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

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2021

☐ 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~~November 1, 2021, the Registrant had outstanding ~~15,769,161~~15,596,681 shares of common stock, $1.00 par value per share.

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


			Page Number(s)
Part I	FINANCIAL INFORMATION

	Item 1	Consolidated Financial Statements (Unaudited)

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

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

		Consolidated Statements of Income
		For the ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020	6

		Consolidated Statements of Comprehensive Income For the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020	7

		Consolidated Statements of Changes in Stockholders' Equity For the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020	8

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

		Notes to Consolidated Financial Statements	11

		Note 1. Summary of Significant Accounting Policies	11
		Note 2. Investment Securities	21
		Note 3. Loans/Leases Receivable	25
		Note 4. Derivatives and Hedging Activities	36
		Note 5. Income Taxes	39
		Note 6. Earnings Per Share	3940
		Note 7. Fair Value	4041
		Note 8. Business Segment Information	4243
		Note 9. Regulatory Capital Requirements	4344

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

		Introduction	4546
		General	4546
		Impact of COVID-19	4546
		Executive Overview	47
		Strategic Financial Metrics	48
		Strategic Developments	49
		GAAP to Non-GAAP Reconciliations	50
		Net Interest Income - (Tax Equivalent Basis)	52
		Critical Accounting Policies	57
		Goodwill	57
		Allowance for Credit Losses	58
		Results of Operations	58
		Interest Income	58
		Interest Expense	58

Table of Contents

		Provision for Credit Losses	59
		Noninterest Income	60
		Noninterest Expense	63
		Income Taxes	65
		Financial Condition	66
		Investment Securities	66
		Loans/Leases	67
		Allowance for Credit Losses on Loans/Leases and OBS Exposures	69
		Nonperforming Assets	71
		Deposits	72
		Borrowings	73
		Stockholders' Equity	74
		Liquidity and Capital Resources	74
		Special Note Concerning Forward-Looking Statements	76

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	77

	Item 4	Controls and Procedures	79

Part II	OTHER INFORMATION		80

	Item 1	Legal Proceedings	80

	Item 1A	Risk Factors	80

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	80

	Item 3	Defaults Upon Senior Securities	80

	Item 4	Mine Safety Disclosures	80

	Item 5	Other Information	80

	Item 6	Exhibits	81

Signatures			82

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

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of ~~June~~September 30, 2021 and December 31, 2020

June 30,

December 31,

2021

2020

(dollars in thousands)
Assets

Cash and due from banks

$
55,598

$
61,329
Federal funds sold

1,340

9,080
Interest-bearing deposits at financial institutions

87,440

86,596

Securities held to maturity, at amortized cost, net of allowance for credit losses

473,159

476,165
Securities available for sale, at fair value

337,286

361,966
Total securities

810,445

838,131

Loans receivable held for sale

4,459

3,758
Loans/leases receivable held for investment

4,413,246

4,247,371
Gross loans/leases receivable

4,417,705

4,251,129
Less allowance for credit losses

(78,894)

(84,376)
Net loans/leases receivable

4,338,811

4,166,753




Bank-owned life insurance

61,509

60,586
Premises and equipment, net

74,765

72,693
Restricted investment securities

20,337

18,103
Other real estate owned, net

1,820

20
Goodwill

74,066

74,066
Intangibles

10,365

11,381
Derivatives

193,395

222,757
Other assets

75,274

61,302
Total assets

$
5,805,165

$
5,682,797




Liabilities and Stockholders' Equity




Liabilities:




Deposits:




Noninterest-bearing

$
1,258,885

$
1,145,378
Interest-bearing

3,430,050

3,453,759
Total deposits

4,688,935

4,599,137




Short-term borrowings

7,070

5,430
Federal Home Loan Bank advances

40,000

15,000
Subordinated notes

113,771

118,691
Junior subordinated debentures

38,067

37,993
Derivatives

196,092

229,270
Other liabilities

90,754

83,483
Total liabilities

5,174,689

5,089,004








Stockholders' Equity:




Preferred stock, $1 par value; shares authorized 250,000 June 2021 and December 2020 - 0 shares issued or outstanding

—

—
Common stock, $1 par value; shares authorized 20,000,000 June 2021 - 15,763,522 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding

15,764

15,806
Additional paid-in capital

275,485

275,807
Retained earnings

335,424

300,804
Accumulated other comprehensive income (loss):

Securities available for sale

8,244

9,008
Derivatives

(4,441)

(7,632)
Total stockholders' equity

630,476

593,793
Total liabilities and stockholders' equity

$
5,805,165

$
5,682,797


	September 30,		December 31,
	2021		2020

	(dollars in thousands)
Assets
Cash and due from banks	$	57,310	$	61,329
Federal funds sold		6,985		9,080
Interest-bearing deposits at financial institutions		63,841		86,596

Securities held to maturity, at amortized cost, net of allowance for credit losses		484,003		476,165
Securities available for sale, at fair value		344,716		361,966
Total securities		828,719		838,131

Loans receivable held for sale		3,452		3,758
Loans/leases receivable held for investment		4,596,278		4,247,371
Gross loans/leases receivable		4,599,730		4,251,129
Less allowance for credit losses		(80,670)		(84,376)
Net loans/leases receivable		4,519,060		4,166,753

Bank-owned life insurance		61,955		60,586
Premises and equipment, net		74,993		72,693
Restricted investment securities		19,936		18,103
Other real estate owned, net		—		20
Goodwill		74,066		74,066
Intangibles		9,857		11,381
Derivatives		198,393		222,757
Other assets		99,393		61,302
Total assets	$	6,014,508	$	5,682,797

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,342,273	$	1,145,378
Interest-bearing		3,529,555		3,453,759
Total deposits		4,871,828		4,599,137

Short-term borrowings		1,600		5,430
Federal Home Loan Bank advances		30,000		15,000
Subordinated notes		113,811		118,691
Junior subordinated debentures		38,103		37,993
Derivatives		201,450		229,270
Other liabilities		107,902		83,483
Total liabilities		5,364,694		5,089,004


Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 September 2021 and December 2020 - 0 shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 September 2021 - 15,590,428 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding		15,590		15,806
Additional paid-in capital		272,964		275,807
Retained earnings		360,003		300,804
Accumulated other comprehensive income (loss):
Securities available for sale		5,825		9,008
Derivatives		(4,568)		(7,632)
Total stockholders' equity		649,814		593,793
Total liabilities and stockholders' equity	$	6,014,508	$	5,682,797

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended ~~June~~September 30, 2021 and 2020


	2021		2020		2021		2020

	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	42,448	$	42,614	$	44,858	$	44,768
Securities:
Taxable		2,132		2,048		2,347		1,938
Nontaxable		4,052		3,565		4,160		3,842
Interest-bearing deposits at financial institutions		34		134		39		92
Restricted investment securities		237		288		262		249
Federal funds sold		—		1		1		1
Total interest and dividend income		48,903		48,650		51,667		50,890

Interest expense:
Deposits		3,235		5,766		3,273		4,484
Short-term borrowings		2		22		1		11
Federal Home Loan Bank advances		16		347		41		211
Subordinated notes		1,570		994		1,554		1,031
Junior subordinated debentures		564		573		569		572
Total interest expense		5,387		7,702		5,438		6,309
Net interest income		43,516		40,948		46,229		44,581
Provision for credit losses		—		19,915		—		20,342
Net interest income after provision for loan/lease losses		43,516		21,033		46,229		24,239

Noninterest income:
Trust department fees		2,848		2,227		2,714		2,280
Investment advisory and management fees		1,039		1,399		1,054		1,266
Deposit service fees		1,492		1,286		1,588		1,403
Gains on sales of residential real estate loans, net		1,184		1,196		954		1,370
Swap fee income/capital markets revenue		9,568		19,927		24,885		26,688
Securities gains (losses), net		(88)		65		—		1,802
Earnings on bank-owned life insurance		451		612		446		502
Debit card fees		1,084		775		1,085		946
Correspondent banking fees		269		198		265		220
Other		1,449		941		1,661		1,482
Total noninterest income		19,296		28,626		34,652		37,959

Noninterest expense:
Salaries and employee benefits		23,044		21,304		28,207		25,999
Occupancy and equipment expense		3,965		3,748		4,122		3,807
Professional and data processing fees		3,702		3,646		3,568		3,758
Post-acquisition compensation, transition and integration costs		—		70
Disposition costs		—		(83)		—		192
FDIC insurance, other insurance and regulatory fees		986		908		1,108		1,301
Loan/lease expense		457		339		308		403
Net income from and gains/losses on operations of other real estate		(113)		(332)		(1,346)		16
Advertising and marketing		853		552		1,095		750
Bank service charges		572		501		525		488
Losses on liability extinguishment		—		429		—		1,874
Correspondent banking expense		198		212		201		205
Intangibles amortization		508		548		508		531
Loss on sale of subsidiary						—		305
Other		1,503		1,280		3,091		1,209
Total noninterest expense		35,675		33,122		41,387		40,838
Net income before income taxes		27,137		16,537		39,494		21,360
Federal and state income tax expense		4,788		2,798		7,929		4,016
Net income	$	22,349	$	13,739	$	31,565	$	17,344

Basic earnings per common share	$	1.41	$	0.87	$	2.02	$	1.10
Diluted earnings per common share	$	1.39	$	0.86	$	1.99	$	1.09

Weighted average common shares outstanding		15,813,932		15,747,056		15,635,123		15,767,152
Weighted average common and common equivalent shares outstanding		16,045,239		15,895,336		15,869,798		15,923,578

Cash dividends declared per common share	$	0.06	$	0.06	$	0.06	$	0.06

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

2021

2020


(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$
83,781

$
85,774

Securities:

Taxable

4,174

3,775

Nontaxable

7,986

7,024

Interest-bearing deposits at financial institutions

71

495

Restricted investment securities

456

546

Federal funds sold

—

18

Total interest and dividend income

96,468

97,632

Interest expense:

Deposits

6,662

14,972

Short-term borrowings

3

86

Federal Home Loan Bank advances

25

796

Subordinated notes

3,164

1,988

Junior subordinated debentures

1,123

1,144

Total interest expense

10,977

18,986

Net interest income

85,491

78,646

Provision for credit losses

6,713

28,282

Net interest income after provision for loan/lease losses

78,778

50,364

Noninterest income:

Trust department fees

5,649

4,539

Investment advisory and management fees

1,979

3,126

Deposit service fees

2,900

2,763

Gains on sales of residential real estate loans, net

2,521

1,848

Swap fee income/capitals markets revenue

23,125

26,731

Securities gains (losses), net

(88)

65

Earnings on bank-owned life insurance

922

941

Debit card fees

2,059

1,533

Correspondent banking fees

583

413

Other

3,135

1,863

Total noninterest income

42,785

43,822

Noninterest expenses:

Salaries and employee benefits

47,891

39,823

Occupancy and equipment expense

8,073

7,780

Professional and data processing fees

7,145

7,015

Post-acquisition compensation, transition and integration costs

—

221

Disposition costs

8

434

FDIC insurance, other insurance and regulatory fees

2,051

1,591

Loan/lease expense

757

567

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

(74)

(319)

Advertising and marketing

1,480

1,234

Bank service charges

1,095

1,005

Losses on liability extinguishment

—

576

Correspondent banking expense

398

428

Intangibles amortization

1,016

1,097

Goodwill impairment

—

500

Other

3,063

2,585

Total noninterest expenses

72,903

64,537

Net income before income taxes

48,660

29,649

Federal and state income tax expense

8,329

4,682

Net income

$
40,331

$
24,967

Basic earnings per common share

$
2.55

$
1.58

Diluted earnings per common share

$
2.52

$
1.56

Weighted average common shares outstanding

15,808,788

15,771,926

Weighted average common and common equivalent shares outstanding

16,035,394

15,956,958

Cash dividends declared per common share

$
0.12

$
0.12


	2021		2020

	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	128,639	$	130,542
Securities:
Taxable		6,521		5,714
Nontaxable		12,146		10,865
Interest-bearing deposits at financial institutions		110		587
Restricted investment securities		718		795
Federal funds sold		1		19
Total interest and dividend income		148,135		148,522

Interest expense:
Deposits		9,935		19,457
Short-term borrowings		4		81
Federal Home Loan Bank advances		66		1,007
Subordinated notes		4,718		3,019
Junior subordinated debentures		1,692		1,715
Total interest expense		16,415		25,279
Net interest income		131,720		123,243
Provision for credit losses		6,713		48,624
Net interest income after provision for loan/lease losses		125,007		74,619

Noninterest income:
Trust department fees		8,363		6,819
Investment advisory and management fees		3,033		4,392
Deposit service fees		4,488		4,166
Gains on sales of residential real estate loans, net		3,475		3,218
Swap fee income/capitals markets revenue		48,010		53,419
Securities gains (losses), net		(88)		1,867
Earnings on bank-owned life insurance		1,368		1,443
Debit card fees		3,144		2,479
Correspondent banking fees		848		633
Other		4,796		3,345
Total noninterest income		77,437		81,781

Noninterest expenses:
Salaries and employee benefits		76,098		65,822
Occupancy and equipment expense		12,195		11,587
Professional and data processing fees		10,713		10,773
Post-acquisition compensation, transition and integration costs		—		189
Disposition costs		8		626
FDIC insurance, other insurance and regulatory fees		3,159		2,892
Loan/lease expense		1,065		970
Net income from and gains/losses on operations of other real estate		(1,420)		(303)
Advertising and marketing		2,575		1,984
Bank service charges		1,620		1,493
Losses on liability extinguishment		—		2,450
Correspondent banking expense		599		633
Intangibles amortization		1,524		1,628
Goodwill impairment		—		500
Loss on sale of subsidiary		—		305
Other		6,154		3,842
Total noninterest expenses		114,290		105,391
Net income before income taxes		88,154		51,009
Federal and state income tax expense		16,258		8,698
Net income	$	71,896	$	42,311

Basic earnings per common share	$	4.54	$	2.68
Diluted earnings per common share	$	4.48	$	2.65

Weighted average common shares outstanding		15,829,124		15,770,335
Weighted average common and common equivalent shares outstanding		16,058,420		15,945,832

Cash dividends declared per common share	$	0.18	$	0.18

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

Three Months Ended June 30,



2021

2020

(dollars in thousands)

Net income

$
22,349

$
13,739

Other comprehensive income:

Unrealized gains (losses) on securities available for sale:

Unrealized holding gains arising during the period before tax

4,663

5,336

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

(88)

65

4,751

5,271

Unrealized gains (losses) on derivatives:

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

492

(654)

Less reclassification adjustment for caplet amortization before tax

(163)

(124)

655

(530)

Other comprehensive income, before tax

5,406

4,741

Tax expense

1,227

1,119

Other comprehensive income, net of tax

4,179

3,622

Comprehensive income

$
26,528

$
17,361


	Three Months Ended September 30,
	2021		2020

	(dollars in thousands)

Net income	$	31,565	$	17,344

Other comprehensive loss:

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

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

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

Comprehensive income	$	29,019	$	16,730


	Six Months Ended June 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(dollars in thousands)				(dollars in thousands)

Net income	$	40,331	$	24,967	$	71,896	$	42,311

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		(1,096)		7,817		(4,290)		8,467
Less reclassification adjustment for gains (losses) included in net income before tax		(88)		65		(88)		1,867
		(1,008)		7,752		(4,202)		6,600
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		3,725		(7,815)		3,383		(7,903)
Less reclassification adjustment for caplet amortization before tax		(314)		(234)		(495)		(384)
		4,039		(7,581)		3,878		(7,519)

Other comprehensive income, before tax		3,031		171
Other comprehensive loss, before tax						(324)		(919)
Tax expense		603		240		(206)		(236)
Other comprehensive income (loss), net of tax		2,428		(69)
Other comprehensive loss, net of tax						(118)		(683)

Comprehensive income	$	42,759	$	24,898	$	71,778	$	41,628

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive


Stock

Capital

Earnings

(Loss) Income

Total

(dollars in thousands)

Balance December 31, 2020

$
15,806

$
275,807

$
300,804

$
1,376

$
593,793
Net income

—

—

17,982

—

17,982
Other comprehensive loss, net of tax

—

—

—

(1,751)

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

—

—

(937)

—

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

—

—

(949)

—

(949)
Stock-based compensation expense

—
��

841

—

—

841
Issuance of common stock under employee benefit plans

38

(298)

—

—

(260)
Balance, March 31, 2021

$
15,844

$
276,350

$
316,900

$
(375)

$
608,719
Net income

—

—

22,349

—

22,349
Other comprehensive income, net of tax

—

—

—

4,179

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

—

—

(951)

—

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

as a result of a share repurchase program

(100)

(1,826)

(2,874)

—

(4,800)
Stock-based compensation expense

—

520

—

—

520
Issuance of common stock under employee benefit plans

20

440

—

—

460
Balance, June 30, 2021

$
15,764

$
275,485

$
335,424

$
3,803

$
630,476


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

	(dollars in thousands)

Balance December 31, 2020	$	15,806	$	275,807	$	300,804	$	1,376	$	593,793
Net income		—		—		17,982		—		17,982
Other comprehensive loss, net of tax		—		—		—		(1,751)		(1,751)
Impact of adoption of ASU 2016-13		—		—		(937)		—		(937)
Common cash dividends declared, $0.06 per share		—		—		(949)		—		(949)
Stock-based compensation expense		—		841		—		—		841
Issuance of common stock under employee benefit plans		38		(298)		—		—		(260)
Balance, March 31, 2021	$	15,844	$	276,350	$	316,900	$	(375)	$	608,719
Net income		—		—		22,349		—		22,349
Other comprehensive income, net of tax		—		—		—		4,179		4,179
Common cash dividends declared, $0.06 per share		—		—		(951)		—		(951)
Repurchase and cancellation of 100,000 shares of common stock
as a result of a share repurchase program		(100)		(1,826)		(2,874)		—		(4,800)
Stock-based compensation expense		—		520		—		—		520
Issuance of common stock under employee benefit plans		20		440		—		—		460
Balance, June 30, 2021	$	15,764	$	275,485	$	335,424	$	3,803	$	630,476
Net income		—		—		31,565		—		31,565
Other comprehensive loss, net of tax		—		—		—		(2,546)		(2,546)
Repurchase and cancellation of 193,153 shares of common stock
as a result of a share repurchase program		(193)		(3,134)		(6,040)		—		(9,367)
Common cash dividends declared, $0.06 per share		—		—		(946)		—		(946)
Stock-based compensation expense		—		504		—		—		504
Issuance of common stock under employee benefit plans		19		109		—		—		128
Balance, September 30, 2021	$	15,590	$	272,964	$	360,003	$	1,257	$	649,814

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive


Stock

Capital

Earnings

(Loss)

Total

(dollars in thousands)

Balance December 31, 2019

$
15,828

$
274,785

$
245,836

$
(1,098)

$
535,351
Net income

—

—

11,228

—

11,228
Other comprehensive loss, net of tax

—

—

—

(3,691)

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

—

—

(942)

—

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

as a result of a share repurchase program

(101)

(1,844)

(1,835)

—

(3,780)
Stock-based compensation expense

—

641

—

—

641
Issuance of common stock under employee benefit plans

47

285

—

—

332
Balance, March 31, 2020

$
15,774

$
273,867

$
254,287

$
(4,789)

$
539,139
Net income

—

—

13,739

—

13,739
Other comprehensive income, net of tax

—

—

—

3,622

3,622
Common cash dividends declared, $0.06 per share

—

—

(945)

—

(945)
Stock-based compensation expense

—

423

—

—

423
Issuance of common stock under employee benefit plans

17

25

—

—

42
Balance, June 30, 2020

$
15,791

$
274,315

$
267,081

$
(1,167)

$
556,020


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

	(dollars in thousands)

Balance December 31, 2019	$	15,828	$	274,785	$	245,836	$	(1,098)	$	535,351
Net income		—		—		11,228		—		11,228
Other comprehensive loss, net of tax		—		—		—		(3,691)		(3,691)
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)
Repurchase and cancellation of 100,932 shares of common stock
as a result of a share repurchase program		(101)		(1,844)		(1,835)		—		(3,780)
Stock-based compensation expense		—		641		—		—		641
Issuance of common stock under employee benefit plans		47		285		—		—		332
Balance, March 31, 2020	$	15,774	$	273,867	$	254,287	$	(4,789)	$	539,139
Net income		—		—		13,739		—		13,739
Other comprehensive income, net of tax		—		—		—		3,622		3,622
Common cash dividends declared, $0.06 per share		—		—		(945)		—		(945)
Stock-based compensation expense		—		423		—		—		423
Issuance of common stock under employee benefit plans		17		25		—		—		42
Balance, June 30, 2020	$	15,791	$	274,315	$	267,081	$	(1,167)	$	556,020
Net income		—		—		17,344		—		17,344
Other comprehensive loss, net of tax		—		—		—		(614)		(614)
Common cash dividends declared, $0.06 per share		—		—		(945)		—		(945)
Stock-based compensation expense		—		472		—		—		472
Issuance of common stock under employee benefit plans		1		335		—		—		336
Balance, September 30, 2020	$	15,792	$	275,122	$	283,480	$	(1,781)	$	572,613

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

2021

2020

(dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES





Net income

$
40,331

$
24,967

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





Depreciation

2,701

2,690

Provision for credit losses

6,713

28,282

Stock-based compensation expense

1,361

1,064

Deferred compensation expense accrued

2,302

1,705

Gains on other real estate owned, net

(389)

(369)

Amortization of premiums on securities, net

1,092

557

Caplet amortization

314

234

Mark to market gains on unhedged derivatives, net

(91)

—

Securities (gains) losses, net

88

(65)

Loans originated for sale

(115,649)

(98,837)

Proceeds on sales of loans

117,469

96,031

Gains on sales of residential real estate loans

(2,521)

(1,848)

Loss on liability extinguishment, net

—

576

Gains on sales of premises and equipment

(22)

(8)

Amortization of intangibles

1,016

1,097

Accretion of acquisition fair value adjustments, net

(795)

(1,361)

Increase in cash value of bank-owned life insurance

(922)

(941)

Goodwill impairment

—

500

Increase in other assets

(14,322)

(2,255)

Decrease in other liabilities

(5,941)

(12,729)

Net cash provided by operating activities

$
32,735

$
39,290

CASH FLOWS FROM INVESTING ACTIVITIES





Net decrease in federal funds sold

7,740

7,675

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

(844)

7,116

Proceeds from sales of other real estate owned

1,407

4,341

Activity in securities portfolio:

Purchases

(108,565)

(166,743)

Calls, maturities and redemptions

70,539

11,946

Paydowns

40,395

22,541

Sales

23,874

4,592

Activity in restricted investment securities:





Purchases

(2,280)

(4,274)

Redemptions

46

4,317

Net increase in loans/leases originated and held for investment

(170,969)

(447,385)

Purchase of premises and equipment

(4,773)

(1,828)

Proceeds from sales of premises and equipment

22

88

Net cash used in investing activities

$
(143,408)

$
(557,614)

CASH FLOWS FROM FINANCING ACTIVITIES





Net increase in deposit accounts

89,798

408,849

Net increase in short-term borrowings

1,640

111,395

Activity in Federal Home Loan Bank advances:





Term advances

—

85,000

Calls and maturities

—

(40,000)

Net change in short-term and overnight advances

25,000

(59,300)

Prepayments on brokered and public time deposits

—

29,359

Prepayments of subordinated notes

(5,000)

—

Payment of cash dividends on common stock

(1,896)

(1,884)

