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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 June 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 August 1, 2023, the Registrant had outstanding 16,715,515 shares of common stock, $1.00 par value per share.

Table of Contents QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


					Page<br>Number(s)
Part I	****	FINANCIAL INFORMATION

		Item 1	****	Consolidated Financial Statements (Unaudited)

				Consolidated Balance Sheets <br>As of June 30, 2023 and December 31, 2022	4

				Consolidated Statements of Income <br>For the Three Months Ended June 30, 2023 and 2022	5

				Consolidated Statements of Income<br><br>For the Six Months Ended June 30, 2023 and 2022	6

				Consolidated Statements of Comprehensive Income <br>For the Three and Six Months Ended June 30, 2023 and 2022	7

				Consolidated Statements of Changes in Stockholders' Equity <br>For the Three and Six Months Ended June 30, 2023 and 2022	8

				Consolidated Statements of Cash Flows <br>For the Six Months Ended June 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	29
				Note 7. Fair Value	30
				Note 8. Business Segment Information	32
				Note 9. Regulatory Capital Requirements	33

		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
				Noninterest Expense		50

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				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	57
				Deposits	58
				Borrowings	59
				Stockholders' Equity	60
				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 and Use of Proceeds	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.

Table of Contents QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of June 30, 2023 and December 31, 2022


	June 30,		December 31,
	2023		2022
	(dollars in thousands)
Assets
Cash and due from banks	$	84,084	$	59,723
Federal funds sold		8,765		56,910
Interest-bearing deposits at financial institutions		166,247		67,360

Securities held to maturity, at amortized cost, net of allowance for credit losses		576,568		587,142
Securities available for sale, at fair value		306,320		340,960
Total securities		882,888		928,102

Loans receivable held for sale		295,057		1,480
Loans/leases receivable held for investment		6,084,263		6,137,391
Gross loans/leases receivable		6,379,320		6,138,871
Less allowance for credit losses		(85,797)		(87,706)
Net loans/leases receivable		6,293,523		6,051,165

Bank-owned life insurance		108,125		106,580
Premises and equipment, net		118,168		117,948
Restricted investment securities		31,988		42,501
Other real estate owned, net		—		133
Goodwill		139,027		137,607
Intangibles		15,228		16,759
Derivatives		170,294		177,631
Other assets		208,336		186,418
Total assets	$	8,226,673	$	7,948,837

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,101,605	$	1,262,981
Interest-bearing		5,505,115		4,721,236
Total deposits	****	6,606,720	****	5,984,217

Short-term borrowings		1,850		129,630
Federal Home Loan Bank advances		135,000		415,000
Subordinated notes		232,852		232,662
Junior subordinated debentures		48,666		48,602
Derivatives		195,841		200,701
Other liabilities		183,055		165,301
Total liabilities	****	7,403,984	****	7,176,113


Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 June 2023 and December 2022 - no shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 June 2023 - 16,713,853 shares issued and outstanding December 2022 - 16,795,942 shares issued and outstanding		16,714		16,796
Additional paid-in capital		368,860		370,712
Retained earnings		499,024		450,114
Accumulated other comprehensive loss:
Securities available for sale		(40,729)		(44,677)
Derivatives		(21,180)		(20,221)
Total stockholders' equity	****	822,689	****	772,724
Total liabilities and stockholders' equity	$	8,226,673	$	7,948,837

See Notes to Consolidated Financial Statements (Unaudited)

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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended June 30, 2023 and 2022


****	****	2023		****	2022
		(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees:
Taxable		$	68,419		$	51,795
Nontaxable			19,545			8,009
Securities:
Taxable			3,693			3,090
Nontaxable			4,868			4,645
Interest-bearing deposits at financial institutions			1,124			169
Restricted investment securities			505			485
Federal funds sold			223			12
Total interest and dividend income		****	98,377		****	68,205

Interest expense:
Deposits			38,445			5,524
Short-term borrowings			33			3
Federal Home Loan Bank advances			2,653			781
Subordinated notes			3,304			1,816
Junior subordinated debentures			737			681
Total interest expense		****	45,172		****	8,805
Net interest income		****	53,205		****	59,400
Provision for credit losses			3,606			11,200
Net interest income after provision for credit losses		****	49,599		****	48,200

Noninterest income:
Trust fees			2,844			2,497
Investment advisory and management fees			986			983
Deposit service fees			2,034			2,223
Gains on sales of residential real estate loans, net			500			809
Capital markets revenue			22,490			13,004
Securities gains, net			12			—
Earnings on bank-owned life insurance			838			350
Debit card fees			1,589			1,499
Correspondent banking fees			356			244
Loan related fee income			770			682
Fair value gain on derivatives			83			432
Other			18			59
Total noninterest income		****	32,520		****	22,782

Noninterest expense:
Salaries and employee benefits			31,459			29,972
Occupancy and equipment expense			6,100			5,978
Professional and data processing fees			4,078			4,365
Acquisition costs			—			1,973
Post-acquisition compensation, transition and integration costs			—			4,796
FDIC insurance, other insurance and regulatory fees			1,927			1,394
Loan/lease expense			652			761
Net income from and gains/losses on operations of other real estate			—			59
Advertising and marketing			1,735			1,198
Communication and data connectivity			471			584
Supplies			281			237
Bank service charges			621			610
Correspondent banking expense			221			213
Intangibles amortization			765			787
Payment card processing			542			626
Trust expense			337			195
Other			538			500
Total noninterest expense		****	49,727		****	54,248
Net income before income taxes		****	32,392		****	16,734
Federal and state income tax expense			3,967			1,492
Net income		$	28,425		$	15,242

Basic earnings per common share		$	1.70		$	0.88
Diluted earnings per common share		$	1.69		$	0.87

Weighted average common shares outstanding			16,701,950			17,345,324
Weighted average common and common equivalent shares outstanding			16,799,527			17,549,107

Cash dividends declared per common share		$	0.06		$	0.06

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Six Months Ended June 30, 2023 and 2022


	****	2023		****	2022		****
		(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees:
Taxable		$	135,053		$	89,222
Nontaxable			36,857			14,778
Securities:
Taxable			7,059			5,488
Nontaxable			10,205			8,795
Interest-bearing deposits at financial institutions			1,945			204
Restricted investment securities			1,018			766
Federal funds sold			457			14
Total interest and dividend income		****	192,594		****	119,267

Interest expense:
Deposits			68,225			8,661
Short-term borrowings			132			3
Federal Home Loan Bank advances			6,174			863
Subordinated notes			6,615			3,370
Junior subordinated debentures			1,433			1,237
Total interest expense		****	82,579		****	14,134
Net interest income		****	110,015		****	105,133
Provision for credit losses			7,534			8,284
Net interest income after provision for loan/lease losses		****	102,481		****	96,849

Noninterest income:
Trust fees			5,750			5,460
Investment advisory and management fees			1,865			2,019
Deposit service fees			4,062			3,778
Gains on sales of residential real estate loans, net			812			1,302
Gains on sales of government guaranteed portions of loans, net			30			19
Capital markets revenue			39,513			19,426
Securities losses, net			(451)			—
Earnings on bank-owned life insurance			1,545			696
Debit card fees			3,055			2,506
Correspondent banking fees			747			521
Loan related fee income			1,421			1,162
Fair value gain (loss) on derivatives			(344)			1,338
Other			357			188
Total noninterest income		****	58,362		****	38,415

Noninterest expenses:
Salaries and employee benefits			63,462			53,599
Occupancy and equipment expense			12,014			9,915
Professional and data processing fees			7,592			8,036
Acquisition costs			—			3,824
Post-acquisition compensation, transition and integration costs			207			4,796
FDIC insurance, other insurance and regulatory fees			3,301			2,704
Loan/lease expense			1,208			1,028
Net cost of (income from) and gains/losses on operations of other real estate			(67)			58
Advertising and marketing			2,972			1,959
Communication and data connectivity			1,136			987
Supplies			586			483
Bank service charges			1,226			1,151
Correspondent banking expense			431			412
Intangibles amortization			1,531			1,280
Payment card processing			1,087			888
Trust expense			551			382
Other			1,275			1,071
Total noninterest expenses		****	98,512		****	92,573
Net income before income taxes		****	62,331		****	42,691
Federal and state income tax expense			6,749			3,825
Net income		$	55,582		$	38,866

Basic earnings per common share		$	3.32		$	2.36
Diluted earnings per common share		$	3.29		$	2.33

Weighted average common shares outstanding			16,739,120			16,485,218
Weighted average common and common equivalent shares outstanding			16,870,830			16,700,682

Cash dividends declared per common share		$	0.12		$	0.12

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and Six Months Ended June 30, 2023 and 2022


		Three Months Ended June 30,					****
	****	2023		****	2022
		(dollars in thousands)

Net income		$	28,425		$	15,242

Other comprehensive income (loss):

Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period before tax			(3,128)			(24,575)
Less reclassification adjustment for sales gains included in net income before tax			12			—
			(3,140)			(24,575)

Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax			(5,579)			(7,414)
Less reclassification adjustment for caplet amortization before tax			(213)			(241)
			(5,366)			(7,173)

Other comprehensive loss, before tax			(8,506)			(31,748)
Tax benefit			(2,170)			(7,462)
Other comprehensive loss, net of tax			(6,336)			(24,286)

Comprehensive income (loss)		$	22,089		$	(9,044)


		Six Months Ended June 30,
	****	2023		****	2022
		(dollars in thousands)

Net income		$	55,582		$	38,866

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax			4,264			(53,745)
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)			—
			5,704			(53,745)
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax			(2,133)			(14,272)
Less reclassification adjustment for caplet amortization before tax			(414)			(462)
			(1,719)			(13,810)

Other comprehensive income (loss), before tax			3,985			(67,555)
Tax expense (benefit)			996			(15,929)
Other comprehensive income (loss), net of tax			2,989			(51,626)

Comprehensive income (loss)		$	58,571		$	(12,760)

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED )

Three and Six Months Ended June 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


											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
Impact of adoption of ASU 2016-13			—			—			—			—			—
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

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30, 2023 and 2022


****	****	2023		****	2022
		(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	55,582		$	38,866
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			4,039			3,619
Provision for credit losses			7,534			8,284
Stock-based compensation expense			1,626			1,296
Deferred compensation expense accrued			2,674			1,939
Gains on other real estate owned, net			(89)			—
Amortization of premiums on securities, net			736			575
Caplet amortization			414			462
Fair value (gain) loss on derivatives			344			(1,338)
Securities losses, net			451			—
Loans originated for sale			(36,241)			(53,057)
Proceeds on sales of loans			34,556			60,235
Gains on sales of residential real estate loans			(812)			(1,302)
Gains on sales of government guaranteed portions of loans			(30)			(19)
Losses on sales and disposals of premises and equipment			26			60
Amortization of intangibles			1,531			1,280
Accretion of acquisition fair value adjustments, net			(962)			(1,813)
Increase in cash value of bank-owned life insurance			(1,545)			(696)
Increase in other assets			(23,883)			(19,837)
Decrease in other liabilities			14,506			15,076
Net cash provided by operating activities		$	60,457		$	53,630

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold			48,145			10,220
Net (increase) decrease in interest-bearing deposits at financial institutions			(98,887)			38,044
Proceeds from sales of other real estate owned			283			—
Activity in securities portfolio:
Purchases			(60,387)			(134,700)
Calls, maturities and redemptions			69,754			18,111
Paydowns			8,410			24,166
Sales			30,556			111,375
Activity in restricted investment securities:
Purchases			(3,177)			(22,514)
Redemptions			13,690			2,159
Net increase in loans/leases originated and held for investment			(244,679)			(314,744)
Purchase of premises and equipment			(4,730)			(23,965)
Proceeds from sales of premises and equipment			445			50
Net cash acquired from acquisition			—			144,973
Net cash used in investing activities		$	(240,577)		$	(146,825)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts			622,503			(178,688)
Net decrease in short-term borrowings			(127,780)			(2,730)
Activity in Federal Home Loan Bank advances:
Term advances			135,000			—
Net change in short-term and overnight advances			(415,000)			385,000
Prepayments			—			(16,000)
Payment of cash dividends on common stock			(2,023)			(1,874)
Proceeds (payment) from issuance of common stock, net			467			(193)
Repurchase and cancellation of shares			(8,686)			(37,431)
Net cash provided by financing activities		$	204,481		$	148,084

Net increase in cash and due from banks		****	24,361		****	54,889

Cash and due from banks, beginning			59,723			37,490
Cash and due from banks, ending		$	84,084		$	92,379

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****	****	2023		****	2022
		(dollars in thousands)
Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest		$	78,966		$	13,779
Income/franchise taxes			1,031			(190)

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			2,989			(51,626)
Transfers of loans to other real estate owned			61			150
Decrease in the fair value of back-to-back interest rate swap assets and liabilities			(7,442)			(131,410)
Dividends payable			1,003			1,059
Transfer of loans to loans held for sale			291,050			—
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)

Table of Contents Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 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 June 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

Table of Contents 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 includes certain commercial loans, interest rate swaps, interest rate caps, and certain securities. In all cases, management has determined a plan of transition from LIBOR to a different index. 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.

