)		-		(426)		-
The effects of fair value hedging:
Gain on interest rate swaps on loans		828		-		-		-

	Nine Months Ended September 30, 2023				Nine Months Ended September 30, 2022
	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	$	301,162	$	135,892	$	198,534	$	32,632
The effects of cash flow hedging:
Gain on interest rate caps on deposits		-		(5,522)		-		199
Gain on interest rate swaps on junior subordinated debentures		-		(830)		-		536
Loss on interest rate swaps and collars on loans		(6,757)		-		715		-
The effects of fair value hedging:
Gain on interest rate swaps on loans		828		-		-		-

28

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

	September 30, 2023		December 31, 2022
	(dollars in thousands)
Cash	$	1,275	$	1,272
Municipal securities		3,945		8,227
Residential mortgage-backed and related securities		5,778		29,257
	$	10,998	$	38,756

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 ratings 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, below 65%.  The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

NOTE 5 – INCOME TAXES

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income is as follows for the three and nine months ended September 30, 2023 and 2022:

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2023				2022				2023				2022
			% of				% of				% of				% of
			Pretax				Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income		Amount		Income
	(dollars in thousands)
Computed "expected" tax expense	$	5,661	21.0	%	$	7,165	21.0	%	$	18,751	21.0	%	$	16,130	21.0	%
Tax exempt income, net		(3,705)	(13.7)			(3,003)	(8.8)			(10,103)	(11.3)			(7,701)	(10.0)
Bank-owned life insurance		(376)	(1.4)			(127)	(0.4)			(700)	(0.8)			(273)	(0.4)
State income taxes, net of federal benefit, current year		955	3.5			1,616	4.7			3,383	3.8			3,889	5.1
Provision adjustment from accounting method change		—	—			—	—			—	—			(1,181)	(1.5)
Tax credits		(202)	(0.7)			(359)	(1.1)			(411)	(0.5)			(890)	(1.2)
Income from tax credit equity investments		(449)	(1.7)			(337)	(1.0)			(1,340)	(1.5)			(939)	(1.2)
Acquisition costs		—	—			78	0.2			—	—			450	0.6
Excess tax benefit on stock options exercised and restricted stock awards vested		(7)	(0.0)			(46)	(0.1)			(451)	(0.5)			(520)	(0.7)
Other		(37)	(0.2)			(163)	(0.4)			(540)	(0.6)			(316)	(0.4)
Federal and state income tax expense	$	1,840	6.8	%	$	4,824	14.1	%	$	8,589	9.6	%	$	8,649	11.3	%

29

NOTE 6 - EARNINGS PER SHARE

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

		Three months ended			Nine months ended
		September 30,			September 30,
		2023		2022		2023		2022
	(dollars in thousands, except share data)
Net income	$	25,121	$	29,294	$	80,703	$	68,160
Basic EPS	$	1.50	$	1.73	$	4.82	$	4.25
Diluted EPS	$	1.49	$	1.71	$	4.79	$	4.20
Weighted average common shares outstanding		16,717,303		16,900,968		16,731,847		16,030,371
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan		130,648		209,723		131,356		213,550
Weighted average common and common equivalent shares outstanding		16,847,951		17,110,691		16,863,203		16,243,921

NOTE 7 – FAIR VALUE

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

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

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

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

Assets and liabilities measured at fair value on a recurring basis comprise the following at September 30, 2023 and December 31, 2022:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
September 30, 2023:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	16,002	$	—	$	16,002	$	—
Residential mortgage-backed and related securities		57,946		—		57,946		—
Municipal securities		149,772		—		149,772		—
Asset-backed securities		16,326		—		16,326		—
Other securities		41,233		—		41,233		—
Derivatives		291,295		—		291,295		—
Total assets measured at fair value	$	572,574	$	—	$	572,574	$	—
Derivatives	$	320,220	$	—	$	320,220	$	—
Total liabilities measured at fair value	$	320,220	$	—	$	320,220	$	—
December 31, 2022:
Securities AFS:
U.S. govt. sponsored agency securities	$	16,981	$	—	$	16,981	$	—
Residential mortgage-backed and related securities		66,215		—		66,215		—
Municipal securities		193,178		—		193,178		—
Asset-backed securities		18,728		—		18,728		—
Other securities		45,858		—		45,858		—
Derivatives		177,631		—		177,631		—
Total assets measured at fair value	$	518,591	$	—	$	518,591	$	—
Derivatives	$	200,701	$	—	$	200,701	$	—
Total liabilities measured at fair value	$	200,701	$	—	$	200,701	$	—

30

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

Interest rate caps, swaps and collars are used for the purpose of hedging interest rate risk on various financial assets and liabilities, further described in Note 4 to the Consolidated Financial Statements. Interest rate swaps are also executed for select commercial customers.  The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

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

Assets measured at fair value on a non-recurring basis comprised the following at September 30, 2023 and December 31, 2022:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
September 30, 2023:
Loans/leases evaluated individually	$	35,197	$	—	$	—	$	35,197
Loans receivable held for sale in preparation for securitization		277,995		—		—		277,995
OREO		120		—		—		120
	$	313,312	$	—	$	—	$	313,312
December 31, 2022:
Loans/leases evaluated individually	$	30,765	$	—	$	—	$	30,765
OREO		144		—		—		144
	$	30,909	$	—	$	—	$	30,909

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 comprised of 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.

Loans receivable held for sale in preparation for securitization are valued at the lower of cost or fair value in the aggregate by type and are classified as Level 3 in the fair value hierarchy.  Fair value is estimated considering the loans have a floating interest rate with a spread that is commensurate with current market pricing, in addition to factoring in a discount for credit risk.

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

31

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

	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	September 30,		December 31,
	2023		2022		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)
Loans/leases evaluated individually	$	35,197	$	30,765	Appraisal of collateral	Appraisal adjustments	-10.00	%	to	-30.00	%
Loans receivable held for sale in preparation for securitization		277,995		—	Market prices for similar loans	Market price adjustments			n/a
OREO		130		144	Appraisal of collateral	Appraisal adjustments	0.00	%	to	-35.00	%

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

For the loans receivable held for sale in preparation for securitization, the Company records carrying value at fair value factoring in a discount for credit risk.

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and nine months ended September 30, 2023 and 2022.

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

	Fair Value	As of September 30, 2023				As of December 31, 2022
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value
		(dollars in thousands)
Cash and due from banks	Level 1	$	104,265	$	104,265	$	59,723	$	59,723
Federal funds sold	Level 2		20,300		20,300		56,910		56,910
Interest-bearing deposits at financial institutions	Level 2		60,350		60,350		67,360		67,360
Investment securities:
HTM	Level 2		615,115		524,819		587,142		535,636
AFS	Level 2		281,279		281,279		340,960		340,960
Loans/leases receivable, net	Level 3		310,585		313,192		28,486		30,765
Loans/leases receivable, net	Level 2		6,208,053		5,907,226		6,022,679		5,896,443
Derivatives	Level 2		291,295		291,295		177,631		177,631
Deposits:
Nonmaturity deposits	Level 2		5,522,283		5,522,283		5,199,633		5,199,633
Time deposits	Level 2		972,569		966,026		784,584		766,294
Short-term borrowings	Level 2		470		470		129,630		129,630
FHLB advances	Level 2		430,000		429,450		415,000		415,000
Subordinated notes	Level 2		232,958		249,002		232,662		250,613
Junior subordinated debentures	Level 2		48,698		40,204		48,602		41,545
Derivatives	Level 2		320,220		320,220		200,701		200,701

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 four subsidiary banks wholly owned by the Company:  QCBT, CRBT, CSB, and GB. Each of these operating segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

32

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 and nine months ended September 30, 2023 and 2022:

	Commercial Banking										Intercompany		Consolidated
	QCBT		CRBT		CSB		GB		All other		Eliminations		Total
	(dollars in thousands)
Three Months Ended September 30, 2023
Total revenue	$	38,165	$	43,592	$	19,225	$	34,498	$	31,878	$	(32,197)	$	135,161
Net interest income		17,198		16,852		11,136		13,743		(3,958)		284		55,255
Provision for credit losses		2,686		503		275		342		—		—		3,806
Net income (loss) from continuing operations		5,856		13,175		4,740		6,801		25,641		(31,092)		25,121
Goodwill		3,223		14,980		9,888		110,936		—		—		139,027
Intangibles		—		950		1,579		12,008		—		—		14,537
Total assets		2,433,084		2,442,263		1,417,249		2,242,638		1,146,137		(1,141,314)		8,540,057
Three Months Ended September 30, 2022
Total revenue	$	26,583	$	34,157	$	14,127	$	25,523	$	36,283	$	(36,311)	$	100,362
Net interest income		18,117		17,160		10,183		18,196		(3,242)		355		60,769
Provision for loan/lease losses		554		(35)		(269)		(250)		—		—		—
Net income (loss) from continuing operations		7,758		14,475		4,106		9,196		29,542		(35,783)		29,294
Goodwill		3,223		14,980		9,888		109,516		—		—		137,607
Intangibles		—		1,344		2,184		14,018		—		—		17,546
Total assets		2,218,166		2,108,614		1,270,426		2,107,407		1,045,774		(1,020,338)		7,730,049
Nine Months Ended September 30, 2023
Total revenue	$	106,664	$	138,018	$	53,126	$	90,443	$	101,472	$	(103,606)	$	386,117
Net interest income		50,590		50,254		32,683		42,716		(11,911)		938		165,270
Provision for loan/lease losses		7,879		2,499		965		(3)		—		—		11,340
Net income (loss) from continuing operations		17,710		48,928		14,113		17,344		82,266		(99,658)		80,703
Goodwill		3,223		14,980		9,888		110,936		—		—		139,027
Intangibles		—		950		1,579		12,008		—		—		14,537
Total assets		2,433,084		2,442,263		1,417,249		2,242,638		1,146,137		(1,141,314)		8,540,057
Nine Months Ended September 30, 2022
Total revenue	$	72,785	$	91,083	$	37,534	$	57,036	$	91,989	$	(92,383)	$	258,044
Net interest income		53,971		46,576		29,365		42,789		(7,845)		1,046		165,902
Provision for loan/lease losses		(88)		(971)		(554)		9,897		—		—		8,284
Net income (loss) from continuing operations		26,153		38,860		11,606		13,327		68,982		(90,768)		68,160
Goodwill		3,223		14,980		9,888		109,516		—		—		137,607
Intangibles		—		1,344		2,184		14,018		—		—		17,546
Total assets		2,218,166		2,108,614		1,270,426		2,107,407		1,045,774		(1,020,338)		7,730,049

NOTE 9 – REGULATORY CAPITAL REQUIREMENTS

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

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain OBS items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation.  Management believes, as of September 30, 2023 and December 31, 2022, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of September 30, 2023 and

33

December 31, 2022 are presented in the following tables (dollars in thousands).  As of September 30, 2023 and December 31, 2022, each of the subsidiary banks met such capital requirements to be “well capitalized”.