Proceeds from issuance of common stock, net

200

1,008

Repurchase and cancellation of shares

(4,800)

(3,780)

Net cash provided by financing activities

$
104,942

$
530,647

Net increase (decrease) in cash and due from banks

(5,731)

12,323

Cash and due from banks, beginning

61,329

76,254

Cash and due from banks, ending

$
55,598

$
88,577


	2021		2020

	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	71,896	$	42,311
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		4,087		4,006
Provision for credit losses		6,713		48,624
Stock-based compensation expense		1,865		1,536
Deferred compensation expense accrued		3,288		2,660
Gains on other real estate owned, net		(1,754)		(298)
Amortization of premiums on securities, net		1,506		728
Caplet amortization		495		383
Mark to market gains on unhedged derivatives, net		(74)		—
Securities (gains) losses, net		88		(1,867)
Loans originated for sale		(157,392)		(172,282)
Proceeds on sales of loans		161,173		170,362
Gains on sales of residential real estate loans		(3,475)		(3,218)
Loss on liability extinguishment, net		—		2,450
Losses (gains) on sales and disposals of premises and equipment		1,457		(13)
Amortization of intangibles		1,524		1,628
Accretion of acquisition fair value adjustments, net		(1,251)		(2,194)
Increase in cash value of bank-owned life insurance		(1,369)		(1,443)
Loss on sale of subsidiary/certain assets and liabilities of subsidiary		—		305
Goodwill impairment		—		500
Increase in other assets		(37,630)		(8,351)
Decrease in other liabilities		13,161		43,489
Net cash provided by operating activities	$	64,308	$	129,316

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold		2,095		9,270
Net decrease (increase) in interest-bearing deposits at financial institutions		22,755		(154,247)
Proceeds from sales of other real estate owned		4,592		4,353
Activity in securities portfolio:
Purchases		(151,702)		(255,500)
Calls, maturities and redemptions		81,000		38,461
Paydowns		50,177		33,870
Sales		23,874		28,579
Activity in restricted investment securities:
Purchases		(4,280)		(4,600)
Redemptions		2,447		8,843
Proceeds from the liquidation of bank-owned life insurance		—		10,999
Net increase in loans/leases originated and held for investment		(353,616)		(555,315)
Purchase of premises and equipment		(7,866)		(2,250)
Proceeds from sales of premises and equipment		22		94
Net cash transferred In sale of subsidiary		—		(349)
Net cash used in investing activities	$	(330,502)	$	(837,792)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		272,691		731,374
Net increase (decrease) in short-term borrowings		(3,830)		17,007
Activity in Federal Home Loan Bank advances:
Term advances		—		125,000
Calls and maturities		—		(81,600)
Net change in short-term and overnight advances		15,000		(109,300)
Prepayments		—		(55,274)
Prepayments on brokered and public time deposits		—		29,359
Prepayments of subordinated notes		(5,000)		—
Proceeds from subordinated notes		—		50,000
Payment of cash dividends on common stock		(2,847)		(2,831)
Proceeds from issuance of common stock, net		328		1,199
Repurchase and cancellation of shares		(14,167)		(3,780)
Net cash provided by financing activities	$	262,175	$	701,154

Net increase (decrease) in cash and due from banks		(4,019)		(7,322)

Cash and due from banks, beginning		61,329		76,254
Cash and due from banks, ending	$	57,310	$	68,932

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

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



Supplemental disclosure of cash flow information, cash payments for:
Interest	$	12,257	$	19,377	$	18,617	$	26,920
Income/franchise taxes		21,310		(1,099)		36,987		16,713

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains (losses) on securities available for sale and derivative instruments, net		2,427		(69)
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised		—		(636)
Change in accumulated other comprehensive income, unrealized losses on securities available for sale and derivative instruments, net						(118)		(683)
Transfers of loans to other real estate owned		2,812		—		2,812		51
Due to broker for purchases of securities		1,000		4,338		—		8,550
Due from broker for sales of securities		—		1,735
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities		(31,297)		140,048		(25,503)		151,398
Dividends payable		951		945		946		945
Consideration received on sale of the Bates Companies						—		1,328

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~June~~September 30, 2021

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2020, included in the Company's Annual Report on Form 10-K filed with the SEC on March 12, 2021. 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~~September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021, 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 Allowance: Allowance for credit losses	GAAP: Generally Accepted Accounting Principles HTM: Held to maturity
AOCI: Accumulated other comprehensive income (loss)	LIBOR: London Inter-Bank Offered Rate
AFS: Available for sale	LRP: Loan Relief Program
ASC: Accounting Standards Codification	m2: m2 Equipment Finance, LLC
ASU: Accounting Standards Update	MSELF: Main Street Expanded Loan Facility
Bates Companies: Bates Financial Advisors, Inc., Bates	MSNLF: Main Street New Loan Facility
Financial Services, Inc., Bates Securities, Inc. and	NIM: Net interest margin
Bates Financial Group, Inc.	NPA: Nonperforming asset
BOLI: Bank-owned life insurance	NPL: Nonperforming loan
Caps: Interest rate cap derivatives	OBS: Off-balance sheet
CARES Act: Coronavirus Aid, Relief and Economy	OREO: Other real estate owned
Security Act	OTTI: Other-than-temporary impairment
CECL: Current Expected Credit Losses	PCAOB: Public Company Accounting Oversight Board
Community National: Community National Bancorporation	PCD: Purchased credit deteriorated loan
COVID-19: Coronavirus Disease 2019	PCI: Purchased credit impaired
CRBT: Cedar Rapids Bank & Trust Company	PPP: Paycheck Protection Program
CRE: Commercial real estate	Provision: Provision for credit losses
CSB: Community State Bank	QCBT: Quad City Bank & Trust Company
C&I: Commercial and industrial	RB&T: Rockford Bank & Trust Company
EPS: Earnings per share	ROAA: Return on average assets
Exchange Act: Securities Exchange Act of 1934, as	SBA: U.S. Small Business Administration
amended	SEC: Securities and Exchange Commission
FASB: Financial Accounting Standards Board	SFCB: Springfield First Community Bank
FDIC: Federal Deposit Insurance Corporation	Springfield Bancshares: Springfield Bancshares, Inc.
Federal Reserve: Board of Governors of the Federal	TA: Tangible assets
Reserve System	TCE: Tangible common equity
FHLB: Federal Home Loan Bank	TDRs: Troubled debt restructurings
FRB: Federal Reserve Bank of Chicago	TEY: Tax equivalent yield
	The Company: QCR Holdings, Inc.

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

Recent accounting developments: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). Under the standard, assets measured at amortized cost (including loans, leases and HTM securities) are presented at the net amount expected to be collected. Rather than the “incurred” model previously utilized, the standard requires the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life. For public companies, ASU 2016-13 became effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law. The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13. Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate would be required to comply with ASU 2016-13, beginning on the date of CARES Act’s enactment and continuing until the earlier of: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020.

On December 27, 2020, ~~former President Trump signed~~ the Consolidated Appropriations Act was established, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022. Based upon guidance from regulators, it was determined the Company could adopt ASU 2016-13 on January 1, 2021, and the Company did adopt on January 1, 2021. The Company has developed a CECL allowance model which calculates allowances over the life of a loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions. Those assumptions are based upon the existing probability of default and loss given the default framework. The Company utilizes economic and other forecasts over a reasonable and supportable forecast period and then fully reverts back to average historical losses.

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

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

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

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


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

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

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

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

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

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

Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are reported at amortized cost, net of the ACL. Amortized cost is the amount of unpaid principal adjusted for charge-offs, any discounts or premiums, and any deferred fees and/or costs on originated loans. Accrued interest receivable totaled ~~$17~~$20 million at ~~June~~September 30, 2021 and was reported in other assets on the consolidated balance sheet. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.

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

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

●

C&I – revolving

●

C&I – other

●

CRE – owner occupied

●

CRE – non-owner occupied

●

Construction and land development

●

Multi-family

●

1-4 family real estate

●

Consumer

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

●

C&I – revolving

●

C&I – other

●

CRE – owner occupied

●

CRE – non-owner occupied

●

Construction and land development

●

Multi-family

●

Direct financing leases

●

1-4 family real estate

●

Consumer

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

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

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

●

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

●

When full repayment of principal and interest is not expected;

●

When the loan is graded “doubtful”;

●

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

●

When foreclosure action is initiated.

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

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

●

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

●

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

●

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

Six months of repayment performance for contractual monthly payments, or

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

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

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

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

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

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

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

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

●

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

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

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

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

The reduction of accrued interest.

●

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

●

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

Allowance:

Allowance for Credit Losses on Loans and Leases

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

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

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

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

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

●

Ability and stability of current management of the borrower;

●

Stable earnings with positive financial trends;

●

Sufficient cash flow to support debt repayment;

●

Earnings projections based on reasonable assumptions;

●

Financial strength of the industry and business; and

●

Value and marketability of collateral.

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

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

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

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

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

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

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

●

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

●

Financial ability to cover cost overruns.

●

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

●

Reliability of the estimate of time to complete the project.

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

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

Quantitative Factors:

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

Qualitative Factors:

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

The Company utilizes the following qualitative factors:

●

National and local economy

●

Loan volume and trend

●

Loan quality

●

Loan policies and procedures

●

Management and staff experience

●

Concentrations

●

Collateral

●

Loan review system

●

Regulatory environment and oversight

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

Economic Forecasting:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Allowance for Credit Losses on Off-Balance Sheet Exposures

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

Allowance for Credit Losses on Held to Maturity Debt Securities

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

Allowance for Credit Losses on Available for Sale Debt Securities

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

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

Risks and Uncertainties:

On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The Company currently expects that the COVID-19 pandemic will continue to have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries will continue to endure ~~significant~~ economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, have impacted and are expected to continue to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. The Company believes that losses have been incurred that are not yet known and anticipates that its asset quality and results of operations could be adversely affected in the future, as described in further detail in this report.

Pending accounting developments:

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

NOTE 2– INVESTMENT SECURITIES

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


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

	(dollars in thousands)								(dollars in thousands)
June 30, 2021:
September 30, 2021:
Securities HTM:
Municipal securities	$	472,283	$	50,129	$	(20)	$	522,392	$	483,127	$	47,122	$	(20)	$	530,229
Other securities		1,050		—		—		1,050		1,050		—		—		1,050
	$	473,333	$	50,129	$	(20)	$	523,442	$	484,177	$	47,122	$	(20)	$	531,279

Securities AFS:
U.S. govt. sponsored agency securities	$	14,310	$	504	$	(144)	$	14,670
U.S. treasuries and govt. sponsored agency securities									$	23,616	$	413	$	(340)	$	23,689
Residential mortgage-backed and related securities		102,625		4,094		(581)		106,138		97,762		3,627		(645)		100,744
Municipal securities		163,607		5,861		(148)		169,320		162,964		4,124		(729)		166,359
Asset-backed securities		30,707		1,072		—		31,779		29,622		985		—		30,607
Other securities		15,139		250		(10)		15,379		23,048		299		(30)		23,317
	$	326,388	$	11,781	$	(883)	$	337,286	$	337,012	$	9,448	$	(1,744)	$	344,716


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

	(dollars in thousands)
December 31, 2020:
Securities HTM:
Municipal securities	$	475,115	$	45,360	$	(248)	$	520,227
Other securities		1,050		—		—		1,050
	$	476,165	$	45,360	$	(248)	$	521,277

Securities AFS:
U.S. govt. sponsored agency securities	$	14,936	$	447	$	(47)	$	15,336
Residential mortgage-backed and related securities		127,670		5,510		(338)		132,842
Municipal securities		147,241		5,215		(48)		152,408
Asset-backed securities		39,663		1,111		(91)		40,683
Other securities		20,550		147		—		20,697
	$	350,060	$	12,430	$	(524)	$	361,966

* HTM securities shown on the balance sheet of ~~$473.2~~$484.0 million represents amortized cost of ~~$473.3~~$484.2 million, net of allowance for credit losses of $174 thousand as of ~~June~~September 30, 2021.

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

The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.

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


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

	(dollars in thousands)												(dollars in thousands)
June 30, 2021:
September 30, 2021:
Securities HTM:
Municipal securities	$	14,440	$	(20)	$	—	$	—	$	14,440	$	(20)	$	14,880	$	(20)	$	—	$	—	$	14,880	$	(20)

Securities AFS:
U.S. govt. sponsored agency securities	$	3,067	$	(144)	$	—	$	—	$	3,067	$	(144)
U.S. treasuries and govt. sponsored agency securities													$	9,809	$	(148)	$	3,001	$	(192)	$	12,810	$	(340)
Residential mortgage-backed and related securities		26,967		(580)		153		(1)		27,120		(581)		18,422		(593)		8,629		(52)		27,051		(645)
Municipal securities		13,608		(148)		—		—		13,608		(148)		50,754		(689)		966		(40)		51,720		(729)
Other securities		4,207		(10)		—		—		4,207		(10)		3,970		(30)		—		—		3,970		(30)
	$	47,849	$	(882)	$	153	$	(1)	$	48,002	$	(883)	$	82,955	$	(1,460)	$	12,596	$	(284)	$	95,551	$	(1,744)


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

	(dollars in thousands)
December 31, 2020:
Securities HTM:
Municipal securities	$	8,407	$	(248)	$	—	$	—	$	8,407	$	(248)

Securities AFS:
U.S. govt. sponsored agency securities	$	3,199	$	(47)	$	—	$	—	$	3,199	$	(47)
Residential mortgage-backed and related securities		37,549		(338)		—		—		37,549		(338)
Municipal securities		10,110		(48)		—		—		10,110		(48)
Asset-backed securities		6,884		(52)		9,945		(39)		16,829		(91)
	$	57,742	$	(485)	$	9,945	$	(39)	$	67,687	$	(524)

At ~~June~~September 30, 2021, the investment portfolio included ~~630~~629 securities. Of this number, 4491 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~0.11%~~0.22% of the total amortized cost of the portfolio. Of these 4491 securities, there were 49 securities that had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At ~~June~~September 30, 2021, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

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


	Three Months Ended June 30, 2021						Six Months Ended June 30, 2021						Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
	Municipal		Other				Municipal		Other				Municipal		Other				Municipal		Other
	securities		securities		Total		securities		securities		Total		securities		securities		Total		securities		securities		Total


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

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

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


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020

		(dollars in thousands)								(dollars in thousands)

Proceeds from sales of securities	$	4,334	$	6,327	$	23,874	$	6,327	$	—	$	22,252	$	23,874	$	28,579
Gross gains from sales of securities		—		134		—		134		—		1,802		—		1,936
Gross losses from sales of securities		(88)		(69)		(88)		(69)		—		—		(88)		(69)

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


	Amortized Cost		Fair Value		Amortized Cost		Fair Value

	(dollars in thousands)				(dollars in thousands)
Securities HTM:
Due in one year or less	$	2,882	$	2,910	$	3,171	$	3,188
Due after one year through five years		29,592		30,281		26,563		27,189
Due after five years		440,859		490,251		454,443		500,902
	$	473,333	$	523,442	$	484,177	$	531,279
Securities AFS:
Due in one year or less	$	1,471	$	1,492	$	1,280	$	1,295
Due after one year through five years		11,927		12,175		12,409		12,694
Due after five years		179,658		185,702		195,939		199,376
		193,056		199,369		209,628		213,365
Residential mortgage-backed and related securities		102,625		106,139		97,762		100,744
Asset-backed securities		30,707		31,778		29,622		30,607
	$	326,388	$	337,286	$	337,012	$	344,716

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


	Amortized Cost		Fair Value		Amortized Cost		Fair Value

	(dollars in thousands)				(dollars in thousands)
Securities HTM:
Municipal securities	$	272,039	$	283,607	$	285,608	$	297,413

Securities AFS:
Municipal securities		158,149		163,595		157,961		161,122
Other securities		15,139		15,379		23,048		23,317
	$	173,288	$	178,974	$	181,009	$	184,439

As of ~~June~~September 30, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by ~~117~~113 issuers with fair values totaling ~~$116.6~~$115.0 million and revenue bonds issued by ~~175~~168 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$575.1~~$581.6 million. The Company also held investments in general obligation bonds in 2120 states, including 8 states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 25 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company also held investments in general obligation bonds in 21 states, including 8 states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 26 states, including 12 states in which the aggregate fair value exceeded $5.0 million.

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

The Company's municipal securities are owned by the 4 charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of ~~June~~September 30, 2021, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of ~~June~~September 30, 2021, 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 by classes of loans/leases as of ~~June~~September 30, 2021 and December 31, 2020 is presented as follows:


	September 30, 2021
	(dollars in thousands)

C&I:
C&I - revolving	$	175,155
C&I - other *		1,465,580
		1,640,735

CRE - owner occupied		434,014
CRE - non-owner occupied		644,850
Construction and land development		852,418
Multi-family		529,727
Direct financing leases**		50,237
1-4 family real estate***		376,067
Consumer		71,682
		4,599,730
Allowance for credit losses		(80,670)
	$	4,519,060
** Direct financing leases:
Net minimum lease payments to be received	$	55,042
Estimated unguaranteed residual values of leased assets		165
Unearned lease/residual income		(4,970)
		50,237
Plus deferred lease origination costs, net of fees		652
		50,889
Less allowance for credit losses		(1,744)
	$	49,145

June 30, 2021

(dollars in thousands)

C&I:

C&I - revolving

$
182,882
C&I - other *

1,505,384

1,688,266


CRE - owner occupied

427,734
CRE - non-owner occupied

618,879
Construction and land development

708,289
Multi-family

466,804
Direct financing leases**

56,153
1-4 family real estate***

382,142
Consumer

69,438

4,417,705
Allowance for credit losses

(78,894)

$
4,338,811
** Direct financing leases:


Net minimum lease payments to be received

$
61,781
Estimated unguaranteed residual values of leased assets

165
Unearned lease/residual income

(5,793)

56,153
Plus deferred lease origination costs, net of fees

783

56,936
Less allowance for credit losses

(1,976)

$
54,960


	December 31, 2020


C&I loans*	$	1,726,723
CRE loans
Owner-occupied CRE		496,471
Commercial construction, land development, and other land		541,455
Other non owner-occupied CRE		1,069,703
		2,107,629

Direct financing leases **		66,016
Residential real estate loans ***		252,121
Installment and other consumer loans		91,302
		4,243,791
Plus deferred loan/lease origination costs, net of fees		7,338
		4,251,129
Less allowance		(84,376)
	$	4,166,753
** Direct financing leases:
Net minimum lease payments to be received	$	72,940
Estimated unguaranteed residual values of leased assets		239
Unearned lease/residual income		(7,163)
		66,016
Plus deferred lease origination costs, net of fees		1,072
		67,088
Less allowance		(1,764)
	$	65,324

* Includes equipment financing agreements outstanding at m2, totaling ~~$202.4~~$212.7 million and $171.5 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively and PPP loans totaling ~~$147.5~~$83.6 million and $273.1 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively.

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

*** Includes residential real estate loans held for sale totaling ~~$4.5~~$3.5 million and $3.8 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively.

Changes in accretable yield for acquired loans were as follows:


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

	(dollars in thousands)

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

Three months ended June 30, 2021

Six months ended June 30, 2021


PCI

Performing


PCI

Performing


Loans

Loans

Total

Loans

Loans

Total

(dollars in thousands)

Balance at the beginning of the period

$
—

$
(2,530)

$
(2,530)

$
—

$
(3,139)

$
(3,139)

Accretion recognized

—

341

341

—

950

950

Balance at the end of the period

$
—

$
(2,189)

$
(2,189)

$
—

$
(2,189)

$
(2,189)


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

	(dollars in thousands)												(dollars in thousands)

Balance at the beginning of the period	$	(59)	$	(5,725)	$	(5,784)	$	(57)	$	(6,378)	$	(6,435)	$	(58)	$	(4,935)	$	(4,993)	$	(57)	$	(6,378)	$	(6,435)
Reclassification of nonaccretable discount to accretable		—		—		—		(30)		—		(30)		—		—		—		(30)		—		(30)
Accretion recognized		1		790		791		29		1,443		1,472		1		941		942		30		2,384		2,414
Balance at the end of the period	$	(58)	$	(4,935)	$	(4,993)	$	(58)	$	(4,935)	$	(4,993)	$	(57)	$	(3,994)	$	(4,051)	$	(57)	$	(3,994)	$	(4,051)

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


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

	(dollars in thousands)																		(dollars in thousands)
C&I:
C&I - revolving	$	182,882		$	—		$	—		$	—		$	—	$		182,882		$	175,155		$	—		$	—		$	—		$	—	$		175,155
C&I - other		1,498,911			1,252			205			57			4,959			1,505,384			1,459,194			874			137			14			5,361			1,465,580
CRE - owner occupied		426,603			865			266			—			—			427,734			433,361			653			—			—			—			434,014
CRE - non-owner occupied		618,483			—			396			—			—			618,879			638,613			—			6,237			—			—			644,850
Construction and land development		708,214			—			—			—			75			708,289			852,343			—			—			—			75			852,418
Multi-family		466,804			—			—			—			—			466,804			529,727			—			—			—			—			529,727
Direct financing leases		55,779			76			137			—			161			56,153			49,215			167			11			—			844			50,237
1-4 family real estate		378,314			228			631			—			2,969			382,142			375,366			96			130			—			475			376,067
Consumer		69,320			52			—			—			66			69,438			71,606			13			—			—			63			71,682
	$	4,405,310		$	2,473		$	1,635		$	57		$	8,230		$	4,417,705		$	4,584,580		$	1,803		$	6,515		$	14		$	6,818		$	4,599,730

As a percentage of total loan/lease portfolio		99.72	%		0.05	%		0.04	%		0.00	%		0.19	%		100.00	%		99.67	%		0.04	%		0.14	%		0.00	%		0.15	%		100.00	%


	As of December 31, 2020
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total

	(dollars in thousands)

C&I	$	1,720,058		$	1,535		$	323		$	—		$	4,807		$	1,726,723
CRE
Owner-occupied CRE		496,459			—			—			—			12			496,471
Commercial construction, land development, and other land		541,455			—			—			—			—			541,455
Other non-owner occupied CRE		1,062,215			—			—			—			7,488			1,069,703
Direct financing leases		64,918			501			191			—			406			66,016
Residential real estate		249,364			1,512			223			—			1,022			252,121
Installment and other consumer		91,047			43			4			3			205			91,302
	$	4,225,516		$	3,591		$	741		$	3		$	13,940		$	4,243,791

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

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


	As of June 30, 2021										As of September 30, 2021
	Accruing Past		Nonaccrual		Nonaccrual						Accruing Past		Nonaccrual		Nonaccrual
	Due 90 Days or		Loans/Leases		Loans/Leases				Percentage of		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		More		with an ACL		without an ACL		Total NPLs		Total NPLs

	(dollars in thousands)										(dollars in thousands)
C&I:
C&I - revolving	$	—	$	—	$	—	$	—	-	%	$	—	$	—	$	—	$	—	-	%
C&I - other		57		4,736		223		5,016	60.52			14		5,024		337		5,375	78.68
CRE - owner occupied		—		—		—		—	-			—		—		—		—	-
CRE - non-owner occupied		—		—		—		—	-			—		—		—		—	-
Construction and land development		—		75		—		75	0.91			—		75		—		75	1.10
Multi-family		—		—		—		—	-			—		—		—		—	-
Direct financing leases		—		110		51		161	1.94			—		112		732		844	12.35
1-4 family real estate		—		2,969		—		2,969	35.83			—		475		—		475	6.95
Consumer		—		66		—		66	0.80			—		63		—		63	0.92
	$	57	$	7,956	$	274	$	8,287	100.00	%	$	14	$	5,749	$	1,069	$	6,832	100.00	%

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


	As of December 31, 2020
	Accruing Past
	Due 90 Days or		Nonaccrual						Percentage of
Classes of Loans/Leases	More		Loans/Leases *		Accruing TDRs		Total NPLs		Total NPLs

		(dollars in thousands)

C&I	$	—	$	4,807	$	606	$	5,413	36.87	%
CRE
Owner-occupied CRE		—		12		—		12	0.08	%
Commercial construction, land development, and other land		—		—		—		—	-	%
Other non-owner occupied CRE		—		7,488		—		7,488	50.99	%
Direct financing leases		—		406		135		541	3.68	%
Residential real estate		—		1,022		—		1,022	6.96	%
Installment and other consumer		3		205		—		208	1.42	%
	$	3	$	13,940	$	741	$	14,684	100.00	%

* Nonaccrual loans/leases included $984 thousand of TDRs, including $836 thousand in CRE loans, $100 thousand in direct financing leases, $48 thousand in installment loans.