Table of Contents

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of June 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)
June 30, 2023:
Securities HTM:
Municipal securities		$	575,698		$	(180)		$	11,351		$	(49,054)		$	537,815
Other securities			1,050			—			—			(21)			1,029
		$	576,748		$	(180)		$	11,351		$	(49,075)		$	538,844

Securities AFS:
U.S. treasuries and govt. sponsored agency securities		$	21,602		$	—		$	14		$	(2,674)		$	18,942
Residential mortgage-backed and related securities			68,025			—			—			(7,068)			60,957
Municipal securities			208,038			—			1			(40,129)			167,910
Asset-backed securities			17,363			—			126			(96)			17,393
Other securities			46,579			(989)			6			(4,478)			41,118
		$	361,607		$	(989)		$	147		$	(54,445)		$	306,320


				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.

Table of Contents 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 June 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)
June 30, 2023:
Securities HTM:
Municipal securities		$	219,789		$	(29,758)		$	136,224		$	(19,296)		$	356,013		$	(49,054)
Other securities			529			(21)			—			—			529			(21)
		$	220,318		$	(29,779)		$	136,224		$	(19,296)		$	356,542		$	(49,075)

Securities AFS:
U.S. treasuries and govt. sponsored agency securities		$	3,866		$	(5)		$	14,056		$	(2,669)		$	17,922		$	(2,674)
Residential mortgage-backed and related securities			4,377			(212)			56,581			(6,856)			60,958			(7,068)
Municipal securities			1,910			(59)			164,631			(40,070)			166,541			(40,129)
Asset-backed securities			—			—			10,848			(96)			10,848			(96)
Other securities			7,854			(590)			28,019			(3,888)			35,873			(4,478)
		$	18,007		$	(866)		$	274,135		$	(53,579)		$	292,142		$	(54,445)


		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 June 30, 2023, the investment portfolio included 641 securities. Of this number, 563 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 11.0% of the total amortized cost of the portfolio. Of these 563 securities, there were 397 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 quarter ended June 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 six months ended June 30, 2023 and 2022.


		Three Months Ended							Six Months Ended
		June 30, 2023					June 30, 2022		June 30, 2023				June 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

Table of Contents All sales of securities for the three and six months ended June 30, 2023 and June 30, 2022 were securities identified as AFS.


****	Three Months Ended				****	Six Months Ended				****
	June 30, 2023		June 30, 2022			June 30, 2023		June 30, 2022

Proceeds from sales of securities	$	1,940	$	111,375		$	30,568	$	111,375
Gross gains from sales of securities		12		—			56		—
Gross losses from sales of securities		—		—			(507)		—

The amortized cost and fair value of securities as of June 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		$	2,845		$	2,813
Due after one year through five years			26,584			28,126
Due after five years			547,319			507,905
		$	576,748		$	538,844
Securities AFS:
Due in one year or less		$	5,376		$	5,362
Due after one year through five years			8,607			8,275
Due after five years			262,236			214,333
			276,219			227,970
Residential mortgage-backed and related securities			68,025			60,957
Asset-backed securities			17,363			17,393
		$	361,607		$	306,320

Portions of the U.S. government sponsored agency securities and municipal securities as of June 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		$	210,513		$	192,465

Securities AFS:
Municipal securities			206,213			166,107
Other securities			45,626			40,158
		$	251,839		$	206,265

As of June 30, 2023, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 85 issuers with fair values totaling $89.6 million and revenue bonds issued by 166 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $616.1 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 13 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

Table of Contents Both general obligation and revenue bonds are diversified across many issuers. As of June 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 June 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 June 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 June 30, 2023 and December 31, 2022 is presented as follows:


	****	June 30, 2023		December 31, 2022
		(dollars in thousands)
C&I:
C&I - revolving		$	304,617	$	296,869
C&I - other * **			1,402,553		1,451,693
			1,707,170		1,748,562

CRE - owner occupied			609,717		629,367
CRE - non-owner occupied			963,814		963,239
Construction and land development**			1,307,766		1,192,061
Multi-family**			1,100,794		963,803
Direct financing leases***			32,937		31,889
1-4 family real estate****			535,405		499,529
Consumer			121,717		110,421
			6,379,320		6,138,871
Allowance for credit losses			(85,797)		(87,706)
		$	6,293,523	$	6,051,165
*** Direct financing leases:
Net minimum lease payments to be received		$	36,291	$	34,754
Estimated unguaranteed residual values of leased assets			165		165
Unearned lease/residual income			(3,519)		(3,030)
			32,937		31,889
Plus deferred lease origination costs, net of fees			133		226
			33,070		32,115
Less allowance for credit losses			(1,006)		(970)
		$	32,064	$	31,145

* Includes equipment financing agreements outstanding at m2, totaling $295.5 million and $278.0 million as of June 30, 2023 and December 31, 2022, respectively.

** As of June 30, 2023, there were C&I – other, construction and land development and multi-family loans held for sale in preparation for securitization totaling $291.1 million. The balances in these loan classes as of June 30, 2023 were $360 thousand, $12.7 million and $278.0 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 $4.0 million and $1.5 million as of June 30, 2023 and December 31, 2022, respectively.

Table of Contents Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $27.3 million and $24.3 million at June 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 six months ended June 30, 2023 and 2022, respectively, are presented as follows:


	For the Three Months Ended					For the Six Months Ended
	June 30, 2023			June 30, 2022		June 30, 2023			June 30, 2022
	Performing			Performing			Performing		Performing
	Loans		****	Loans		Loans		****	Loans
	(dollars in thousands)

Balance at the beginning of the period	$	(5,239)		$	(1,372)	$	(6,088)		$	(1,533)
Discount added at acquisition		—			(13,381)		—			(13,381)
Accretion recognized		135			1,764		984			1,925
Balance at the end of the period	$	(5,104)		$	(12,989)	$	(5,104)		$	(12,989)

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


		As of June 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		$	304,617		$	—		$	—		$	—		$	—	$		304,617
C&I - other			1,384,130			6,270			3,928			3			8,222			1,402,553
CRE - owner occupied			605,065			1,848			281			—			2,523			609,717
CRE - non-owner occupied			957,595			4,008			—			—			2,211			963,814
Construction and land development			1,303,847			1,320			240			—			2,359			1,307,766
Multi-family			1,092,622			—			—			—			8,172			1,100,794
Direct financing leases			32,682			123			—			—			132			32,937
1-4 family real estate			533,103			—			71			80			2,151			535,405
Consumer			121,019			376			30			—			292			121,717
		$	6,334,680		$	13,945		$	4,550		$	83		$	26,062		$	6,379,320

As a percentage of total loan/lease portfolio			99.30	%		0.22	%		0.07	%		0.00	%		0.41	%		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	%

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


		As of June 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			3			5,904			2,318			8,225		31.46
CRE - owner occupied			—			1,086			1,437			2,523		9.65
CRE - non-owner occupied			—			1,268			943			2,211		8.46
Construction and land development			—			2,359			—			2,359		9.02
Multi-family			—			—			8,172			8,172		31.26
Direct financing leases			—			132			—			132		0.50
1-4 family real estate			80			1,757			394			2,231		8.53
Consumer			—			292			—			292		1.12
		$	83		$	12,798		$	13,264		$	26,145		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 six months ended June 30, 2023 and 2022.

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


		Three Months Ended June 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		$	4,637	$	26,637	$	9,089		$	12,632	$	15,245	$	11,621	$	5,270		$	1,442	$	86,573
Change in ACL for writedown of LHFS to fair value			—		(5)		—			—		207		(2,479)		—			—		(2,277)
Provision			(536)		2,318		(358)			(664)		436		2,087		(57)			87		3,313
Charge-offs			—		(1,920)		—			—		—		—		—			(27)		(1,947)
Recoveries			—		132		—			—		—		—		—			3		135
Balance, ending		$	4,101	$	27,162	$	8,731		$	11,968	$	15,888	$	11,229	$	5,213		$	1,505	$	85,797

Table of Contents


		Six Months Ended June 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)		(3,834)		—			—		(3,986)
Provision			(356)		2,875		(1,026)			214		1,785		1,877		245			157		5,771
Charge-offs			—		(3,975)		(208)			—		(12)		—		—			(27)		(4,222)
Recoveries			—		514		—			5		—		—		5			4		528
Balance, ending		$	4,101	$	27,162	$	8,731		$	11,968	$	15,888	$	11,229	$	5,213		$	1,505	$	85,797

* Included within the C&I – Other column are ACL on leases with a beginning balance of $1.1 million, negative provision of $10 thousand, charge- offs of $49 thousand and recoveries of $12 thousand. ACL on leases was $1.0 million as of June 30, 2023.

** Included within the C&I – Other column are ACL on leases with a beginning balance of $970 thousand, provision of $59 thousand, charge-offs of $53 thousand and recoveries of $30 thousand. ACL on leases was $1.0 million as of June 30, 2023.


		Three Months Ended June 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		$	3,619	$	25,437	$	7,897		$	7,857	$	14,671	$	10,336	$	4,154	$	815	$	74,786
Initial ACL recorded for PCD loans			600		7		2,481			1,076		1,100		481		137		20		5,902
Provision**			960		2,864		686			3,309		617		1,966		1,222		517		12,141
Charge-offs			—		(426)		—			(193)		—		—		—		(1)		(620)
Recoveries			—		211		1			—		—		—		—		4		216
Balance, ending		$	5,179	$	28,093	$	11,065		$	12,049	$	16,388	$	12,783	$	5,513	$	1,355	$	92,425


		Six Months Ended June 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**			672		2,533		77			2,489		(1,684)		2,963		835		407		8,292
Charge-offs			—		(875)		—			(193)		—		—		—		(8)		(1,076)
Recoveries			—		446		6			128		—		—		—		6		586
Balance, ending		$	5,179	$	28,093	$	11,065		$	12,049	$	16,388	$	12,783	$	5,513	$	1,355	$	92,425

* Included within the C&I – Other column are ACL on leases with adoption impact of $1.5 million, provision of $185 thousand, charge-offs of $109 thousand and recoveries of $48 thousand. ACL on leases was $1.6 million as of June 30, 2022.

** Provision for the three and six months ended June 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 $158 thousand, charge-offs of $223 thousand and recoveries of $108 thousand. ACL on leases was $1.6 million as of June 30, 2022.

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


		As of June 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		$	2,840		$	301,777	$	304,617	$	507		$	3,594	$	4,101
C&I - other*			11,999			1,423,491		1,435,490		1,740			25,422		27,162
			14,839			1,725,268		1,740,107		2,247			29,016		31,263
CRE - owner occupied			23,478			586,239		609,717		2,615			6,116		8,731
CRE - non-owner occupied			22,839			940,975		963,814		941			11,027		11,968
Construction and land development			2,359			1,305,407		1,307,766		775			15,113		15,888
Multi-family			9,531			1,091,263		1,100,794		417			10,812		11,229
1-4 family real estate			3,341			532,064		535,405		314			4,899		5,213
Consumer			693			121,024		121,717		70			1,435		1,505
		$	77,080		$	6,302,240	$	6,379,320	$	7,379		$	78,418	$	85,797

Table of Contents

* Included within the C&I – Other category are leases individually evaluated of $132 thousand with a related allowance for credit losses of $40 thousand and leases collectively evaluated of $32.8 million with a related allowance for credit losses of $966 thousand.


		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 June 30, 2023 and December 31, 2022:



		As of June 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		$	2,735		$	—		$	—	$	—	$	—	$	105	$	—	$	2,840
C&I - other*			866			—			—		—		95		10,665		373		11,999
			3,601			—			—		—		95		10,770		373		14,839
CRE - owner occupied			—			23,412			—		66		—		—		—		23,478
CRE - non-owner occupied			—			—			22,839		—		—		—		—		22,839
Construction and land development			—			—			2,359		—		—		—		—		2,359
Multi-family			—			—			9,531		—		—		—		—		9,531
1-4 family real estate			—			—			363		2,978		—		—		—		3,341
Consumer			—			—			120		536		—		—		37		693
		$	3,601		$	23,412		$	35,212	$	3,580	$	95	$	10,770	$	410	$	77,080

* Included within the C&I – Other category are leases individually evaluated of $132 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.