										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
	( dollars in thousands)
As of September 30, 2023:
Company:
Total risk-based capital	$	1,135,262	14.54	%	$	624,805	>	8.00	%	$	820,057	>	10.50	%	$	781,007	>	10.00	%
Tier 1 risk-based capital		807,582	10.34			468,604	>	6.00			663,856	>	8.50			624,805	>	8.00
Tier 1 leverage		807,582	9.92			325,480	>	4.00			325,480	>	4.00			406,850	>	5.00
Common equity Tier 1		758,884	9.72			351,453	>	4.50			546,705	>	7.00			507,654	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	295,319	12.90	%	$	183,095	>	8.00	%	$	240,313	>	10.50	%	$	228,869	>	10.00	%
Tier 1 risk-based capital		266,688	11.65			137,321	>	6.00			194,539	>	8.50			183,095	>	8.00
Tier 1 leverage		266,688	11.10			96,111	>	4.00			96,111	>	4.00			120,139	>	5.00
Common equity Tier 1		266,688	11.65			102,991	>	4.50			160,208	>	7.00			148,765	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	358,150	17.05	%	$	168,021	>	8.00	%	$	220,527	>	10.50	%	$	210,026	>	10.00	%
Tier 1 risk-based capital		331,423	15.78			126,016	>	6.00			178,522	>	8.50			168,021	>	8.00
Tier 1 leverage		331,423	14.60			90,799	>	4.00			90,799	>	4.00			113,498	>	5.00
Common equity Tier 1		331,423	15.78			94,512	>	4.50			147,018	>	7.00			136,517	>	6.50
Community State Bank:
Total risk-based capital	$	177,296	13.57	%	$	104,554	>	8.00	%	$	137,227	>	10.50	%	$	130,693	>	10.00	%
Tier 1 risk-based capital		152,596	11.68			78,416	>	6.00			111,089	>	8.50			104,554	>	8.00
Tier 1 leverage		152,596	11.24			54,303	>	4.00			54,303	>	4.00			67,879	>	5.00
Common equity Tier 1		152,596	11.68			58,812	>	4.50			91,485	>	7.00			84,950	>	6.50
Guaranty Bank:
Total risk-based capital	$	258,732	12.53	%	$	165,160	>	8.00	%	$	216,772	>	10.50	%	$	206,450	>	10.00	%
Tier 1 risk-based capital		236,071	11.43			123,870	>	6.00			175,482	>	8.50			165,160	>	8.00
Tier 1 leverage		236,071	11.22			84,130	>	4.00			84,130	>	4.00			105,162	>	5.00
Common equity Tier 1		236,071	11.43			92,902	>	4.50			144,515	>	7.00			134,192	>	6.50

										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
	( dollars in thousands)
As of December 31, 2022:
Company:
Total risk-based capital	$	1,055,177	14.28	%	$	591,132	>	8.00	%	$	775,861	>	10.50	%	$	738,915	>	10.00	%
Tier 1 risk-based capital		734,977	9.95			443,349	>	6.00			628,078	>	8.50			591,132	>	8.00
Tier 1 leverage		734,977	9.61			305,959	>	4.00			305,959	>	4.00			382,449	>	5.00
Common equity Tier 1		686,375	9.29			332,512	>	4.50			517,241	>	7.00			480,295	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	275,337	13.07	%	$	168,588	>	8.00	%	$	221,272	>	10.50	%	$	210,735	>	10.00	%
Tier 1 risk-based capital		248,978	11.81			126,441	>	6.00			179,125	>	8.50			168,588	>	8.00
Tier 1 leverage		248,978	11.01			90,419	>	4.00			90,419	>	4.00			133,023	>	5.00
Common equity Tier 1		248,978	11.81			94,831	>	4.50			147,514	>	7.00			136,978	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	308,153	14.84	%	$	166,168	>	8.00	%	$	218,096	>	10.50	%	$	207,711	>	10.00	%
Tier 1 risk-based capital		282,258	13.59			124,626	>	6.00			176,554	>	8.50			166,168	>	8.00
Tier 1 leverage		282,258	13.17			85,707	>	4.00			85,707	>	4.00			107,134	>	5.00
Common equity Tier 1		282,258	13.59			93,470	>	4.50			145,397	>	7.00			135,012	>	6.50
Community State Bank:
Total risk-based capital	$	142,974	12.04	%	$	94,981	>	8.00	%	$	124,662	>	10.50	%	$	118,726	>	10.00	%
Tier 1 risk-based capital		128,130	10.79			71,236	>	6.00			100,917	>	8.50			94,981	>	8.00
Tier 1 leverage		128,130	10.09			50,799	>	4.00			50,799	>	4.00			63,499	>	5.00
Common equity Tier 1		128,130	10.79			53,427	>	4.50			83,108	>	7.00			77,172	>	6.50
Guaranty Bank:
Total risk-based capital	$	243,106	12.24	%	$	158,903	>	8.00	%	$	208,560	>	10.50	%	$	198,629	>	10.00	%
Tier 1 risk-based capital		218,647	11.01			119,177	>	6.00			168,834	>	8.50			158,903	>	8.00
Tier 1 leverage		218,647	10.90			80,229	>	4.00			80,229	>	4.00			100,286	>	5.00
Common equity Tier 1		218,647	11.01			89,383	>	4.50			139,040	>	7.00			129,109	>	6.50

NOTE 10 - COMMITMENTS

The Company entered into a construction contract in 2023 for the construction of a new CRBT facility in Cedar Rapids, Iowa.  The Company will pay the contractor a contract price of approximately $17.0 million, subject to additions and deductions as provided in the contract documents. As of September 30, 2023, the Company has paid $1.2 million of the contract price, resulting in a remaining future commitment of $15.8 million. Construction is anticipated to be completed in 2024.  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending September 30, 2023. 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 thirty years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries.  As of September 30, 2023, the Company had $8.5 billion in consolidated assets, including $6.5 billion in net loans/leases, and $6.5 billion in deposits.  The financial results of acquired entities for the periods since their acquisition are included in this report.  Further information related to acquired entities has been presented in the annual reports previously filed with the SEC corresponding to the year of each acquisition.  

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

● Allowance for Credit Losses on Loans and Leases and Off-Balance Sheet Exposures

● Fair Value of Loans Acquired in Business Combinations

● Fair Value of Financial Instruments

● Fair Value of Securities

A more detailed discussion of these critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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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 $25.1 million and diluted EPS of $1.49 for the quarter ended September 30, 2023. By comparison, for the quarter ended June 30, 2023, the Company reported net income of $28.4 million and diluted EPS of $1.69.  For the quarter ended September 30, 2022, the Company reported net income of $29.3 million, and diluted EPS of $1.71.  For the nine months ended September 30, 2023, the Company reported net income of $80.7 million and diluted EPS of $4.79.  By comparison, for the nine months ended September 30, 2022, the Company reported net income of $68.2 million and diluted EPS of $4.20.  

The third quarter of 2023 was also highlighted by the following results and events:

● Adjusted net income (non-GAAP) of $25.4 million, or $1.51 per diluted share;

● Net interest income of $55.3 million, up 3.9% from the second quarter;

● NIM (TEY)(non-GAAP) of 3.31% increased 2 basis points from the prior quarter while Adjusted NIM (TEY)(non-GAAP) of 3.28% was static;

● Capital markets revenue of $15.6 million and $55.1 million year-to-date; and

● Tangible book value (non-GAAP) per share increased $0.34 or 3.4% annualized.

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

	For the three months ended						For the nine months ended
	September 30, 2023		June 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
	(dollars in thousands)
Net income	$	25,121	$	28,425	$	29,294	$	80,703	$	68,160
Diluted earnings per common share	$	1.49	$	1.69	$	1.71	$	4.79	$	4.20
Weighted average common and common equivalent shares outstanding		16,847,951		16,799,527		17,110,691		16,863,203		16,243,921

The Company reported adjusted net income (non-GAAP) of $25.4 million, with adjusted diluted EPS of $1.51 for the three months ended September 30, 2023.  See section titled “GAAP to Non-GAAP Reconciliations” for additional information.  Adjusted net income for the three months ended September 30, 2023 excludes a number of non-recurring items, after-tax, as set forth in the GAAP to Non-GAAP Reconciliation section.  The Company reported adjusted net income (non-GAAP) of $81.8 million, with adjusted diluted EPS of $4.85 for the nine months ended September 30, 2023.  Adjusted net income for the nine months ended September 30, 2023 excludes a number of non-recurring items, after-tax, as set forth in the GAAP to Non-GAAP Reconciliation section.

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

	For the three months ended						For the nine months ended
	September 30, 2023		June 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
	(dollars in thousands)
Net interest income	$	55,255	$	53,205	$	60,769	$	165,270	$	165,902
Provision for credit losses		3,806		3,606		—		11,340		8,284
Noninterest income		26,593		32,520		21,095		84,955		59,510
Noninterest expense		51,081		49,727		47,746		149,593		140,319
Federal and state income tax expense		1,840		3,967		4,824		8,589		8,649
Net income	$	25,121	$	28,425	$	29,294	$	80,703	$	68,160

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

● Net interest income in the third quarter of 2023 increased 4% compared to the second quarter of 2023 and decreased 9% when compared to the third quarter of 2022. The increase from the second quarter of 2023 was primarily due to an increase in average earning assets and strong loan growth. The decrease from the third quarter of 2022 was primarily due to the significantly inverted yield curve, a highly competitive deposit landscape and a continued shift in the deposit mix of noninterest bearing and lower beta deposits to higher beta deposits.  Net interest income remained static when comparing the first nine months of 2023 to the same period of the prior year.