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


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

	(dollars in thousands)

Balance, beginning	$	—	$	3,177	$	32,325	$	—	$	8,020	$	8,911	$	13,640	$	6,977	$	—	$	—	$	4,925	$	919	$	78,894
Provision		—		(262)		(276)		—		(62)		25		2,141		923		—		—		(558)		(36)		1,895
Charge-offs		—		—		(283)		—		—		—		—		—		—		—		—		(4)		(287)
Recoveries		—		—		109		—		4		50		—		—		—		—		—		5		168
Balance, ending	$	—	$	2,915	$	31,875	$	—	$	7,962	$	8,986	$	15,781	$	7,900	$	—	$	—	$	4,367	$	884	$	80,670

Three Months Ended June 30, 2021

CRE

CRE

Construction

Direct

Residential

1-4

C&I -

C&I -

Owner

Non-Owner

and Land

Multi-

Financing

Real

Family


C&I

Revolving

Other*

CRE

Occupied

Occupied

Development

Family

Leases

Estate

Real Estate

Consumer

Total

(dollars in thousands)

Balance, beginning

$
—

$
3,547

$
33,167

$
—

$
9,147

$
11,155

$
12,327

$
6,278

$
—

$
—

$
5,165

$
1,045

$
81,831
Provision

—

(370)

(2)

—

(1,121)

(376)

1,313

849

—

—

(105)

(329)

(141)
Charge-offs

—

—

(998)

—

—

(1,876)

—

(150)

—

—

(646)

(4)

(3,674)
Recoveries

—

—

158

—

(6)

8

—

—

—

—

511

207

878
Balance, ending

$
—

$
3,177

$
32,325

$
—

$
8,020

$
8,911

$
13,640

$
6,977

$
—

$
—

$
4,925

$
919

$
78,894


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

	(dollars in thousands)																										(dollars in thousands)

Balance, beginning	$	35,421	$	—	$	—	$	42,161	$	—	$	—	$	—	$	—	$	1,764	$	3,732	$	—	$	1,298	$	84,376	$	35,421	$	—	$	—	$	42,161	$	—	$	—	$	—	$	—	$	1,764	$	3,732	$	—	$	1,298	$	84,376
Adoption of ASU 2016-13		(35,421)		2,982		29,130		(42,161)		8,696		11,428		11,999		5,836		(1,764)		(3,732)		5,042		(137)		(8,102)		(35,421)		2,982		29,130		(42,161)		8,696		11,428		11,999		5,836		(1,764)		(3,732)		5,042		(137)		(8,102)
Provision		—		195		4,547		—		(670)		(662)		1,641		1,291		—		—		56		(546)		5,852		—		(67)		4,271		—		(732)		(637)		3,782		2,214		—		—		(502)		(582)		7,747
Charge-offs		—		—		(1,666)		—		—		(1,876)		—		(150)		—		—		(690)		(5)		(4,387)		—		—		(1,949)		—		—		(1,876)		—		(150)		—		—		(690)		(9)		(4,674)
Recoveries		—		—		314		—		(6)		21		—		—		—		—		517		309		1,155		—		—		423		—		(2)		71		—		—		—		—		517		314		1,323
Balance, ending	$	—	$	3,177	$	32,325	$	—	$	8,020	$	8,911	$	13,640	$	6,977	$	—	$	—	$	4,925	$	919	$	78,894	$	—	$	2,915	$	31,875	$	—	$	7,962	$	8,986	$	15,781	$	7,900	$	—	$	—	$	4,367	$	884	$	80,670

* Included within the C&I – Other column are ACL on leases with a beginning balance of ~~$2.2~~$2.0 million, negative provision of ~~$144~~$212 thousand, charge-offs of ~~$130~~$72 thousand and recoveries of ~~$58~~$52 thousand. ACL on leases was ~~$2.0~~$1.7 million as of ~~June~~September 30, 2021.

** Included within the C&I – Other column are ACL on leases with a beginning balance of $1.8 million, adoption impact of $685 thousand, negative provision of ~~$279~~negative $491 thousand, charge-offs of ~~$328~~$400 thousand and recoveries of ~~$134~~$186 thousand. ACL on leases was ~~$2.0~~$1.7 million as of ~~June~~September 30, 2021.


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

	(dollars in thousands)												(dollars in thousands)

Balance, beginning	$	18,151	$	19,269	$	1,303	$	2,313	$	1,197	$	42,233	$	25,748	$	29,123	$	1,639	$	3,010	$	1,307	$	60,827
Provision		7,859		10,365		887		697		107		19,915		9,008		10,428		608		253		45		20,342
Charge-offs		(340)		(511)		(595)		—		(4)		(1,450)		(1,079)		(362)		(358)		—		(20)		(1,819)
Recoveries		78		—		44		—		7		129		150		64		13		—		5		232
Balance, ending	$	25,748	$	29,123	$	1,639	$	3,010	$	1,307	$	60,827	$	33,827	$	39,253	$	1,902	$	3,263	$	1,337	$	79,582



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

	(dollars in thousands)												(dollars in thousands)

Balance, beginning	$	16,072	$	15,379	$	1,464	$	1,948	$	1,138	$	36,001	$	16,072	$	15,379	$	1,464	$	1,948	$	1,138	$	36,001
Provisions		11,556		14,181		1,281		1,033		231		28,282
Charge-offs		(1,979)		(511)		(1,195)		—		(100)		(3,785)
Recoveries		99		74		89		29		38		329
Provisions charged to expense														20,564		24,609		1,890		1,286		275		48,624
Loans/leases charged off														(3,058)		(873)		(1,554)		—		(119)		(5,604)
Recoveries on loans/leases previously charged off														249		138		102		29		43		561
Balance, ending	$	25,748	$	29,123	$	1,639	$	3,010	$	1,307	$	60,827	$	33,827	$	39,253	$	1,902	$	3,263	$	1,337	$	79,582

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


	As of June 30, 2021												As of September 30, 2021
	Amortized Cost of Loans Receivable						Allowance for Credit Losses						Amortized Cost of Loans Receivable						Allowance for Credit Losses
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for				Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total

	(dollars in thousands)												(dollars in thousands)
C&I :
C&I – Revolving	$	2,725	$	180,157	$	182,882	$	189	$	2,988	$	3,177
C&I - Other*		40,175		1,521,362		1,561,537		3,762		28,563		32,325
C&I - revolving													$	2,650	$	172,505	$	175,155	$	188	$	2,727	$	2,915
C&I - other*														26,124		1,489,693		1,515,817		3,173		28,702		31,875
		42,900		1,701,519		1,744,419		3,951		31,551		35,502		28,774		1,662,198		1,690,972		3,361		31,429		34,790
CRE - owner occupied		5,425		422,309		427,734		283		7,737		8,020		3,883		430,131		434,014		287		7,675		7,962
CRE - non-owner occupied		19,879		599,000		618,879		46		8,865		8,911		19,183		625,667		644,850		—		8,986		8,986
Construction and Land Development		10,553		697,736		708,289		12		13,628		13,640
Construction and land development														10,507		841,911		852,418		12		15,769		15,781
Multi-family		—		466,804		466,804		—		6,977		6,977		—		529,727		529,727		—		7,900		7,900
1-4 family real estate		4,683		377,459		382,142		491		4,434		4,925		1,527		374,540		376,067		203		4,164		4,367
Consumer		271		69,167		69,438		36		883		919		227		71,455		71,682		28		856		884
	$	83,711	$	4,333,994	$	4,417,705	$	4,819	$	74,075	$	78,894	$	64,101	$	4,535,629	$	4,599,730	$	3,891	$	76,779	$	80,670

* Included within the C&I – Other category are leases individually evaluated of ~~$161~~$844 thousand with a related allowance for credit losses of ~~$33~~$34 thousand and leases collectively evaluated of ~~$56.0~~$49.4 million with a related allowance for credit losses of ~~$1.9~~$1.7 million.

Information for impaired loans/leases prior to adoption of ASU 2016-13 on January 1, 2021, is presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.

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

Interest Income

Average

Recognized for

Recorded

Unpaid Principal

Related

Recorded

Interest Income

Cash Payments
Classes of Loans/Leases

Investment

Balance

Allowance

Investment

Recognized

Received

(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:












C&I

$
1,978

$
2,051

$
—

$
1,512

$
25

$
25
CRE






Owner-occupied CRE

320

577

—

128

—

—
Commercial construction, land development, and other land

—

—

—

—

—

—
Other non-owner occupied CRE

965

965

—

742

14

14
Direct financing leases

1,364

1,364

—

1,379

11

11
Residential real estate

624

652

—

474

—

—
Installment and other consumer

562

562

—

525

—

—

$
5,813

$
6,171

$
—

$
4,760

$
50

$
50












Impaired Loans/Leases with Specific Allowance Recorded:












C&I

$
569

$
569

$
341

$
479

$
—

$
—
CRE

Owner-occupied CRE

—

—

—

—

—

—
Commercial construction, land development, and other land

—

—

—

—

—

—
Other non-owner occupied CRE

6,530

6,530

1,692

5,329

—

—
Direct financing leases

55

55

20

59

—

—
Residential real estate

260

260

23

206

—

—
Installment and other consumer

78

78

78

67

—

—

$
7,492

$
7,492

$
2,154

$
6,140

$
—

$
—












Total Impaired Loans/Leases:












C&I

$
2,547

$
2,620

$
341

$
1,991

$
25

$
25
CRE












Owner-occupied CRE

320

577

—

128

—

—
Commercial construction, land development, and other land

—

—

—

—

—

—
Other non-owner occupied CRE

7,495

7,495

1,692

6,071

14

14
Direct financing leases

1,419

1,419

20

1,438

11

11
Residential real estate

884

912

23

680

—

—
Installment and other consumer

640

640

78

592

—

—

$
13,305

$
13,663

$
2,154

$
10,900

$
50

$
50


											Interest Income
							Average				Recognized for
	Recorded		Unpaid Principal		Related		Recorded		Interest Income		Cash Payments
Classes of Loans/Leases	Investment		Balance		Allowance		Investment		Recognized		Received
	(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	2,004	$	2,114	$	—	$	1,418	$	35	$	35
CRE
Owner-occupied CRE		287		528		—		146		—		—
Commercial construction, land development, and other land		—		—		—		—		—		—
Other non-owner occupied CRE		1,336		1,336		—		334		22		22
Direct financing leases		944		944		—		792		16		16
Residential real estate		507		507		—		416		—		—
Installment and other consumer		146		146		—		119		—		—
	$	5,224	$	5,575	$	—	$	3,225	$	73	$	73

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	—	$	—	$	—	$	—	$	—	$	—
CRE
Owner-occupied CRE		—		—		—		—		—		—
Commercial construction, land development, and other land		—		—		—		—		—		—
Other non-owner occupied CRE		13,046		13,046		3,210		7,228		—		—
Direct financing leases		—		—		—		—		—		—
Residential real estate		259		259		21		220		—		—
Installment and other consumer		75		75		75		69		—		—
	$	13,380	$	13,380	$	3,306	$	7,517	$	—	$	—

Total Impaired Loans/Leases:
C&I	$	2,004	$	2,114	$	—	$	1,418	$	35	$	35
CRE
Owner-occupied CRE		287		528		—		146		—		—
Commercial construction, land development, and other land		—		—		—		—		—		—
Other non-owner occupied CRE		14,382		14,382		3,210		7,562		22		22
Direct financing leases		944		944		—		792		16		16
Residential real estate		766		766		21		636		—		—
Installment and other consumer		221		221		75		188		—		—
	$	18,604	$	18,955	$	3,306	$	10,742	$	73	$	73

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


	Three Months Ended June 30, 2020						Three Months Ended September 30, 2020
					Interest Income						Interest Income
	Average				Recognized for		Average				Recognized for
	Recorded		Interest Income		Cash Payments		Recorded		Interest Income		Cash Payments
Classes of Loans/Leases	Investment		Recognized		Received		Investment		Recognized		Received


Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	1,742	$	13	$	13	$	1,825	$	11	$	11
CRE
Owner-Occupied CRE		174		—		—		292		—		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		978		7		7		668		7		7
Direct Financing Leases		1,411		6		6		953		6		6
Residential Real Estate		524		—		—		512		—		—
Installment and Other Consumer		550		—		—		146		—		—
	$	5,379	$	26	$	26	$	4,396	$	24	$	24

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	568	$	—	$	—	$	—	$	—	$	—
CRE
Owner-Occupied CRE		—		—		—		—		—		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		6,560		—		—		9,757		—		—
Direct Financing Leases		57		—		—		—		—		—
Residential Real Estate		220		—		—		260		—		—
Installment and Other Consumer		70		—		—		77		—		—
	$	7,475	$	—	$	—	$	10,094	$	—	$	—

Total Impaired Loans/Leases:
C&I	$	2,310	$	13	$	13	$	1,825	$	11	$	11
CRE
Owner-Occupied CRE		174		—		—		292		—		—
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		7,538		7		7		10,425		7		7
Direct Financing Leases		1,468		6		6		953		6		6
Residential Real Estate		744		—		—		772		—		—
Installment and Other Consumer		620		—		—		223		—		—
	$	12,854	$	26	$	26	$	14,490	$	24	$	24

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2020 are presented as

follows:


	December 31, 2020

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

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	1,361	$	1,441	$	—	$	1,002	$	33	$	33
CRE
Owner-occupied CRE		—		—		—		—		—		—
Commercial construction, land development, and other land		—		—		—		—		—		—
Other non-owner occupied CRE		1,133		1,933		—		494		29		29
Direct financing leases		578		578		—		483		17		17
Residential real estate		719		719		—		476		—		—
Installment and other consumer		133		133		—		121		—		—
	$	3,924	$	4,804	$	—	$	2,576	$	79	$	79

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	4,020	$	4,020	$	650	$	1,555	$	—	$	—
CRE
Owner-occupied CRE		—		—		—		—		—		—
Commercial construction, land development, and other land		—		—		—		—		—		—
Other non-owner occupied CRE		6,354		6,354		1,938		5,726		—		—
Direct financing leases		—		—		—		—		—		—
Residential real estate		258		258		20		227		—		—
Installment and other consumer		72		72		72		70		—		—
	$	10,704	$	10,704	$	2,680	$	7,578	$	—	$	—

Total Impaired Loans/Leases:
C&I	$	5,381	$	5,461	$	650	$	2,557	$	33	$	33
CRE
Owner-occupied CRE		—		—		—		—		—		—
Commercial construction, land development, and other land		—		—		—		—		—		—
Other non-owner occupied CRE		7,487		8,287		1,938		6,220		29		29
Direct financing leases		578		578		—		483		17		17
Residential real estate		977		977		20		703		—		—
Installment and other consumer		205		205		72		191		—		—
	$	14,628	$	15,508	$	2,680	$	10,154	$	79	$	79

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

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, 2021														As of September 30, 2021
			Non														Non
	Commercial		Owner-Occupied		Owner Occupied										Commercial		Owner-Occupied		Owner Occupied
	Assets		Real Estate		Real Estate		Securities		Equipment		Other		Total		Assets		Real Estate		Real Estate		Securities		Equipment		Other		Total

	(dollars in thousands)														(dollars in thousands)
C & I:
C&I - Revolving	$	2,475	$	—	$	—	$	—	$	250	$	—	$	2,725
C&I - Other*		852		—		2,591		6,224		30,508		—		40,175
C&I - revolving															$	2,400	$	—	$	—	$	—	$	250	$	—	$	2,650
C&I - other*																746		—		2,530		145		22,404		299		26,124
		3,327		—		2,591		6,224		30,758		—		42,900		3,146		—		2,530		145		22,654		299		28,774
CRE - owner occupied		—		—		5,425		—		—		—		5,425		—		—		3,883		—		—		—		3,883
CRE - non-owner occupied		—		19,879		—		—		—		—		19,879		—		19,183		—		—		—		—		19,183
Construction and Land Development		—		10,478		75		—		—		—		10,553
Construction and land development																—		10,431		76		—		—		—		10,507
Multi-family		—		—		—		—		—		—		—		—		—		—		—		—		—		—
1-4 Family Real Estate		—		2,532		2,151		—		—		—		4,683
1-4 family real estate																—		—		1,527		—		—		—		1,527
Consumer		—		—		248		—		—		23		271		—		—		207		—		—		20		227
	$	3,327	$	32,889	$	10,490	$	6,224	$	30,758	$	23	$	83,711	$	3,146	$	29,614	$	8,223	$	145	$	22,654	$	319	$	64,101

* Included within the C&I – Other category are leases individually evaluated of ~~$161~~$844 thousand with primary collateral of equipment.

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

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

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


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

	(dollars in thousands)																(dollars in thousands)
C&I - revolving
Pass (Ratings 1 through 5)	$	—	$	—	$	—	$	—	$	—	$	—	$	177,045	$	177,045	$	—	$	—	$	—	$	—	$	—	$	—	$	171,646	$	171,646
Special Mention (Rating 6)		—		—		—		—		—		—		3,112		3,112		—		—		—		—		—		—		859		859
Substandard (Rating 7)		—		—		—		—		—		—		2,725		2,725		—		—		—		—		—		—		2,650		2,650
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	182,882	$	182,882	$	—	$	—	$	—	$	—	$	—	$	—	$	175,155	$	175,155

C&I - other
Pass (Ratings 1 through 5)	$	316,725	$	437,339	$	208,611	$	125,116	$	117,406	$	56,478	$	—	$	1,261,675	$	389,930	$	414,997	$	158,888	$	109,194	$	91,950	$	58,973	$	—	$	1,223,932
Special Mention (Rating 6)		146		693		—		69		495		1,259		—		2,662		3,572		381		—		67		381		1,263		—		5,664
Substandard (Rating 7)		8,481		6,952		16,690		366		60		6,131		—		38,680		411		6,439		15,945		355		59		50		—		23,259
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total C&I - other	$	325,352	$	444,984	$	225,301	$	125,551	$	117,961	$	63,868	$	—	$	1,303,017	$	393,913	$	421,817	$	174,833	$	109,616	$	92,390	$	60,286	$	—	$	1,252,855

CRE - owner occupied
Pass (Ratings 1 through 5)	$	65,781	$	159,219	$	63,344	$	32,677	$	23,452	$	64,232	$	10,344	$	419,049	$	99,294	$	154,383	$	57,484	$	30,136	$	19,636	$	52,166	$	12,616	$	425,715
Special Mention (Rating 6)		901		—		178		244		672		1,266		—		3,261		889		—		177		237		1,875		1,234		—		4,412
Substandard (Rating 7)		214		—		1,921		1,261		2,028		—		—		5,424		197		—		1,913		1,250		527		—		—		3,887
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	66,896	$	159,219	$	65,443	$	34,182	$	26,152	$	65,498	$	10,344	$	427,734	$	100,380	$	154,383	$	59,574	$	31,623	$	22,038	$	53,400	$	12,616	$	434,014

CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	81,897	$	177,081	$	91,579	$	76,121	$	72,401	$	51,555	$	6,570	$	557,204	$	142,226	$	168,609	$	90,613	$	67,934	$	62,429	$	38,946	$	8,336	$	579,093
Special Mention (Rating 6)		5,019		8,617		1,846		15,288		4,201		5,673		1,151		41,795		6,807		15,462		2,226		12,299		4,144		5,627		19		46,584
Substandard (Rating 7)		419		—		17,000		499		957		—		1,005		19,880		386		628		15,605		1,126		950		—		478		19,173
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	87,335	$	185,698	$	110,425	$	91,908	$	77,559	$	57,228	$	8,726	$	618,879	$	149,419	$	184,699	$	108,444	$	81,359	$	67,523	$	44,573	$	8,833	$	644,850

Construction and land development
Pass (Ratings 1 through 5)	$	144,416	$	231,399	$	171,796	$	117,381	$	7,770	$	2,613	$	8,634	$	684,009	$	304,504	$	244,267	$	155,738	$	110,633	$	4,904	$	182	$	6,860	$	827,088
Special Mention (Rating 6)		—		—		—		593		—		—		—		593		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		10,478		—		—		—		—		10,478		—		—		10,433		—		—		—		—		10,433
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total Construction and land development	$	144,416	$	231,399	$	182,274	$	117,974	$	7,770	$	2,613	$	8,634	$	695,080	$	304,504	$	244,267	$	166,171	$	110,633	$	4,904	$	182	$	6,860	$	837,521

Multi-family
Pass (Ratings 1 through 5)	$	125,743	$	206,255	$	66,161	$	47,105	$	7,420	$	11,359	$	2,761	$	466,804	$	191,982	$	203,030	$	69,276	$	48,093	$	5,719	$	8,638	$	2,989	$	529,727
Special Mention (Rating 6)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total Multi-family	$	125,743	$	206,255	$	66,161	$	47,105	$	7,420	$	11,359	$	2,761	$	466,804	$	191,982	$	203,030	$	69,276	$	48,093	$	5,719	$	8,638	$	2,989	$	529,727

1-4 family real estate
Pass (Ratings 1 through 5)	$	27,769	$	33,721	$	19,874	$	12,928	$	7,333	$	8,990	$	6,122	$	116,737	$	34,087	$	30,604	$	18,906	$	8,462	$	6,001	$	6,744	$	6,267	$	111,071
Special Mention (Rating 6)		38		—		—		—		152		—		—		190		37		179		—		545		354		—		—		1,115
Substandard (Rating 7)		2,532		—		—		—		—		—		—		2,532		—		—		—		—		—		—		—		—
Doubtful (Rating 8)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	30,339	$	33,721	$	19,874	$	12,928	$	7,485	$	8,990	$	6,122	$	119,459	$	34,124	$	30,783	$	18,906	$	9,007	$	6,355	$	6,744	$	6,267	$	112,186

Total	$	780,081	$	1,261,276	$	669,478	$	429,648	$	244,347	$	209,556	$	219,469	$	3,813,855	$	1,174,322	$	1,238,979	$	597,204	$	390,331	$	198,929	$	173,823	$	212,720	$	3,986,308

As of June 30, 2021

Term Loans

Amortized Cost Basis by Origination Year

Revolving

Loans

Amortized

Delinquency Status *

2021

2020

2019

2018

2017

Prior

Cost Basis

Total

(dollars in thousands)
C&I - other

Performing

$
63,299

$
65,043

$
43,563

$
21,207

$
7,542

$
751

$
—

$
201,405
Nonperforming

69

290

423

72

85

23

—

962
Total C&I - other

$
63,368

$
65,333

$
43,986

$
21,279

$
7,627

$
774

$
—

$
202,367

Direct financing leases

Performing

$
4,358

$
15,240

$
15,002

$
12,725

$
6,349

$
2,318

$
—

$
55,992
Nonperforming

—

—

—

57

31

73

—

161
Total Direct financing leases

$
4,358

$
15,240

$
15,002

$
12,782

$
6,380

$
2,391

$
—

$
56,153

Construction and land development

Performing

$
3,111

$
9,299

$
213

$
511

$
—

$
—

$
—

$
13,134
Nonperforming

—

—

—

—

75

—

—

75
Total Construction and land development

$
3,111

$
9,299

$
213

$
511

$
75

$
—

$
—

$
13,209

1-4 family real estate

Performing

$
67,843

$
86,487

$
24,356

$
13,340

$
13,954

$
56,239

$
28

$
262,247
Nonperforming

—

—

72

—

—

364

—

436
Total 1-4 family real estate

$
67,843

$
86,487

$
24,428

$
13,340

$
13,954

$
56,603

$
28

$
262,683

Consumer

Performing

$
3,418

$
6,882

$
2,788

$
2,321

$
848

$
3,034

$
50,081

$
69,372
Nonperforming

47

—

—

—

17

1

1

66
Total Consumer

$
3,465

$
6,882

$
2,788

$
2,321

$
865

$
3,035

$
50,082

$
69,438

Total

$
142,145

$
183,241

$
86,417

$
50,233

$
28,901

$
62,803

$
50,110

$
603,850


	As of September 30, 2021
	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
Delinquency Status *	2021		2020		2019		2018		2017			Prior	Cost Basis		Total

	(dollars in thousands)
C&I - other
Performing	$	90,454	$	59,480	$	38,136	$	17,435	$	5,160	$	515	$	—	$	211,180
Nonperforming		90		236		722		435		47		15		—		1,545
Total C&I - other	$	90,544	$	59,716	$	38,858	$	17,870	$	5,207	$	530	$	—	$	212,725

Direct financing leases
Performing	$	5,448	$	13,473	$	13,211	$	10,874	$	5,026	$	1,361	$	—	$	49,393
Nonperforming		—		732		—		41		23		48		—		844
Total Direct financing leases	$	5,448	$	14,205	$	13,211	$	10,915	$	5,049	$	1,409	$	—	$	50,237

Construction and land development
Performing	$	7,131	$	6,697	$	212	$	502	$	—	$	—	$	280	$	14,822
Nonperforming		—		—		—		—		75		—		—		75
Total Construction and land development	$	7,131	$	6,697	$	212	$	502	$	75	$	—	$	280	$	14,897

1-4 family real estate
Performing	$	85,172	$	82,206	$	20,469	$	12,210	$	12,232	$	51,088	$	28	$	263,405
Nonperforming		—		—		72		—		—		404		—		476
Total 1-4 family real estate	$	85,172	$	82,206	$	20,541	$	12,210	$	12,232	$	51,492	$	28	$	263,881

Consumer
Performing	$	4,218	$	6,190	$	2,517	$	2,132	$	674	$	2,391	$	53,497	$	71,619
Nonperforming		45		—		—		—		16		2		—		63
Total Consumer	$	4,263	$	6,190	$	2,517	$	2,132	$	690	$	2,393	$	53,497	$	71,682

Total	$	192,558	$	169,014	$	75,339	$	43,629	$	23,253	$	55,824	$	53,805	$	613,422

* 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.