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. 20

Table of Contents

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

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


		As of June 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)		$	—		$	—		$	—		$	—		$	—	$	—		$	277,753	$	277,753
Special Mention (Rating 6)			—			—			—			—			—		—			24,024		24,024
Substandard (Rating 7)			—			—			—			—			—		—			2,840		2,840
Doubtful (Rating 8)			—			—			—			—			—		—			—		—
Total C&I - revolving		$	—		$	—		$	—		$	—		$	—	$	—		$	304,617	$	304,617

C&I - other
Pass (Ratings 1 through 5)		$	243,118		$	332,368		$	187,767		$	96,026		$	73,226	$	147,909		$	—	$	1,080,414
Special Mention (Rating 6)			8,225			3,852			5,476			3,624			946		305			—		22,428
Substandard (Rating 7)			—			315			250			34			3,322		249			—		4,170
Doubtful (Rating 8)			—			—			—			—			—		—			—		—
Total C&I - other		$	251,343		$	336,535		$	193,493		$	99,684		$	77,494	$	148,463		$	—	$	1,107,012

CRE - owner occupied
Pass (Ratings 1 through 5)		$	40,936		$	131,227		$	163,991		$	124,295		$	32,120	$	65,922		$	10,735	$	569,226
Special Mention (Rating 6)			2,896			782			7,355			6,301			475		310			873		18,992
Substandard (Rating 7)			2,392			726			—			16,032			1,200		1,149			—		21,499
Doubtful (Rating 8)			—			—			—			—			—		—			—		—
Total CRE - owner occupied		$	46,224		$	132,735		$	171,346		$	146,628		$	33,795	$	67,381		$	11,608	$	609,717

CRE - non-owner occupied
Pass (Ratings 1 through 5)		$	84,164		$	306,989		$	205,376		$	130,383		$	77,559	$	90,070		$	7,822	$	902,363
Special Mention (Rating 6)			5,714			4,832			269			17,410			—		10,388			—		38,613
Substandard (Rating 7)			4,008			3,472			—			156			15,097		—			105		22,838
Doubtful (Rating 8)			—			—			—			—			—		—			—		—
Total CRE - non-owner occupied		$	93,886		$	315,293		$	205,645		$	147,949		$	92,656	$	100,458		$	7,927	$	963,814

Construction and land development
Pass (Ratings 1 through 5)		$	225,179		$	479,466		$	301,544		$	222,318		$	11,703	$	12,034		$	25,396	$	1,277,640
Special Mention (Rating 6)			1,100			—			10,160			—			—		—			—		11,260
Substandard (Rating 7)			—			1,367			992			—			—		—			—		2,359
Doubtful (Rating 8)			—			—			—			—			—		—			—		—
Total Construction and land development		$	226,279		$	480,833		$	312,696		$	222,318		$	11,703	$	12,034		$	25,396	$	1,291,259

Multi-family
Pass (Ratings 1 through 5)		$	91,011		$	233,466		$	265,375		$	229,203		$	152,741	$	117,806		$	96	$	1,089,698
Special Mention (Rating 6)			—			—			—			—			1,564		—			—		1,564
Substandard (Rating 7)			—			—			8,211			1,321			—		—			—		9,532
Doubtful (Rating 8)			—			—			—			—			—		—			—		—
Total Multi-family		$	91,011		$	233,466		$	273,586		$	230,524		$	154,305	$	117,806		$	96	$	1,100,794

1-4 family real estate
Pass (Ratings 1 through 5)		$	45,483		$	51,944		$	54,924		$	28,824		$	11,738	$	8,085		$	3,537	$	204,535
Special Mention (Rating 6)			29			—			—			—			—		—			—		29
Substandard (Rating 7)			—			26			—			—			3		254			—		283
Doubtful (Rating 8)			—			—			—			—			—		—			—		—
Total 1-4 family real estate		$	45,512		$	51,970		$	54,924		$	28,824		$	11,741	$	8,339		$	3,537	$	204,847

Consumer
Pass (Ratings 1 through 5)		$	93		$	485		$	716		$	499		$	28	$	776		$	8,999	$	11,596
Special Mention (Rating 6)			—			—			—			—			—		—			—		—
Substandard (Rating 7)			44			280			—			11			—		100			—		435
Doubtful (Rating 8)			—			—			—			—			—		—			—		—
Total Consumer		$	137		$	765		$	716		$	510		$	28	$	876		$	8,999	$	12,031

Total		$	754,392		$	1,551,597		$	1,212,406		$	876,437		$	381,722	$	455,357		$	362,180	$	5,594,091

Table of Contents


	As of June 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	$	78,476	$	130,879	$	53,969	$	18,994	$	5,056	$	665	$	—	$	288,039
Nonperforming		—		5,047		2,281		156		17		1		—		7,502
Total C&I - other	$	78,476	$	135,926	$	56,250	$	19,150	$	5,073	$	666	$	—	$	295,541

Construction and land development
Performing	$	10,561	$	5,590	$	284	$	10	$	2	$	60	$	—	$	16,507
Nonperforming		—		—		—		—		—		—		—		—
Total Construction and land development	$	10,561	$	5,590	$	284	$	10	$	2	$	60	$	—	$	16,507

Direct financing leases
Performing	$	6,833	$	13,839	$	4,237	$	4,168	$	2,994	$	734	$	—	$	32,805
Nonperforming		—		34		25		47		8		18		—		132
Total Direct financing leases	$	6,833	$	13,873	$	4,262	$	4,215	$	3,002	$	752	$	—	$	32,937

1-4 family real estate
Performing	$	40,655	$	60,315	$	84,754	$	72,512	$	16,158	$	53,960	$	82	$	328,436
Nonperforming		87		131		607		394		455		448		—		2,122
Total 1-4 family real estate	$	40,742	$	60,446	$	85,361	$	72,906	$	16,613	$	54,408	$	82	$	330,558

Consumer
Performing	$	9,001	$	11,020	$	2,964	$	3,171	$	795	$	1,763	$	80,852	$	109,566
Nonperforming		—		37		—		—		—		40		43		120
Total Consumer	$	9,001	$	11,057	$	2,964	$	3,171	$	795	$	1,803	$	80,895	$	109,686

Total	$	145,613	$	226,892	$	149,121	$	99,452	$	25,485	$	57,689	$	80,977	$	785,229

* 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 six months ended June 30, 2023:


		Three Months Ended June 30, 2023																		Six Months Ended June 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			—			1,120			590			55			32		74		1,871		—			1,860			871			849			233		109		3,922
CRE - owner occupied			—			—			—			—			—		—		—		—			—			208			—			—		—		208
CRE - non-owner occupied			—			—			—			—			—		—		—		—			—			—			—			—		—		—
Construction and land development			—			—			—			—			—		—		—		—			12			—			—			—		—		12
Multi-family			—			—			—			—			—		—		—		—			—			—			—			—		—		—
Direct financing leases			—			37			—			—			12		—		49		—			37			—			—			15		1		53
1-4 family real estate			—			—			—			—			—		—		—		—			—			—			—			—		—		—
Consumer			—			19			3			—			5		—		27		—			19			3			—			5		—		27
		$	—		$	1,157		$	590		$	55		$	44	$	74	$	1,947	$	—		$	1,909		$	1,079		$	849		$	248	$	110	$	4,222

Table of Contents 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

Table of Contents


		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

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 six months ended June 30, 2023.


	For the three months ended						For the six months ended
	June 30, 2023						June 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	$	235		1	%		$	235		1	%

At June 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 six months ended June 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 June 30, 2023.

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


	Three Months Ended						Six Months Ended
	June 30, 2023		****	June 30, 2022		****	June 30, 2023		****	June 30, 2022
	(dollars in thousands)

Balance, beginning	$	6,033		$	7,819		$	5,552		$	6,886
Provisions (credited) to expense		293			(941)			774			(8)
Balance, ending	$	6,326		$	6,878		$	6,326		$	6,878

Table of Contents

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

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


	June 30, 2023		****	December 31, 2022
	(dollars in thousands)
Assets:
Interest rate caps - hedged	$	6,673		$	8,327
Interest rate caps		1,869			2,213
Interest rate swaps - hedged		2,580			477
Interest rate swaps		159,172			166,614
	$	170,294		$	177,631

Liabilities:
Interest rate collars - hedged	$	(688)		$	(263)
Interest rate swaps - hedged		(35,981)			(33,824)
Interest rate swaps		(159,172)			(166,614)
	$	(195,841)		$	(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		June 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	%		382		714
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		50,000	1.57	%		929		1,566
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.80	%		465		783
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.75	%		1,159		1,264
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		50,000	1.57	%		2,492		2,700
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.80	%		1,246		1,350
				$	225,000			$	6,673	$	8,327

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		June 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	%		534		822
3/1/2020	3/3/2025	Derivatives - Assets		25,000	1.90	%		1,335		1,388
			$	75,000			$	1,869	$	2,213

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		June 30, 2023		December 31, 2022
Loans	10/1/2022	10/1/2026	Derivatives - Liabilities	$	50,000	4.40	%	2.44	%	$	(688)	$	(263)

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


			Balance Sheet							Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		June 30, 2023		December 31, 2022
(dollars in thousands)

Loans	7/1/2021	7/1/2031	Derivatives - Liabilities	$	35,000	1.40	%	5.22	%	$	(5,585)	$	(5,646)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		50,000	1.40	%	5.22	%		(7,979)		(8,066)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		40,000	1.40	%	5.22	%		(6,394)		(6,464)
Loans	10/1/2022	7/1/2031	Derivatives - Liabilities		25,000	1.30	%	5.09	%		(4,039)		(4,018)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		15,000	1.91	%	5.22	%		(1,198)		(1,144)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	5.22	%		(3,995)		(3,812)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		35,000	1.91	%	5.22	%		(2,796)		(2,669)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	5.22	%		(3,995)		(3,812)
				$	300,000					$	(35,981)	$	(35,631)

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		June 30, 2023		December 31, 2022
		(dollars in thousands)

QCR Holdings Statutory Trust II	9/30/2018		9/30/2028	Derivatives - Assets	$	10,000	8.39	%	5.85	%	$	519	$	464
QCR Holdings Statutory Trust III	9/30/2018		9/30/2028	Derivatives - Assets		8,000	8.39	%	5.85	%		415		372
QCR Holdings Statutory Trust V	7/7/2018		7/7/2028	Derivatives - Assets		10,000	7.13	%	4.54	%		513		459
Community National Statutory Trust II	9/20/2018		9/20/2028	Derivatives - Assets		3,000	7.68	%	5.17	%		156		140
Community National Statutory Trust III	9/15//2018		9/15/2028	Derivatives - Assets		3,500	7.30	%	4.75	%		182		163
Guaranty Bankshares Statutory Trust I	9/15/2018		9/15/2028	Derivatives - Assets		4,500	7.30	%	4.75	%		234		209
Guaranty Statutory Trust II*	5/23/2019		2/23/2026	Derivatives - Assets		10,310	6.84	%	4.09	%		561		477
					$	49,310					$	2,580	$	2,284

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

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

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


		June 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	$	2,926,858	$	159,172	$	2,528,949	$	166,614
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	2,926,858	$	159,172	$	2,528,949	$	166,614

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


	Three Months Ended June 30, 2023				Three Months Ended June 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	$	98,377	$	45,172	$	68,205	$	8,805

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:
Interest rate caps on deposits		-		(1,875)		-		241
Interest rate swaps and collars on variable rate loans		(2,207)		-		671		-
Interest rate swaps on junior subordinated debentures		-		(275)		-		240


	Six Months Ended June 30, 2023				Six Months Ended June 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	$	192,594	$	82,579	$	119,267	$	14,134

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:
Interest rate caps on deposits		-		(3,456)		-		462
Interest rate swaps on variable rate loans		(4,262)		-		1,142		-
Interest rate swaps on junior subordinated debentures		-		(502)		-		463

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:


	June 30, 2023		December 31, 2022
	(dollars in thousands)

Cash	$	1,261	$	1,272
Municipal securities		3,954		8,227
Residential mortgage-backed and related securities		5,987		29,257
	$	11,202	$	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 that is below 65%. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

Table of Contents

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 six months ended June 30, 2023 and 2022:


		For the Three Months Ended June 30,										For the Six Months Ended June 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		$	6,802		21.0	%	$	3,514		21.0	%	$	13,090		21.0	%	$	8,965		21.0	%
Tax exempt income, net			(3,182)		(9.8)			(2,476)		(14.8)			(6,398)		(10.3)			(4,698)		(11.0)
Bank-owned life insurance			(176)		(0.5)			(73)		(0.4)			(324)		(0.5)			(146)		(0.3)
State income taxes, net of federal benefit, current year			1,239		3.8			982		5.9			2,428		3.9			2,273		5.3
Provision adjustment from accounting method change			—		—			—		—			—		—			(1,181)		(2.8)
Tax credits			(32)		(0.1)			(289)		(1.7)			(209)		(0.3)			(531)		(1.2)
Income from tax credit equity investments			(478)		(1.5)			158		0.9			(891)		(1.4)			(143)		(0.3)
Acquisition costs			—		—			242		1.4			—		—			372		0.9
Excess tax benefit on stock options exercised and restricted stock awards vested			(46)		(0.1)			(40)		(0.2)			(444)		(0.7)			(474)		(1.1)
Other			(160)		(0.6)			(526)		(3.2)			(503)		(0.9)			(612)		(1.5)
Federal and state income tax expense		$	3,967		12.2	%	$	1,492		8.9	%	$	6,749		10.8	%	$	3,825		9.0	%

NOTE 6 - EARNINGS PER SHARE

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


		Three months ended					Six months ended
		June 30,					June 30,
		2023	****		2022	****		2023	****		2022
	(dollars in thousands, except share data)

Net income	$	28,425		$	15,242		$	55,582		$	38,866


Basic EPS	$	1.70		$	0.88		$	3.32		$	2.36
Diluted EPS	$	1.69		$	0.87		$	3.29		$	2.33

Weighted average common shares outstanding		16,701,950			17,345,324			16,739,120			16,485,218
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan*		97,577			203,783			131,710			215,464
Weighted average common and common equivalent shares outstanding		16,799,527			17,549,107			16,870,830			16,700,682

Table of Contents

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 June 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)
June 30, 2023:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities		$	18,942		$	—		$	18,942		$	—
Residential mortgage-backed and related securities			60,957			—			60,957			—
Municipal securities			167,910			—			167,910			—
Asset-backed securities			17,393			—			17,393			—
Other securities			41,118			—			41,118			—
Derivatives			170,294			—			170,294			—
Total assets measured at fair value		$	476,614		$	—		$	476,614		$	—

Derivatives		$	195,841		$	—		$	195,841		$	—
Total liabilities measured at fair value		$	195,841		$	—		$	195,841		$	—


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		$	—

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). 30

Table of Contents 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 June 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)

June 30, 2023:
Loans/leases evaluated individually		$	34,091		$	—		$	—		$	34,091
Loans receivable held for sale			291,050			—			—			291,050
OREO			—			—			—			—
		$	325,141		$	—		$	—		$	325,141

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 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 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 is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraise 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.