● Provision expense in the third quarter of 2023 increased $200 thousand as compared to the second quarter of 2023 and increased $3.8 million when compared to the third quarter of 2022.  The increase from third quarter 2022 represents a $3.3 million increase related to loans and leases, a $546 thousand increase related to OBS exposures and no change in provision related to securities. Provision expense in the first nine months of 2023 increased $3.1 million compared to the first nine months of 2022, representing a $409 thousand increase related to loans and leases, a $1.7 million increase related to OBS exposures and a $989 thousand increase related to AFS securities. The increase in provision for loans and leases was driven by strong loan growth. The increase in provision related to OBS was due to an increase in the balance of those OBS exposures.  The increase in provision related to AFS securities was entirely due to an impairment of one subordinated debt investment in a failed bank in the first quarter of 2023.  This was a legacy investment acquired as part of the 2022 GFED acquisition and an allowance was established for the entire balance of the investment during the first quarter of 2023.

● Noninterest income in the third quarter of 2023 decreased $5.9 million, or 18%, compared to the second quarter of 2023. The decrease was primarily due to lower capital markets revenue from swap fees in the third quarter as compared to the outsized performance of $22.5 million in the second quarter.  Noninterest income increased $5.5 million, or 26%, compared to the third quarter of 2022. Noninterest income increased $25.4 million, or 43%, when comparing the first nine months of 2023 to the same period of the prior year. The increase was primarily due to higher capital markets revenue from swap fees as strong demand for affordable housing established by our tax credit lending clients has continued.  The demand for low-income housing remains healthy and the economics associated with these tax credit projects continue to be favorable.  The Company has a strong pipeline for this business and expects it to be a solid source of fee income.

● Noninterest expense increased $1.4 million, or 3%, in the third quarter of 2023 compared to the second quarter of 2023.  This increase was primarily due to higher variable employee compensation, increased professional and data processing fees and other expenses related to fixed asset disposals. Noninterest expense increased $3.3 million, or 7%, compared to the third quarter of 2022 and increased $9.3 million, or 7%, when comparing the first nine months of 2023 to the same period of the prior year.  The increase was primarily due to a full nine months of Guaranty Bank expenses in 2023, compared to six months of Guaranty Bank expenses in 2022, due to the acquisition of Guaranty Bank on April 1, 2022.  

STRATEGIC FINANCIAL METRICS

The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics may be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2022. The Company's long-term strategic financial metrics are as follows:

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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

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

			Year to Date*
Strategic Financial Metric*	Key Metric	Target	September 30, 2023			June 30, 2023			September 30, 2022
Loan and lease growth organically **	Loans and leases growth	> 9% annually		10.2	%		12.2	%		15.7	%
Fee income growth ***	Fee income growth	> 6% annually		45.8	%		54.2	%		(23.9)	%
Improve operational efficiencies and hold noninterest expense growth	Noninterest expense growth	< 5% annually		10.2	%		8.8	%		15.1	%

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

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

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

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

STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the third quarter of 2023 to support its corporate strategy:

● The Company grew loans and leases in the third quarter of 2023 by 13.3% on an annualized basis, driven by both our traditional and tax credit lending business. The Company has one LIHTC securitization that closed in October  and one LIHTC securitization scheduled to close prior to the end of November. Securitizations will continue to be utilized on an ongoing basis as a liquidity and capital management tool, as well as creating an ongoing capacity to produce LIHTC loans and the corresponding capital markets revenue generated from this 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 180 downstream banks with total noninterest bearing deposits of $93.0 million and total interest-bearing deposits of $308.2 million as of September 30, 2023. By comparison, the Company acted as the correspondent bank for 187 downstream banks with average total noninterest bearing deposits of $302.9 million and average total interest-bearing deposits of $313.8 million as of September 30, 2022. This line of business provides a strong source of deposits, fee income, high-quality loan participations and bank stock loans.  The Company also manages off-balance sheet liquidity held at the Federal Reserve on behalf of the downstream banks of $258.4 million as of September 30, 2023, as compared to $363.7 million for the quarter ended June 30, 2023.

● The Company is focused on executing interest rate swaps on select commercial loans, including LIHTC permanent loans. These 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 applicable borrowers and the Company. Levels of capital markets revenue from swap fees are influenced by prevailing interest rates.  Capital markets revenue totaled $15.6 million for the quarter and $55.1 million for the first nine months of 2023.  Capital markets revenue averaged $18.4 million per quarter for the year 2023 and $10.3 million per quarter for the year 2022.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

● 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. There were 220 new relationships added in the first nine months of 2023, totaling $576.8 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. Trust department fees are primarily determined based on the value of the investments within 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.  During the third quarter of 2023, the Company began offering trust and wealth management services at Guaranty Bank.

● Noninterest expense for the first nine months of 2023 totaled $149.6 million as compared to $140.3 million in the first nine months of 2022. The increase was primarily due to nine months of operating expenses in 2023 for the combined GB entity as compared to six months of operating expenses in 2022 for the combined GB entity.

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 and adjusted ROAE”, “NIM (TEY)”, “adjusted NIM (TEY)” and “efficiency ratio”. 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, adjusted ROAA and adjusted ROAE (all non-GAAP measures) are reconciled to net income;

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

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

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.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

	As of
GAAP TO NON-GAAP	September 30,			June 30,			September 30,
RECONCILIATIONS	2023			2023			2022
	(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	828,383		$	822,689		$	737,072
Less: Intangible assets		153,564			154,255			155,153
TCE (non-GAAP)	$	674,819		$	668,434		$	581,919
					��
Total assets (GAAP)	$	8,540,057		$	8,226,673		$	7,730,049
Less: Intangible assets		153,564			154,255			155,153
TA (non-GAAP)	$	8,386,493		$	8,072,418		$	7,574,896
TCE/TA ratio (non-GAAP)		8.05	%		8.28	%		7.68	%

	For the Quarter Ended									For the Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2023			2023			2022			2023			2022
	(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	25,121		$	28,425		$	29,294		$	80,703		$	68,160
Less non-core items (post-tax) (*):
Income:
Securities gains (losses), net	$	—		$	9		$	—		$	(356)		$	—
Fair value gain(loss) on derivatives, net		(265)			66			714			(537)			1,771
Total non-core income (non-GAAP)	$	(265)		$	75		$	714		$	(893)		$	1,771
Expense:
Acquisition costs	$	—		$	—		$	321		$	—		$	3,715
Post-acquisition compensation, transition and integration costs		—			—			48			164			3,837
CECL Day 2 credit loss expense on acquired loans		—			—			—			—			8,651
CECL Day 2 credit loss expense on acquired OBS exposure		—			—			—			—			1,140
Total non-core expense (non-GAAP)	$	—		$	—		$	369		$	164		$	17,343
Adjusted net income (non-GAAP)	$	25,386		$	28,350		$	28,949		$	81,760		$	83,732
ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	25,386		$	28,350		$	28,949		$	81,760		$	83,732
Weighted average common shares outstanding		16,717,303			16,701,950			16,900,968			16,731,847			16,030,371
Weighted average common and common equivalent shares outstanding		16,847,951			16,799,527			17,110,691			16,863,203			16,243,921
Adjusted EPS (non-GAAP):
Basic	$	1.52		$	1.70		$	1.71		$	4.89		$	5.22
Diluted	$	1.51		$	1.69		$	1.69		$	4.85		$	5.15
ADJUSTED ROAA and ADJUSTED ROAE (non-GAAP)
Adjusted net income (non-GAAP) (from above)	$	25,386		$	28,350		$	28,949		$	81,760		$	83,732
Average Assets	$	8,287,813		$	7,924,597		$	7,652,463		$	8,041,141		$	7,005,988
Adjusted ROAA (non-GAAP)		1.23	%		1.43	%		1.51	%		1.36	%		1.59	%
Adjusted ROAE (non-GAAP)		12.12	%		13.88	%		15.21	%		13.35	%		14.99	%
ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	55,255		$	53,205		$	60,769		$	165,270		$	165,902
Plus: Tax equivalent adjustment		7,771			6,542			4,459			20,283			10,785
Net interest income - tax equivalent (non-GAAP)	$	63,026		$	59,747		$	65,228		$	185,553		$	176,687
Less: Acquisition accounting net accretion		539			134			1,080			1,501			2,893
Adjusted net interest income		62,487			59,613			64,148			184,052			173,794
Average earning assets	$	7,573,785		$	7,283,286		$	6,975,857		$	7,369,420		$	6,452,867
NIM (GAAP)		2.89	%		2.93	%		3.46	%		3.00	%		3.44	%
NIM (TEY) (non-GAAP)		3.31	%		3.29	%		3.71	%		3.37	%		3.66	%
Adjusted NIM (TEY) (non-GAAP)		3.28	%		3.28	%		3.65	%		3.34	%		3.60	%
EFFICIENCY RATIO
Noninterest expense (GAAP)	$	51,081		$	49,727		$	47,746		$	149,593		$	140,319
Net interest income (GAAP)	$	55,255		$	53,205		$	60,769		$	165,270		$	165,902
Noninterest income (GAAP)		26,593			32,520			21,095			84,955			59,510
Total income	$	81,848		$	85,725		$	81,864		$	250,225		$	225,412
Efficiency ratio (noninterest expense/total income) (non-GAAP)		62.41	%		58.01	%		58.32	%		59.78	%		62.25	%

*     Nonrecurring items (after-tax) are calculated using an estimated effective federal tax rate of 21% with the exception of acquisition costs which have an estimated effective federal tax rate of 13.62%.

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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 GAAP basis, decreased 9% for the quarter ended September 30, 2023, compared to the same quarter of the prior year.  Net interest income, on a tax equivalent basis (non-GAAP), decreased 3% for the quarter ended September 30, 2023, compared to the same quarter of the prior year.