For each class of financing receivable, the following table presents the recorded investment by credit quality indicator as of December 31, 2020:



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

	(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,506,578	$	488,478	$	530,297	$	999,931	$	3,525,284	96.25	%
Special Mention (Rating 6)		23,929		3,087		680		43,785		71,481	1.95	%
Substandard (Rating 7)		24,710		4,906		10,478		25,987		66,081	1.80	%
Doubtful (Rating 8)		—		—		—		—		—	—	%
	$	1,555,217	$	496,471	$	541,455	$	1,069,703	$	3,662,846	100.00	%


	As of December 31, 2020
			Direct Financing		Residential Real		Installment and				As a % of
Delinquency Status *	C&I		Leases		Estate		Other Consumer		Total		Total

	(dollars in thousands)

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

* Prior to Adoption of ASU 2016-13: Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing TDRs.

As of ~~June~~September 30, 2021 and December 31, 2020, TDRs totaled ~~$3.1 million~~$591 thousand and $1.7 million, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the ~~three and six~~nine months ended ~~June~~September 30, 2021 and ~~June~~during the three and nine months ended September 30, 2020. There were 0 loans restructured during the three months ended September 30, 2021. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.


	For the three months ended June 30, 2021							For the six months ended June 30, 2021							For the three months ended September 30, 2021							For the nine months ended September 30, 2021
		Pre-		Post-					Pre-		Post-					Pre-		Post-					Pre-		Post-
	Number of	Modification		Modification				Number of	Modification		Modification				Number of	Modification		Modification				Number of	Modification		Modification
	Loans/	Recorded		Recorded		Specific		Loans/	Recorded		Recorded		Specific		Loans/	Recorded		Recorded		Specific		Loans/	Recorded		Recorded		Specific
Classes of Loans/Leases	Leases	Investment		Investment		Allowance		Leases	Investment		Investment		Allowance		Leases	Investment		Investment		Allowance		Leases	Investment		Investment		Allowance

	(dollars in thousands)														(dollars in thousands)
CONCESSION - Extension of Maturity
Consumer	1	$	2,532	$	2,532	$	182	1	$	2,532	$	2,532	$	182
1-4 family real estate															—	$	—	$	—	$	—	1	$	2,532	$	2,532	$	—

CONCESSION - Interest Rate Adjusted Below Market
1-4 Family	1	$	54	$	54	$	6	1	$	54	$	54	$	6
1-4 family real estate															—	$	—	$	—	$	—	1	$	54	$	54	$	6
Consumer	1		13		13		1	1		13		13		1	—		—		—		—	1		13		13		6
	2	$	67	$	67	$	7	2	$	67	$	67	$	7	—	$	—	$	—	$	—	2	$	67	$	67	$	12

TOTAL	3	$	2,599	$	2,599	$	189	3	$	2,599	$	2,599	$	189	—	$	—	$	—	$	—	3	$	2,599	$	2,599	$	12

For the three months ended June 30, 2020

For the six months ended June 30, 2020




Pre-

Post-





Pre-

Post-


Number of

Modification

Modification

Number of

Modification

Modification

Loans/

Recorded

Recorded

Specific

Loans/

Recorded

Recorded

Specific

Classes of Loans/Leases

Leases

Investment

Investment

Allowance

Leases

Investment

Investment

Allowance

(dollars in thousands)

CONCESSION - Significant Payment Delay

















C&I

—

$
—

$
—

$
—

2

$
111

$
111

$
—

Direct Financing Leases

2

78

78

—

3

145

145

—

2

$
78

$
78

$
—

5

$
256

$
256

$
—

TOTAL

2

$
78

$
78

$
—

5

$
256

$
256

$
—

��


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

	(dollars in thousands)
CONCESSION - Significant Payment Delay
C&I	3	$	197	$	197	$	—	5	$	308	$	308	$	—
Direct financing leases	—		—		—		—	3		145		145		—
	3	$	197	$	197	$	—	8	$	453	$	453	$	—

TOTAL	3	$	197	$	197	$	—	8	$	453	$	453	$	—

Of the loans restructured during the ~~three and six~~nine months ended ~~June~~September 30, 2021, 21 with a post-modification recorded investment totaling ~~$2.6 million were~~$54 thousand was on nonaccrual and of the loans restructured during the three and ~~six~~nine months ended ~~June~~September 30, 2020, ~~NaN~~none were on nonaccrual.

For the three and ~~six~~nine months ended ~~June~~September 30, 2021, NaN of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

For the three months ended ~~June~~September 30, 2020, 21 of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. ~~These TDRs were related to 1 equipment financing agreement customer whose loans were~~This TDR was a lease restructured in the fourth quarter of 2019 with a pre-modification ~~balances~~balance totaling ~~$93~~$32 thousand. For the ~~six~~nine months ended ~~June~~September 30, 2020, 3 of the Company’s TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These TDRs included the 2TDR that defaulted in the three months ended ~~June~~September 30, 2020 as well as a lease that was restructured in the fourth quarter of 2019 with pre-modification ~~balances~~balance totaling $55 thousand and a commercial loan that was restructured in the fourth quarter of 2019 with a pre-modification balance of $48 thousand.

Not included in the table above are 710 TDRs that were restructured and charged off for the ~~six~~nine months ended ~~June~~September 30, 2020, totaling ~~$354~~$482 thousand.

extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to

COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators clarified that this guidance may continue to be applied in 2021.

In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be (1) related to COVID-19, (2) executed on a loan that was not more than 30 days past due as of December 31, 2019 and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the termination of the National Emergency or (B) December 31, 2020. If a modification does not meet the criteria of the CARES Act, a deferral can still be excluded from TDR treatment as long as the modifications meet the banking regulatory criteria discussed in the preceding paragraph.

The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of ~~June~~September 30, 2021, there were 0 bank modifications and 298 m2 modifications of loans and leases totaling ~~$4.7~~$2.9 million, representing ~~0.11%~~0.06% of the total loan and lease portfolio, that were on deferral as of such date.

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

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


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020

	(dollars in thousands)								(dollars in thousands)

Balance, beginning	$	9,846	$	—	$	—	$	—	$	9,987	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		9,117		—		—		—		9,117		—
Provisions charged to expense		141		—		870		—
Provisions credited to expense										(1,895)		—		(1,025)		—
Balance, ending	$	9,987	$	—	$	9,987	$	—	$	8,092	$	—	$	8,092	$	—

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

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


	June 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020

	(dollars in thousands)				(dollars in thousands)
Assets:
Interest rate caps - hedged	$	613	$	259	$	517	$	259
Interest rate caps		158		67		141		67
Interest rate swaps - hedged		1,490		—		807		—
Interest rate swaps		191,134		222,431		196,928		222,431
	$	193,395	$	222,757	$	198,393	$	222,757

Liabilities:
Interest rate swaps - hedged	$	(4,958)	$	(6,839)	$	(4,522)	$	(6,839)
Interest rate swaps		(191,134)		(222,431)		(196,928)		(222,431)
	$	(196,092)	$	(229,270)	$	(201,450)	$	(229,270)

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

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


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

Deposits		1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.75	%	$	3	$	3		1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.75	%	$	1	$	3
Deposits		1/1/2020	1/1/2023	Derivatives - Assets		50,000	1.57			8		5		1/1/2020	1/1/2023	Derivatives - Assets		50,000	1.57			2		5
Deposits		1/1/2020	1/1/2023	Derivatives - Assets		25,000	1.80			3		3		1/1/2020	1/1/2023	Derivatives - Assets		25,000	1.80			1		3
Deposits		1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.75			35		15		1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.75			26		15
Deposits		1/1/2020	1/1/2024	Derivatives - Assets		50,000	1.57			73		31		1/1/2020	1/1/2024	Derivatives - Assets		50,000	1.57			53		31
Deposits		1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.80			37		15		1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.80			26		15
Deposits		1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.75			110		46		1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.75			101		46
Deposits		1/1/2020	1/1/2025	Derivatives - Assets		50,000	1.57			229		94		1/1/2020	1/1/2025	Derivatives - Assets		50,000	1.57			205		94
Deposits		1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.80			115		47		1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.80			102		47
					$	300,000			$	613	$	259					$	300,000			$	517	$	259

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


		Balance Sheet					Fair Value as of						Balance Sheet					Fair Value as of
Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		June 30, 2021		December 31, 2020		Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		September 30, 2021		December 31, 2020

(dollars in thousands)											(dollars in thousands)

1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.90	%	$	3	$	2	1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.90	%	$	1	$	2
2/1/2020	2/1/2024	Derivatives - Assets		25,000	1.90			35		15	2/1/2020	2/1/2024	Derivatives - Assets		25,000	1.90			26		15
3/1/2020	3/1/2025	Derivatives - Assets		25,000	1.90			120		50	3/1/2020	3/1/2025	Derivatives - Assets		25,000	1.90			114		50
			$	75,000			$	158	$	67				$	75,000			$	141	$	67

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


				Balance Sheet							Fair Value as of							Balance Sheet							Fair Value as of
Hedged Item		Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		June 30, 2021		December 31, 2020			Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2021		December 31, 2020
(dollars in thousands)	(dollars in thousands)														(dollars in thousands)
QCBT - Loans		7/1/2021	7/1/2031	Derivatives - Assets		35,000	1.40	%	2.81	%		351		N/A		7/1/2021	7/1/2031	Derivatives - Assets		35,000	1.40	%	2.81	%		192		N/A
CRBT - Loans		7/1/2021	7/1/2031	Derivatives - Assets		50,000	1.40	%	2.81	%		502		N/A		7/1/2021	7/1/2031	Derivatives - Assets		50,000	1.40	%	2.81	%		274		N/A
CSB - Loans		7/1/2021	7/1/2031	Derivatives - Assets		40,000	1.40	%	2.81	%		386		N/A		7/1/2021	7/1/2031	Derivatives - Assets		40,000	1.40	%	2.81	%		204		N/A
SFCB - Loans		7/1/2021	7/1/2031	Derivatives - Assets		25,000	1.40	%	2.81	%		251		N/A		7/1/2021	7/1/2031	Derivatives - Assets		25,000	1.40	%	2.81	%		137		N/A
					$	150,000					$	1,490	$	N/A					$	150,000					$	807	$	N/A

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


				Balance Sheet							Fair Value as of							Balance Sheet							Fair Value as of
Hedged Item		Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		June 30, 2021		December 31, 2020			Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2021		December 31, 2020
(dollars in thousands)	(dollars in thousands)														(dollars in thousands)
QCR Holdings Statutory Trust II		9/30/2018	9/30/2028	Derivatives - Liabilities		10,000	3.00	%	5.85	%		(1,282)		(1,767)		9/30/2018	9/30/2028	Derivatives - Liabilities		10,000	2.98	%	5.85	%		(1,169)		(1,767)
QCR Holdings Statutory Trust III		9/30/2018	9/30/2028	Derivatives - Liabilities		8,000	3.00	%	5.85	%		(1,025)		(1,414)		9/30/2018	9/30/2028	Derivatives - Liabilities		8,000	2.98	%	5.85	%		(936)		(1,414)
QCR Holdings Statutory Trust V		7/7/2018	7/7/2028	Derivatives - Liabilities		10,000	1.74	%	4.54	%		(1,246)		(1,721)		7/7/2018	7/7/2028	Derivatives - Liabilities		10,000	1.68	%	4.54	%		(1,135)		(1,721)
Community National Statutory Trust II		9/20/2018	9/20/2028	Derivatives - Liabilities		3,000	2.30	%	5.17	%		(383)		(529)		9/20/2018	9/20/2028	Derivatives - Liabilities		3,000	2.29	%	5.17	%		(350)		(529)
Community National Statutory Trust III		9/15//2018	9/15/2028	Derivatives - Liabilities		3,500	1.87	%	4.75	%		(447)		(616)		9/15//2018	9/15/2028	Derivatives - Liabilities		3,500	1.87	%	4.75	%		(408)		(616)
Guaranty Bankshares Statutory Trust I		9/15/2018	9/15/2028	Derivatives - Liabilities		4,500	1.87	%	4.75	%		(575)		(792)		9/15/2018	9/15/2028	Derivatives - Liabilities		4,500	1.87	%	4.75	%		(524)		(792)
					$	39,000					$	(4,958)	$	(6,839)					$	39,000					$	(4,522)	$	(6,839)

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

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


		June 30, 2021			December 31, 2020					September 30, 2021			December 31, 2020
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value

	(dollars in thousands)								(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	3,149,265	$	191,134	$	1,539,602	$	222,431	$	3,609,566	$	196,928	$	1,539,602	$	222,431
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	3,149,265	$	191,134	$	1,539,602	$	222,431	$	3,609,566	$	196,928	$	1,539,602	$	222,431

~~Swap fee~~The effect of cash flow hedging and fair value accounting on the consolidated statements of income ~~totaled $9.6 million and $19.9 million~~ for the three months ended ~~June~~September 30, 2021 and September 30, 2020 ~~respectively. Swap fee~~are as follows:


	Three Months Ended September 30, 2021				Three Months Ended September 30, 2020
	Interest and		Interest		Interest and		Interest
	Dividend Income		Expense		Dividend Income		Expense

	(dollars in thousands)
Income and expense line items presented in the consolidated statements of income	$	51,667	$	5,438	$	50,890	$	6,309

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		-		-		-		79
Interest rate swap on variable rate loans		502		-		-		-
Interest rate cap on deposits		-		181		-		128

The effect of cash flow hedging and fair value accounting on the consolidated statements of income ~~totaled $23.1 million and $26.7 million~~ for the ~~six~~nine months ended ~~June~~September 30, 2021 and September 30, 2020 ~~respectively.~~are as follows:


	Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
	Interest and		Interest		Interest and		Interest
	Dividend Income		Expense		Dividend Income		Expense

	(dollars in thousands)
Income and expense line items presented in the consolidated statements of income	$	148,135	$	16,415	$	148,522	$	25,279

The effects of cash flow hedging:

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

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, 2021		December 31, 2020		September 30, 2021		December 31, 2020

	(dollars in thousands)				(dollars in thousands)

Cash	$	22,660	$	45,719	$	13,220	$	45,719
U.S govt. sponsored agency securities		3,612		3,628
U.S treasuries and govt. sponsored agency securities						3,579		3,628
Municipal securities		85,895		85,937		69,397		85,937
Residential mortgage-backed and related securities		78,733		89,646		122,606		89,646
	$	190,900	$	224,930	$	208,802	$	224,930

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

NOTE 5 – INCOME TAXES

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


	For the Three Months Ended June 30,								For the Six Months Ended June 30,								For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021				2020				2021				2020				2021				2020				2021				2020
			% of				% of				% of				% of				% of				% of				% of				% of
			Pretax				Pretax				Pretax				Pretax				Pretax				Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income

	(dollars in thousands)																(dollars in thousands)

Computed "expected" tax expense	$	5,699	21.0	%	$	3,472	21.0	%	$	10,219	21.0	%	$	6,226	21.0	%	$	8,293	21.0	%	$	4,486	21.0	%	$	18,512	21.0	%	$	10,712	21.0	%
Tax exempt income, net		(1,802)	(6.6)			(1,247)	(7.5)			(3,521)	(7.2)			(2,472)	(8.3)			(2,032)	(5.1)			(1,350)	(6.3)			(5,553)	(6.3)			(3,822)	(7.5)
Bank-owned life insurance		(95)	(0.4)			(115)	(0.7)			(194)	(0.4)			(170)	(0.6)			(93)	(0.2)			(101)	(0.5)			(287)	(0.3)			(271)	(0.5)
State income taxes, net of federal benefit, current year		1,247	4.6			776	4.7			2,271	4.7			1,453	4.9			1,799	4.6			1,003	4.7			4,070	4.6			2,456	4.8
Tax credits		(57)	(0.2)			(116)	(0.7)			(114)	(0.2)			(232)	(0.8)			(57)	(0.1)			(116)	(0.5)			(171)	(0.2)			(348)	(0.7)
Excess tax benefit on stock options exercised and restricted stock awards vested		(40)	(0.1)			2	—			(204)	(0.4)			(262)	(0.9)			(107)	(0.3)			14	0.1			(311)	(0.4)			(248)	(0.5)
Other		(164)	(0.6)			26	0.1			(128)	(0.3)			139	0.5			126	0.2			80	0.4			(2)	—			219	0.5
Federal and state income tax expense	$	4,788	17.6	%	$	2,798	16.9	%	$	8,329	17.2	%	$	4,682	15.8	%	$	7,929	20.1	%	$	4,016	18.9	%	$	16,258	18.4	%	$	8,698	17.1	%

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					Three months ended			Nine months ended
		June 30,			June 30,					September 30,			September 30,
		2021		2020		2021		2020		2021		2020		2021		2020

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

Net income	$	22,349	$	13,739	$	40,331	$	24,967	$	31,565	$	17,344	$	71,896	$	42,311


Basic EPS	$	1.41	$	0.87	$	2.55	$	1.58	$	2.02	$	1.10	$	4.54	$	2.68
Diluted EPS	$	1.39	$	0.86	$	2.52	$	1.56	$	1.99	$	1.09	$	4.48	$	2.65

Weighted average common shares outstanding		15,813,932		15,747,056		15,808,788		15,771,926		15,635,123		15,767,152		15,829,124		15,770,335
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan		231,307		148,280		226,606		185,032		234,675		156,426		229,296		175,497
Weighted average common and common equivalent shares outstanding		16,045,239		15,895,336		16,035,394		15,956,958		15,869,798		15,923,578		16,058,420		15,945,832

3940

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~~September 30, 2021 and December 31, 2020:


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

	(dollars in thousands)								(dollars in thousands)
June 30, 2021:
September 30, 2021:
Securities AFS:
U.S. govt. sponsored agency securities	$	14,670	$	—	$	14,670	$	—
U.S. treasuries and govt. sponsored agency securities									$	23,689	$	—	$	23,689	$	—
Residential mortgage-backed and related securities		106,138		—		106,138		—		100,744		—		100,744		—
Municipal securities		169,320		—		169,320		—		166,359		—		166,359		—
Asset-backed securities		31,779		—		31,779		—		30,607		—		30,607		—
Other securities		15,379		—		15,379		—		23,317		—		23,317		—
Derivatives		193,395		—		193,395		—		198,393		—		198,393		—
Total assets measured at fair value	$	530,681	$	—	$	530,681	$	—	$	543,109	$	—	$	543,109	$	—

Derivatives	$	196,092	$	—	$	196,092	$	—	$	201,450	$	—	$	201,450	$	—
Total liabilities measured at fair value	$	196,092	$	—	$	196,092	$	—	$	201,450	$	—	$	201,450	$	—


December 31, 2020:
Securities AFS:
U.S. govt. sponsored agency securities	$	15,336	$	—	$	15,336	$	—	$	15,336	$	—	$	15,336	$	—
Residential mortgage-backed and related securities		132,842		—		132,842		—		132,842		—		132,842		—
Municipal securities		152,408		—		152,408		—		152,408		—		152,408		—
Asset-backed securities		40,683		—		40,683		—		40,683		—		40,683		—
Other securities		20,697		—		20,697		—		20,697		—		20,697		—
Derivatives		222,757		—		222,757		—		222,757		—		222,757		—
Total assets measured at fair value	$	584,723	$	—	$	584,723	$	—	$	584,723	$	—	$	584,723	$	—

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

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

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

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

4041

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

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

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

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


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

	(dollars in thousands)								(dollars in thousands)

June 30, 2021:
September 30, 2021:
Loans/leases evaluated individually	$	85,276	$	—	$	—	$	85,276	$	65,027	$	—	$	—	$	65,027
OREO		1,966		—		—		1,966		—		—		—		—
	$	87,242	$	—	$	—	$	87,242	$	65,027	$	—	$	—	$	65,027

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

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

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

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

4142

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											Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value									Fair Value		Fair Value
	June 30,		December 31,									September 30,		December 31,
	2021		2020		Valuation Technique	Unobservable Input	Range					2021		2020		Valuation Technique	Unobservable Input	Range

	(dollars in thousands)											(dollars in thousands)