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
	June 30,		December 31,
	2023		2022		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)

Loans/leases evaluated individually	$	34,091	$	30,765	Appraisal of collateral	Appraisal adjustments	-10.00	%	to	-30.00	%
Loans receivable held for sale		291,050		—	Market prices for similar loans	Market price adjustments			n/a
OREO		—		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. 31

Table of Contents For the loans receivable held for sale, 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 six months ended June 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 June 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		$	84,084		$	84,084		$	59,723		$	59,723
Federal funds sold		Level 2			8,765			8,765			56,910			56,910
Interest-bearing deposits at financial institutions		Level 2			166,247			166,247			67,360			67,360
Investment securities:
HTM		Level 2			576,568			538,844			587,142			535,636
AFS		Level 2			306,320			306,320			340,960			340,960
Loans/leases receivable, net		Level 3			322,616			325,141			28,486			30,765
Loans/leases receivable, net		Level 2			5,970,907			5,710,672			6,022,679			5,896,443
Derivatives		Level 2			170,294			170,294			177,631			177,631

Deposits:
Nonmaturity deposits		Level 2			5,483,579			5,483,579			5,199,633			5,199,633
Time deposits		Level 2			1,123,141			1,118,483			784,584			766,294
Short-term borrowings		Level 2			1,850			1,850			129,630			129,630
FHLB advances		Level 2			135,000			136,449			415,000			415,000
Subordinated notes		Level 2			232,852			249,753			232,662			250,613
Junior subordinated debentures		Level 2			48,666			40,163			48,602			41,545
Derivatives		Level 2			195,841			195,841			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.

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.

Table of Contents Selected financial information on the Company's business segments is presented as follows as of and for the three and six months ended June 30, 2023 and 2022:


	Commercial Banking										Intercompany		Consolidated
	QCBT		CRBT		CSB		GB		All other		Eliminations		Total
	(dollars in thousands)
Three Months Ended June 30, 2023
Total revenue	$	35,375	$	51,303	$	17,333	$	28,324	$	34,925	$	(36,363)	$	130,897
Net interest income		16,403		16,223		10,657		13,601		(3,989)		310		53,205
Provision for credit losses		3,620		480		198		(692)		—		—		3,606
Net income (loss) from continuing operations		4,816		19,353		4,613		5,156		28,945		(34,458)		28,425
Goodwill		3,223		14,980		9,888		110,936		—		—		139,027
Intangibles		—		991		1,729		12,508		—		—		15,228
Total assets		2,611,832		2,389,623		1,332,966		2,179,844		1,143,683		(1,431,275)		8,226,673

Three Months Ended June 30, 2022
Total revenue	$	23,722	$	31,715	$	12,091	$	23,669	$	26,795	$	(27,005)	$	90,987
Net interest income		18,540		15,093		9,851		18,065		(2,494)		345		59,400
Provision for loan/lease losses		617		(165)		100		10,648		—		—		11,200
Net income (loss) from continuing operations		8,425		13,256		3,374		1,027		15,612		(26,452)		15,242
Goodwill		3,223		14,980		9,888		109,516		—		—		137,607
Intangibles		—		1,463		2,340		14,530		—		—		18,333
Total assets		2,122,852		1,985,198		1,221,406		2,037,364		949,955		(923,834)		7,392,941

Six Months Ended June 30, 2023
Total revenue	$	68,499	$	94,426	$	33,901	$	55,945	$	69,594	$	(71,409)	$	250,956
Net interest income		33,391		33,402		21,547		28,973		(7,952)		654		110,015
Provision for loan/lease losses		5,193		1,996		690		(345)		—		—		7,534
Net income (loss) from continuing operations		11,854		35,753		9,373		10,543		56,625		(68,566)		55,582
Goodwill		3,223		14,980		9,888		110,936		—		—		139,027
Intangibles		—		991		1,729		12,508		—		—		15,228
Total assets		2,611,832		2,389,623		1,332,966		2,179,844		1,143,683		(1,431,275)		8,226,673

Six Months Ended June 30, 2022
Total revenue	$	46,202	$	56,926	$	23,407	$	31,513	$	55,707	$	(56,073)	$	157,682
Net interest income		35,854		29,416		19,182		24,593		(4,603)		691		105,133
Provision for loan/lease losses		(642)		(936)		(285)		10,147		—		—		8,284
Net income (loss) from continuing operations		18,395		24,385		7,500		4,131		39,439		(54,984)		38,866
Goodwill		3,223		14,980		9,888		109,516		—		—		137,607
Intangibles		—		1,463		2,340		14,530		—		—		18,333
Total assets		2,122,852		1,985,198		1,221,406		2,037,364		949,955		(923,834)		7,392,941

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 June 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 June 30, 2023 and 33

Table of Contents December 31, 2022 are presented in the following tables (dollars in thousands). As of June 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 June 30, 2023:
Company:
Total risk-based capital		$	1,106,838		14.69	%	$	602,690	>	8.00	%	$	791,030	>	10.50	%	$	753,362	>	10.00	%
Tier 1 risk-based capital			781,863		10.38			452,017	>	6.00			640,358	>	8.50			602,690	>	8.00
Tier 1 leverage			781,863		10.06			310,928	>	4.00			310,928	>	4.00			388,660	>	5.00
Common equity Tier 1			733,197		9.73			339,013	>	4.50			527,353	>	7.00			489,685	>	6.50
Quad City Bank & Trust:
Total risk-based capital		$	288,709		12.95	%	$	178,291	>	8.00	%	$	234,007	>	10.50	%	$	222,864	>	10.00	%
Tier 1 risk-based capital			260,833		11.70			133,718	>	6.00			189,434	>	8.50			178,291	>	8.00
Tier 1 leverage			260,833		11.04			94,465	>	4.00			94,465	>	4.00			118,081	>	5.00
Common equity Tier 1			260,833		11.70			100,289	>	4.50			156,005	>	7.00			144,861	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital		$	343,875		16.68	%	$	164,959	>	8.00	%	$	216,509	>	10.50	%	$	206,199	>	10.00	%
Tier 1 risk-based capital			318,177		15.43			123,720	>	6.00			175,269	>	8.50			164,959	>	8.00
Tier 1 leverage			318,177		14.58			87,303	>	4.00			87,303	>	4.00			109,128	>	5.00
Common equity Tier 1			318,177		15.43			92,790	>	4.50			144,340	>	7.00			134,030	>	6.50
Community State Bank:
Total risk-based capital		$	152,195		12.58	%	$	96,820	>	8.00	%	$	127,076	>	10.50	%	$	121,025	>	10.00	%
Tier 1 risk-based capital			137,739		11.38			72,615	>	6.00			102,871	>	8.50			96,820	>	8.00
Tier 1 leverage			137,739		10.79			51,052	>	4.00			51,052	>	4.00			63,815	>	5.00
Common equity Tier 1			137,739		11.38			54,461	>	4.50			84,717	>	7.00			78,666	>	6.50
Guaranty Bank:
Total risk-based capital		$	251,030		12.58	%	$	159,629	>	8.00	%	$	209,513	>	10.50	%	$	199,536	>	10.00	%
Tier 1 risk-based capital			228,770		11.47			119,721	>	6.00			169,605	>	8.50			159,629	>	8.00
Tier 1 leverage			228,770		11.26			81,302	>	4.00			81,302	>	4.00			101,627	>	5.00
Common equity Tier 1			228,770		11.47			89,791	>	4.50			139,675	>	7.00			129,698	>	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

Table of Contents Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending June 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 June 30, 2023, the Company had $8.2 billion in consolidated assets, including $6.3 billion in net loans/leases, and $6.6 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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EXECUTIVE OVERVIEW

The Company reported net income of $28.4 million and diluted EPS of $1.69 for the quarter ended June 30, 2023. By comparison, for the quarter ended March 31, 2023 the Company reported net income of $27.2 million and diluted EPS of $1.60. For the quarter ended June 30, 2022, the Company reported net income of $15.2 million, and diluted EPS of $0.87. For the six months ended June 30, 2023, the Company reported net income of $55.6 million and diluted EPS of $3.29. By comparison, for the six months ended June 30, 2022, the Company reported net income of $38.9 million and diluted EPS of $2.33.

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

●	Return on average assets of 1.44% and return on average total equity of 13.97%;
●	Annualized loan and lease growth of 12.2%;
---	---
●	Annualized core deposit growth, excluding brokered deposits, of 23.0%;
---	---
●	Uninsured and uncollateralized deposits improved to 19.9% of total deposits;
---	---
●	Capital markets revenue grew $5.5 million, or 32.1%, to $22.5 million;
---	---
●	Tangible book value (non-GAAP) per share increased $1.28 or 13.2% annualized; and
---	---
●	TCE ratio grew 7 basis points to 8.28%.
---	---

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


	For the three months ended								For the six months ended
	June 30, 2023		****	March 31, 2023		****	June 30, 2022		June 30, 2023		****	June 30, 2022
	(dollars in thousands)

Net income	$	28,425		$	27,157		$	15,242	$	55,582		$	38,866

Diluted earnings per common share	$	1.69		$	1.60		$	0.87	$	3.29		$	2.33

Weighted average common and common equivalent shares outstanding		16,799,527			16,942,132			17,549,107		16,870,830			16,700,682

The Company reported adjusted net income (non-GAAP) of $28.4 million, with adjusted diluted EPS of $1.69 for the three months ended June 30, 2023. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the three months ended June 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 $56.4 million, with adjusted diluted EPS of $3.34 for the six months ended June 30, 2023. Adjusted net income for the six months ended June 30, 2023 excludes a number of non-recurring items, after-tax, as set forth in the GAAP to Non-GAAP Reconciliation section, most significantly $356 thousand of securities losses, fair value loss on derivatives of $272 thousand and post-acquisition compensation, transition and integration costs of $164 thousand.

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


	For the three months ended									For the six months ended
	June 30, 2023		****	March 31, 2023		****	June 30, 2022		****	June 30, 2023		****	June 30, 2022
	(dollars in thousands)

Net interest income	$	53,205		$	56,810		$	59,400		$	110,015		$	105,133
Provision for credit losses		3,606			3,928			11,200			7,534			8,284
Noninterest income		32,520			25,842			22,782			58,362			38,415
Noninterest expense		49,727			48,785			54,248			98,512			92,573
Federal and state income tax expense		3,967			2,782			1,492			6,749			3,825
Net income	$	28,425		$	27,157		$	15,242		$	55,582		$	38,866

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

●

Net interest income in the second quarter of 2023 decreased 6% compared to the first quarter of 2023 and decreased 10% when comparing to the second quarter of 2022. The decrease 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 increased 5% when comparing the first six months of 2023 to the same period of the prior year. The increase was primarily due to an increase in average earning assets, largely attributable to the GFED transaction, but also due to strong organic loan growth.