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

		GAAP						Tax Equivalent Basis
		For the Quarter Ended						For the Quarter Ended
		September 30,		June 30,		September 30,		September 30,		June 30,		September 30,
		2023		2023		2022		2023		2023		2022
Average Yield on Interest-Earning Assets		5.73	%	5.40	%	4.55	%	6.10	%	5.78	%	4.76	%
Average Cost of Interest-Bearing Liabilities		3.54	%	3.20	%	1.43	%	3.54	%	3.20	%	1.43	%
Net Interest Spread	��	2.19	%	2.21	%	3.10	%	2.56	%	2.58	%	3.33	%
NIM (TEY) (Non-GAAP)		3.31	%	3.29	%	3.46	%	3.31	%	3.29	%	3.71	%
NIM Excluding Acquisition Accounting Net Accretion		2.89	%	2.91	%	3.47	%	3.28	%	3.28	%	3.65	%

	GAAP				Tax Equivalent Basis
	For the Nine Months Ended				For the Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2023		2022		2023		2022
Average Yield on Interest-Earning Assets	4.54	%	4.10	%	5.83	%		4.33	%
Average Cost of Interest-Bearing Liabilities	3.17	%	0.95	%	3.17	%		0.95	%
Net Interest Spread	1.37	%	3.16	%	2.66	%		3.38	%
NIM (TEY) (Non-GAAP)	3.49	%	3.44	%	3.37	%		3.66	%
NIM Excluding Acquisition Accounting Net Accretion	2.47	%	3.37	%	3.34	%		3.60	%

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

		For the Quarter Ended						For the Nine Months Ended
		September 30,		June 30,		September 30,		September 30,		September 30,
		2023		2023		2022		2023		2022
		(dollars in thousands)						(dollars in thousands)
Acquisition Accounting Net Accretion in NIM	$	539	$	134	$	1,080	$	1,501	$	2,893

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

	For the Three Months Ended September 30,
	2023								2022
				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	$	21,526		$	284		5.23	%	$	16,224		$	100		2.45	%
Interest-bearing deposits at financial institutions		86,807			1,205		5.51	%		54,799			381		2.76	%
Investment securities - taxable		344,657			3,788		4.38	%		354,366			3,304		3.71	%
Investment securities - nontaxable (1)		600,693			6,974		4.64	%		591,730			6,299		4.26	%
Restricted investment securities		43,590			659		5.91	%		42,638			674		6.18	%
Gross loans/leases receivable (1) (2) (3)		6,476,512			103,428		6.34	%		5,916,100			72,969		4.89	%
Total interest earning assets		7,573,785			116,338		6.10	%		6,975,857			83,727		4.76	%
Noninterest-earning assets:
Cash and due from banks		76,135								88,477
Premises and equipment		118,757								115,816
Less allowance		(85,778)								(92,164)
Other		604,914								474,477
Total assets	$	8,287,813							$	7,562,463
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	4,264,208			33,562		3.12	%	$	3,862,556			10,889		1.12	%
Time deposits		999,488			10,003		3.97	%		593,490			1,681		1.12	%
Short-term borrowings		1,514			20		5.28	%		11,376			84		2.94	%
FHLB advances		425,870			5,724		5.26	%		418,239			2,584		2.42	%
Other borrowings		—			—		—	%		4,239			53		4.93	%
Subordinated notes		232,890			3,307		5.68	%		181,177			2,518		5.56	%
Junior subordinated debentures		48,678			697		5.59	%		48,551			689		5.56	%
Total interest-bearing liabilities		5,972,648			53,313		3.54	%		5,119,628			18,498		1.43	%
Noninterest-bearing demand deposits		1,078,643								1,435,152
Other noninterest-bearing liabilities		398,788								246,255
Total liabilities		7,450,079								6,801,035
Stockholders' equity		837,734								761,428
Total liabilities and stockholders' equity	$	8,287,813							$	7,562,463
Net interest income				$	63,025							$	65,229
Net interest spread							2.56	%							3.33	%
Net interest margin							2.89	%							3.46	%
Net interest margin (TEY)(Non-GAAP)							3.31	%							3.71	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.28	%							3.65	%
Ratio of average interest-earning assets to average interest-bearing liabilities		126.81	%							136.26	%

(1) Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 21% federal 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 September 30, 2023

	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume
	2023 vs. 2022
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	184	$	143	$	41
Interest-bearing deposits at financial institutions		824		520		304
Investment securities - taxable		484		1,045		(561)
Investment securities - nontaxable (2)		676		577		98
Restricted investment securities		(15)		(88)		73
Gross loans/leases receivable (2) (3)		30,459		23,084		7,375
Total change in interest income		32,612		25,281		7,330
INTEREST EXPENSE
Interest-bearing deposits		22,673		21,426		1,248
Time deposits		8,322		6,559		1,763
Short-term borrowings		(64)		247		(311)
Federal Home Loan Bank advances		3,140		3,092		48
Other borrowings		(53)		(27)		(26)
Subordinated notes		789		55		734
Junior subordinated debentures		8		4		2
Total change in interest expense		34,815		31,356		3,458
Total change in net interest income	$	(2,203)	$	(6,075)	$	3,872

(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% federal 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

	For the Nine Months Ended September 30,
	2023								2022
				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	$	19,267		$	741		5.14	%	$	8,937		$	114		1.70	%
Interest-bearing deposits at financial institutions		83,783			3,151		5.03	%		63,740			584		1.23	%
Investment securities - taxable		340,140			10,847		4.24	%		331,222			8,792		3.53	%
Investment securities - nontaxable (1)		599,070			19,892		4.43	%		558,860			17,494		4.17	%
Restricted investment securities		38,817			1,677		5.70	%		34,071			1,439		5.57	%
Gross loans/leases receivable (1) (2) (3)		6,288,343			285,136		6.06	%		5,456,037			180,896		4.43	%
Total interest earning assets		7,369,420			321,444		5.83	%		6,452,867			209,319		4.33	%
Noninterest-earning assets:
Cash and due from banks		72,767								80,157
Premises and equipment, net		118,408								103,409
Less allowance for estimated losses on loans/leases		(86,840)								(84,360)
Other		567,386								453,915
Total assets	$	8,041,141							$	7,005,988
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	4,099,789			84,565		2.76	%	$	3,629,735			17,704		0.65	%
Time deposits		1,020,421			27,225		3.57	%		508,067			3,527		0.93	%
Short-term borrowings		3,588			152		5.66	%		4,945			87		2.37	%
Federal Home Loan Bank advances		311,740			11,898		5.03	%		264,718			3,447		1.72	%
Other borrowings		—			—		—	%		1,429			53		4.90	%
Subordinated notes		232,784			9,922		5.68	%		143,104			5,888		5.49	%
Junior subordinated debentures		48,646			2,130		5.77	%		44,457			1,926		5.71	%
Total interest-bearing liabilities		5,716,968			135,892		3.17	%		4,596,455			32,632		0.95	%
Noninterest-bearing demand deposits		1,151,873								1,419,815
Other noninterest-bearing liabilities		355,709								244,849
Total liabilities		7,224,550								6,261,119
Stockholders' equity		816,591								744,869
Total liabilities and stockholders' equity	$	8,041,141							$	7,005,988
Net interest income				$	185,552							$	176,687
Net interest spread							2.66	%							3.38	%
Net interest margin							3.00	%							3.44	%
Net interest margin (TEY)(Non-GAAP)							3.37	%							3.66	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.34	%							3.60	%
Ratio of average interest earning assets to average interest-bearing liabilities		128.90	%							140.39	%

(1) Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 21% federal 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 nine months ended September 30, 2023
	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume
	2023 vs. 2022
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	627	$	399	$	228
Interest-bearing deposits at other financial institutions		2,567		2,329		238
Investment securities - taxable		2,055		1,812		243
Investment securities - nontaxable (2)		2,398		1,113		1,285
Restricted investment securities		238		34		204
Gross loans/leases receivable (2) (3)		104,240		73,689		30,551
Total change in interest income		112,125		79,376		32,749
INTEREST EXPENSE
Interest-bearing demand deposits		66,861		64,296		2,565
Time deposits		23,698		17,486		6,212
Short-term borrowings		65		108		(43)
Federal Home Loan Bank advances		8,451		7,737		714
Other borrowings		(53)		(27)		(26)
Subordinated notes		4,034		211		3,823
Junior subordinated debentures		204		21		182
Total change in interest expense		103,260		89,832		13,427
Total change in net interest income	$	8,865	$	(10,456)	$	19,322

(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% federal 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, capital markets revenue, 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 increased $29.3 million, comparing the third quarter of 2023 to the same period of 2022, and increased $102.6 million when comparing the first nine months of 2023 to the same period of 2022.  Interest income (tax equivalent) increased $32.6 million, comparing the third quarter of 2023 to the same period of 2022, and increased $112.1 million when comparing the first nine months of 2023 to the same period of 2022. This was primarily due to the GFED acquisition, but also due to continued loan growth and repricing of the Company’s floating rate loan portfolio with rapidly rising interest rates.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

INTEREST EXPENSE

Interest expense increased $34.8 million, comparing the third quarter of 2023 to the same period of 2022, and increased $103.3 million when comparing the first nine months of 2023 to the same period of 2022.  The increase is primarily due to the GFED acquisition in conjunction with a significant increase in cost of funds given the sharp rising rate environment. The Company’s cost of funds was 3.54% for the quarter ended September 30, 2023, which was up from 1.43% for the quarter ended September 30, 2022.  The Company’s cost of funds was 3.17% for the nine months ended September 30, 2023, which was up from 0.95% for the nine months ended September 30, 2022.  The Company has also experienced a shift of the composition of our deposits from noninterest and lower interest beta deposits to higher beta deposits.

PROVISION FOR CREDIT LOSSES

The ACL is established through provision expense to provide an estimated ACL. The following table shows the components of the provision for credit losses for the three and nine months ended September 30, 2023 and 2022.

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2023		2022		2023		2022
	(dollars in thousands)				(dollars in thousands)
Provision for credit losses - loans and leases	$	3,260	$	331	$	9,031	$	8,623
Provision for credit losses - off-balance sheet exposures		546		(331)		1,320		(339)
Provision for credit losses - held to maturity securities		—		—		—		—
Provision for credit losses - available for sale securities		—		—		989		—
Total provision for credit losses	$	3,806	$	—	$	11,340	$	8,284

The Company had total provision for credit losses on loans and leases of $3.3 million for the third quarter of 2023, which was up from $331 thousand for the same period of 2022, primarily driven by loan growth during the quarter.  The provision related to OBS was $546 thousand for the third quarter of 2023 compared to a negative $331 thousand for the for the third quarter of 2022. The increase was due to an increase in the balance of OBS exposures. There was no provision related to HTM securities for the third quarter of 2023 or 2022.  There was no provision related to AFS securities for the third quarter of 2023 or 2022.