Loans/leases evaluated individually	$	85,276	$	9,926	Appraisal of collateral	Appraisal adjustments	-10.00	%	to	-30.00	%	$	65,027	$	9,926	Appraisal of collateral	Appraisal adjustments	-10.00	%	to	-30.00	%
OREO		1,966		22	Appraisal of collateral	Appraisal adjustments	0.00	%	to	-35.00	%		—		22	Appraisal of collateral	Appraisal adjustments	0.00	%	to	-35.00	%

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

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

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

		(dollars in thousands)									(dollars in thousands)

Cash and due from banks	Level 1	$	55,598	$	55,598	$	61,329	$	61,329	Level 1	$	57,310	$	57,310	$	61,329	$	61,329
Federal funds sold	Level 2		1,340		1,340		9,080		9,080	Level 2		6,985		6,985		9,080		9,080
Interest-bearing deposits at financial institutions	Level 2		87,440		87,440		86,596		86,596	Level 2		63,841		63,841		86,596		86,596
Investment securities:
HTM	Level 2		473,159		523,442		476,165		521,277	Level 2		484,003		531,279		476,165		521,277
AFS	Level 2		337,286		337,286		361,966		361,966	Level 2		344,716		344,716		361,966		361,966
Loans/leases receivable, net	Level 3		78,959		85,276		9,191		9,926	Level 3		60,210		65,027		9,191		9,926
Loans/leases receivable, net	Level 2		4,259,852		4,174,761		4,157,562		4,112,735	Level 2		4,458,850		4,361,433		4,157,562		4,112,735
Derivatives	Level 2		193,395		193,395		222,757		222,757	Level 2		198,393		198,393		222,757		222,757

Deposits:
Nonmaturity deposits	Level 2		4,232,439		4,232,439		4,138,478		4,138,478	Level 2		4,426,844		4,426,844		4,138,478		4,138,478
Time deposits	Level 2		456,496		453,483		460,659		465,681	Level 2		444,984		440,549		460,659		465,681
Short-term borrowings	Level 2		7,070		7,070		5,430		5,430	Level 2		1,600		1,600		5,430		5,430
FHLB advances	Level 2		40,000		39,996		15,000		14,998	Level 2		30,000		30,000		15,000		14,998
Subordinated notes	Level 2		113,771		116,441		118,691		112,406	Level 2		113,811		116,321		118,691		112,406
Junior subordinated debentures	Level 2		38,067		30,799		37,993		30,618	Level 2		38,103		30,912		37,993		30,618
Derivatives	Level 2		196,092		196,092		229,270		229,270	Level 2		201,450		201,450		229,270		229,270

NOTE 8 – BUSINESS SEGMENT INFORMATION

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

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

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

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


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

	(dollars in thousands)														(dollars in thousands)
Three Months Ended June 30, 2021
Three Months Ended September 30, 2021
Total revenue	$	21,676	$	26,498	$	10,809	$	9,181	$	137	$	(102)	$	68,199	$	22,630	$	41,415	$	11,445	$	10,886	$	36,749	$	(36,806)	$	86,319
Net interest income		16,152		14,005		8,672		6,479		(2,119)		327		43,516		16,862		14,784		9,303		7,058		(2,121)		343		46,229
Provision for credit losses		136		(692)		756		(200)		—		—		—		247		(733)		596		(110)		—		—		—
Net income (loss) from continuing operations		8,679		11,145		3,109		3,685		22,320		(26,589)		22,349		8,704		19,730		3,243		4,590		31,740		(36,442)		31,565
Goodwill		3,223		14,980		9,888		45,975		—		—		74,066		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		1,946		2,979		5,440		—		—		10,365		—		1,824		2,816		5,217		—		—		9,857
Total assets		2,059,634		1,913,761		1,079,930		850,067		81,076		(179,303)		5,805,165		2,106,631		2,019,018		1,140,933		880,143		828,808		(961,025)		6,014,508

Three Months Ended June 30, 2020
Three Months Ended September 30, 2020
Total revenue	$	21,712	$	35,505	$	9,853	$	9,533	$	18,461	$	(17,788)	$	77,276	$	22,971	$	44,164	$	11,159	$	10,266	$	22,128	$	(21,839)	$	88,849
Net interest income		15,653		12,820		7,538		6,201		(1,509)		245		40,948		16,648		14,432		8,593		6,159		(1,531)		280		44,581
Provision for loan/lease losses		7,539		7,160		2,811		2,405		—		—		19,915		7,861		8,878		2,493		1,110		—		—		20,342
Net income (loss) from continuing operations		3,999		11,043		569		1,899		13,650		(17,421)		13,739		3,273		13,437		1,888		2,869		17,360		(21,483)		17,344
Goodwill		3,223		14,980		9,888		45,975		182		—		74,248		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		2,437		3,643		6,344		1,448		—		13,872		—		2,313		3,474		6,115		—		—		11,902
Total assets		1,984,245		2,021,043		903,648		745,470		715,740		(765,385)		5,604,761		2,205,934		2,012,182		937,016		803,478		756,716		(850,766)		5,864,560

Six Months Ended June 30, 2021
Nine Months Ended September 30, 2021
Total revenue	$	42,960	$	56,855	$	21,232	$	17,927	$	503	$	(224)	$	139,253	$	65,590	$	98,270	$	32,677	$	28,813	$	86,699	$	(86,477)	$	225,572
Net interest income		31,938		27,611		17,040		12,548		(4,221)		575		85,491		48,800		42,395		26,343		19,606		(6,342)		918		131,720
Provision for loan/lease losses		2,248		1,492		2,122		851		—		—		6,713		2,495		759		2,718		741		—		—		6,713
Net income (loss)		15,843		22,541		5,171		5,954		40,268		(49,446)		40,331		24,547		42,271		8,414		10,544		72,008		(85,888)		71,896
Goodwill		3,223		14,980		9,888		45,975		—		—		74,066		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		1,946		2,979		5,440		—		—		10,365		—		1,824		2,816		5,217		—		—		9,857
Total assets		2,059,634		1,913,761		1,079,930		850,067		81,076		(179,303)		5,805,165		2,106,631		2,019,018		1,140,933		880,143		828,808		(961,025)		6,014,508

Six Months Ended June 30, 2020
Nine Months Ended September 30, 2020
Total revenue	$	43,399	$	58,384	$	20,074	$	18,224	$	34,875	$	(33,502)	$	141,454	$	66,370	$	102,548	$	31,234	$	28,490	$	57,003	$	(55,342)	$	230,303
Net interest income		30,080		24,206		15,038		11,843		(2,998)		477		78,646		46,728		38,638		23,631		18,002		(4,514)		758		123,243
Provision for loan/lease losses		10,722		9,410		4,775		3,375		—		—		28,282		18,583		18,288		7,268		4,485		—		—		48,624
Net income (loss) from continuing operations		9,723		17,504		1,635		4,105		24,674		(32,674)		24,967		12,995		30,941		3,523		6,714		42,295		(54,157)		42,311
Goodwill		3,223		14,980		9,888		45,975		182		—		74,248		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		2,437		3,643		6,344		1,448		—		13,872		—		2,313		3,474		6,115		—		—		11,902
Total assets		1,984,245		2,021,043		903,648		745,470		715,740		(765,385)		5,604,761		2,205,934		2,012,182		937,016		803,478		756,716		(850,766)		5,864,560

NOTE 9 – REGULATORY CAPITAL REQUIREMENTS

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

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

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December 31, 2020 are presented in the following tables (dollars in thousands). As of ~~June~~September 30, 2021 and December 31, 2020, each of the subsidiary banks met the requirements to be “well capitalized”.


										For Capital					To Be Well														For Capital					To Be Well
										Adequacy Purposes					Capitalized Under														Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective									For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions					Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio		Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of June 30, 2021:
As of September 30, 2021:
Company:
Total risk-based capital	$	760,593	14.72	%	$	413,445	>	8.00	%	$	542,647	>	10.50	%	$	516,806	>	10.00	%	$	785,424	14.64	%	$	429,282	>	8.00	%	$	563,433	>	10.50	%	$	536,603	>	10.00	%
Tier 1 risk-based capital		581,919	11.26			310,084	>	6.00			439,285	>	8.50			413,445	>	8.00			604,268	11.26			321,962	>	6.00			456,113	>	8.50			429,282	>	8.00
Tier 1 leverage		581,919	10.29			226,250	>	4.00			226,250	>	4.00			282,812	>	5.00			604,268	10.28			235,118	>	4.00			235,118	>	4.00			293,897	>	5.00
Common equity Tier 1		543,852	10.52			232,563	>	4.50			361,764	>	7.00			335,924	>	6.50			566,165	10.55			241,471	>	4.50			375,622	>	7.00			348,792	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	228,180	13.15	%	$	138,799	>	8.00	%	$	182,174	>	10.50	%	$	173,499	>	10.00	%	$	237,936	13.07	%	$	145,613	>	8.00	%	$	191,117	>	10.50	%	$	182,017	>	10.00	%
Tier 1 risk-based capital		206,355	11.89			104,099	>	6.00			147,474	>	8.50			138,799	>	8.00			215,059	11.82			109,210	>	6.00			154,714	>	8.50			145,613	>	8.00
Tier 1 leverage		206,355	9.75			84,699	>	4.00			84,699	>	4.00			105,874	>	5.00			215,059	10.33			83,257	>	4.00			83,257	>	4.00			104,071	>	5.00
Common equity Tier 1		206,355	11.89			78,075	>	4.50			121,449	>	7.00			112,774	>	6.50			215,059	11.82			81,907	>	4.50			127,412	>	7.00			118,311	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	243,211	13.86	%	$	140,431	>	8.00	%	$	184,316	>	10.50	%	$	175,539	>	10.00	%	$	264,015	14.39	%	$	146,780	>	8.00	%	$	192,649	>	10.50	%	$	183,475	>	10.00	%
Tier 1 risk-based capital		221,202	12.60			105,323	>	6.00			149,208	>	8.50			140,431	>	8.00			241,037	13.14			110,085	>	6.00			155,954	>	8.50			146,780	>	8.00
Tier 1 leverage		221,202	11.95			74,072	>	4.00			74,072	>	4.00			92,590	>	5.00			241,037	12.20			79,004	>	4.00			79,004	>	4.00			98,755	>	5.00
Common equity Tier 1		221,202	12.60			78,992	>	4.50			122,877	>	7.00			114,100	>	6.50			241,037	13.14			82,564	>	4.50			128,433	>	7.00			119,259	>	6.50
Community State Bank:
Total risk-based capital	$	114,512	11.99	%	$	76,389	>	8.00	%	$	100,261	>	10.50	%	$	95,487	>	10.00	%	$	118,637	11.69	%	$	81,208	>	8.00	%	$	106,585	>	10.50	%	$	101,510	>	10.00	%
Tier 1 risk-based capital		102,521	10.74			57,292	>	6.00			81,164	>	8.50			76,389	>	8.00			105,894	10.43			60,906	>	6.00			86,283	>	8.50			81,208	>	8.00
Tier 1 leverage		102,521	9.78			41,943	>	4.00			41,943	>	4.00			52,429	>	5.00			105,894	9.80			43,204	>	4.00			43,204	>	4.00			54,005	>	5.00
Common equity Tier 1		102,521	10.74			42,969	>	4.50			66,841	>	7.00			62,066	>	6.50			105,894	10.43			45,679	>	4.50			71,057	>	7.00			65,981	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	91,663	12.60	%	$	58,189	>	8.00	%	$	76,373	>	10.50	%	$	72,736	>	10.00	%	$	96,864	12.77	%	$	60,706	>	8.00	%	$	79,676	>	10.50	%	$	75,882	>	10.00	%
Tier 1 risk-based capital		82,554	11.35			43,641	>	6.00			61,825	>	8.50			58,189	>	8.00			87,367	11.51			45,529	>	6.00			64,500	>	8.50			60,706	>	8.00
Tier 1 leverage		82,554	10.53			31,351	>	4.00			31,351	>	4.00			39,189	>	5.00			87,367	10.67			32,751	>	4.00			32,751	>	4.00			40,939	>	5.00
Common equity Tier 1		82,554	11.35			32,731	>	4.50			50,915	>	7.00			47,278	>	6.50			87,367	11.51			34,147	>	4.50			53,117	>	7.00			49,223	>	6.50


										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of December 31, 2020:
Company:
Total risk-based capital	$	721,004	14.95	%	$	385,832	>	8.00	%	$	506,404	>	10.50	%	$	482,290	>	10.00	%
Tier 1 risk-based capital		546,729	11.34			289,374	>	6.00			409,946	>	8.50			385,832	>	8.00
Tier 1 leverage		546,729	9.49			230,345	>	4.00			230,345	>	4.00			287,931	>	5.00
Common equity Tier 1		508,736	10.55			217,030	>	4.50			337,603	>	7.00			313,488	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	213,608	12.24	%	$	139,581	>	8.00	%	$	183,200	>	10.50	%	$	174,477	>	10.00	%
Tier 1 risk-based capital		191,693	10.99			104,686	>	6.00			148,305	>	8.50			139,581	>	8.00
Tier 1 leverage		191,693	8.48			90,430	>	4.00			90,430	>	4.00			113,038	>	5.00
Common equity Tier 1		191,693	10.99			78,514	>	4.50			122,134	>	7.00			113,410	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	217,227	13.14	%	$	132,269	>	8.00	%	$	173,603	>	10.50	%	$	165,336	>	10.00	%
Tier 1 risk-based capital		196,438	11.88			99,202	>	6.00			140,536	>	8.50			132,269	>	8.00
Tier 1 leverage		196,438	10.01			78,535	>	4.00			78,535	>	4.00			98,169	>	5.00
Common equity Tier 1		196,438	11.88			74,401	>	4.50			115,735	>	7.00			107,469	>	6.50
Community State Bank:
Total risk-based capital	$	108,040	12.69	%	$	68,117	>	8.00	%	$	89,404	>	10.50	%	$	85,146	>	10.00	%
Tier 1 risk-based capital		97,350	11.43			51,088	>	6.00			72,374	>	8.50			68,117	>	8.00
Tier 1 leverage		97,350	10.27			37,930	>	4.00			37,930	>	4.00			47,412	>	5.00
Common equity Tier 1		97,350	11.43			38,316	>	4.50			59,602	>	7.00			55,345	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	90,334	14.35	%	$	50,357	>	8.00	%	$	66,094	>	10.50	%	$	62,947	>	10.00	%
Tier 1 risk-based capital		77,668	12.34			37,768	>	6.00			53,505	>	8.50			50,357	>	8.00
Tier 1 leverage		77,668	10.87			28,575	>	4.00			28,575	>	4.00			35,719	>	5.00
Common equity Tier 1		77,668	12.34			28,326	>	4.50			44,063	>	7.00			40,915	>	6.50

4445

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

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

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

GENERAL

The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty-eight years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of ~~June~~September 30, 2021, the Company had ~~$5.8~~$6.0 billion in consolidated assets, including ~~$4.3~~$4.5 billion in net loans/leases, and ~~$4.7~~$4.9 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger.

IMPACT OF COVID-19

The progression of the COVID-19 pandemic in the United States has had an impact on the Company’s financial condition and results of operations as of and for the three and ~~six~~nine months ended ~~June~~September 30, 2021, and could continue to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on the Company’s Market Areas

The Company offers commercial and consumer banking products and services primarily in Iowa, Missouri and Illinois. Each of these three states has taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. The continuation and scope of re-openings in each jurisdiction are subject to change, delay and setbacks based on ongoing regional monitoring of the pandemic.

~~Policy and Regulatory Developments~~

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

●

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

●

On March 27, 2020, former President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, which provided for cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act, which authorized an additional $310 billion of PPP loans. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to limitations and

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eligibility criteria. In December 2020, former President Trump signed into law a $900 billion pandemic relief bill to extend several aid programs in the CARES Act that were set to expire on December 31, 2020. The SBA reopened the PPP in January 2021 to allow certain eligible borrowers that did not previously receive a PPP loan to apply for a second draw PPP loan. At least $15 billion and $25 billion, respectively, was set aside from first draw and second draw PPP loans. On March 11, 2021, President Biden signed into law the American Rescue Plan Act, which allocated an additional $7.25 billion in funds to the PPP. The subsidiary banks have participated as lenders in the PPP. The PPP ended May 31, 2021.

●

In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be related to COVID-19, the existing loan could not be more than 30 days past due as of December 31, 2019 and the modification must be executed between March 1, 2020 and the earlier of 60 days after the termination of the national emergency or December 31, 2020. On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. If a modification does not meet the criteria of the CARES Act, a deferral can still be excluded from TDR treatment as long as the modifications meet the FASB criteria discussed in Note 3 of the Consolidated Financial Statements.

●

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19 and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs. The agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. The regulators have clarified that this guidance may continue to be applied in 2021. See Note 3 of the Consolidated Financial Statements for additional discussion on TDRs.

Effects on the Company’s Business

The Company currently expects that the COVID-19 pandemic and the specific developments referred to above could have an on-going impact on its business. In particular, the Company anticipates that a portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries could continue to experience economic ~~distress,~~challenges, and could adversely affect their ability to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, may impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. As a result, the Company anticipates that its asset quality and results of operations could be adversely affected, as described in further detail below.

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The Company’s Response

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

●

The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of ~~June~~September 30, 2021 there were no bank and 29eight m2 modifications of loans and leases totaling ~~$4.7~~$2.9 million representing ~~0.11%~~0.06% of the total loan and lease portfolio, that were currently on deferral.

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●

The Company has processed 2,633 loans for a total of $484 million as of ~~June~~September 30, 2021 under the PPP. PPP loans are included in the C&I - other category of loans in Note 3 of the Consolidated Financial Statements and total ~~$147.5~~$83.6 million at ~~June~~September 30, 2021 compared to $273.1 million at December 31, 2020.

EXECUTIVE OVERVIEW

The Company reported net income of ~~$22.3~~$31.6 million and diluted EPS of ~~$1.39~~$1.99 for the quarter ended ~~June~~September 30, 2021. By comparison, for the quarter ended March 31, 2021 the Company reported net income of $18.0 million and diluted EPS of $1.12. For the quarter ended June 30, 2020, the Company reported net income of $13.7 million, and diluted EPS of $0.86. For the six months ended June 30, 2021 the Company reported net income of ~~$40.3~~$22.3 million and diluted EPS of ~~$2.52. By comparison, for~~$1.39. For the ~~six months~~quarter ended ~~June~~September 30, 2020, the Company reported net income of ~~$25.0~~$17.3 million, and diluted EPS of ~~$1.56.~~$1.09. For the nine months ended September 30, 2021, the Company reported net income of $71.9 million, and diluted EPS of $4.48. By comparison, for the nine months ended September 30, 2020, the Company reported net income of $42.3 million and diluted EPS of $2.65.

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

●

Record net income of ~~$22.3~~$31.6 million, or ~~$1.39 per diluted share;~~

●

~~Adjusted net income (non-GAAP) of $22.5 million, or $1.40~~$1.99 per diluted share;

●

NIM increased 28 basis points and Adjusted NIM (TEY)(non-GAAP) increased by 49 basis points to ~~3.28%~~3.36% and ~~3.44%~~3.53%, respectively;

●

Adjusted net interest income (non-GAAP) increased by ~~$1.9~~$2.8 million, or ~~4.4%~~6.2%;

●

Annualized ~~core~~traditional loan and lease growth (non-GAAP) of ~~14.9%~~23.0% for the quarter and 18.0% year-to-date, excluding SBA PPP loans;

●

Annualized core deposit growth of ~~4.9%~~15.6% for the quarter;

●

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

●

ACL for loans/leases to total loans/leases of ~~1.85%~~1.79%, excluding PPP loans (non-GAAP)~~; and~~

●

~~Nonperforming assets improved by 28% for the quarter and now represent only 0.17% of total assets.~~.

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

For the three months ended

For the six months ended

June 30, 2021

March 31, 2021

June 30, 2020

June 30, 2021

June 30, 2020

(dollars in thousands)

Net income

$
22,349

$
17,982

$
13,739

$
40,331

$
24,967

Diluted earnings per common share

$
1.39

$
1.12

$
0.86

$
2.52

$
1.56

Weighted average common and common equivalent shares outstanding

16,045,239

16,025,548

15,895,336

16,035,394

15,956,958

~~The Company reported adjusted net income (non-GAAP) of $22.5 million, with adjusted diluted EPS of $1.40. See section titled “GAAP to Non-GAAP Reconciliations” for additional information.~~


	For the three months ended						For the nine months ended
	September 30, 2021		June 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020

	(dollars in thousands)

Net income	$	31,565	$	22,349	$	17,344	$	71,896	$	42,311

Diluted earnings per common share	$	1.99	$	1.39	$	1.09	$	4.48	$	2.65

Weighted average common and common equivalent shares outstanding		15,869,798		16,045,239		15,923,578		16,058,420		15,945,832

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The Company reported adjusted net income (non-GAAP) of $31.6 million, with adjusted diluted EPS of $1.99. See section titled “GAAP to Non-GAAP Reconciliations” for additional information.

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

	(dollars in thousands)										(dollars in thousands)

Net interest income	$	43,516	$	41,975	$	40,948	$	85,491	$	78,646	$	46,229	$	43,516	$	44,581	$	131,720	$	123,243
Provision for credit losses		—		6,713		19,915		6,713		28,282		—		—		20,342		6,713		48,624
Noninterest income		19,296		23,489		28,626		42,785		43,822		34,652		19,296		37,959		77,437		81,781
Noninterest expense		35,675		37,228		33,122		72,903		64,537		41,387		35,675		40,838		114,290		105,391
Federal and state income tax expense		4,788		3,541		2,798		8,329		4,682		7,929		4,788		4,016		16,258		8,698
Net income	$	22,349	$	17,982	$	13,739	$	40,331	$	24,967	$	31,565	$	22,349	$	17,344	$	71,896	$	42,311

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

●

Net interest income in the ~~second~~third quarter of 2021 ~~increased 4% compared to the first quarter of 2021. Net interest income~~ increased 6% compared to the second quarter of 2021. Net interest income increased 4% compared to the third quarter of 2020 and 9%7% when comparing the first ~~six~~nine months of 2021 to the same period of the prior year. The increase was due to strong loan growth funded by ~~even stronger~~ core deposit growth ~~allowing for improved mix in funding and minimizing loan~~while maintaining modest excess liquidity. The Company had success holding on to earning asset yield ~~reductions, driving~~while moving cost of funds lower which helped to drive NIM expansion.

●

There was no provision expense in the third or second quarter of 2021. Provision expense decreased ~~$21.6~~$41.9 million when comparing the first ~~six~~nine months of 2021 to the same period in the prior year. The decrease was primarily due to continued strong credit quality, a reduction in NPLs and improving economic conditions. ~~Note that the~~The provision amounts for prior years were calculated under different accounting standards due to the adoption of CECL on January 1, 2021. See the Provision for Credit Losses section of this report for additional details.

●

Noninterest income in the ~~second~~third quarter of 2021 ~~decreased $4.2~~increased $15.4 million or ~~18%~~80% compared to the ~~first~~second quarter of 2021. Noninterest income decreased ~~$9.3~~$3.3 million or ~~33%~~9% compared to the ~~second~~third quarter of 2020 and decreased ~~$1.0~~$4.3 million or 2%5% when comparing the first ~~six~~nine months of 2021 to the same period of the prior year. The ~~decrease~~increase in the third quarter of 2021 was primarily due to ~~a $4 million reduction in~~ swap fee income/capital market revenue asfor certain loans that closed in the third quarter that were scheduled to close in the second ~~quarter will now close in the third~~ quarter due to factors outside of the Company’s control.