●

Provision expense in the second quarter of 2023 decreased $322 thousand compared to the first quarter of 2023, representing an $855 thousand increase related to loans and leases, an $188 thousand decrease related to OBS exposures and a $989 thousand decrease related to securities. Provision expense in the first six months of 2023 decreased $750 thousand compared to the first six months of 2022, representing a $2.5 million decrease related to loans and leases, a $782 thousand increase related to OBS exposures and a $989 thousand decrease related to AFS securities. The decrease in provision for loans and leases was driven by the CECL Day 2 credit loss expense recorded in 2022 of $11.2 million as a result of the GFED acquisition offset by negative provision on other charters. 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 recently 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 second quarter of 2023 increased $6.7 million, or 26%, compared to the first quarter of 2023. Noninterest income increased $9.7 million, or 43%, compared to the second quarter of 2022. Noninterest income increased $19.9 million or 52% when comparing the first six 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 the project delays our clients have been experiencing in recent quarters due to ongoing supply chain disruptions, inflationary pressures and higher interest rates have subsided and 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 in 2023.

●

Noninterest expense increased $941 thousand, or 2%, in the second quarter of 2023 compared to the first quarter of 2023. This increase was primarily due to higher variable compensation, increased Insured Cash Sweep fees, insurance and regulatory fees and advertising and marketing expenses. Noninterest expense decreased $4.5 million, or 8%, compared to the second quarter of 2022 and decreased $5.9 million, or 6%, when comparing the first six months of 2023 to the same period in the prior year. The decrease was primarily due to acquisition costs and post-acquisition compensation, transition and integration costs of $6.7 million with the acquisition of GFED in April 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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●	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	June 30, 2023			March 31, 2023			June 30, 2022
Loan and lease growth organically **		Loans and leases growth		> 9% annually		12.2	%		3.3	%		14.0	%
Fee income growth ***		Fee income growth		> 6% annually		54.2	%		30.0	%		(26.1)	%
Improve operational efficiencies and hold noninterest expense growth		Noninterest expense growth		< 5% annually		8.8	%		7.5	%		10.4	%

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

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

***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 second quarter of 2023 to support its corporate strategy:

●	The Company grew loans and leases in the second quarter of 2023 by 12.2% on an annualized basis, driven by both our traditional and tax credit lending 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 181 downstream banks with total noninterest bearing deposits of $108.3 million and total interest-bearing deposits of $386.0 million during the first six months of 2023. By comparison, the Company acted as the correspondent bank for 189 downstream banks with average total noninterest bearing deposits of $358.7 million and average total interest-bearing deposits of $249.9 million during the first six months of 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 $363.7 million as of June 30, 2023, as compared to $574.2 million for the quarter ended March 31, 2023.
---	---
●	The Company is focused on executing interest rate swaps on select commercial loans, including LIHTC permanent loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as appropriate for the borrowers and the Company. Levels of capital markets revenue from swap fees are influenced by prevailing interest rates. Capital markets revenue totaled $22.5 million for the quarter and $39.5 million for the first six months of 2023. Capital markets revenue averaged $19.8 million per quarter for the year 2023 and $10.3 million per quarter for the year 2022.
---	---
●	In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $861.0 million in the first six months of 2023. There were 148 new relationships added in the first
---	---

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six months of 2023 totaling $455.0 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 the fully-managed trusts. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

●

Noninterest expense for the first six months of 2023 totaled $98.5 million as compared to $92.6 million in the first six months of 2022. The increase was primarily due to six months of operating expenses in 2023 for the combined GB entity as compared to three 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 39

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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	****	June 30,		****	March 31,		****	June 30,
RECONCILIATIONS		2023			2023			2022
	****	(dollars in thousands, except per share data)
TCE/TA RATIO	****
Stockholders’ equity (GAAP)		$	822,689		$	801,494		$	743,138
Less: Intangible assets			154,255			154,467			155,940
TCE (non-GAAP)		$	668,434		$	647,027		$	587,198

Total assets (GAAP)		$	8,226,673		$	8,036,904		$	7,392,941
Less: Intangible assets			154,255			154,467			155,940
TA (non-GAAP)		$	8,072,418		$	7,882,437		$	7,237,001

TCE/TA ratio (non-GAAP)		****	8.28	%	****	8.21	%	****	8.11	%


		For the Quarter Ended										For the Six Months Ended
		June 30,		****	March 31,		****	June 30,		****		June 30,			June 30,
	****	2023		****	2023		****	2022			****	2023			2022
		(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)		$	28,425		$	27,157		$	15,242			$	55,582		$	38,866
Less non-core items (post-tax) (*):
Income:
Securities losses, net		$	9		$	(366)		$	—			$	(356)		$	—
Fair value gain(loss) on derivatives			66			(337)			342				(272)			1,057
Total non-core income (non-GAAP)		$	75		$	(703)		$	342			$	(628)		$	1,057
Expense:
Acquisition costs		$	—		$	—		$	1,932			$	—		$	3,394
Post-acquisition compensation, transition and integration costs			—			164			3,789				164			3,789
CECL Day 2 credit loss expense on acquired loans			—			—			8,651				—			8,651
CECL Day 2 credit loss expense on acquired OBS exposure			—			—			1,140				—			1,140
Total non-core expense (non-GAAP)		$	—		$	164		$	15,512			$	164		$	16,974


Adjusted net income (non-GAAP)		$	28,350		$	28,024		$	30,412			$	56,374		$	54,783

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)		$	28,350		$	28,024		$	30,412			$	56,374		$	54,783

Weighted average common shares outstanding			16,701,950			16,776,289			17,345,324				16,739,120			16,485,218
Weighted average common and common equivalent shares outstanding			16,799,527			16,942,132			17,549,107				16,870,830			16,700,682

Adjusted EPS (non-GAAP):
Basic		$	1.70		$	1.67		$	1.75			$	3.37		$	3.32
Diluted		$	1.69		$	1.65		$	1.73			$	3.34		$	3.28

ADJUSTED ROAA and ADJUSTED ROAE (non-GAAP)
Adjusted net income (non-GAAP) (from above)		$	28,350		$	28,024		$	30,412			$	56,374		$	54,783

Average Assets		$	7,924,597		$	7,906,830		$	7,324,470			$	7,915,763		$	6,723,137

Adjusted ROAA (non-GAAP)		****	1.43	%	****	1.42	%	****	1.66	%		****	1.42	%	****	1.63	%
Adjusted ROAE (non-GAAP)			13.88	%		14.11	%		15.43	%			13.99	%		14.88	%

ADJUSTED NIM (TEY)*
Net interest income (GAAP)		$	53,205		$	56,810		$	59,400			$	110,015		$	105,133
Plus: Tax equivalent adjustment			6,542			6,057			3,396				12,601			6,327
Net interest income - tax equivalent (non-GAAP)		$	59,747		$	62,867		$	62,796			$	122,616		$	111,460
Less: Acquisition accounting net accretion			134			828			1,695				962			1,813
Adjusted net interest income			59,613			62,039			61,101				121,654			109,647

Average earning assets		$	7,283,286		$	7,247,605		$	6,742,095			$	7,265,544		$	6,187,038

NIM (GAAP)			2.93	%		3.18	%		3.53	%			3.05	%		3.43	%
NIM (TEY) (non-GAAP)			3.29	%		3.52	%		3.74	%			3.40	%		3.63	%
Adjusted NIM (TEY) (non-GAAP)			3.28	%		3.47	%		3.64	%			3.38	%		3.57	%

EFFICIENCY RATIO
Noninterest expense (GAAP)		$	49,727		$	48,785		$	54,248			$	98,512		$	92,573

Net interest income (GAAP)		$	53,205		$	56,810		$	59,400			$	110,015		$	105,133
Noninterest income (GAAP)			32,520			25,842			22,782				58,362			38,415
Total income		$	85,725		$	82,652		$	82,182			$	168,377		$	143,548

Efficiency ratio (noninterest expense/total income) (non-GAAP)		****	58.01	%	****	59.02	%	****	66.01	%		****	58.51	%	****	64.49	%

* 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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NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a GAAP basis, decreased 10% for the quarter ended June 30, 2023, compared to the same quarter of the prior year. Net interest income, on a tax equivalent basis (non-GAAP), decreased 5% to $59.7 million for the quarter ended June 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
	June 30,		March 31,		June 30,		June 30,		March 31,		June 30,
	2023		2023		2022		2023		2023		2022
Average Yield on Interest-Earning Assets	5.40	%	5.20	%	4.05	%	5.78	%	5.60	%	4.26	%
Average Cost of Interest-Bearing Liabilities	3.20	%	2.71	%	0.74	%	3.20	%	2.74	%	0.74	%
Net Interest Spread	2.21	%	2.49	%	3.31	%	2.58	%	2.86	%	3.52	%
NIM (TEY) (Non-GAAP)	3.29	%	3.52	%	3.53	%	3.29	%	3.52	%	3.74	%
NIM Excluding Acquisition Accounting Net Accretion	2.91	%	3.09	%	3.50	%	3.28	%	3.47	%	3.64	%


	GAAP				Tax Equivalent Basis
	For the Six Months Ended				For the Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2023		2022		2023		2022
Average Yield on Interest-Earning Assets	2.91	%	3.71	%	5.69	%		4.09	%
Average Cost of Interest-Bearing Liabilities	1.72	%	0.59	%	2.97	%		0.66	%
Net Interest Spread	1.18	%	3.12	%	2.72	%		3.43	%
NIM (TEY) (Non-GAAP)	3.49	%	3.30	%	3.40	%		3.63	%
NIM Excluding Acquisition Accounting Net Accretion	1.65	%	3.28	%	3.38	%		3.57	%

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 Six Months Ended
		June 30,			March 31,			June 30,		June 30,			June 30,
		2023	****		2023	****		2022		2023	****		2022
		(dollars in thousands)								(dollars in thousands)

Acquisition Accounting Net Accretion in NIM	$	134		$	828		$	1,695	$	962		$	1,813

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. 41

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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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 June 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	$	16,976		$	223		5.27	%	$	5,896		$	12		0.83	%
Interest-bearing deposits at financial institutions		90,814			1,123		4.96	%		67,254			169		1.01	%
Investment securities - taxable		342,991			3,693		4.30	%		346,440			3,090		3.56	%
Investment securities - nontaxable (1)		577,494			6,217		4.31	%		573,868			5,912		4.12	%
Restricted investment securities		35,031			506		5.71	%		37,166			485		5.16	%
Gross loans/leases receivable (1) (2) (3)		6,219,980			93,159		6.01	%		5,711,471			61,932		4.35	%
Total interest earning assets		7,283,286			104,921		5.78	%		6,742,095			71,600		4.26	%

Noninterest-earning assets:
Cash and due from banks		70,799								97,927
Premises and equipment		118,363								114,510
Less allowance		(86,841)								(81,871)
Other		538,990								451,809
Total assets	$	7,924,597							$	7,324,470

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	3,965,592			27,227		2.75	%	$	3,791,595			4,478		0.47	%
Time deposits		1,190,440			11,219		3.78	%		529,675			1,047		0.79	%
Short-term borrowings		1,980			34		6.82	%		1,404			3		0.78	%
FHLB advances		211,593			2,653		4.96	%		286,484			780		1.08	%
Subordinated notes		232,782			3,303		5.68	%		133,529			1,816		5.44	%
Junior subordinated debentures		48,647			738		6.00	%		46,536			680		5.78	%
Total interest-bearing liabilities		5,651,034			45,174		3.20	%		4,789,223			8,804		0.74	%

Noninterest-bearing demand deposits		1,136,449								1,546,174
Other noninterest-bearing liabilities		320,232								200,869
Total liabilities		7,107,715								6,536,266

Stockholders’ equity		816,882								788,204
Total liabilities and stockholders’ equity	$	7,924,597							$	7,324,470
Net interest income				$	59,747							$	62,796
Net interest spread							2.58	%							3.52	%
Net interest margin							2.93	%							3.53	%
Net interest margin (TEY)(Non-GAAP)							3.29	%							3.74	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.28	%							3.64	%

Ratio of average interest-earning assets to average interest-bearing liabilities		128.88	%							140.78	%

(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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Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended June 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	$	211	$	156	$	55
Interest-bearing deposits at financial institutions		954		876		78
Investment securities - taxable		603		810		(207)
Investment securities - nontaxable (2)		305		268		37
Restricted investment securities		21		157		(136)
Gross loans/leases receivable (2) (3)		31,227		25,320		5,907
Total change in interest income		33,321		27,587		5,734

INTEREST EXPENSE
Interest-bearing deposits		22,749		22,536		213
Time deposits		10,172		7,650		2,522
Short-term borrowings		31		30		1
Federal Home Loan Bank advances		1,873		3,254		(1,381)
Subordinated notes		1,487		83		1,404
Junior subordinated debentures		58		26		32
Total change in interest expense		36,370		33,579		2,791