Provision for loans and leases for the first nine months of 2023 totaled $9.0 million, up from $8.6 million in the first nine months of 2022.  The increase in provision on loans and leases was driven by loan growth and higher criticized loan balances. The provision related to OBS was $1.3 million for the first nine months of 2023, compared to a negative $339 thousand for the for the first nine months of 2022. The increase was due to an increase in the balance of OBS exposures.  There was no provision related to HTM securities for the first nine months of 2023 or 2022. The provision related to AFS securities was $989 thousand in the first nine months of 2023 as compared to no provision for the first nine months of 2022.  The increase was entirely due to an impairment of one subordinated debt investment in a failed bank in the first quarter of 2023.  This was a legacy investment acquired as part of the 2022 GFED acquisition and an allowance was established for the entire balance of the investment.

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 and Critical Accounting Estimates” section of this discussion.

The Company had an ACL for loans/leases held for investment of 1.39% of total gross loans/leases held for investment at September 30, 2023, compared to 1.41% at June 30, 2023 and 1.51% at September 30, 2022.  Management has evaluated the allowance needed on the loans acquired prior to the adoption of ASU 2016-13 on January 1, 2021, factoring in the

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

remaining discount, which was $4.6 million and $11.8 million at September 30, 2023 and September 30, 2022, respectively.

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

NONINTEREST INCOME

The following table sets forth the various categories of noninterest income for the three and nine months ended September 30, 2023 and 2022.

	Three Months Ended
	September 30,		September 30,
	2023		2022		$ Change		% Change
	(dollars in thousands)
Trust fees	$	2,863	$	2,537	$	326	12.8	%
Investment advisory and management fees		947		921		26	2.8
Deposit service fees		2,107		2,214		(107)	(4.8)
Gains on sales of residential real estate loans, net		476		641		(165)	(25.7)
Gains on sales of government guaranteed portions of loans, net		—		50		(50)	(100.0)
Capital markets revenue		15,596		10,545		5,051	47.9
Earnings on bank-owned life insurance		1,807		605		1,202	198.7
Debit card fees		1,584		1,453		131	9.0
Correspondent banking fees		450		189		261	138.1
Loan related fee income		800		652		148	22.7
Fair value gain (loss) on derivatives		(336)		904		(1,240)	(137.2)
Other		299		384		(85)	(22.1)
Total noninterest income	$	26,593	$	21,095	$	5,498	26.1	%

	Nine Months Ended
	September 30,		September 30,
	2023		2022		$ Change		% Change
	(dollars in thousands)
Trust fees	$	8,613	$	7,997	$	616	7.7	%
Investment advisory and management fees		2,812		2,940		(128)	(4.4)
Deposit service fees		6,169		5,992		177	3.0
Gains on sales of residential real estate loans, net		1,288		1,943		(655)	(33.7)
Gains on sales of government guaranteed portions of loans, net		30		69		(39)	(56.5)
Capital markets revenue		55,109		29,971		25,138	83.9
Securities losses, net		(451)		—		(451)	(100.0)
Earnings on bank-owned life insurance		3,352		1,301		2,051	157.6
Debit card fees		4,639		3,959		680	17.2
Correspondent banking fees		1,197		710		487	68.6
Loan related fee income		2,221		1,814		407	22.4
Fair value gain (loss) on derivatives		(680)		2,242		(2,922)	(130.3)
Other		656		572		84	14.7
Total noninterest income	$	84,955	$	59,510	$	25,445	42.8	%

The Company continues to be successful in expanding its wealth management client base and new assets under management. Trust fees continue to be a significant contributor to noninterest income. Assets under management decreased $556.2 million since June 30, 2023 due to market fluctuation but have increased by $529.3 million since September 30, 2022.  Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. Trust fees are primarily determined based on the market value of the investments within the fully-managed trusts. Trust fees increased 13%, comparing the  third quarter of 2023 to the same period of the prior year, and increased 8% when comparing the first nine months of 2023 to the first nine months of 2022 due to market volatility.  The Company expects trust fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Investment advisory and management fees increased 3% comparing the third quarter of 2023 to the same period of the prior year, and they decreased 4% when comparing the first nine months of 2023 to the first nine months of 2022. Similar to trust fees, investment advisory and management fees are largely determined based on the market value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations.

Deposit service fees decreased 5% comparing the third quarter of 2023 to the same period of the prior year.  The decrease was primarily due to a decrease in NSF and service charge fee income. Deposit service fees increased 3% when comparing the first nine months of 2023 to the first nine months of 2022. This increase was primarily due to the GFED acquisition. The Company continues to be successful in expanding its core deposit base.

Gains on sales of residential real estate loans, net, decreased 26% when comparing the third quarter of 2023 to the same period of the prior year, and they decreased 34% when comparing the first nine months of 2023 to the first nine months of 2022. The decreases were due to decreased volume of residential real estate purchases and the refinancing of residential real estate loans with the sharp increase in mortgage rates.

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.

Capital markets revenue totaled $15.6 million for the second quarter of 2023, compared to $10.5 million for the third quarter of 2022.  Capital markets revenue totaled $55.1 million for the first nine months of 2023 compared to $30.0 million for the first nine months of 2022. The increase was primarily due to higher capital markets revenue from swap fees due to improvements in the supply chain and resetting of deal stacks for the current interest rate environment.  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. The demand for low-income housing remains healthy and the economics associated with these tax credit projects continue to be favorable. Future levels of swap fees 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. The Company has one LIHTC securitization that closed in October and one LIHTC securitization scheduled to close prior to the end of November. LIHTC securitizations will continue on an ongoing basis, as a tool to provide capacity for continued LIHTC loan production and the corresponding capital markets revenue generated from this business.

There were no securities gains or losses for the three months ended September 30, 2023 and September 30, 2022.  Securities losses totaled $451 thousand for the nine months ended September 30, 2023.  There were no securities gains or losses for the nine months ended September 30, 2022.  The Company sold $29 million of securities during the first quarter of 2023.  The securities sold were part of a strategy to partially deleverage the balance sheet with an anticipated rapid earn back of the modest loss before the end of the calendar year.

Earnings on BOLI increased 199% comparing the third quarter of 2023 to the third quarter of 2022, and increased 158% comparing the first nine months of 2023 to the first nine months of 2022. The increase was primarily due to income of $1.1 million on death benefit proceeds of a former executive that were received in the third quarter of 2023. There were no purchases of BOLI in the first nine months of 2023.  BOLI purchases totaled $10.0 million in 2022 related to the GFED acquisition.  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 9% comparing the third quarter of 2023 to the same period of the prior year, and increased 17% comparing the first nine

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months of 2023 to the first nine months of 2022. The increase was primarily due to the GFED acquisition.  The fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees increased 138% comparing the third quarter of 2023 to the same period of the prior year, and increased 69% comparing the first nine months of 2023 to the first nine months of 2022. The increase was primarily due to a shift of correspondent banking balances from non-interest bearing accounts to interest bearing accounts, in light of increasing rates. Fees from correspondent banks generally increase when non-interest bearing account balances decrease. 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 180 banks in Iowa, Illinois, Missouri and Wisconsin.  

Loan-related fee income increased 23% comparing the third quarter of 2023 to the same period of the prior year, and increased 22% comparing the first nine months of 2023 to the first nine months of 2022.  The increase was primarily due to the increase in loan growth.

Fair value loss on derivatives was $336 thousand in the third quarter of 2023, as compared to $904 thousand in gains in the same period of the prior year.  Fair value loss on derivatives was $680 thousand in the first nine months of 2023 as compared to $2.2 million in fair value gain on derivatives in the first nine months of 2022.  The decrease was due to the rapidly rising interest rate environment.  The Company uses cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.  See Note 4 to the Consolidated Financial Statements for additional information.

Other noninterest income decreased 22% comparing the third quarter of 2023 to the same period of the prior year. Other noninterest income increased 15% comparing the first nine months of 2023 to the first nine months of 2022. Included in other noninterest income is income on equity investments.  Income on equity investments is largely determined based on the market value of the investments managed. As a result, income fluctuates with market valuations.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and nine months ended September 30, 2023 and 2022.

	Three Months Ended
	September 30,		September 30,
	2023		2022		$ Change		% Change
	(dollars in thousands)
Salaries and employee benefits	$	32,098	$	29,175	$	2,923	10.0	%
Occupancy and equipment expense		6,228		6,033		195	3.2
Professional and data processing fees		4,456		4,477		(21)	(0.5)
Acquisition costs		—		315		(315)	(100.0)
Post-acquisition compensation, transition and integration costs		—		62		(62)	(100.0)
FDIC insurance, other insurance and regulatory fees		1,721		1,497		224	15.0
Loan/lease expense		826		390		436	111.8
Net cost of and gains/losses on operations of real estate		3		19		(16)	(84.2)
Advertising and marketing		1,429		1,437		(8)	(0.6)
Communication and data connectivity		478		639		(161)	(25.2)
Supplies		335		289		46	15.9
Bank service charges		605		568		37	6.5
Correspondent banking expense		232		218		14	6.4
Intangibles amortization		691		787		(96)	(12.2)
Payment card processing		733		477		256	53.7
Trust expense		432		227		205	90.3
Other		814		1,136		(322)	(28.3)
Total noninterest expense	$	51,081	$	47,746	$	3,335	7.0	%

	Nine Months Ended
	September 30,		September 30,
	2023		2022		$ Change		% Change
	(dollars in thousands)
Salaries and employee benefits	$	95,560	$	82,774	$	12,786	15.4	%
Occupancy and equipment expense		18,242		15,948		2,294	14.4
Professional and data processing fees		12,048		12,513		(465)	(3.7)
Acquisition costs		—		4,139		(4,139)	(100.0)
Post-acquisition compensation, transition and integration costs		207		4,858		(4,651)	(95.7)
FDIC insurance, other insurance and regulatory fees		5,022		4,201		821	19.5
Loan/lease expense		2,034		1,418		616	43.4
Net cost of (income from) and gains/losses on operations of other real estate		(64)		77		(141)	(183.1)
Advertising and marketing		4,401		3,396		1,005	29.6
Communication and data connectivity		1,614		1,626		(12)	(0.7)
Supplies		921		772		149	19.3
Bank service charges		1,831		1,719		112	6.5
Correspondent banking expense		663		630		33	5.2
Intangibles amortization		2,222		2,067		155	7.5
Payment card processing		1,820		1,365		455	33.3
Trust expense		983		609		374	61.4
Other		2,089		2,207		(118)	(5.3)
Total noninterest expense	$	149,593	$	140,319	$	9,274	6.6	%

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

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the third quarter of 2022 to the third quarter of 2023 by 10%, and increased from the first nine months of 2022 to the first nine months of 2023

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by 15%.  The increased expense was primarily related to higher variable compensation and to the GFED acquisition, which resulted in an increase of 165 full-time equivalent employees.  