●

Noninterest expense ~~decreased $1.6~~increased $5.7 million or 4%16% in the ~~second~~third quarter of 2021 compared to the ~~first~~second quarter of 2021. This ~~decrease~~increase was due to several factors but was primarily the result of ~~lower~~higher salary and benefits expense of ~~$1.8~~$5.2 million, driven by ~~lower~~higher incentive compensation and commission expense in the quarter due to ~~lower~~higher swap fee income/capital market revenue and ~~lower~~higher incentive compensation accruals. ~~Partially offsetting this decrease~~In addition, there was a ~~$259 thousand~~$1.2 million increase in ~~professional~~net income from and ~~data processing fees and a $226 thousand increase in advertising and marketing expense, both returning~~gains/losses on operations of other real estate due to ~~more normalized levels from their lower levels in~~ the ~~first quarter.~~sale of one large other real estate owned property. Noninterest expense increased ~~$2.6 million~~$549 thousand or 8%1% compared to the ~~second~~third quarter of 2020 and increased ~~$8.4~~$8.9 million or ~~13%~~8% when comparing the first ~~six~~nine months of 2021 to the same period in the prior year. The increase was primarily due to increased incentive compensation with improved financial performance of the Company.

STRATEGIC FINANCIAL METRICS

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

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Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual

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Report on Form 10-K for the year ended December 31, 2020. The Company's long-term strategic financial metrics are as follows:

●

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

●

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

●

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

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


			Year to Date*											Year to Date*
Strategic Financial Metric*	Key Metric	Target	June 30, 2021			March 31, 2021			June 30, 2020			Key Metric	Target	September 30, 2021			June 30, 2021			September 30, 2020
Loan and lease growth organically **	Loans and leases growth	> 9% annually		14.7	%		14.0	%		5.0	%	Loans and leases growth	> 9% annually		18.0	%		14.7	%		11.5	%
Fee income growth	Fee income growth	> 6% annually		(23.3)	%		(15.9)	%		31.7	%	Fee income growth	> 6% annually		(7.5)	%		(23.3)	%		61.1	%
Improve operational efficiencies and hold noninterest expense growth	Noninterest expense growth	< 5% annually		(1.0)	%		1.2	%		(11.6)	%	Noninterest expense growth	< 5% annually		3.3	%		(1.0)	%		(5.3)	%

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

** Loan and lease growth excludes PPP loans.

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

STRATEGIC DEVELOPMENTS

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

●

The Company grew loans and leases organically in the ~~second~~third quarter of 2021 by ~~14.9%~~23.0% on an annualized basis, excluding PPP loans (non-GAAP), driven by both our specialty finance group and our ~~core~~traditional commercial lending and leasing business.

●

Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states currently served – Iowa, Wisconsin, Missouri and Illinois. The Company acted as the correspondent bank for 186 downstream banks with average total noninterest bearing deposits of ~~$348.4~~$350.0 million and average total interest bearing deposits of ~~$335.6~~$317.5 million during the ~~six~~nine months of 2021. By comparison, the Company acted as the correspondent bank for ~~191~~192 downstream banks with average total noninterest bearing deposits of ~~$249.2~~$307.0 million and average total interest bearing deposits of ~~$505.2~~$542.6 million during the ~~six~~nine months of 2020. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

●

As a result of the low interest rate environment, the Company is focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. 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.

●

~~Noninterest expense~~ Capital markets revenue totaled $24.9 million for the quarter, which benefited from a number of swap transactions that were scheduled to close in the second quarter carrying over into the third quarter. Capital markets revenue averaged $16 million per quarter for the first ~~six~~nine months of 2021 ~~totaled $72.9 million as compared to $64.5 million in the first six months of 2020. Salaries~~ and ~~employee benefits for the first six months of 2021 were up 20.3% from the same period of the prior year primarily due to the higher incentive compensation due to strong financial results.~~$16.3

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

●

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

●

In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by ~~$730.4~~$687.5 million in the first ~~six~~nine months of 2021. There were ~~154~~233 new relationships added in the first ~~six~~nine months of 2021 totaling ~~$191.3~~$319.0 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. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

GAAP TO NON-GAAP RECONCILIATIONS

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

●

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

●

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

●

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

●

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

●

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

●

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

The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets. The TCE/TA ratio excluding PPP loans non-GAAP ratio is provided as the Company’s management believes this financial measure is important to investors as total assets for the quarters ended ~~June~~September 30, 2021 and ~~March 31,~~June 30, 2021 were materially higher due to the addition of PPP loans. By excluding the PPP loans, management believes the investor is provided a better comparison to prior periods for analysis.

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

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

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

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

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


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

		(dollars in thousands, except per share data)									(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	630,476		$	608,719		$	556,020		$	649,814		$	630,476		$	572,613
Less: Intangible assets		84,431			84,939			88,120			83,923			84,431			85,968
TCE (non-GAAP)	$	546,045		$	523,780		$	467,900		$	565,891		$	546,045		$	486,645

Total assets (GAAP)	$	5,805,165		$	5,645,147		$	5,604,761		$	6,014,508		$	5,805,165		$	5,864,560
Less: Intangible assets		84,431			84,939			88,120			83,923			84,431			85,968
TA (non-GAAP)	$	5,720,734		$	5,560,208		$	5,516,641		$	5,930,585		$	5,720,734		$	5,778,592

TCE/TA ratio (non-GAAP)		9.55	%		9.42	%		8.48	%		9.54	%		9.55	%		8.42	%


TCE/TA RATIO EXCLUDING PPP LOANS
Stockholders' equity (GAAP)	$	630,476		$	608,719		$	556,020		$	649,814		$	630,476		$	572,613
Less: PPP loan interest income (post-tax)		10,788			9,479			2,085			12,297			10,788			4,934
Less: Intangible assets		84,431			84,939			88,120			83,923			84,431			85,968
TCE (non-GAAP)	$	535,257		$	514,301		$	465,815		$	553,594		$	535,257		$	481,711

Total assets (GAAP)	$	5,805,165		$	5,645,147		$	5,604,761		$	6,014,508		$	5,805,165		$	5,864,560
Less: PPP loans		147,506			243,860			358,052			83,575			147,506			357,506
Less: Intangible assets		84,431			84,939			88,120			83,923			84,431			85,968
TA (non-GAAP)	$	5,573,228		$	5,316,348		$	5,158,589		$	5,847,010		$	5,573,228		$	5,421,086

TCE/TA ratio excluding PPP loans (non-GAAP)		9.60	%		9.67	%		9.03	%		9.47	%		9.60	%		8.89	%

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

	(dollars in thousands, except per share data)															(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	22,349		$	17,982		$	13,739		$	40,331		$	24,967		$	31,565		$	22,349		$	17,344		$	71,896		$	42,311
Less non-core items (post-tax) (*):
Income:
Securities gains (losses), net	$	(69)		$	—		$	51		$	(69)		$	51		$	—		$	(69)		$	1,424		$	(69)		$	1,475
Mark to market gains (losses) on unhedged derivatives, net		(58)			129			—			71			—			(13)			(58)			—			58			—
Gain on sale of loan																$	28		$	—		$	—			28			—
Total non-core income (non-GAAP)	$	(127)		$	129		$	51		$	2		$	51		$	15		$	(127)		$	1,424		$	17		$	1,475
Expense:
Losses on liability extinguishment	$	—		$	—		$	339		$	—		$	455		$	—		$	—		$	1,480		$	—		$	1,936
Goodwill impairment		—			—			—			—			500			—			—			—			—			500
Disposition costs		—			7			(66)			7			343			—			—			152			7			495
Post-acquisition compensation, transition and integration costs		—			—			55			—			175			—			—			(25)			—			149
Separation agreement		—			734			—			734			—			—			—			—			734			—
Loss on sale of subsidiary																	—			—			212			—			212
Total non-core expense (non-GAAP)	$	—		$	741		$	329		$	741		$	1,472		$	—		$	—		$	1,819		$	741		$	3,291


Adjusted net income (non-GAAP)	$	22,476		$	18,594		$	14,016		$	41,070		$	26,388		$	31,550		$	22,476		$	17,739		$	72,620		$	44,127

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	22,476		$	18,594		$	14,016		$	41,070		$	26,388		$	31,550		$	22,476		$	17,739		$	72,620		$	44,127

Weighted average common shares outstanding		15,813,932			15,803,643			15,747,056			15,808,788			15,771,926			15,635,123			15,813,932			15,767,152			15,829,124			15,770,335
Weighted average common and common equivalent shares outstanding		16,045,239			16,025,548			15,895,336			16,035,394			15,956,958			15,869,768			16,045,239			15,923,578			16,058,420			15,945,832

Adjusted EPS (non-GAAP):
Basic	$	1.42		$	1.18		$	0.89		$	2.60		$	1.67		$	2.02		$	1.42		$	1.13		$	4.59		$	2.80
Diluted	$	1.40		$	1.16		$	0.88		$	2.56		$	1.65		$	1.99		$	1.40		$	1.11		$	4.52		$	2.77

ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	22,476		$	18,594		$	14,016		$	41,070		$	26,388		$	31,550		$	22,476		$	17,739		$	72,620		$	44,127

Average Assets	$	5,739,067		$	5,668,850		$	5,800,164		$	5,704,151		$	5,374,224		$	5,960,336		$	5,739,067		$	5,820,555		$	5,789,753		$	5,524,087

Adjusted ROAA (annualized) (non-GAAP)		1.57	%		1.31	%		0.97	%		1.44	%		0.98	%		2.12	%		1.57	%		1.22	%		1.67	%		1.07	%

ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	43,516		$	41,975		$	40,948		$	85,491		$	78,646		$	46,229		$	43,516		$	44,581		$	131,720		$	123,243
Plus: Tax equivalent adjustment		2,444			2,267			1,728			4,702			3,517			2,708			2,444			1,942			7,411			5,587
Net interest income - tax equivalent (non-GAAP)	$	45,960		$	44,242		$	42,676		$	90,193		$	82,163		$	48,937		$	45,960		$	46,523		$	139,131		$	128,830
Less: Acquisition accounting net accretion		291			504			736			795			1,361			456			291			833			1,251			2,194
Adjusted net interest income		45,669			43,738			41,940			89,398			80,802			48,481			45,669			45,690			137,880			126,636

Average earning assets	$	5,320,881		$	5,218,198		$	5,252,663		$	5,269,820		$	4,856,842		$	5,451,571		$	5,320,881		$	5,278,298		$	5,330,338		$	4,998,352

NIM (GAAP)		3.28	%		3.26	%		3.14	%		3.27	%		3.26	%		3.36	%		3.28	%		3.36	%		3.30	%		3.29	%
NIM (TEY) (non-GAAP)		3.46	%		3.43	%		3.27	%		3.45	%		3.40	%		3.56	%		3.46	%		3.51	%		3.49	%		3.44	%
Adjusted NIM (TEY) (non-GAAP)		3.44	%		3.40	%		3.21	%		3.42	%		3.35	%		3.53	%		3.44	%		3.44	%		3.46	%		3.38	%

EFFICIENCY RATIO
Noninterest expense (GAAP)	$	35,675		$	37,228		$	33,122		$	72,903		$	64,537		$	41,387		$	35,675		$	40,838		$	114,290		$	105,391

Net interest income (GAAP)	$	43,516		$	41,975		$	40,948		$	85,491		$	78,646		$	46,229		$	43,516		$	44,581		$	131,720		$	123,243
Noninterest income (GAAP)		19,296			23,489			28,626			42,785			43,822			34,652			19,296			37,959			77,437			81,781
Total income	$	62,812		$	65,464		$	69,574		$	128,276		$	122,468		$	80,881		$	62,812		$	82,540		$	209,157		$	205,024

Efficiency ratio (noninterest expense/total income) (non-GAAP)		56.80	%		56.87	%		47.61	%		56.83	%		52.70	%		51.17	%		56.80	%		49.48	%		54.64	%		51.40	%

ACL TO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS
ACL	$	78,894		$	81,831		$	60,827		$	78,894		$	60,827		$	80,670		$	78,894		$	79,582		$	80,670		$	79,582

Total loans and leases	$	4,417,705		$	4,361,051		$	4,140,259		$	4,417,705		$	4,140,259		$	4,599,730		$	4,417,705		$	4,247,977		$	4,599,730		$	4,247,977
Less: PPP loans		147,506			243,860			358,052			147,506			358,052			83,575			147,506			357,506			83,575			357,506
Total loans and leases, excluding PPP loans	$	4,270,199		$	4,117,191		$	3,782,207		$	4,270,199		$	3,782,207		$	4,516,155		$	4,270,199		$	3,890,471		$	4,516,155		$	3,890,471

ACL to total loans and leases, excluding PPP loans		1.85	%		1.99	%		1.61	%		1.85	%		1.61	%		1.79	%		1.85	%		2.05	%		1.79	%		2.05	%

LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS
Total loans and leases	$	4,417,705		$	4,361,051		$	4,140,259		$	4,417,705		$	4,140,259		$	4,599,730		$	4,417,705		$	4,247,977		$	4,599,730		$	4,247,977
Less: PPP loans		147,506			243,860			358,052			147,506			358,052			83,575			147,506			357,506			83,575			357,506
Total loans and leases, excluding PPP loans	$	4,270,199		$	4,117,191		$	3,782,207		$	4,270,199		$	3,782,207		$	4,516,155		$	4,270,199		$	3,890,471		$	4,516,155		$	3,890,471

Loan growth annualized, excluding PPP loans		14.87	%		14.00	%		8.37	%		12.90	%		4.99	%		23.04	%		14.87	%		11.45	%		16.08	%		16.28	%

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

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a tax equivalent basis, increased 8%5% to ~~$46.0~~$48.9 million for the quarter ended ~~June~~September 30, 2021 compared to the same quarter of the prior year and increased ~~10%~~8% to ~~$90.2~~$139.1 million for the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to the same period of the prior year. Net interest income, on a GAAP basis, increased 6%4% for the quarter ended ~~June~~September 30, 2021 compared to the same quarter of the prior year, and increased 9%7% for the ~~six~~nine months ~~ended June 30, 2021 compared to the same period of the prior year. Net interest income improved due to the following factors:~~

●

~~Continued organic loan and deposit growth;~~

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

ended September 30, 2021 compared to the same period of the prior year. Net interest income improved due to the following factors:

●

Strong organic loan and deposit growth;

●

Significant growth in PPP loans in 2020 and 2021;

●

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

●

~~Significant reduction~~Reduction in cost of funds.

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


	Tax Equivalent Basis						GAAP						Tax Equivalent Basis						GAAP
	For the Quarter Ended						For the Quarter Ended						For the Quarter Ended						For the Quarter Ended
	June 30,		March 31,		June 30,		June 30,		March 31,		June 30,		September 30,		June 30,		September 30,		September 30,		June 30,		September 30,
	2021		2021		2020		2021		2021		2020		2021		2021		2020		2021		2021		2020
Average Yield on Interest-Earning Assets	3.87	%	3.86	%	3.86	%	3.68	%	3.65	%	3.70	%	3.96	%	3.87	%	3.99	%	3.79	%	3.68	%	3.86	%
Average Cost of Interest-Bearing Liabilities	0.60	%	0.63	%	0.80	%	0.60	%	0.62	%	0.79	%	0.58	%	0.60	%	0.66	%	0.59	%	0.60	%	0.67	%
Net Interest Spread	3.27	%	3.23	%	3.06	%	3.08	%	3.03	%	2.91	%	3.38	%	3.27	%	3.33	%	3.21	%	3.08	%	3.19	%
NIM (TEY) (Non-GAAP)	3.46	%	3.43	%	3.27	%	3.28	%	3.26	%	3.14	%	3.56	%	3.46	%	3.51	%	3.36	%	3.28	%	3.36	%
NIM Excluding Acquisition Accounting Net Accretion	3.44	%	3.40	%	3.21	%	3.27	%	3.21	%	3.10	%	3.53	%	3.44	%	3.44	%	3.38	%	3.27	%	3.36	%


	Tax Equivalent Basis				GAAP				Tax Equivalent Basis				GAAP
	For the Six Months Ended				For the Six Months Ended				For the Nine Months Ended				For the Nine Months Ended
	June 30,		June 30,		June 30,		June 30,		September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020		2021		2020		2021		2020
Average Yield on Interest-Earning Assets	3.87	%	4.19	%	1.83	%	4.02	%	3.90	%	4.12	%	3.71	%	3.96	%
Average Cost of Interest-Bearing Liabilities	0.61	%	1.05	%	0.21	%	0.78	%	0.60	%	0.91	%	0.60	%	0.67	%
Net Interest Spread	3.26	%	3.14	%	1.62	%	3.24	%	3.30	%	3.21	%	3.11	%	3.29	%
NIM (TEY) (Non-GAAP)	3.45	%	3.40	%	3.27	%	3.26	%	3.49	%	3.44	%	3.30	%	3.29	%
NIM Excluding Acquisition Accounting Net Accretion	3.42	%	3.35	%	1.61	%	3.21	%	3.46	%	3.38	%	3.26	%	3.24	%

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				For the Quarter Ended						For the Nine Months Ended
		June 30,		March 31,		June 30,		June 30,		June 30,		September 30,		June 30,		September 30,		September 30,		September 30,
		2021		2021		2020		2021		2020		2021		2021		2020		2021		2020
		(dollars in thousands)						(dollars in thousands)				(dollars in thousands)						(dollars in thousands)

Acquisition Accounting Net Accretion in NIM	$	291	$	504	$	736	$	795	$	1,361	$	456	$	291	$	833	$	1,251	$	2,194

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

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2021 and 2020.

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


	For the Three Months Ended June 30,																For the Three Months Ended September 30,
	2021								2020								2021								2020
				Interest		Average						Interest		Average						Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost

	(dollars in thousands)																(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	1,817		$	1		0.06	%	$	865		$	1		0.46	%	$	3,030		$	1		0.10	%	$	2,205		$	1		0.18	%
Interest-bearing deposits at financial institutions		88,396			35		0.16	%		533,483			135		0.10	%		99,024			39		0.16	%		321,679			92		0.11	%
Investment securities (1)		798,732			7,294		3.66	%		697,559			6,536		3.77	%		799,471			7,646		3.82	%		749,425			6,836		3.66	%
Restricted investment securities		19,614			238		4.79	%		21,234			288		5.46	%		20,910			262		4.97	%		19,714			249		4.94	%
Gross loans/leases receivable (1) (2) (3)		4,412,322			43,776		3.98	%		3,999,522			43,417		4.37	%		4,529,136			46,427		4.07	%		4,185,275			45,654		4.34	%
Total interest earning assets		5,320,881			51,344		3.87	%		5,252,663			50,377		3.86	%		5,451,571			54,375		3.96	%		5,278,298			52,832		3.99	%

Noninterest-earning assets:
Cash and due from banks		62,876								82,171								55,359								75,480
Premises and equipment		74,328								73,376								75,712								72,618
Less allowance		(80,603)								(42,878)								(78,884)								(61,892)
Other		361,585								434,865								456,578								456,051
Total assets	$	5,739,067							$	5,800,197							$	5,960,336							$	5,820,555

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	2,978,382			2,050		0.28	%	$	2,840,860			2,429		0.34	%	$	3,041,941			2,183		0.28	%	$	2,932,988			2,086		0.28	%
Time deposits		440,599			1,184		1.08	%		809,233			3,337		1.66	%		461,210			1,090		0.94	%		638,031			2,399		1.50	%
Short-term borrowings		10,883			1		0.05	%		25,064			22		0.35	%		6,858			1		0.10	%		26,996			11		0.17	%
FHLB advances		21,802			15		0.28	%		95,616			347		1.46	%		54,293			41		0.30	%		57,078			211		1.45	%
Subordinated notes		115,339			1,570		5.45	%		68,480			994		5.84	%		113,789			1,554		5.46	%		77,783			1,031		5.30	%
Junior subordinated debentures		38,044			564		5.86	%		37,891			572		6.07	%		38,084			569		5.84	%		37,936			571		5.89	%
Total interest-bearing liabilities		3,605,049			5,384		0.60	%		3,877,144			7,701		0.80	%		3,716,175			5,438		0.58	%		3,770,812			6,309		0.66	%

Noninterest-bearing demand deposits		1,290,751								1,082,532								1,276,725								1,155,862
Other noninterest-bearing liabilities		219,267								284,461								313,250								318,890
Total liabilities		5,115,067								5,244,137								5,306,150								5,245,564

Stockholders' equity		624,000								556,060								654,186								574,991
Total liabilities and stockholders' equity	$	5,739,067							$	5,800,197							$	5,960,336							$	5,820,555
Net interest income				$	45,960							$	42,676							$	48,937							$	46,523
Net interest spread							3.27	%							3.06	%							3.38	%							3.33	%
Net interest margin							3.28	%							3.14	%							3.36	%							3.36	%
Net interest margin (TEY)(Non-GAAP)							3.46	%							3.27	%							3.56	%							3.51	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.44	%							3.21	%							3.53	%							3.44	%
Ratio of average interest-earning assets to average interest-bearing liabilities		147.60	%							135.48	%							146.70	%							139.98	%

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

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

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

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended ~~June~~September 30, 2021



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

	2021 vs. 2020						2021 vs. 2020
	(dollars in thousands)						(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	—	$	(4)	$	4	$	—	$	(1)	$	1
Interest-bearing deposits at financial institutions		(100)		324		(424)		(53)		168		(221)
Investment securities (2)		758		(1,112)		1,870		810		320		490
Restricted investment securities		(50)		(31)		(19)		13		1		12
Gross loans/leases receivable (2) (3)		359		(16,480)		16,839		773		(12,517)		13,290
Total change in interest income		967		(17,303)		18,270		1,543		(12,029)		13,572

INTEREST EXPENSE
Interest-bearing deposits		(379)		(1,064)		685		97		(113)		210
Time deposits		(2,153)		(936)		(1,217)		(1,309)		(750)		(559)
Short-term borrowings		(21)		76		(97)		(10)		(4)		(6)
Federal Home Loan Bank advances		(332)		(170)		(162)		(170)		(160)		(10)
Subordinated notes		576		—		576		523		—		523
Junior subordinated debentures		(8)		(23)		15		(2)		(14)		12
Total change in interest expense		(2,317)		(2,117)		(200)		(871)		(1,041)		170

Total change in net interest income	$	3,284	$	(15,186)	$	18,470	$	2,414	$	(10,988)	$	13,402

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

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

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued


	For the Six Months Ended June 30,																For the Nine Months Ended September 30,
	2021								2020								2021								2020
				Interest		Average						Interest		Average						Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost

	(dollars in thousands)																(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	1,830		$	1		0.05	%	$	3,095		$	18		1.17	%	$	1,503		$	1		0.13	%	$	2,795		$	19		0.89	%
Interest-bearing deposits at financial institutions		102,343			71		0.14	%		331,048			495		0.30	%		101,225			110		0.15	%		327,902			587		0.24	%
Investment securities (1)		804,364			14,344		3.57	%		658,433			12,616		3.85	%		802,715			21,989		3.65	%		688,985			19,567		3.78	%
Restricted investment securities		18,843			456		4.81	%		21,300			546		5.16	%		19,540			718		4.85	%		20,767			795		5.03	%
Gross loans/leases receivable (1) (2) (3)		4,342,440			86,299		4.01	%		3,842,966			87,474		4.58	%		4,405,355			132,728		4.03	%		3,957,903			133,141		4.49	%
Total interest earning assets		5,269,820			101,171		3.87	%		4,856,842			101,149		4.19	%		5,330,338			155,546		3.90	%		4,998,352			154,109		4.12	%