Total change in net interest income	$	(3,049)	$	(5,992)	$	2,943

(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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	For the Six Months Ended June 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	$	18,119		$	457		5.09	%	$	5,234		$	14		0.53	%
Interest-bearing deposits at financial institutions		82,246			1,945		4.77	%		68,285			204		0.60	%
Investment securities - taxable		337,844			7,059		4.17	%		319,457			5,488		3.43	%
Investment securities - nontaxable (1)		598,244			13,009		4.35	%		542,153			11,195		4.13	%
Restricted investment securities		36,391			1,018		5.56	%		29,716			766		5.13	%
Gross loans/leases receivable (1) (2) (3)		6,192,700			181,707		5.92	%		5,222,193			107,927		4.17	%
Total interest earning assets		7,265,544			205,195		5.69	%		6,187,038			125,594		4.09	%

Noninterest-earning assets:
Cash and due from banks		71,056								75,928
Premises and equipment, net		118,231								97,103
Less allowance for estimated losses on loans/leases		(87,380)								(80,393)
Other		548,312								443,461
Total assets	$	7,915,763							$	6,723,137

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	4,016,217			51,003		2.56	%	$	3,511,396			6,816		0.39	%
Time deposits		1,031,062			17,222		3.37	%		464,647			1,846		0.80	%
Short-term borrowings		4,642			132		5.75	%		1,676			3		0.36	%
Federal Home Loan Bank advances		253,729			6,174		4.84	%		186,685			863		0.92	%
Subordinated notes		232,731			6,615		5.68	%		123,753			3,370		5.45	%
Junior subordinated debentures		48,630			1,433		5.86	%		42,376			1,236		5.80	%
Total interest-bearing liabilities		5,587,011			82,579		2.97	%		4,330,533			14,134		0.66	%

Noninterest-bearing demand deposits		1,189,095								1,412,019
Other noninterest-bearing liabilities		333,812								244,133
Total liabilities		7,109,918								5,986,685

Stockholders’ equity		805,845								736,452
Total liabilities and stockholders’ equity	$	7,915,763							$	6,723,137
Net interest income				$	122,616							$	111,460
Net interest spread							2.72	%							3.43	%
Net interest margin							3.05	%							3.43	%
Net interest margin (TEY)(Non-GAAP)							3.40	%							3.63	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.38	%							3.57	%
Ratio of average interest earning assets to average interest-bearing liabilities		130.04	%							142.87	%

(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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Analysis of Changes of Interest Income/Interest Expense
For the six months ended June 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		$	443	$	388	$	55
Interest-bearing deposits at other financial institutions			1,741		1,660		81
Investment securities - taxable			1,571		1,094		477
Investment securities - nontaxable (2)			1,814		600		1,214
Restricted investment securities			252		179		73
Gross loans/leases receivable (2) (3)			73,780		51,230		22,550
Total change in interest income			79,601		55,151		24,450

INTEREST EXPENSE
Interest-bearing demand deposits			44,187		43,224		963
Time deposits			15,376		11,165		4,211
Short-term borrowings			129		126		3
Federal Home Loan Bank advances			5,311		6,088		(777)
Subordinated notes			3,245		151		3,094
Junior subordinated debentures			197		(44)		241
Total change in interest expense			68,445		60,710		7,735

Total change in net interest income		$	11,156	$	(5,559)	$	16,715

(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 $30.2 million, comparing the second quarter of 2023 to the same period of 2022, and increased $73.3 million when comparing the first half of 2023 to the same period of 2022. Interest income (tax equivalent) increased $33.3 million, comparing the second quarter of 2023 to the same period of 2022, and increased $79.6 million when comparing the first half of 2023 to the same period of 2022. This was primarily due to the GFED acquisition, but also due to continued organic loan growth and repricing of the Company’s floating rate loan portfolio with the rapidly rising interest rates. 45

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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 $36.4 million, comparing the second quarter of 2023 to the same period of 2022 and increased $68.4 million, comparing the first half 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 3.20% for the quarter ended June 30, 2023, which was up from 0.74% for the quarter ended June 30, 2022. The Company’s cost of funds was 2.97% for the six months ended June 30, 2023, which was up from 0.66% for the six months ended June 30, 2022. The Company has also experienced a shift in mix from noninterest and lower interest bearing deposits to higher cost funding.

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 six months ended June 30, 2023 and 2022.


		Three Months Ended					Six Months Ended
		June 30,			June 30,		June 30,			June 30,
	****	2023		****	2022		2023		****	2022
		(dollars in thousands)					(dollars in thousands)

Provision for credit losses - loans and leases		$	3,313		$	12,141	$	5,771		$	8,292
Provision for credit losses - off-balance sheet exposures			293			(941)		774			(8)
Provision for credit losses - held to maturity securities			—			—		—			—
Provision for credit losses - available for sale securities			—			—		989			—
Total provision for credit losses		$	3,606		$	11,200	$	7,534		$	8,284

The Company had total provision for credit losses on loans and leases of $3.3 million for the second quarter of 2023, which was down from $12.1 million for the same period of 2022. The decrease was due to the CECL Day 2 provision of $11.2 million as a result of the GFED acquisition in April 2022. The provision related to OBS was $293 thousand for the second quarter of 2023 compared to a negative $941 thousand for the for the second quarter of 2022. The increase was due to an increase in the balance of those OBS exposures. There was no provision related to HTM securities for the second quarter of 2023 or 2022. There was no provision related to AFS securities for the second quarter of 2023 or 2022.

Provision for loans and leases for the first six months of 2023 totaled $5.8 million, which was down from $8.3 million in the first six months of 2022. The decrease in provision on loans and leases was driven by the CECL Day 2 credit loss expense recorded in 2022 of $11.2 million as a result of the GFED acquisition, offset by negative provision on other charters. The provision related to OBS was $774 thousand for the first six months of 2023 compared to a negative $8 thousand for the for the first six months of 2022. The increase was due to an increase in the balance of those OBS exposures. There was no provision related to HTM securities for the first half of 2023 or 2022. The provision related to AFS securities was $989 thousand in the first six months of 2023 as compared to no provision for the first six months of 2022. The increase was entirely due to an impairment of one subordinated debt investment in a recently 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.

The Company had an ACL for loans/leases held for investment of 1.41% of total gross loans/leases held for investment at June 30, 2023, compared to 1.43% at March 31, 2023 and 1.59% at June 30, 2022. Management has evaluated the 46

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allowance needed on the loans acquired prior to the adoption of ASU 2016-13 on January 1, 2021, factoring in the remaining discount, which was $5.1 million and $13.0 million at June 30, 2023 and June 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 six months ended June 30, 2023 and 2022.


		Three Months Ended									****
		June 30,			June 30,						****
	****	2023		****	2022		****	Change	****	% Change	****
		(dollars in thousands)

Trust fees		$	2,844		$	2,497				13.9	%
Investment advisory and management fees			986			983				0.3
Deposit service fees			2,034			2,223				(8.5)
Gains on sales of residential real estate loans, net			500			809				(38.2)
Capital markets revenue			22,490			13,004				72.9
Securities gains, net			12			—				100.0
Earnings on bank-owned life insurance			838			350				139.4
Debit card fees			1,589			1,499				6.0
Correspondent banking fees			356			244				45.9
Loan related fee income			770			682				12.9
Fair value gain on derivatives			83			432				(80.8)
Other			18			59				(69.5)
Total noninterest income		$	32,520		$	22,782				42.7	%

All values are in US Dollars.


		Six Months Ended								****
		June 30,			June 30,					****
	****	2023		****	2022		****	Change	% Change	****
		(dollars in thousands)

Trust fees		$	5,750		$	5,460			5.3	%
Investment advisory and management fees			1,865			2,019			(7.6)
Deposit service fees			4,062			3,778			7.5
Gains on sales of residential real estate loans, net			812			1,302			(37.6)
Gains on sales of government guaranteed portions of loans, net			30			19			57.9
Capital markets revenue			39,513			19,426			103.4
Securities losses, net			(451)			—			(100.0)
Earnings on bank-owned life insurance			1,545			696			122.0
Debit card fees			3,055			2,506			21.9
Correspondent banking fees			747			521			43.4
Loan related fee income			1,421			1,162			22.3
Fair value gain (loss) on derivatives			(344)			1,338			(125.7)
Other			357			188			89.9
Total noninterest income		$	58,362		$	38,415			51.9	%

All values are in US Dollars.

The Company continues to be successful in expanding its wealth management client base. Trust fees continue to be a significant contributor to noninterest income. Assets under management increased by $569.9 million in the second quarter of 2023 and have increased by $876.7 million since June 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 14%, comparing the second quarter of 2023 to the same period of the prior year, and increased 5% when comparing the first half of 2023 to the first half 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. 47

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Investment advisory and management fees remained constant, comparing the second quarter of 2023 to the same period of the prior year, and they decreased 8% when comparing the first half of 2023 to the first half 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 9% comparing the second 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 8% when comparing the first half of 2023 to the first half of 2022. This increase was primarily due to the GFED acquisition. The Company continues to focus on expanding its core deposit base. In particular, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees.

Gains on sales of residential real estate loans, net, decreased 38% when comparing the second quarter of 2023 to the same period of the prior year, and they decreased 38% when comparing the first half of 2023 to the first half of 2022. The decrease was primarily due to decreased volume of residential real estate purchases and the refinancing of residential real estate loans with a 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 $22.5 million for the second quarter of 2023, compared to $13.0 million for the second quarter of 2022. Capital markets revenue totaled $39.5 million for the first half of 2023 compared to $19.4 million for the first half of 2022. The increase was primarily due to higher capital markets revenue from swap fees as the project delays our clients have been experiencing in recent quarters due to ongoing supply chain disruptions, inflationary pressures and higher interest rates continue to subside and continued strong demand for affordable housing that is being established by our tax credit lending clients. 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.

Securities gains totaled $12 thousand for the three months ended June 30, 2023. There were no securities gains or losses for the three months ended June 30, 2022. Securities losses totaled $451 thousand for the six months ended June 30, 2023. There were no securities gains or losses for the six months ended June 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 139% comparing the second quarter of 2023 to the second quarter of 2022 and increased 122% comparing the first half of 2023 to the first half of 2022. There were no purchases of BOLI in the first half of 2023. BOLI purchases totaled $10.0 million in 2022 and increased due 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 6% comparing the second quarter of 2023 to the same period of the prior year, and increased 22% comparing the first half of 2023 to the first half of 2022. The increase was primarily due to the GFED acquisition. The fees can vary based on 48

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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 46% comparing the second quarter of 2023 to the same period of the prior year, and increased 43% comparing the first half of 2023 to the first half of 2022. The increase was primarily due to a shift of correspondent banking balances from non-interest bearing accounts to interest bearing accounts. 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 181 banks in Iowa, Illinois, Missouri and Wisconsin.

Loan-related fee income increased 13% comparing the second quarter of 2023 to the same period of the prior year, and increased 22% comparing the first half of 2023 to the first half of 2022. The increase was primarily due to the increase in loan volume with the GFED acquisition.

Fair value gain on derivatives was $83 thousand in gains in the second quarter of 2023, as compared to $432 thousand in gains in the same period of the prior year. Fair value loss on derivatives was $344 thousand in the first half of 2023 as compared to $1.3 million in fair value gain on derivatives in the first half 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 70% comparing the second quarter of 2023 to the same period of the prior year. Other noninterest income increased 90% comparing the first half of 2023 to the first half of 2022. The increase was primarily due to higher income on equity investments.

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NONINTEREST EXPENSE

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


		Three Months Ended									****
		June 30,			June 30,						****
	****	2023		****	2022		****	Change	****	% Change	****
		(dollars in thousands)

Salaries and employee benefits		$	31,459		$	29,972				5.0	%
Occupancy and equipment expense			6,100			5,978				2.0
Professional and data processing fees			4,078			4,365				(6.6)
Acquisition costs			—			1,973				(100.0)
Post-acquisition compensation, transition and integration costs			—			4,796				(100.0)
FDIC insurance, other insurance and regulatory fees			1,927			1,394				38.2
Loan/lease expense			652			761				(14.3)
Net cost of and gains/losses on operations of real estate			—			59				(100.0)
Advertising and marketing			1,735			1,198				44.8
Communication and data connectivity			471			584				(19.3)
Supplies			281			237				18.6
Bank service charges			621			610				1.8
Correspondent banking expense			221			213				3.8
Intangibles amortization			765			787				(2.8)
Payment card processing			542			626				(13.4)
Trust expense			337			195				72.8
Other			538			500				7.6
Total noninterest expense		$	49,727		$	54,248				(8.3)	%

All values are in US Dollars.