Occupancy and equipment expense increased 3% comparing the third quarter of 2023 to the same period of the prior year, and increased 14% comparing the first nine months of 2023 to the first nine months of 2022. The increase was due to higher depreciation expense and computer hardware expense related to the GFED acquisition.

Professional and data processing fees remained stable comparing the third quarter of 2023 to the same period in 2022, and decreased 4% comparing the first nine months of 2023 to the first nine months of 2022.  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.

There were no acquisition costs incurred in the third quarter of 2023 or in the first nine months of 2023.  Acquisition costs totaled $315 thousand the third quarter of 2022 and $4.1 million the first nine months of 2022. The acquisition costs, comprised primarily of legal, accounting and other professional fees, related to the acquisition of GFED.

There were no post-acquisition compensation, transition and integration costs in the third quarter of 2023, whereas such costs totaled $207 thousand in the first nine months of 2023. Post-acquisition compensation, transition and integration costs totaled $62 thousand in the third quarter of 2022 and totaled $4.9 million in the nine months ended September 30, 2022.  These costs were comprised primarily of IT integration and data conversion costs related to the acquisition of GFED.

FDIC insurance, other insurance and regulatory fee expense increased 15%, comparing the third quarter of 2023 to the third quarter of 2022, and increased 20% comparing the first nine months of 2023 to the first nine months of 2022.  The increase in expense was due to a 30% increase in the asset size of the Company and an increase in announced FDIC rates for 2023, which increased the Company’s insurance rates and expenses.

Loan/lease expense increased 112% when comparing the third quarter of 2023 to the same quarter of 2022, and increased 43% comparing the first nine months of 2023 to the first nine months of 2022. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs. NPLs have increased 97% since September 30, 2022.

Net income from and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net cost of and gains/losses on operations of other real estate for the third quarter of 2023 totaled $3 thousand, compared to net cost of and gains/losses on operations of other real estate of $19 thousand for the third quarter of 2022. Net income from and gains/losses on operations of other real estate totaled $64 thousand for the first nine months of 2023, compared to net cost of and gains/losses on operations of other real estate of $77 thousand for the first nine months of 2022. The gain on sale of OREO for the nine months ended September 30, 2023 was related to the sale of three properties.

Advertising and marketing expense remained stable comparing the third quarter of 2023 to the third quarter of 2022, and increased 30% comparing the first nine months of 2023 to the first nine months of 2022. The increase in expense was primarily due to the GFED acquisition and increased marketing of our deposit products.

Communication and data connectivity expense decreased 25% comparing the third quarter of 2023 to the third quarter of 2022 primarily due to a reduction in long distance charges, cell phone and air card expenses as the Company continues to improve operational efficiencies.  Communication and data connectivity expense remained stable comparing the first nine months of 2023 to the first nine months of 2022.  

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Supplies expense increased 16% comparing the third quarter of 2023 to the third quarter of 2022, and increased 19% comparing the first nine months of 2023 to the first nine months of 2022. This increase is primarily due to an increase in supply stock and the GFED acquisition.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 7% when comparing the third quarter of 2023 to the same quarter of 2022, and increased 7% comparing the first nine months of 2023 to the first nine months of 2022.  As transaction volumes continue to increase, the associated expenses are expected to also increase.

Correspondent banking expense increased 6% when comparing the third quarter of 2023 to the same quarter of 2022, and increased 5% comparing the first nine months of 2023 to the first nine months of 2022.  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 12% when comparing the third quarter of 2023 to the same quarter of 2022, and increased 8% comparing the first nine months of 2023 to the first nine months of 2022. The year-to-date increase is due to the GFED acquisition.  These expenses will naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.

Payment card processing expense increased 54% when comparing the third quarter of 2023 to the same quarter of 2022 due to one-time charges and adjustments, and increased 33% comparing the first nine months of 2023 to the first nine months of 2022 due to the GFED acquisition as they have a large client base.

Trust expense increased 90% when comparing the third quarter of 2023 to the same quarter of 2022, and increased 61% comparing the first nine months of 2023 to the first nine months of 2022. The increase was due to new relationships added in 2023 totaling $576.8 million of new assets under management as well as costs for a conversion to a new core system.

Other noninterest expense decreased 28% when comparing the third quarter of 2023 to the third quarter of 2022.  The decrease was primarily due to a higher loss on disposal of fixed assets in the third quarter of 2022. Other noninterest expense decreased 5% comparing the first nine months of 2023 to the first nine months of 2022. Included in other noninterest expense are items such as meals and entertainment, subscriptions, loss on disposal of fixed assets, sales and use tax and expenses related to wealth management.

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INCOME TAXES

In the third quarter of 2023, the Company incurred income tax expense of $1.8 million. During the first nine months of the year, the Company incurred income tax expense of $8.6 million. The Company benefitted in the third quarter of 2023 from a full quarter of strong growth in tax-exempt loan and bond portfolios that was added during the late portion of the second quarter and throughout the third quarter.  As a result, this has helped drive the Company’s effective tax rate lower. Refer to the reconciliation of the expected income tax rate to the effective tax rate that is included in Note 5 to the Consolidated Financial Statements for additional detail.

FINANCIAL CONDITION

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

	As of
	September 30, 2023				June 30, 2023				December 31, 2022				September 30, 2022
	(dollars in thousands)
	Amount		%		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	184,915	2	%	$	259,096	3	%	$	183,993	2	%	$	157,325	2	%
Securities		896,394	10	%		882,888	11	%		928,102	12	%		879,450	11	%
Net loans/leases		6,518,638	77	%		6,293,523	77	%		6,051,165	76	%		5,918,121	77	%
Derivatives		291,295	3	%		170,294	2	%		177,631	2	%		185,037	2	%
Other assets		648,815	8	%		620,872	7	%		607,946	8	%		590,116	8	%
Total assets	$	8,540,057	100	%	$	8,226,673	100	%	$	7,948,837	100	%	$	7,730,049	100	%
Total deposits	$	6,494,852	76	%	$	6,606,720	81	%	$	5,984,217	75	%	$	5,941,035	76	%
Total borrowings		712,126	8	%		418,368	5	%		825,894	10	%		701,491	9	%
Derivatives		320,220	4	%		195,841	2	%		200,701	3	%		209,479	3	%
Other liabilities		184,476	2	%		183,055	2	%		165,301	2	%		140,972	2	%
Total stockholders' equity		828,383	10	%		822,689	10	%		772,724	10	%		737,072	10	%
Total liabilities and stockholders' equity	$	8,540,057	100	%	$	8,226,673	100	%	$	7,948,837	100	%	$	7,730,049	100	%

During the third quarter of 2023, the Company's total assets increased $313.4 million, or 4%, from June 30, 2023, to a total of $8.5 billion. The Company’s net loans/leases increased $225.1 million in the third quarter of 2023. The increase in net loans/leases was driven primarily by strength in our low-income housing tax credit lending business.  The Company also experienced improved loan demand from its traditional commercial lending/leasing businesses.

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 invested in tax-exempt municipal securities made up of 89% general obligation bonds and 11% revenue bonds. 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 diversified across many issuers. 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 that 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:

	As of
	September 30, 2023					June 30, 2023					December 31, 2022					September 30, 2022
	Amount			%		Amount			%		Amount			%		Amount			%
	(dollars in thousands)
U.S. treasuries and govt. sponsored agency securities	$	16,002		2	%	$	18,942		2	%	$	16,981		2	%	$	20,527		2	%
Municipal securities		764,017		85	%		743,608		84	%		779,270		84	%		724,006		83	%
Residential mortgage-backed and related securities		57,946		6	%		60,957		7	%		66,215		7	%		68,844		8	%
Asset-backed securities		16,326		2	%		17,393		2	%		18,728		2	%		19,630		2	%
Other securities		42,283		5	%		42,168		5	%		46,908		5	%		46,443		5	%
	$	896,574		100	%	$	883,068		100	%	$	928,102		100	%	$	879,450		100	%
Securities as a % of total assets		10.50	%				10.73	%				11.68	%				11.38	%
Net unrealized losses as a % of Amortized Cost		(16.86)	%				(9.81)	%				(11.26)	%				(10.27)	%
Duration (in years)		5.5					5.7					5.5					9.0
Quarterly yield on investment securities (tax equivalent)		4.55	%				4.31	%				3.99	%				4.05	%

Due to increases in intermediate and long-term interest rates during 2023, which directly impact the fair value of the Company’s AFS portfolio, the AFS portfolio declined $59.7 million, or 17.5%, from December 31, 2022 to September 30, 2023, primarily attributable to an increase in unrealized losses.  

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 grew 10.2% on an annualized basis during the first nine months of 2023.  The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following table.