Noninterest-earning assets:
Cash and due from banks		64,741								90,799								61,579								85,655
Premises and equipment, net		73,752								73,641								74,413								73,298
Less allowance for estimated losses on loans/leases		(83,494)								(39,439)								(81,941)								(46,978)
Other		379,332								392,401								405,364								413,760
Total assets	$	5,704,151							$	5,374,242							$	5,789,753							$	5,524,087

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	2,979,835			4,036		0.27	%	$	2,610,248			7,756		0.60	%	$	3,000,766			6,219		0.28	%	$	2,718,613			9,920		0.49	%
Time deposits		444,297			2,625		1.19	%		797,184			7,216		1.82	%		449,996			3,716		1.10	%		743,746			9,537		1.71	%
Short-term borrowings		9,021			3		0.06	%		22,190			86		0.78	%		7,560			4		0.08	%		23,804			81		0.45	%
Federal Home Loan Bank advances		17,464			25		0.28	%		103,512			796		1.55	%		29,875			66		0.29	%		87,920			1,007		1.50	%
Subordinated notes		117,014			3,164		5.41	%		68,449			1,988		5.84	%		115,927			4,718		5.43	%		71,582			3,019		5.63	%
Junior subordinated debentures		38,026			1,125		5.87	%		37,872			1,144		6.07	%		38,045			1,692		5.86	%		37,894			1,715		5.95	%
Total interest-bearing liabilities		3,605,657			10,978		0.61	%		3,639,455			18,986		1.05	%		3,642,169			16,415		0.60	%		3,683,559			25,279		0.91	%

Noninterest-bearing demand deposits		1,245,401								936,223								1,255,957								1,009,970
Other noninterest-bearing liabilities		239,032								247,697								264,044								271,639
Total liabilities		5,090,090								4,823,374								5,162,170								4,965,168

Stockholders' equity		614,061								550,869								627,583								558,919
Total liabilities and stockholders' equity	$	5,704,151							$	5,374,242							$	5,789,753							$	5,524,087
Net interest income				$	90,193							$	82,163							$	139,131							$	128,830
Net interest spread							3.26	%							3.14	%							3.30	%							3.21	%
Net interest margin							3.27	%							3.26	%							3.30	%							3.29	%
Net interest margin (TEY)(Non-GAAP)							3.45	%							3.40	%							3.49	%							3.44	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.42	%							3.35	%							3.46	%							3.38	%
Ratio of average interest earning assets to average interest-bearing liabilities		146.15	%							133.45	%							146.35	%							135.69	%

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

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

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued



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

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

		2021 vs. 2020							2021 vs. 2020
		(dollars in thousands)							(dollars in thousands)
INTEREST INCOME
Federal funds sold		$	(17)	$	(12)	$	(5)		$	(18)	$	(12)	$	(6)
Interest-bearing deposits at other financial institutions			(424)		(185)		(239)			(477)		(167)		(310)
Investment securities (2)			1,728		(2,371)		4,099			2,422		(1,065)		3,487
Restricted investment securities			(90)		(33)		(57)			(77)		(29)		(48)
Gross loans/leases receivable (2) (3)			(1,175)		(22,896)		21,721			(413)		(19,381)		18,968
Total change in interest income			22		(25,497)		25,519			1,437		(20,654)		22,091

INTEREST EXPENSE
Interest-bearing demand deposits			(3,720)		(6,466)		2,746			(3,701)		(5,186)		1,485
Time deposits			(4,591)		(2,015)		(2,576)			(5,821)		(2,767)		(3,054)
Short-term borrowings			(83)		(50)		(33)			(77)		(42)		(35)
Federal Home Loan Bank advances			(771)		(383)		(388)			(941)		(518)		(423)
Subordinated notes			1,176		—		1,176			1,699		—		1,699
Junior subordinated debentures			(19)		—		(19)			(23)		—		(23)
Total change in interest expense			(8,008)		(8,914)		906			(8,864)		(8,513)		(351)
Total change in net interest income		$	8,030	$	(16,583)	$	24,613		$	10,301	$	(12,141)	$	22,442

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

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

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

GOODWILL

The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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

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

During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies. This was the result of the announcement of a sale of the Bates Companies.

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

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

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

The Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. A more detailed discussion of this critical accounting policy can be found in Note 1 to the Consolidated Financial Statements for ~~June~~September 30, 2021.

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

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

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income increased 1%2%, comparing the ~~second~~third quarter of 2021 to the same period of 2020, and was ~~down 1%~~unchanged when comparing the first ~~half~~nine months of 2021 to the same period of 2020. This was primarily due to an increase in the volume of average securities and average loans/leases offset by a decline in yields ~~in those categories with a downward fed rate adjustment of 150 bps in late March 2020.~~on loans/leases. Average gross loans and leases increased ~~10%~~8%, while average investment securities increased ~~15%~~7%, when comparing the quarter ended ~~June~~September 30, 2021 to ~~June~~September 30, 2020. Average gross loans and leases increased ~~13%~~11%, while average investment securities increased ~~22%~~17%, when comparing the ~~six~~nine months ended ~~June~~September 30, 2021 to ~~June~~September 30, 2020.

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

INTEREST EXPENSE

Interest expense for the ~~second~~third quarter of 2021 decreased ~~30%~~14% from the ~~second~~third quarter of 2020, and decreased ~~42%~~35% comparing the first ~~half~~nine months of 2021 to the same period of 2020. The Company has grown organically at a significant pace over the past several years. ~~Outsized core~~Core deposit growth has funded loan growth and has allowed the Company to prepay higher cost brokered deposits and FHLB advances. The cost of funds on the Company’s average interest-bearing liabilities declined

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~higher cost brokered deposits and FHLB advances. The cost of funds on the Company’s average interest-bearing liabilities declined~~ in conjunction with the declining rate environment. The Company’s cost of funds was ~~0.60%~~0.58% for the quarter ended ~~June~~September 30, 2021, which was down from ~~0.80%~~0.66% for the quarter ended ~~June~~September 30, 2020. The Company’s cost of funds was ~~0.61%~~0.60% for the ~~six~~nine months ended ~~June~~September 30, 2021, which was down from ~~1.05%~~0.91% for the ~~six~~nine months ended ~~June~~September 30, 2020.

The Company's management intends to continue to minimize its level of wholesale funds with a focus on well-priced core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company's franchise value, reduce funding costs and increase fee income opportunities through deposit service charges.

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~~nine months ended ~~June~~September 30, 2021 and 2020.


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,		June 30,		June 30,		June 30,		September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020		2021		2020		2021		2020

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

Provision for credit losses - loans and leases (1)	$	(141)	$	19,915	$	5,852	$	28,282	$	1,895	$	20,342	$	7,747	$	48,624
Provision for credit losses - off-balance sheet exposures (2)		141		N/A		870		N/A		(1,895)		N/A		(1,025)		N/A
Provision for credit losses - held to maturity securities (3)		—		N/A		(9)		N/A		—		N/A		(9)		N/A
Total provision for credit losses	$	—	$	19,915	$	6,713	$	28,282	$	—	$	20,342	$	6,713	$	48,624

(1)

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

(2)

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

(3)

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

The Company’s total provision for credit losses was zero for the ~~second~~third quarter of 2021, compared to ~~$19.9~~$20.3 million for the ~~second~~third quarter of 2020. Provision for the first ~~six~~nine months of 2021 totaled $6.7 million, which was down from ~~$28.3~~$48.6 million in the first ~~six~~nine months of 2020. The adoption of ASU 2016-13 now requires an allowance on held to maturity debt securities and OBS exposures, specifically unfunded commitments. For the ~~six~~nine months ended ~~June~~September 30, 2021, the provision related to HTM debt securities was negative due to the decrease in the balance of those HTM debt securities. For the three and nine months ended September 30, 2021, the provision related to OBS ~~required an additional provision of $141 thousand~~was negative due to the decrease in the ~~second quarter~~balance of those OBS exposures with increase of line of credit usage. In the three and nine months ended September 30, 2021, ~~and~~ loans/leases saw a decrease in provision from the ~~second quarter of 2020. OBS required a provision of $870 thousand~~same periods in the ~~first six months of 2021 and loans/leases saw a decrease in provision from the first six months of 2020.~~prior year. The decrease in provision on loans and leases was substantially driven by decreased qualitative allocations in response to improving economic conditions related to the effects of ~~COVID-19 as well as the change in methodology as related to ASU 2016-13.~~COVID-19.

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

The Company had an ACL on loans/leases of 1.75% of total gross loans/leases at September 30, 2021, compared to 1.79% of total gross loans/leases at June 30, 2021 ~~compared to 1.88% of total gross loans/leases~~and 1.87% at ~~March 31, 2021 and 1.47% at June~~September 30, 2020. Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was ~~$2.2~~$1.7 million and ~~$5.5~~$4.0 million at ~~June~~September 30, 2021 and ~~June~~September 30, 2020, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	As of June 30,				As of September 30,
	2021				2021
			% of Total Gross				% of Total Gross
	Amount		Loans and Leases		Amount		Loans and Leases

	(dollars in thousands)				(dollars in thousands)

Hotels	$	79,764	1.80	%	$	78,478	1.71	%
Restaurants (full service and limited service only)		30,074	0.68			24,465	0.53
Arts, Entertainment and Recreation		28,634	0.65			25,551	0.55
	$	138,472	3.13	%	$	128,494	2.79	%

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

NONINTEREST INCOME

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


	Three Months Ended								Three Months Ended
	June 30,		June 30,						September 30,		September 30,
	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change

	(dollars in thousands)								(dollars in thousands)

Trust department fees	$	2,848	$	2,227	$	621	27.9	%	$	2,714	$	2,280	$	434	19.0	%
Investment advisory and management fees		1,039		1,399		(360)	(25.7)			1,054		1,266		(212)	(16.7)
Deposit service fees		1,492		1,286		206	16.0			1,588		1,403		185	13.2
Gains on sales of residential real estate loans, net		1,184		1,196		(12)	(1.0)			954		1,370		(416)	(30.4)
Swap fee income/capital markets revenue		9,568		19,927		(10,359)	(52.0)			24,885		26,688		(1,803)	(6.8)
Securities gains (losses), net		(88)		65		(153)	(235.4)			—		1,802		(1,802)	(100.0)
Earnings on bank-owned life insurance		451		612		(161)	(26.3)			446		502		(56)	(11.2)
Debit card fees		1,084		775		309	39.9			1,085		946		139	14.7
Correspondent banking fees		269		198		71	35.9			265		220		45	20.5
Other		1,449		941		508	54.0			1,661		1,482		179	12.1
Total noninterest income	$	19,296	$	28,626	$	(9,330)	(32.6)	%	$	34,652	$	37,959	$	(3,307)	(8.7)	%


	Six Months Ended
	June 30,		June 30,
	2021		2020		$ Change		% Change

	(dollars in thousands)

Trust department fees	$	5,649	$	4,539	$	1,110	24.5	%
Investment advisory and management fees		1,979		3,126		(1,147)	(36.7)
Deposit service fees		2,900		2,763		137	5.0
Gains on sales of residential real estate loans, net		2,521		1,848		673	36.4
Swap fee income/capital markets revenue		23,125		26,731		(3,606)	(13.5)
Securities gains (losses), net		(88)		65		(153)	(235.4)
Earnings on bank-owned life insurance		922		941		(19)	(2.0)
Debit card fees		2,059		1,533		526	34.3
Correspondent banking fees		583		413		170	41.2
Other		3,135		1,863		1,272	68.3
Total noninterest income	$	42,785	$	43,822	$	(1,037)	(2.4)	%


	Nine Months Ended
	September 30,		September 30,
	2021		2020		$ Change		% Change

	(dollars in thousands)

Trust department fees	$	8,363	$	6,819	$	1,544	22.6	%
Investment advisory and management fees		3,033		4,392		(1,359)	(30.9)
Deposit service fees		4,488		4,166		322	7.7
Gains on sales of residential real estate loans, net		3,475		3,218		257	8.0
Swap fee income/capital markets revenue		48,010		53,419		(5,409)	(10.1)
Securities gains (losses), net		(88)		1,867		(1,955)	(104.7)
Earnings on bank-owned life insurance		1,368		1,443		(75)	(5.2)
Debit card fees		3,144		2,479		665	26.8
Correspondent banking fees		848		633		215	34.0
Other		4,796		3,345		1,451	43.4
Total noninterest income	$	77,437	$	81,781	$	(4,344)	(5.3)	%

Table of Contents

Part I

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $273.7 million in the secondthird quarter of 2021 ~~and~~due to market volatility but increased by ~~$730.4~~$687.5 million in the first ~~half~~nine months of 2021. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. Trust department fees increased ~~28%~~19%, comparing the ~~second~~third quarter of 2021 to the same period of the prior year and they increased ~~25%~~23% when comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

Investment advisory and management fees decreased ~~26%~~17%, comparing the ~~second~~third quarter of 2021 to the same period of the prior year and ~~they~~ decreased ~~37%~~31% when comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations. The sale of the Bates Companies in August 2020 negatively impacted the results compared to 2020. Excluding the impact of the Bates Companies sale, investment advisory and management fees increased ~~18%~~80% when comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020.

Deposit service fees increased ~~16%~~13% comparing the ~~second~~third quarter of 2021 to the same period of the prior year, and increased 5%8% when comparing the first ~~half~~nine months of 2021 to the same period of the prior year. This increase was primarily due to higher transactional volume due to improving economic conditions. The Company continues to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in-service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, decreased 1%30% when comparing the ~~second~~third quarter of 2021 to the same period of the prior year, but increased ~~36%~~8% when comparing the first ~~half~~nine months of 2021 to the same period of the prior year. The increase was primarily due to increased residential real estate purchase and the refinancing of residential real estate loans with lower interest rates in the first ~~six~~nine months of 2021.

As a result of the low interest rate environment and its continued focus across all subsidiary banks, the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrowers and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. ~~Swap fee income/capital~~Capital markets revenue totaled ~~$9.6~~$24.9 million for the ~~second~~third quarter ~~of 2021, compared to $19.9 million for the second quarter of 2020. Swap fee income/capital markets revenue totaled $23.1 million for the first half~~ of 2021, compared to $26.7 million for the ~~first half~~third quarter of 2020. ~~The decrease was primarily due to a $4 million reduction in swap fee income/capital~~Capital markets revenue ~~as certain loans scheduled~~totaled $48.0 million for the first nine months of 2021, compared to ~~close in~~$53.4 million for the ~~second quarter will now close in the third quarter due to factors outside~~first nine months of ~~the Company’s control.~~2020. Future levels of ~~swap fee income/~~capital markets revenue are somewhat dependent upon prevailing interest rates.

There were no securities gains or losses for the three months ended September 30, 2021. Securities losses totaled $88 thousand for the ~~three and six~~nine months ended ~~June~~September 30, 2021. By comparison, securities gains totaled ~~$65 thousand~~$1.8 million and $1.9 million for the three and ~~six~~nine months ended ~~June~~September 30, ~~2020.~~2020, respectively.

Earnings on BOLI decreased ~~26%~~11% comparing the ~~second~~third quarter of 2021 to the ~~second~~third quarter of 2020 and decreased 2%5% comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity markets. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 15% comparing the third quarter of 2021 to the third quarter of the prior year, and increased 27% comparing the first nine

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~~Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 40% comparing the second quarter~~months of 2021 to the ~~second quarter of the prior year, and increased 34% comparing the first half of 2021 to the first half~~same period of 2020. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees increased ~~36%~~21% comparing the ~~second~~third quarter of 2021 to the ~~second~~third quarter of the prior year, and increased ~~41%~~34% comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Correspondent bank deposit volumes are higher on average in 2021 than in 2020 which is driving the higher fee income. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately 186 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income increased ~~54%~~12% comparing the ~~second~~third quarter of 2021 to the ~~second~~third quarter of the prior year, and increased ~~68%~~43% comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. The increase in the ~~second~~third quarter and first ~~half~~nine months of 2021 was primarily due to equity investment income and gains on disposal of leased assets.

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NONINTEREST EXPENSE

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


	Three Months Ended								Three Months Ended
	June 30,		June 30,						September 30,		September 30,
	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change

	(dollars in thousands)								(dollars in thousands)

Salaries and employee benefits	$	23,044	$	21,304	$	1,740	8.2	%	$	28,207	$	25,999	$	2,208	8.5	%
Occupancy and equipment expense		3,965		3,748		217	5.8			4,122		3,807		315	8.3
Professional and data processing fees		3,702		3,646		56	1.5			3,568		3,758		(190)	(5.1)
Post-acquisition compensation, transition and integration costs		—		70		(70)	(100.0)
Disposition costs		—		(83)		83	(100.0)			—		192		(192)	(100.0)
FDIC insurance, other insurance and regulatory fees		986		908		78	8.6			1,108		1,301		(193)	(14.8)
Loan/lease expense		457		339		118	34.8			308		403		(95)	(23.6)
Net (income from) and gains/losses on operations of other real estate		(113)		(332)		219	(66.0)			(1,346)		16		(1,362)	(8,512.5)
Advertising and marketing		853		552		301	54.5			1,095		750		345	46.0
Bank service charges		572		501		71	14.2			525		488		37	7.6
Loss on liability extinguishment		—		429		(429)	(100.0)			—		1,874		(1,874)	(100.0)
Correspondent banking expense		198		212		(14)	(6.6)			201		205		(4)	(2.0)
Intangibles amortization		508		548		(40)	(7.3)			508		531		(23)	(4.3)
Loss on sale of subsidiary										—		305		(305)	(100.0)
Other		1,503		1,280		223	17.4			3,091		1,209		1,882	155.7
Total noninterest expense	$	35,675	$	33,122	$	2,553	7.7	%	$	41,387	$	40,838	$	549	1.3	%


	Six Months Ended								Nine Months Ended
	June 30,		June 30,						September 30,		September 30,
	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change

	(dollars in thousands)								(dollars in thousands)

Salaries and employee benefits	$	47,891	$	39,823	$	8,068	20.3	%	$	76,098	$	65,822	$	10,276	15.6	%
Occupancy and equipment expense		8,073		7,780		293	3.8			12,195		11,587		608	5.2
Professional and data processing fees		7,145		7,015		130	1.9			10,713		10,773		(60)	(0.6)
Post-acquisition compensation, transition and integration costs		—		221		(221)	(100.0)			—		189		(189)	(100.0)
Disposition costs		8		434		(426)	(98.2)			8		626		(618)	(98.7)
FDIC insurance, other insurance and regulatory fees		2,051		1,591		460	28.9			3,159		2,892		267	9.2
Loan/lease expense		757		567		190	33.5			1,065		970		95	9.8
Net (income from) and gains/losses on operations of other real estate		(74)		(319)		245	(76.8)			(1,420)		(303)		(1,117)	368.6
Advertising and marketing		1,480		1,234		246	19.9			2,575		1,984		591	29.8
Bank service charges		1,095		1,005		90	9.0			1,620		1,493		127	8.5
Losses on liability extinguishment, net		—		576		(576)	(100.0)			—		2,450		(2,450)	(100.0)
Correspondent banking expense		398		428		(30)	(7.0)			599		633		(34)	(5.4)
Intangibles amortization		1,016		1,097		(81)	(7.4)			1,524		1,628		(104)	(6.4)
Goodwill Impairment		—		500		(500)	(100.0)			—		500		(500)	(100.0)
Loss on sale of subsidiary										—		305		(305)	(100.0)
Other		3,063		2,585		478	18.5			6,154		3,842		2,312	60.2
Total noninterest expense	$	72,903	$	64,537	$	8,366	13.0	%	$	114,290	$	105,391	$	8,899	8.4	%

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

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the ~~second~~third quarter of 2020 to the ~~second~~third quarter of 2021 by 8%9%, and increased from the first ~~half~~nine months of 2020 to the first ~~half~~nine months of 2021 by ~~20%~~16%. The increased expense was primarily related to increased incentive compensation driven by strong financial results.

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Occupancy and equipment expense increased 6%8% comparing the ~~second~~third quarter of 2021 to the same period of the prior year, and increased 4%5% comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. The increase was due to higher investments for information technology and repair and maintenance costs.

Professional and data processing fees ~~increased 2%~~decreased 5% comparing both the ~~second~~third quarter of 2021 to the same period in 2020, and decreased 1% comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. ~~The increase was primarily due to accounting and audit fees.~~ 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 post-acquisition costs incurred in the three and ~~six~~nine months of 2021. ~~There were $70~~Post-acquisition costs totaled $189 thousand ~~and $221 thousand~~for the first nine months of ~~post-acquisition costs incurred in the second quarter of 2020 and first half of 2020, respectively.~~2020. These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to previous mergers/acquisitions.

There were no disposition costs for the ~~second~~third quarter of 2021 and there were $8 thousand for the first ~~half~~nine months of 2021. Disposition costs totaled ~~$434~~$192 thousand for the third quarter of 2020 and $626 thousand for the first ~~half~~nine months of 2020. The costs were comprised primarily of legal, accounting, personnel costs and IT deconversion costs related to the sale of the Bates Companies in the third quarter of 2020 and the sale of RB&T in the fourth quarter of 2019.

FDIC insurance, other insurance and regulatory fee expense ~~increased 9%~~decreased 15%, comparing the ~~second~~third quarter of 2021 to the ~~second~~third quarter of 2020, and increased ~~29%~~9% comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. The increase in expense was due to an increase in the asset size of the Company in 2020 and 2021 as well as FDIC insurance assessment credits applied in 2020.

Loan/lease expense ~~increased 35%~~decreased 24% when comparing the ~~second~~third quarter of 2021 to the same quarter of 2020, and increased ~~34%~~10% comparing the first ~~half~~nine months of 2021 to the same period of the prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from and gains/losses on operations of other real estate totaled ~~$113 thousand~~$1.3 million for the ~~second~~third quarter of 2021, compared to net ~~income~~expense from and gains/losses on operations of other real estate of ~~$332~~$16 thousand for the ~~second~~third quarter of 2020. Net income from and gains/losses on operations of other real estate totaled ~~$74~~$1.4 million for the first nine months of 2021, compared to $303 thousand for the first ~~half~~nine months of 2020. The increase in the third quarter of 2021 ~~compared~~was due primarily to ~~net income from and gains/losses on operations~~the sale of one commercial other real estate ~~of $319 thousand for the first half of 2020.~~property.

Advertising and marketing expense increased ~~55%~~46% comparing the ~~second~~third quarter of 2021 to the ~~second~~third quarter of 2020, and increased ~~20%~~30% comparing the first ~~half~~nine months of 2021 to the ~~first half~~same period of 2020. The increase in expense was primarily due to the return to more normal operations during 2021 after improvements in the general environment due to COVID-19 as compared to 2020.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased ~~14%~~8% when comparing the ~~second~~third quarter of 2021 to the same quarter of 2020, and increased 9% when comparing the first ~~half~~nine months of 2021 to the same period of 2020. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses is expected to also increase.

There were no losses on liability extinguishment during the three and ~~six~~nine months of 2021. Losses on liability extinguishment were ~~$429 thousand~~$1.9 million for the ~~second~~third quarter of 2020 and ~~$576 thousand~~$2.5 million for the first ~~half~~nine months of 2020. These losses relate to the prepayment of certain FHLB advances.

Correspondent banking expense decreased 7%2% when comparing the ~~second~~third quarter of 2021 to the ~~second~~third quarter of 2020 and decreased 7%5% when comparing the first ~~half~~nine months of 2021 to the same period of the prior year. These are direct costs

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

Intangibles amortization expense decreased 7%4% when comparing ~~both~~ the ~~second~~third quarter of 2021 to the same quarter of 2020 and decreased 6% when comparing the first ~~half~~nine months of 2021 to the same period of the prior year. These expenses naturally decrease unless there is an addition to intangible assets.