		Six Months Ended									****
		June 30,			June 30,						****
	****	2023		****	2022		****	Change	****	% Change	****
		(dollars in thousands)

Salaries and employee benefits		$	63,462		$	53,599				18.4	%
Occupancy and equipment expense			12,014		****	9,915				21.2
Professional and data processing fees			7,592		****	8,036				(5.5)
Acquisition costs			—		****	3,824				(100.0)
Post-acquisition compensation, transition and integration costs			207		****	4,796				(95.7)
FDIC insurance, other insurance and regulatory fees			3,301		****	2,704				22.1
Loan/lease expense			1,208		****	1,028				17.5
Net cost of (income from) and gains/losses on operations of other real estate			(67)		****	58				(215.5)
Advertising and marketing			2,972		****	1,959				51.7
Communication and data connectivity			1,136			987				15.1
Supplies			586			483				21.3
Bank service charges			1,226		****	1,151				6.5
Correspondent banking expense			431		****	412				4.6
Intangibles amortization			1,531		****	1,280				19.6
Payment card processing			1,087			888				22.4
Trust expense			551			382				44.2
Other			1,275		****	1,071				19.0
Total noninterest expense		$	98,512		$	92,573				6.4	%

All values are in US Dollars.

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges relating to acquisitions and post-acquisition compensation, transition, and integration cost impacted noninterest expense in 2023 and 2022.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the second quarter of 2022 to the second quarter of 2023 by 5%, and increased from the first half of 2022 to the first half of 2023 by 18%. 50

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

Occupancy and equipment expense increased 2% comparing the second quarter of 2023 to the same period of the prior year, and increased 21% comparing the first half of 2023 to the first half of 2022. The increase was due to higher depreciation expense and computer hardware expense related to the GFED acquisition.

Professional and data processing fees decreased 7% comparing the second quarter of 2023 to the same period in 2022, and decreased 6% comparing the first half of 2023 to the first half 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 second quarter of 2023 or in the first six months of 2023. Acquisition costs totaled $2.0 million the second quarter of 2022 and $3.8 million the first half 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 second quarter of 2023 and totaled $207 thousand in the first half of 2023. Post-acquisition compensation, transition and integration costs totaled $4.8 million in the three and six months ended June 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 38%, comparing the second quarter of 2023 to the second quarter of 2022, and increased 22% comparing the first half of 2023 to the first half 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 decreased 14% when comparing the second quarter of 2023 to the same quarter of 2022, and increased 18% comparing the first half of 2023 to the first half of 2022. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

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. There was no net cost of and gains/losses on operations of other real estate for the second quarter of 2023, compared to net cost of and gains/losses on operations of other real estate of $59 thousand for the second quarter of 2022. Net income from and gains/losses on operations of other real estate totaled $67 thousand for the first half of 2023, compared to net cost of and gains/losses on operations of other real estate of $58 thousand for the first half of 2022.The gain on sale of OREO for the six months ended June 30, 2023 was related to the sale of three properties.

Advertising and marketing expense increased 45% comparing the second quarter of 2023 to the second quarter of 2022, and increased 52% comparing the first half of 2023 to the first half of 2022. The increase in expense was primarily due to the GFED acquisition.

Communication and data connectivity expense decreased 19% comparing the second quarter of 2023 to the second quarter of 2022 primarily due to a reduction in long distance charges, cell phone and air card expenses. Communication and data connectivity expense increased 15% comparing the first half of 2023 to the first half of 2022. The increase is primarily due to the GFED acquisition.

Supplies expense increased 19% comparing the second quarter of 2023 to the second quarter of 2022, and increased 21% comparing the first half of 2023 to the first half of 2022. This increase is primarily due to the GFED acquisition. 51

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Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 2% when comparing the second quarter of 2023 to the same quarter of 2022, and increased 7% comparing the first half of 2023 to the first half of 2022. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses are expected to also increase.

Correspondent banking expense increased 4% when comparing the second quarter of 2023 to the second quarter of 2022, and increased 5% comparing the first half of 2023 to the first half 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 3% when comparing the second quarter of 2023 to the same quarter of 2022, and increased 20% comparing the first half of 2023 to the first half of 2022. The increase is due to the GFED acquisition. These expenses will naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.

Payment card processing expense decreased 13% when comparing the second quarter of 2023 due to the same quarter of 2022. The decrease was due to initial accrual adjustments made in the second quarter of 2022 related to the Company’s net business credit card program. Payment card processing expensed increased 22% comparing the first half of 2023 to the first half of 2022 due to the GFED acquisition.

Trust expense increased 73% when comparing the second quarter of 2023 to the same quarter of 2022, and increased 44% comparing the first half of 2023 to the first half of 2022. The increase was due to new relationships added in 2023 totaling $861.0 million of new assets under management as well as costs for a conversion to a new core system.

Other noninterest expense increased 8% when comparing the second quarter of 2023 to the second quarter of 2022, and increased 19% comparing the first half of 2023 to the first half of 2022, primarily due to the GFED acquisition. Included in other noninterest expense are items such as meals and entertainment, subscriptions, sales and use tax and expenses related to wealth management.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INCOME TAXES

In the second quarter of 2023, the Company incurred income tax expense of $4.0 million. During the first half of the year, the Company incurred income tax expense of $6.7 million. 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
		June 30, 2023					March 31, 2023					December 31, 2022				****		June 30, 2022
		(dollars in thousands)

	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%	****	****	Amount		****	%	****
Cash, federal funds sold, and interest-bearing deposits		$	259,096		3	%	$	318,292		4	%	$	183,993		2	%		$	148,911		2	%
Securities			882,888		11	%		877,446		11	%		928,102		12	%			879,918		12	%
Net loans/leases			6,293,523		77	%		6,103,449		76	%		6,051,165		76	%			5,705,478		77	%
Derivatives			170,294		2	%		130,350		2	%		177,631		2	%			97,455		1	%
Other assets			620,872		7	%		607,367		7	%		607,946		8	%			561,179		8	%
Total assets		$	8,226,673		100	%	$	8,036,904		100	%	$	7,948,837		100	%		$	7,392,941		100	%

Total deposits		$	6,606,720		81	%	$	6,501,663		80	%	$	5,984,217		75	%		$	5,820,657		78	%
Total borrowings			418,368		5	%		417,480		5	%		825,894		10	%			583,166		8	%
Derivatives			195,841		2	%		150,401		2	%		200,701		3	%			113,305		2	%
Other liabilities			183,055		2	%		165,866		3	%		165,301		2	%			132,675		2	%
Total stockholders' equity			822,689		10	%		801,494		10	%		772,724		10	%			743,138		10	%
Total liabilities and stockholders' equity		$	8,226,673		100	%	$	8,036,904		100	%	$	7,948,837		100	%		$	7,392,941		100	%

During the second quarter of 2023, the Company's total assets increased $189.8 million, or 2%, from March 31, 2023, to a total of $8.2 billion. The Company’s net loans/leases increased $190.1 million in the second quarter of 2023. Total deposits increased $105.1 million in the second 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 in the second quarter of 2023 from its traditional commercial lending/leasing businesses. The increase in total deposits was primarily a growth in core deposits building upon our strong and diversified deposit franchise.

INVESTMENT SECURITIES

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


		As of
		June 30, 2023					March 31, 2023					December 31, 2022				****	June 30, 2022				****
	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%
		(dollars in thousands)																			****

U.S. treasuries and govt. sponsored agency securities		$	18,942		2	%	$	19,320		2	%	$	16,981		2	%	$	20,448		2	%
Municipal securities			743,608		84	%		731,509		84	%		779,270		84	%		710,440		82	%
Residential mortgage-backed and related securities			60,957		7	%		63,104		7	%		66,215		7	%		81,247		9	%
Asset-backed securities			17,393		2	%		17,967		2	%		18,728		2	%		19,956		2	%
Other securities			42,168		5	%		45,546		5	%		46,908		5	%		47,827		5	%
		$	883,068		100	%	$	877,446		100	%	$	928,102		100	%	$	879,918		100	%

Securities as a % of total assets			10.73	%				10.92	%				11.68	%				11.90	%
Net unrealized losses as a % of Amortized Cost			(9.81)	%				(9.07)	%				(11.26)	%				(6.12)	%
Duration (in years)			5.7					5.6					5.5					5.9
Quarterly yield on investment securities (tax equivalent)			4.31	%				4.27	%				3.99	%				3.91	%

Due to the sharp increase in intermediate and long-term interest rates during 2022, the valuation of the Company’s AFS portfolio declined when comparing June 30, 2023 to June 30, 2022. Net unrealized losses improved June 30, 2023 as compared to December 31, 2022 as intermediate and long-term interest rates declined.

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 7.8% on an annualized basis during the first half of 2023. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables.


		As of
		June 30, 2023					March 31, 2023					December 31, 2022					June 30, 2022
	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%
		(dollars in thousands)

C&I - revolving		$	304,617		5	%	$	307,612		5	%	$	296,869		5	%	$	322,258		5	%
C&I - other *			1,402,553		21	%		1,420,331		23			1,451,693		23			1,403,689		24
CRE - owner occupied			609,717		10	%		616,922		10			629,367		10			628,565		11
CRE - non-owner occupied			963,814		15	%		982,716		16			963,239		16			889,530		15
Construction and land development			1,307,766		21	%		1,208,185		19			1,192,061		19			1,080,372		19
Multi-family			1,100,794		17	%		969,870		15			963,803		16			860,742		15
Direct financing leases			32,937		1	%		35,373		1			31,889		1			40,050		1
1-4 family real estate			535,405		8	%		532,491		9			499,529		8			473,141		8
Consumer			121,717		2	%		116,522		2			110,421		2			99,556		2
Total loans/leases		$	6,379,320		100	%	$	6,190,022		100	%	$	6,138,871		100	%	$	5,797,903		100	%
Less allowance			(85,797)					(86,573)					(87,706)					(92,425)
Net loans/leases		$	6,293,523				$	6,103,449				$	6,051,165				$	5,705,478

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 June 30, 2023 and March 31, 2023, approximately 15% of the CRE loan portfolio (as defined below) was owner-occupied.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Following is a listing of significant industries within the Company's CRE loan portfolio. These include loans in the following portfolio segments as of June 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 $184.2 million or 2.9% of total loans at June 30, 2023.


		As of June 30,					As of March 31,				****	As of December 31,				****	As of June 30,				****
		2023					2023					2022					2022
	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%	****
		(dollars in thousands)																			****

Lessors of Residential Buildings		$	2,091,510		50	%	$	1,902,965		48	%	$	1,861,197		48	%	$	1,618,186		47	%
Lessors of Nonresidential Buildings			591,128		14	%		581,615		15	%		537,940		13	%		601,708		17	%
Hotels			131,832		3	%		132,705		3	%		145,662		4	%		124,503		4	%
New Multifamily Housing Construction			80,338		2	%		86,228		2	%		82,905		2	%		38,176		1	%
New Housing For-Sale Builders			76,592		2	%		72,007		2	%		71,991		2	%		64,211		2	%
Other *			1,211,059		29	%		1,208,432		30	%		1,216,679		31	%		995,520		29	%
Total CRE Loans		$	4,182,459		100	%	$	3,983,952		100	%	$	3,916,374		100	%	$	3,442,304		100	%

* “Other” consists of all other industries. None of these had concentrations greater than $58.8 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
	June 30, 2023				March 31, 2023				December 31, 2022				June 30, 2022
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)

LIHTC	$	870,084	67	%	$	759,924	63	%	$	705,487	61	%	$	641,460	59	%
Construction (commercial)		359,202	27			372,819	31			353,007	31			256,622	24
Land development		61,973	5			61,001	5			70,830	6			74,492	7
Construction (residential)		16,507	1			14,441	1			20,179	2			107,798	10
Total construction and land development	$	1,307,766	100	%	$	1,208,185	100	%	$	1,149,503	100	%	$	1,080,372	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. 55

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	As of June 30,					As of March 31,					As of December 31,					As of June 30,
	2023					2023					2022					2022
	Amount		****	%	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%	****
	(dollars in thousands)

Trucks, Vans and Vocational Vehicles	$	74,534		23	%	$	73,221		23	%	$	70,821		23	%	$	69,383		24	%
Freightliners		27,171		8	%		27,401		9	%		26,433		9	%		17,471		6	%
Trailers		25,406		8	%		24,061		7	%		23,186		7	%		19,723		7	%
Tractor		20,410		6	%		18,620		6	%		17,740		6	%		15,255		5	%
Manufacturing - General		18,263		6	%		17,105		5	%		17,493		6	%		17,524		6	%
Construction - General		17,882		5	%		17,040		5	%		16,256		5	%		14,279		5	%
Food Processing Equipment		13,838		4	%		13,853		4	%		14,304		5	%		13,946		5	%
Marine - Travelifts		13,375		4	%		14,484		5	%		14,653		5	%		14,825		5	%
Computer Hardware		12,794		4	%		12,823		4	%		9,617		3	%		9,682		3	%
Aesthetic Equipment		9,684		3	%		9,160		3	%		8,311		3	%		6,957		2	%
Computer Equipment		9,388		3	%		10,032		3	%		7,736		2	%		8,179		3	%
Other *		85,733		26	%		83,694		26	%		83,382		26	%		86,211		29	%
Total m2 loans and leases	$	328,478		100	%	$	321,494		100	%	$	309,932		100	%	$	293,435		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 six months ended June 30, 2023 and 2022 are presented as follows:


	Three Months Ended						Six Months Ended
	June 30, 2023		****	June 30, 2022		****	June 30, 2023		****	June 30, 2022
	(dollars in thousands)						(dollars in thousands)

Balance, beginning	$	86,573		$	74,786		$	87,706		$	78,721
Initial ACL recorded for PCD loans		—			5,902			—			5,902
Change in ACL for writedown of LHFS to fair value		(2,277)			—			(3,986)			—
Provision		3,313			12,141			5,771			8,292
Charge-offs		(1,947)			(620)			(4,222)			(1,076)
Recoveries		135			216			528			586
Balance, ending	$	85,797		$	92,425		$	85,797		$	92,425

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


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
	(dollars in thousands)				(dollars in thousands)

Balance, beginning	$	6,033	$	7,819	$	5,552	$	6,886
Provisions (credited) to expense		293		(941)		774		(8)
Balance, ending	$	6,326	$	6,878	$	6,326	$	6,878

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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 *	****	June 30, 2023		****	March 31, 2023		****	December 31, 2022		****	June 30, 2022			****
		(dollars in thousands)

Special Mention (Rating 6)		$	116,910		$	125,048		$	98,333		$	54,558
Substandard (Rating 7)/Classified loans			63,956			70,866			66,021			83,048
Doubtful (Rating 8)/Classified loans			—			—			—			—
Criticized Loans		$	180,866		$	195,914		$	164,354		$	137,606

Criticized Loans as a % of Total Loans/Leases			2.84	%		3.16	%		2.68	%		2.37	%
Classified Loans as a % of Total Loans/Leases			1.00	%		1.14	%		1.08	%		1.43	%

* 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 decreased 8% and classified loans decreased 10% from March 31, 2023 to June 30, 2023. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.