	As of
	September 30, 2023				June 30, 2023				December 31, 2022				September 30, 2022
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
C&I - revolving	$	299,588	5	%	$	304,617	5	%	$	296,869	5	%	$	332,996	5	%
C&I - other *		1,487,568	22	%		1,402,553	21			1,451,693	23			1,415,996	24
CRE - owner occupied		610,618	9	%		609,717	10			629,367	10			627,558	10
CRE - non-owner occupied		955,552	14	%		963,814	15			963,239	16			920,876	15
Construction and land development		1,394,054	21	%		1,307,766	21			1,192,061	19			1,149,503	19
Multi-family		1,156,980	18	%		1,100,794	17			963,803	16			933,118	16
Direct financing leases		34,401	1	%		32,937	1			31,889	1			33,503	1
1-4 family real estate		539,931	8	%		535,405	8			499,529	8			487,508	8
Consumer		127,615	2	%		121,717	2			110,421	2			107,552	2
Total loans/leases	$	6,606,307	100	%	$	6,379,320	100	%	$	6,138,871	100	%	$	6,008,610	100	%
Less allowance		(87,669)				(85,797)				(87,706)				(90,489)
Net loans/leases	$	6,518,638			$	6,293,523			$	6,051,165			$	5,918,121

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans because owner-occupied loans are generally considered to have less risk. As of September 30, 2023 and June 30, 2023, approximately 14% and 15% of the CRE loan portfolio (as defined below) 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 September 30, 2023:  CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate. Within the CRE Loan portfolio, there is minimal office exposure, totaling $188.9 million or 2.9% of total loans at September 30, 2023.

	As of September 30,				As of June 30,				As of December 31,				As of September 30,
	2023				2023				2022				2022
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
Lessors of Residential Buildings	$	2,213,149	51	%	$	2,091,510	50	%	$	1,861,197	48	%	$	1,745,720	48	%
Lessors of Nonresidential Buildings		610,919	14	%		591,128	14	%		537,940	13	%		618,190	17	%
Hotels		128,177	3	%		131,832	3	%		145,662	4	%		121,310	3	%
New Multifamily Housing Construction		83,142	2	%		80,338	2	%		82,905	2	%		40,787	1	%
New Housing For-Sale Builders		81,054	2	%		76,592	2	%		71,991	2	%		64,895	2	%
Other *		1,201,135	28	%		1,211,059	29	%		1,216,679	31	%		1,020,214	29	%
Total CRE Loans	$	4,317,576	100	%	$	4,182,459	100	%	$	3,916,374	100	%	$	3,611,116	100	%

*     “Other” consists of all other industries. None of these had concentrations greater than $60.7 million, or approximately 1.4% of total CRE loans in the most recent period presented.

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

	As of
	September 30, 2023				June 30, 2023				December 31, 2022				September 30, 2022
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
LIHTC	$	921,359	66	%	$	870,084	67	%	$	743,075	62	%	$	705,487	61	%
Construction (commercial)		389,947	28			359,202	27			352,941	30			353,007	32
Land development		67,186	5			61,973	5			66,825	6			70,830	6
Construction (residential)		15,562	1			16,507	1			29,220	2			20,179	2
Total construction and land development	$	1,394,054	100	%	$	1,307,766	100	%	$	1,192,061	100	%	$	1,149,503	100	%

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

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

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

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

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

	As of September 30,				As of June 30,				As of December 31,				As of September 30,
	2023				2023				2022				2022
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
Trucks, Vans and Vocational Vehicles	$	77,383	23	%	$	74,534	23	%	$	70,821	23	%	$	69,328	23	%
Freightliners		25,081	7	%		27,171	8	%		26,433	9	%		22,256	7	%
Trailers		24,360	7	%		25,406	8	%		23,186	7	%		22,074	7	%
Tractor		20,822	6	%		20,410	6	%		17,740	6	%		17,297	6	%
Manufacturing - General		19,424	6	%		18,263	6	%		17,493	6	%		17,079	6	%
Construction - General		18,104	5	%		17,882	5	%		16,256	5	%		15,845	5	%
Food Processing Equipment		14,164	4	%		13,838	4	%		14,304	5	%		14,566	5	%
Marine - Travelifts		13,646	4	%		13,375	4	%		14,653	5	%		13,930	5	%
Computer Equipment		13,006	4	%		9,388	3	%		7,736	2	%		7,874	3	%
Aesthetic Equipment		10,235	3	%		9,684	3	%		8,311	3	%		7,190	2	%
Computer Hardware		8,953	3	%		12,794	4	%		9,617	3	%		8,945	3	%
Other *		95,863	28	%		85,733	26	%		83,382	26	%		84,370	28	%
Total m2 loans and leases	$	341,041	100	%	$	328,478	100	%	$	309,932	100	%	$	300,754	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.

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, 2022, 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 and nine months ended September 30, 2023 and 2022 are presented as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
	(dollars in thousands)				(dollars in thousands)
Balance, beginning	$	85,797	$	92,425	$	87,706	$	78,721
Initial ACL recorded for PCD loans		—		—		—		5,902
Change in ACL for writedown of LHFS to fair value		175		—		(3,811)		—
Provision		3,260		331		9,031		8,623
Charge-offs		(1,816)		(2,489)		(6,038)		(3,565)
Recoveries		253		222		781		808
Balance, ending	$	87,669	$	90,489	$	87,669	$	90,489

Changes in the ACL for OBS exposures for the three and nine months ended September 30, 2023 and 2022 are presented as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
	(dollars in thousands)				(dollars in thousands)
Balance, beginning	$	6,326	$	6,878	$	5,552	$	6,886
Provisions (credited) to expense		546		(331)		1,320		(339)
Balance, ending	$	6,872	$	6,547	$	6,872	$	6,547

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

	As of
Internally Assigned Risk Rating *	September 30, 2023			June 30, 2023			December 31, 2022			September 30, 2022
	(dollars in thousands)
Special Mention (Rating 6)	$	127,202		$	116,910		$	98,333		$	63,973
Substandard (Rating 7)/Classified loans		69,369			63,956			66,021			77,317
Doubtful (Rating 8)/Classified loans		—			—			—			—
Criticized Loans	$	196,571		$	180,866		$	164,354		$	141,290
Criticized Loans as a % of Total Loans/Leases		2.98	%		2.84	%		2.68	%		2.35	%
Classified Loans as a % of Total Loans/Leases		1.05	%		1.00	%		1.08	%		1.29	%

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

Criticized loans increased 8% and classified loans increased 9% from June 30, 2023 to September 30, 2023 due to the downgrade of four large relationships that are still performing. The Company continues its strong focus on maintaining credit quality in an effort to limit NPLs.

	As of
	September 30, 2023		June 30, 2023		December 31, 2022		September 30, 2022
ACL for loans/leases / Total loans/leases held for investment	1.39	%	1.41	%	1.43	%	1.51	%
ACL for loans/leases / NPLs	253.61	%	328.16	%	1,000.07	%	516.67	%

Although management believes that the ACL at September 30, 2023 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 equipment financing 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NONPERFORMING ASSETS

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

	As of September 30,			As of June 30,			As of December 31,			As of September 30,
	2023			2023			2022			2022
	(dollars in thousands)
Nonaccrual loans/leases (1)	$	34,568		$	26,062		$	8,765		$	17,511
Accruing loans/leases past due 90 days or more		—			83			5			3
Total NPLs		34,568			26,145			8,770			17,514
Other repossessed assets		—			—			—			340
OREO		120			—			133			177
Total NPAs	$	34,688		$	26,145		$	8,903		$	18,031
NPLs to total loans/leases		0.52	%		0.41	%		0.14	%		0.29	%
NPAs to total loans/leases plus repossessed property		0.53	%		0.41	%		0.15	%		0.30	%
NPAs to total assets		0.41	%		0.32	%		0.11	%		0.23	%
Nonaccrual loans/leases to total loans/leases		0.52	%		0.41	%		0.14	%		0.29	%
ACL to nonaccrual loans		253.61	%		329.20	%		1,000.64	%		516.76	%

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

NPAs at September 30, 2023 were $34.7 million, up $8.5 million from June 30, 2023, and $16.7 million from September 30, 2022.  The increase in NPAs during the quarter was driven by three client relationships from unrelated industries. Approximately one-third of total NPAs consist of one credit and the Company believes this credit will be resolved without a loss. The ratio of NPAs to total assets was 0.41% at September 30, 2023, up from 0.32% at June 30, 2023, and up from 0.23% at September 30, 2022.

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.

DEPOSITS

Deposits decreased $111.9 million during the third quarter of 2023. During the third quarter of 2023, the Company’s deposits, excluding brokered deposits, decreased $9.0 million to a total of $6.2 billion, or 0.1%. The Company reduced $102.8 million of brokered deposits in the third quarter.

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

	As of
	September 30, 2023				June 30, 2023				December 31, 2022				September 30, 2022
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
Noninterest bearing demand deposits	$	1,027,791	16	%	$	1,101,605	17	%	$	1,262,981	21	%	$	1,315,555	22	%
Interest bearing demand deposits		4,416,725	68	%		4,374,847	65	%		3,875,497	65	%		3,904,303	66	%
Time deposits		788,692	12	%		765,801	12	%		744,593	12	%		672,133	11	%
Brokered deposits		261,644	4	%		364,467	6	%		101,146	2	%		49,044	1	%
	$	6,494,852	100	%	$	6,606,720	100	%	$	5,984,217	100	%	$	5,941,035	100	%

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Estimated total uninsured and uncollateralized deposits represented 20.1% of total consolidated deposits at September 30, 2023. The Company maintained approximately $3.0 billion of available liquidity sources at September 30, 2023, which includes $1.1 billion of immediately available liquidity.

The Company actively participates in the ICS/CDARS program, which is a trusted resource that provides FDIC insurance coverage for clients that maintain larger deposit balances.  Deposits in the ICS/CDARS program totaled $2.1 billion, or 31.6% of all deposits, as of September 30, 2023.

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

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

● Money market deposits which represent excess liquidity, and

● EBA balances of the correspondent banks at the FRB.

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

BORROWINGS

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

	As of
	September 30, 2023		June 30, 2023		December 31, 2022		September 30, 2022
	(dollars in thousands)
Federal funds purchased	$	470	$	1,850	$	129,630	$	85,180

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.  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The table below presents the Company's FHLB advances.

	As of
	September 30, 2023		June 30, 2023		December 31, 2022		September 30, 2022
	(dollars in thousands)
Term FHLB advances	$	135,000	$	135,000	$	—	$	—
Overnight FHLB advances		295,000		—		415,000		335,000
	$	430,000	$	135,000	$	415,000	$	335,000

The Company had an increase in overnight FHLB advances of $295.0 million from June 30, 2023 to September 30, 2023.  The increase was primarily due to the need to fund strong loan growth. The Company had no change in term FHLB advances from June 30, 2023 to September 30, 2023.  

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

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

	September 30, 2023				December 31, 2022
			Weighted				Weighted
			Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate
	(dollars in thousands)
Year ending December 31:
2023	$	429,252	5.44	%	$	516,146	4.69	%
2024		127,392	5.23			—	—
2025		—	—			—	—
2026		45,000	5.01			—	—
2027		45,000	4.82			—	—
Thereafter		45,000	4.64			—	—
Total Wholesale Funding	$	691,644	5.28	%	$	516,146	4.69	%

During the first nine months of 2023, wholesale funding increased $175.5 million due to intentionally bolstering on-balance sheet liquidity and funding strong loan growth.

The Company renewed its revolving credit note in the second quarter of 2023.  At renewal, the line amount totaled $50.0 million.  Interest on the revolving line of credit is calculated at the greater of: (a) the effective Prime Rate less 0.50% and (b) 3.00% per annum.  The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries.  There was no outstanding balance on the revolving line of credit at September 30, 2023.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

STOCKHOLDERS' EQUITY

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

	As of
	September 30, 2023			June 30, 2023			December 31, 2022			September 30, 2022
	(dollars in thousands)
Common stock	$	16,732		$	16,714		$	16,796		$	16,885
Additional paid in capital		369,833			368,860			370,712			372,086
Retained earnings		523,142			499,024			450,114			422,958
AOCI		(81,324)			(61,909)			(64,898)			(74,857)
Total stockholders' equity	$	828,383		$	822,689		$	772,724		$	737,072
TCE / TA ratio (non-GAAP)		8.05	%		8.28	%		7.93	%		7.68	%

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

AOCI decreased $19.4 million during the third quarter of 2023 due to a decrease in the value of the Company’s AFS securities portfolio and certain derivatives resulting from the change in interest rates during the third quarter.

On May 19, 2022, the board of directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021. As of September 30, 2023, the Company had purchased 745,000 shares under the program and all shares purchased have been retired.  No shares were repurchased during the third quarter of 2023.

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 customer credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid an 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 totaled $184.9 million at September 30, 2023. The Company’s liquidity sources as of September 30, 2023 are summarized as follows:

	As of
	September 30, 2023
	(dollars in billions)
Excess cash	$	0.1
Borrowing capacity at FHLB		0.7
Borrowing capacity at FRB		0.2
Secured line of credit with upstream counterparty		0.1
Immediately available liquidity	$	1.1
Fed funds lines of credit		0.5
Brokered deposit capacity limited by Company policy		1.4
Total available liquidity excluding unpledged AFS/HTM securities	$	3.0

Including unpledged AFS and HTM securities of approximately $867.8 million, the Company’s total liquidity is strong at over 45% of total assets.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

During the third quarter of 2023, the Company’s core deposits, excluding brokered deposits, remained static at a total of $6.2 billion.  Total uninsured and uncollateralized deposits represented 20.1% of total consolidated deposits. The Company maintained approximately $1.1 billion of immediately available liquidity at quarter-end.

The Company has increased pledging of loans to FHLB and the Fed in an effort to strengthen this contingent source of liquidity.

At September 30, 2023, the subsidiary banks had 25 unsecured lines of credit totaling $450.8 million with upstream correspondent banks.  The subsidiary banks also had availability of $144.3 million with the FRB which was secured. At September 30, 2023, the Company had the full $595.1 million available.

At December 31, 2022, the subsidiary banks had 27 unsecured lines of credit totaling $470.8 million with upstream correspondent banks.  The subsidiary banks also had availability of $31.0 million with the FRB which was secured. At December 31, 2022, $372.8 million of the $501.8 million was available.

At September 30, 2023, the subsidiary banks had availability of $730.1 million with the FHLB which was secured by loans totaling $2.2 billion.   At December 31, 2022, the subsidiary banks had availability of $551.6 million with the FHLB which was secured by loans totaling $1.7 billion.

As of September 30, 2023, the Company had $401.2 million in actual correspondent banking deposits spread over 180 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 $426.5 million during the first nine months of 2023, compared to $404.4 million for the same period of 2022. The net decrease in federal funds sold was $36.6 million for the first nine months of 2023, compared to a net increase of $15.8 million for the same period of 2022. The net decrease in interest-bearing deposits at financial institutions was $7.0 million for the first nine months of 2023, compared to a net decrease of $49.6 million for the same period of 2022. Proceeds from calls, maturities, and paydowns of securities were $87.7 million for the first nine months of 2023, compared to $57.9 million for the same period of 2022. Purchases of securities used cash of $102.7 million for the first nine months of 2023, compared to $173.3 million for the same period of 2022. Proceeds from sales of securities were $30.6 million for the first nine months of 2023, compared to $111.4 million for the same period of 2022. The net increase in loans/leases used cash of $479.8 million for the first nine months of 2023 compared to $524.9 million for the same period of 2022.

Financing activities provided cash of $385.7 million for the first nine months of 2023, compared to $376.6 million for same period of 2022. Net increases in deposits totaled $510.6 million for the first nine months of 2023, compared to net decreases in deposits of $58.3 million for the same period of 2022. During the first nine months of 2023, the Company's short-term borrowings decreased $129.2 million, compared to an increase in short-term borrowings of $81.4 million for the same period of 2022. There were long-term FHLB advances of $135.0 million during the first nine months of 2023 compared to no long-term FHLB advances during the same period of 2022. There were no maturities and principal payments on FHLB term advances in the first nine months of 2023. There was a $16.0 million prepayment of FHLB term advances in the first nine months of 2022. Net decrease in overnight advances totaled $120.0 million for the first nine months of 2023 as compared to net increase of $320.0 million for the same period of 2022. There were no proceeds from subordinated notes in the first nine months of 2023.  Proceeds from subordinated notes totaled $100.0 million in the first

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

nine months of 2022. Repurchase and cancellation of shares totaled $8.7 million in the first nine months of 2023, as compared to $47.9 million for the same period of 2022.

Total cash provided by operating activities was $85.3 million for the first nine months of 2023, compared to $76.6 million for the same period of 2022.

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 subordinated notes.

The Company has one LIHTC securitization that closed in October and one LIHTC securitization scheduled to close prior to the end of November. LIHTC securitizations will continue to be an ongoing tool in managing liquidity and capital.

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,” “annualize,” “may,” “will,” “would,” “could,” “should,” “likely,” “might,” “potential,” “continue,” “target,” “outlook,” as well as the negative forms of those words 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 (including the Russian invasion of Ukraine and the Israeli-Palestinian conflict) 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 local, state and federal laws, regulations and governmental policies concerning the Company’s general business and any other changes in response to the recent failures of other banks.

● Changes in the interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out and the recent potential additional rate increases by the Federal Reserve).

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● Increased competition in the financial services sector, including from non-bank competitors such as credit unions and “fintech” companies, 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.

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

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

● Fluctuations in the value of securities held in our securities portfolio.

● Concentrations within our securities portfolio, large loans to certain borrowers, and large deposits from certain clients.

● The concentration of large deposits from certain clients who have balances above current FDIC insurance limits and who may withdraw deposits to diversify their exposure.

● The level of non-performing assets on our balance sheet.

● Interruptions involving our information technology and communications systems or third-party servicers.

● Breaches or failures of our information security controls or cybersecurity-related incidents.

● 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, 2022.

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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 bi-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 and downward shifts; 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 100, 200 and 300 basis point upward and 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 (a “shock”) upward and downward of 100, 200, 300, and 400 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 and downward parallel shift. For the 300-basis point upward and downward shock, the established policy limit is a 30% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

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

	NET INTEREST INCOME EXPOSURE in YEAR 1
			As of September 30,		As of December 31,		As of December 31,
INTEREST RATE SCENARIO	POLICY LIMIT		2023		2022		2021
300 basis point downward shock	(30.0)	%	(0.2)	%	(6.1)	%	n/a
200 basis point downward shift	(10.0)	%	1.5	%	(0.2)	%	n/a
200 basis point upward shift	(10.0)	%	(2.1)	%	(1.3)	%	3.1	%
300 basis point upward shock	(30.0)	%	(5.2)	%	(2.3)	%	11.6	%

With the shift in funding from non-interest bearing and lower beta deposits to higher beta deposits, the Company’s balance sheet is now moderately liability sensitive. Notably, management is conservative with the repricing assumptions on loans and deposits.  For example, management does not model any delay in loan and deposit betas despite historical experience and practice of delays in deposit betas.  Additionally, management does not model mix shift or growth in its standard scenarios which can be impactful.  As an alternative, management runs separate scenarios to capture the impact on delayed beta performance and various shifts in mix of loans and deposits. Finally, management models a variety of scenarios including some that stress key assumptions to help capture and isolate the impact of the management’s more conservative approach to the assumptions in the base model.

The simulation is within the board-established policy limits for all four scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at September 30, 2023 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

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

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Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of September 30, 2023. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

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

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1           Legal Proceedings

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

Item 1A        Risk Factors

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.  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, Use of Proceeds, and Issuer Purchases of Equity Securities

On May 19, 2022, the board of directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021. The repurchase program does not have an expiration date. There were no shares repurchased under the share repurchase program during the third quarter of 2023.

			Total number of shares	Maximum number
			purchased as part of	of shares that may yet
	Total number of	Average price	publicly announced	be purchased under
Period	shares purchased	paid per share	plans or programs	the plans or programs
July 1-31, 2023	—	—	—	755,000
August 1-31, 2023	—	—	—	755,000
September 1-30, 2023	—	—	—	755,000
Total	—	$ -	—	755,000

Item 3           Defaults Upon Senior Securities

None

Item 4           Mine Safety Disclosures

Not applicable

Item 5           Other Information

During the fiscal quarter ended September 30, 2023, none of the Company’s directors or executive officers adopted or terminated a contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5-1(c) or any non-Rule 10b5-1 trading arrangement.  

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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 September 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2023 and September 30, 2022; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and September 30, 2022; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2023 and September 30, 2022; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and September 30, 2022; and (vi) Notes to the Consolidated Financial Statements.
104	Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101.

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SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)

Date	November 8, 2023	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer
Date	November 8, 2023	/s/ Todd A. Gipple
		Todd A. Gipple
		President
		Chief Financial Officer
Date	November 8, 2023	/s/ Nick W. Anderson
		Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)

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