		As of
	****	June 30, 2023	****	March 31, 2023	****	December 31, 2022	****	June 30, 2022
ACL for loans/leases / Total loans/leases held for investment		1.41	%	1.43	%	1.43	%	1.59	%
ACL for loans/leases / NPLs		328.16	%	377.03	%	1,000.07	%	387.66	%

Although management believes that the ACL at June 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 leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

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

NONPERFORMING ASSETS

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




	As of June 30,			As of March 31,			As of December 31,			As of June 30,
	2023			2023			2022			2022
	(dollars in thousands)

Nonaccrual loans/leases (1)	$	26,062		$	22,947		$	8,765		$	23,574
Accruing loans/leases past due 90 days or more		83			15			5			268
Total NPLs		26,145			22,962			8,770			23,842
OREO		—			61			133			205
Total NPAs	$	26,145		$	23,023		$	8,903		$	24,047


NPLs to total loans/leases		0.41	%		0.37	%		0.14	%		0.41	%
NPAs to total loans/leases plus repossessed property		0.41	%		0.37	%		0.15	%		0.41	%
NPAs to total assets		0.32	%		0.29	%		0.11	%		0.33	%
Nonaccrual loans/leases to total loans/leases		0.41	%		0.37	%		0.14	%		0.41	%
ACL to nonaccrual loans		329.20	%		377.27	%		1,000.64	%		392.06	%

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NPAs at June 30, 2023 were $26.1 million, up $3.1 million from March 31, 2023, and $2.1 million from June 30, 2022. Approximately half of total NPAs consist of one credit and the Company believes this credit will be resolved later this year without a loss. The ratio of NPAs to total assets was 0.32% at June 30, 2023, up from 0.29% at March 31, 2023, and down from 0.33% at June 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 increased $105.1 million during the second quarter of 2023. During the second quarter of 2023, the Company’s deposits, excluding brokered deposits, grew $339.3 million to a total of $6.2 billion, or 23.0% on an annualized basis. With the growth of deposits in the second quarter, the Company reduced short-term brokered deposits by $234.2 million throughout the second quarter.

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


		As of																			****
		June 30, 2023				****	March 31, 2023				****	December 31, 2022				****	June 30, 2022				****
	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%	****	Amount		****	%
		(dollars in thousands)

Noninterest bearing demand deposits		$	1,101,605		17	%	$	1,189,858		18	%	$	1,262,981		21	%	$	1,514,005		26	%
Interest bearing demand deposits			4,374,847		65	%		4,033,193		63	%		3,875,497		65	%		3,758,566		65	%
Time deposits			765,801		12	%		679,946		10	%		744,593		12	%		540,074		9	%
Brokered deposits			364,467		6	%		598,666		9	%		101,146		2	%		8,012		0	%
		$	6,606,720		100	%	$	6,501,663		100	%	$	5,984,217		100	%	$	5,820,657		100	%

Total uninsured and uncollateralized deposits represented 19.9% of total consolidated deposits at June 30, 2023. The Company maintained approximately $1.6 billion of immediately available liquidity at quarter-end with excess cash and borrowing capacity at FHLB and FRB as well as a $50.0 million revolving line of credit. Immediately available liquidity more than covers the Company’s uninsured and uncollateralized deposits.

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 $2.0 billion, or 29.8% of all deposits, as of June 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 58

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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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
	****	June 30, 2023		****	March 31, 2023		December 31, 2022		****	June 30, 2022		****
		(dollars in thousands)

Federal funds purchased		$	1,850		$	1,100	$	129,630		$	1,070

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

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

The table below presents the Company's FHLB advances.


		As of
	****	June 30, 2023		March 31, 2023		December 31, 2022		****	June 30, 2022
		(dollars in thousands)

Term FHLB advances		$	135,000	$	135,000	$	—		$	—
Overnight FHLB advances		$	—	$	—	$	415,000		$	400,000

The Company had no change in term or overnight FHLB advances from March 31, 2023 to June 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. 59

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


		June 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		$	339,480		5.02	%	$	516,146		4.69	%
2024			24,987		4.65			—		—
2025			—		—			—		—
2026			45,000		5.01			—		—
2027			45,000		4.82			—		—
Thereafter			45,000		4.64			—		—
Total Wholesale Funding		$	499,467		4.95	%	$	516,146		4.69	%

During the first six months of 2023, wholesale funding decreased $16.7 million due to intentionally bolstering on-balance sheet liquidity and fully eliminating overnight borrowings from the FHLB.

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 was calculated at the greater of: (a) the effective Prime Rate less 0.50% and (b) 3.00% per annum. The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries. There was no outstanding balance on the revolving line of credit at June 30, 2023.

STOCKHOLDERS' EQUITY

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


		As of											****
	****	June 30, 2023		****	March 31, 2023		****	December 31, 2022		****	June 30, 2022		****
		(dollars in thousands)

Common stock		$	16,714		$	16,714		$	16,796		$	17,064
Additional paid in capital			368,860			368,302			370,712			375,358
Retained earnings			499,024			472,051			450,114			400,790
AOCI			(61,909)			(55,573)			(64,898)			(50,074)
Total stockholders' equity		$	822,689		$	801,494		$	772,724		$	743,138

TCE / TA ratio (non-GAAP)			8.28	%		8.21	%		7.93	%		8.11	%

* 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 $6.3 million during the second 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 second 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 June 30, 2023, the Company had purchased 745,000 shares under the program and all shares purchased have been retired. 60

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for 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 $259.1 million at June 30, 2023. The Company’s liquidity sources as of June 30, 2023 are summarized as follows:


	As of
	June 30, 2023
	(dollars in billions)

Excess cash	$	0.2
Borrowing capacity at FHLB		1.0
Borrowing capacity at FRB		0.3
Secured line of credit with upstream counterparty		0.1
Immediately available liquidity	$	1.6
Fed funds lines of credit		0.4
Brokered deposit capacity limited by Company policy		1.3
Total available liquidity excluding unpledged AFS/HTM securities	$	3.3

Including unpledged AFS and HTM securities of approximately $834 million, the Company’s total liquidity is strong at over 50% of total assets.

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 second quarter of 2023, the Company’s core deposits, excluding brokered deposits, grew $339.3 million to a total of $6.2 billion, or 23.0% on an annualized basis. Total uninsured and uncollateralized deposits represented 19.9% of total consolidated deposits. The Company maintained approximately $1.6 billion of immediately available liquidity at quarter-end which more than covers the Company’s uninsured and uncollateralized deposits.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity.

At June 30, 2023, the subsidiary banks had 26 unsecured lines of credit totaling $450.8 million with upstream correspondent banks. The subsidiary banks also had availability of $190.3 million with the FRB which was secured. At June 30, 2023, the Company had the full $641.1 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.

As of June 30, 2023, the Company had $494.3 million in actual correspondent banking deposits spread over 181 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. 61

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Investing activities used cash of $240.6 million during the first six months of 2023, compared to $146.8 million for the same period of 2022. The net decrease in federal funds sold was $48.1 million for the first six months of 2023, compared to a net decrease of $10.2 million for the same period of 2022. The net increase in interest-bearing deposits at financial institutions was $98.9 million for the first six months of 2023, compared to a net decrease of $38.0 million for the same period of 2022. Proceeds from calls, maturities, and paydowns of securities were $78.2 million for the first six months of 2023, compared to $42.3 million for the same period of 2022. Purchases of securities used cash of $60.4 million for the first six months of 2023, compared to $134.7 million for the same period of 2022. Proceeds from sales of securities were $30.6 million for the first six months of 2023, compared to $111.4 million for the same period of 2022. The net increase in loans/leases used cash of $244.7 million for the first six months of 2023 compared to $314.7 million for the same period of 2022.

Financing activities provided cash of $204.5 million for the first six months of 2023, compared to $148.1 million for same period of 2022. Net increases in deposits totaled $622.5 million for the first six months of 2023, compared to net decreases in deposits of $178.7 million for the same period of 2022. During the first six months of 2023, the Company's short-term borrowings decreased $127.8 million, compared to a decrease in short-term borrowings of $2.7 million for the same period of 2022. There were long-term FHLB advances of $135.0 million during the first six 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 six months of 2023. There was a $16.0 million prepayment of FHLB term advances in the first six months of 2022. Net decrease in overnight advances totaled $415.0 million for the first six months of 2023 as compared to net increase of $385.0 million for the same period of 2022. Repurchase and cancellation of shares totaled $8.7 million in the first six months of 2023, as compared to $37.4 million for the same period of 2022.

Total cash provided by operating activities was $60.5 million for the first six months of 2023, compared to $53.6 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, most recently, subordinated notes.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “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 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).
---	---
●	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.
---	---

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●	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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Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Internal asset/liability management teams consisting of members of the subsidiary banks' management meet 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. 65

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Item 3

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


		NET INTEREST INCOME EXPOSURE in YEAR 1							****
	****		****	As of June 30,	****	As of December 31,	****	As of December 31,	****
INTEREST RATE SCENARIO		POLICY LIMIT	****	2023	****	2022	****	2021

300 basis point downward shock		(30.0)	%	(5.3)	%	(6.1)	%	n/a
200 basis point downward shift		(10.0)	%	(0.4)	%	(0.2)	%	n/a
200 basis point upward shift		(10.0)	%	(0.4)	%	(1.3)	%	(3.1)	%
300 basis point upward shock		(30.0)	%	(0.6)	%	(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 modestly 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 three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at June 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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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 June 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.

Table of Contents Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

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

Item 1A Risk Factors

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

On May 19, 2022, the board of directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021. The repurchase program does not have an expiration date. All shares repurchased under the share repurchase program during the second quarter were retired.


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

April 1-30, 2023	22,500		$ 42.97		22,500		755,000
May 1-31, 2023	—		—		—		755,000
June 1-30, 2023	—		—		—		755,000
Total	22,500		$ 42.97		22,500		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 June 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.

Table of Contents Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6 Exhibits


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

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

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

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

101	Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2023 and June 30, 2022; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and June 30, 2022; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2023 and June 30, 2022; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and June 30, 2022; and (vi) Notes to the Consolidated Financial Statements.<br><br>
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.

Table of Contents SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)



Date	August 8, 2023	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer


Date	August 8, 2023	/s/ Todd A. Gipple
		Todd A. Gipple
		President
		Chief Financial Officer


Date	August 8, 2023	/s/ Nick W. Anderson
		Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)

Exhibit 31.1

I, Larry J. Helling, certify that:

1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 8, 2023	/s/ Larry J. Helling
	Larry J. Helling
	Chief Executive Officer

Exhibit 31.2

I, Todd A. Gipple, certify that:

1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2023	/s/ Todd A. Gipple
	Todd A. Gipple
	President
	Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of QCR Holdings, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Larry J. Helling, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

ugust 8
/s/ Larry J. Helling

Larry J. Helling
Chief Executive Officer
August 8, 2023

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of QCR Holdings, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Todd A. Gipple, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

ugsut
/s/ Todd A. Gipple

Todd A. Gipple
President
Chief Financial Officer
August 8, 2023