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

There was no loss on sale of subsidiary in the first three and nine months of 2021. Loss on sale of subsidiary totaled $305 thousand in the first three and nine months of 2020 related to the sale of the Bates Companies.

Other noninterest expense increased ~~17%~~156% when comparing the ~~second~~third quarter of 2021 to the ~~second~~third quarter of 2020 and increased ~~19%~~60% when comparing the first ~~half~~nine months of 2021 to the same period of the prior year. ~~Included~~The increase was due primarily to the write-off of certain fixed assets which resulted in ~~other noninterest expense are items such as credit card processing expenses.~~a $1.4 million loss on disposal of fixed assets.

INCOME TAXES

In the ~~second~~third quarter of 2021, the Company incurred income tax expense of ~~$4.8~~$7.9 million. During the first ~~half~~nine months of the year, the Company incurred income tax expense of ~~$8.3~~$16.3 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and nine months ended ~~June~~September 30, 2021 and 2020.


	For the Three Months Ended June 30,								For the Six Months Ended June 30,								For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021				2020				2021				2020				2021				2020				2021				2020
			% of				% of				% of				% of				% of				% of				% of				% of
			Pretax				Pretax				Pretax				Pretax				Pretax				Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income

	(dollars in thousands)																(dollars in thousands)

Computed "expected" tax expense	$	5,699	21.0	%	$	3,472	21.0	%	$	10,219	21.0	%	$	6,226	21.0	%	$	8,293	21.0	%	$	4,486	21.0	%	$	18,512	21.0	%	$	10,712	21.0	%
Tax exempt income, net		(1,802)	(6.6)			(1,247)	(7.5)			(3,521)	(7.2)			(2,472)	(8.3)			(2,032)	(5.1)			(1,350)	(6.3)			(5,553)	(6.3)			(3,822)	(7.5)
Bank-owned life insurance		(95)	(0.4)			(115)	(0.7)			(194)	(0.4)			(170)	(0.6)			(93)	(0.2)			(101)	(0.5)			(287)	(0.3)			(271)	(0.5)
State income taxes, net of federal benefit, current year		1,247	4.6			776	4.7			2,271	4.7			1,453	4.9			1,799	4.6			1,003	4.7			4,070	4.6			2,456	4.8
Tax credits		(57)	(0.2)			(116)	(0.7)			(114)	(0.2)			(232)	(0.8)			(57)	(0.1)			(116)	(0.5)			(171)	(0.2)			(348)	(0.7)
Excess tax benefit on stock options exercised and restricted stock awards vested		(40)	(0.1)			2	—			(204)	(0.4)			(262)	(0.9)			(107)	(0.3)			14	0.1			(311)	(0.4)			(248)	(0.5)
Other		(164)	(0.6)			26	0.1			(128)	(0.3)			139	0.5			126	0.2			80	0.4			(2)	—			219	0.5
Federal and state income tax expense	$	4,788	17.6	%	$	2,798	16.9	%	$	8,329	17.2	%	$	4,682	15.8	%	$	7,929	20.1	%	$	4,016	18.9	%	$	16,258	18.4	%	$	8,698	17.1	%

The effective tax rate for the quarter ended ~~June~~September 30, 2021 was ~~17.6%, which was a modest increase from the effective tax rate of 16.9% for the quarter ended June 30, 2020. The effective tax rate for the six months ended June 30, 2021 was 17.2%~~20.1%, which was an increase from the effective tax rate of ~~15.8%~~18.8% for the ~~six~~quarter ended September 30, 2020. The effective tax rate for the nine months ended ~~June~~September 30, 2021 was 18.4%, which was an increase from the effective tax rate of 17.1% for the nine months ended September 30, 2020. The increase for both periods was due to ~~a decrease in tax exempt~~increased levels of taxable income as compared to ~~total pretax~~tax exempt income.

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FINANCIAL CONDITION

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


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

	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	144,378	2	%	$	133,870	2	%	$	157,005	3	%	$	231,477	4	%	$	128,136	2	%	$	144,378	2	%	$	157,005	3	%	$	371,600	6	%
Securities		810,445	14	%		799,825	14	%		838,131	15	%		748,883	13	%		828,719	14	%		810,445	14	%		838,131	15	%		782,088	13	%
Net loans/leases		4,338,811	76	%		4,279,220	77	%		4,166,753	73	%		4,079,432	73	%		4,519,060	75	%		4,338,811	76	%		4,166,753	73	%		4,168,395	72	%
Derivatives		193,395	3	%		122,668	2	%		222,757	4	%		225,164	4	%		198,393	3	%		193,395	3	%		222,757	4	%		236,381	4	%
Other assets		318,136	5	%		309,564	5	%		298,151	5	%		309,040	6	%		340,200	6	%		318,136	5	%		298,151	5	%		306,096	5	%
Assets held for sale		—	-	%		—	-	%		—	-	%		10,765	-	%
Total assets	$	5,805,165	100	%	$	5,645,147	100	%	$	5,682,797	100	%	$	5,604,761	100	%	$	6,014,508	100	%	$	5,805,165	100	%	$	5,682,797	100	%	$	5,864,560	100	%

Total deposits	$	4,688,935	81	%	$	4,631,782	82	%	$	4,599,137	82	%	$	4,349,775	78	%	$	4,871,828	81	%	$	4,688,935	81	%	$	4,599,137	82	%	$	4,672,268	79	%
Total borrowings		198,908	3	%		188,601	3	%		177,114	3	%		376,250	7	%		183,514	3	%		198,908	3	%		177,114	3	%		226,962	4	%
Derivatives		196,092	3	%		125,863	2	%		229,270	4	%		233,589	4	%		201,450	3	%		196,092	3	%		229,270	4	%		244,510	4	%
Other liabilities		90,754	2	%		90,182	2	%		83,483	1	%		87,539	1	%		107,902	2	%		90,754	2	%		83,483	1	%		148,207	3	%
Liabilities held for sale		—	-	%		—	-	%		—	-	%		1,588	0	%
Total stockholders' equity		630,476	11	%		608,719	11	%		593,793	10	%		556,020	10	%		649,814	11	%		630,476	11	%		593,793	10	%		572,613	10	%
Total liabilities and stockholders' equity	$	5,805,165	100	%	$	5,645,147	100	%	$	5,682,797	100	%	$	5,604,761	100	%	$	6,014,508	100	%	$	5,805,165	100	%	$	5,682,797	100	%	$	5,864,560	100	%

During the ~~second~~third quarter of 2021, the Company's total assets increased ~~$160.0~~$209.3 million, or 3%4% from ~~March 31,~~June 30, 2021, to a total of ~~$5.8~~$6.0 billion. The Company’s net loans/leases increased ~~$59.6~~$180.2 million in the ~~second~~third quarter of 2021. Total deposits increased ~~$57.2~~$182.9 million in the ~~second~~third quarter of 2021 primarily due to an increase in interest-bearing demand deposits. Borrowings ~~increased $10.3~~decreased $15.4 million in the ~~second~~third quarter of 2021 which consisted primarily of ~~an increase~~a decrease in FHLB overnight borrowings of ~~$15.0~~$10.0 million.

INVESTMENT SECURITIES

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

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


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

	(dollars in thousands)																				(dollars in thousands)
																																			��
U.S. govt. sponsored agency securities	$	14,670		2	%	$	14,581		2	%	$	15,336		2	%	$	17,472		2	%
U.S. treasuries and govt. sponsored agency securities																					$	23,689		3	%	$	14,670		2	%	$	15,336		2	%	$	18,437		2	%
Municipal securities		641,430		79	%		614,476		76	%		627,523		75	%		526,192		71	%		649,312		78	%		641,430		79	%		627,523		75	%		569,075		73	%
Residential mortgage-backed and related securities		106,138		13	%		118,052		15	%		132,842		16	%		145,672		19	%		100,744		12	%		106,138		13	%		132,842		16	%		134,147		17	%
Asset-backed securities		31,779		4	%		39,815		5	%		40,683		4	%		39,797		5	%		30,607		4	%		31,779		4	%		40,683		4	%		40,665		5	%
Other securities		16,428		2	%		12,901		2	%		21,747		3	%		19,750		3	%		24,367		3	%		16,428		2	%		21,747		3	%		19,764		3	%
	$	810,445		100	%	$	799,825		100	%	$	838,131		100	%	$	748,883		100	%	$	828,719		100	%	$	810,445		100	%	$	838,131		100	%	$	782,088		100	%

Securities as a % of Total Assets		13.96	%				14.17	%				14.75	%				13.36	%				13.78	%				13.96	%				14.75	%				13.34	%
Net Unrealized Gains as a % of Amortized Cost		7.63	%				5.59	%				6.90	%				4.16	%				6.67	%				7.63	%				6.90	%				4.62	%
Duration (in years)		8.1					7.6					7.0					6.3					8.2					8.1					7.0					6.6
Yield on investment securities (tax equivalent)		3.66	%				3.48	%				3.74	%				3.77	%				3.82	%				3.66	%				3.74	%				3.66	%

At January 1, 2021, the Company adopted ASU 2016-13, which requires an allowance for credit losses related to HTM securities. Additionally, ASU 2016-13 replaced the legacy GAAP OTTI model with a credit loss model. The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.

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

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

LOANS/LEASES

Total loans/leases, excluding PPP loans (non-GAAP), grew ~~14.9%~~23% on an annualized basis during the ~~first~~third quarter of 2021. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables. Adoption of ASU 2016-13 resulted in a change in loans and lease segments and those segments for years prior to 2021 are shown in a separate table.


	As of								As of
	June 30, 2021				March 31, 2021				September 30, 2021				June 30, 2021
	Amount		%		Amount		%		Amount		%		Amount		%

	(dollars in thousands)								(dollars in thousands)

C&I - revolving	$	182,882	4	%	$	168,842	4	%	$	175,155	4	%	$	182,882	4	%
C&I - other *		1,505,384	34	%		1,616,144	37	%		1,465,580	32	%		1,505,384	34	%
CRE - owner occupied		427,734	10	%		461,272	11	%		434,014	9	%		427,734	10	%
CRE - non-owner occupied		618,879	14	%		610,582	14	%		644,850	14	%		618,879	14	%
Construction and land development		708,289	16	%		607,798	14	%		852,418	19	%		708,289	16	%
Multi-family		466,804	10	%		396,272	9	%		529,727	11	%		466,804	10	%
Direct financing leases		56,153	1	%		60,134	1	%		50,237	1	%		56,153	1	%
1-4 family real estate		382,142	9	%		368,927	8	%		376,067	8	%		382,142	9	%
Consumer		69,438	2	%		71,080	2	%		71,682	2	%		69,438	2	%
Total loans/leases	$	4,417,705	100	%	$	4,361,051	100	%	$	4,599,730	100	%	$	4,417,705	100	%
Less allowance		(78,894)				(81,831)				(80,670)				(78,894)
Net loans/leases	$	4,338,811			$	4,279,220			$	4,519,060			$	4,338,811

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

December 31, 2020

June 30, 2020


Amount

%


Amount

%


C&I loans*

$
1,726,723

41
%

$
1,850,110

45
%

CRE loans

2,107,629

50
%

1,869,162

45
%

Direct financing leases

66,016

1
%

79,105

2
%

Residential real estate loans

252,121

6
%

241,069

6
%

Installment and other consumer loans

91,302

2
%

99,150

2
%

Total loans/leases

$
4,243,791

100
%

$
4,138,596

100
%

Plus deferred loan/lease origination costs, net of fees

7,338



1,663



Less allowance

(84,376)



(60,827)



Net loans/leases

$
4,166,753

$
4,079,432



	December 31, 2020				September 30, 2020
	Amount		%		Amount		%


C&I loans*	$	1,726,723	41	%	$	1,823,049	43	%
CRE loans		2,107,629	50	%		1,999,715	47	%
Direct financing leases		66,016	1	%		73,011	2	%
Residential real estate loans		252,121	6	%		245,032	6	%
Installment and other consumer loans		91,302	2	%		102,471	2	%
Total loans/leases	$	4,243,791	100	%	$	4,243,278	100	%
Plus deferred loan/lease origination costs, net of fees		7,338				4,699
Less allowance		(84,376)				(79,582)
Net loans/leases	$	4,166,753			$	4,168,395

*Includes PPP loans totaling ~~$147.5~~$83.6 million, ~~$243.9~~$147.5 million, $273.1 million and ~~$358.1~~$357.5 million as of ~~June~~September 30, 2021, ~~March 31,~~June 30, 2021, December 31, 2020 and ~~June~~September 30, 2020, respectively.

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans because owner-occupied loans are generally considered to have less risk. As of September 30, 2021 and June 30, 2021, ~~and March 31, 2021,~~ approximately ~~18% and 28%~~17% of the CRE loan portfolio was ~~owner-occupied, respectively.~~owner-occupied.

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~~September 30, 2021: CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate.


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

	(dollars in thousands)																(dollars in thousands)

Lessors of Residential Buildings	$	1,002,902	43	%		845,547	39	%	$	786,066	37	%	$	593,063	32	%	$	1,194,234	46	%	$	1,002,902	43	%	$	786,066	37	%	$	661,562	33	%
Lessors of Nonresidential Buildings		557,786	24	%	$	573,026	26	%		567,759	27	%		545,026	29	%		569,477	22	%		557,786	24	%		567,759	27	%		578,837	29	%
Hotels		75,850	3	%		67,072	3	%		72,718	4	%		70,675	4	%		75,212	3	%		75,850	3	%		72,718	4	%		71,435	4	%
New Housing For-Sale Builders		56,143	2	%		46,867	2	%		45,619	2	%		56,229	3	%		56,936	2	%		56,143	2	%		45,619	2	%		47,733	2	%
Lessors of Other Real Estate Property		41,707	2	%		39,580	2	%		39,344	2	%		40,248	2	%		50,576	2	%		41,707	2	%		39,344	2	%		46,877	2	%
Other Activities Related to Real Estate																		41,185	2	%		39,057	2	%		41,197	2	%		41,883	2	%
New Single-Family Housing Construction																		40,426	2	%		42,919	2	%		29,559	1	%		37,797	2	%
Nonresidential Property Managers		39,502	2	%		39,933	2	%		46,764	2	%		44,887	2	%		39,195	2	%		39,502	2	%		46,764	2	%		44,293	2	%
Other Activities Related to Real Estate		39,057	2	%		43,411	2	%		41,197	2	%		38,044	2	%
Land Subdivision		36,603	2	%		40,767	2	%		40,720	2	%		55,555	3	%
Other *		478,406	20	%		485,999	22	%		467,442	22	%		425,435	23	%		491,057	19	%		472,090	19	%		478,603	23	%		469,298	24	%
Total CRE Loans	$	2,327,956	100	%	$	2,182,202	100	%	$	2,107,629	100	%	$	1,869,162	100	%	$	2,558,298	100	%	$	2,327,956	100	%	$	2,107,629	100	%	$	1,999,715	100	%

* “Other” consists of all other industries. None of these had concentrations greater than ~~$42.9~~$36.4 million, or approximately ~~1.8%~~1.4% of total CRE loans in the most recent period presented.

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

●

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

●

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The remaining 1-4 family real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

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


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

	(dollars in thousands)																(dollars in thousands)

Trucks, Vans and Vocational Vehicles	$	65,063	25	%	$	63,643	26	%	$	61,044	26	%	$	59,782	26	%	$	68,387	26	%	$	65,063	25	%	$	61,044	26	%	$	59,906	26	%
Manufacturing - General		18,474	7	%		18,196	7	%		18,599	8	%		16,939	7	%		18,274	7	%		18,474	7	%		18,599	8	%		18,914	8	%
Food Processing Equipment		14,569	6	%		14,873	6	%		16,110	7	%		16,244	7	%		14,717	6	%		14,569	6	%		16,110	7	%		16,219	7	%
Marine - Travelifts		13,279	5	%		12,188	5	%		12,682	5	%		11,642	5	%		14,629	6	%		13,279	5	%		12,682	5	%		12,266	5	%
Construction - General		12,918	5	%		13,128	5	%		14,052	6	%		15,156	7	%		12,482	5	%		12,918	5	%		14,052	6	%		14,198	6	%
Computer Hardware		12,745	5	%		11,942	5	%		10,790	4	%		11,385	5	%		11,781	4	%		12,745	5	%		10,790	4	%		10,930	5	%
Trailers		10,715	4	%		10,109	4	%		9,008	4	%		9,541	4	%		11,308	4	%		10,715	4	%		9,008	4	%		9,071	4	%
Tractor		8,478	3	%		6,739	3	%		3,679	2	%		1,529	1	%		9,188	3	%		8,478	3	%		3,679	2	%		—	—	%
Other *		102,279	40	%		98,660	39	%		91,558	38	%		90,542	38	%		102,196	39	%		102,279	40	%		91,558	38	%		93,194	40	%
Total m2 loans and leases	$	258,520	100	%	$	249,478	100	%	$	237,522	100	%	$	232,760	100	%	$	262,962	100	%	$	258,520	100	%	$	237,522	100	%	$	234,698	101	%

* “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

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

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

Three Months Ended

Six Months Ended

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

(dollars in thousands)

Balance, beginning
$
81,831

$
42,233

$
84,376

$
36,001
Impact of adopting ASU 2016-13

—

—

(8,102)

—
Provision

(141)

19,915

5,852

28,282
Charge-offs

(3,674)

(1,450)

(4,387)

(3,785)
Recoveries

878

129

1,155

329
Balance, ending
$
78,894

$
60,827

$
78,894

$
60,827
Balance, ending

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Part I

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Changes in the ACL for ~~OBS exposures~~loans/leases for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 are presented as follows:


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020

	(dollars in thousands)								(dollars in thousands)

Balance, beginning ~~(1)~~	$	9,846	$	—	$	—	$	—	$	78,894	$	60,827	$	84,376	$	36,001
Impact of adopting ASU 2016-13		—		—		9,117		—		—		—		(8,102)		—
Provisions charged to expense		141		—		870		—
Provision										1,895		20,342		7,747		48,624
Charge-offs										(287)		(1,819)		(4,674)		(5,604)
Recoveries										168		232		1,323		561
Balance, ending	$	9,987	$	—	$	9,987	$	—	$	80,670	$	79,582	$	80,670	$	79,582

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


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020

	(dollars in thousands)

Balance, beginning (1)	$	9,987	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		9,117		—
Provisions credited to expense		(1,895)		—		(1,025)		—
Balance, ending	$	8,092	$	—	$	8,092	$	—

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

The ACL for OBS exposures totaled $9.1 million after the adoption of CECL on January 1, 2021. Prior to January 1, 2021, the allowance for OBS exposures was not required. The Company recorded ~~$141 thousand~~negative $1.9 million and ~~$870 thousand~~negative $1.0 million of provision for credit losses related to OBS exposures, specifically unfunded commitments, in the ~~second~~third quarter of 2021 and first ~~half~~nine months of 2021, respectively. At ~~June~~September 30, 2021, the allowance for OBS exposures was ~~$10.0~~$8.1 million.

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


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

	(dollars in thousands)												(dollars in thousands)

Special Mention (Rating 6)	$	51,613		$	53,466		$	71,482		$	104,608		$	58,634		$	51,613		$	71,482		$	79,587
Substandard (Rating 7)		79,719			84,982			66,081			39,855			59,402			79,719			66,081			70,409
Doubtful (Rating 8)		—			—			—			—			—			—			—			—
	$	131,332		$	138,448		$	137,563		$	144,463		$	118,036		$	131,332		$	137,563		$	149,996

Criticized Loans **	$	131,332		$	138,448		$	137,563		$	144,463		$	118,036		$	131,332		$	137,563		$	149,996
Classified Loans ***	$	79,719		$	84,982		$	66,081		$	39,855		$	59,402		$	79,719		$	66,081		$	70,409

Criticized Loans as a % of Total Loans/Leases		2.97	%		3.17	%		3.24	%		3.49	%		2.57	%		2.97	%		3.24	%		3.53	%
Classified Loans as a % of Total Loans/Leases		1.80	%		1.95	%		1.55	%		0.96	%		1.29	%		1.80	%		1.55	%		1.66	%

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

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

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

Table of Contents

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Criticized loans decreased 5%10% and classified loans decreased 6%25% from ~~March 31,~~June 30, 2021 to ~~June~~September 30, 2021. The Company continues its strong focus on improving credit quality in an effort to limit NPLs. See further discussion on industries impacted by COVID-19 in the “Provision for Loan/Lease Losses” section of this report.

As of


June 30, 2021

March 31, 2021

December 31, 2020


June 30, 2020

ACL on loans/leases / Gross loans/leases

1.79
%
1.88
%
1.98
%

1.47
%

ACL on loans/leases / NPLs

952.02
%
590.28
%
605.15
%

498.66
%


	As of
	September 30, 2021		June 30, 2021		December 31, 2020		September 30, 2020
ACL on loans/leases / Gross loans/leases	1.75	%	1.79	%	1.98	%	1.87	%
ACL on loans/leases / NPLs	1,180.77	%	952.02	%	605.15	%	450.05	%

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

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

	(dollars in thousands)												(dollars in thousands)

Nonaccrual loans/leases (1) (2)	$	8,230		$	13,863		$	13,940		$	12,099		$	6,818		$	8,230		$	13,940		$	17,597
Accruing loans/leases past due 90 days or more		57			—			3			99			14			57			3			86
Total NPLs		8,287			13,863			13,943			12,198			6,832			8,287			13,943			17,683
OREO		1,820			173			20			157			—			1,820			20			125
Other repossessed assets		—			50			135			25			—			—			135			110
Total NPAs	$	10,107		$	14,086		$	14,098		$	12,380		$	6,832		$	10,107		$	14,098		$	17,918


NPLs to total loans/leases		0.19	%		0.32	%		0.35	%		0.32	%		0.15	%		0.19	%		0.35	%		0.42	%
NPAs to total loans/leases plus repossessed property		0.23	%		0.32	%		0.35	%		0.32	%		0.15	%		0.23	%		0.35	%		0.42	%
NPAs to total assets		0.17	%		0.25	%		0.25	%		0.22	%		0.11	%		0.17	%		0.25	%		0.32	%

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

(2)	Includes TDRs of $152 thousand at September 30, 2021, $2.7 million at June 30, ~~2021, $1.5 million at March 31,~~ 2021, $984 thousand at December 31, 2020 and ~~$352~~$204 thousand at ~~June~~September 30, 2020.

NPAs at September 30, 2021 were $6.8 million, down $3.3 million from June 30, 2021, ~~were $10.1 million,~~and down ~~$4.0~~$11.1 million from ~~March 31, 2021, and down $2.3 million from June~~September 30, 2020. The ratio of NPAs to total assets was 0.11% at September 30, 2021, down from 0.17% at June 30, 2021, ~~down from 0.25% at March 31, 2021,~~ and down from ~~0.22%~~0.32% at ~~June~~September 30, 2020.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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

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

Due to the economic impacts of COVID-19, the Company established its LRP for its clients. The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term. Those deferred payments will be added to the end of the original term of the loan through a three month extension of the maturity date. The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest for up to 90 days. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020. On December 27, 2020, ~~former President Trump signed the Consolidated Appropriations Act, which extended~~ this relief was extended to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022. The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. The Company implemented its LRP offerings to extend qualifying customers’ payments for 90 days. As of ~~June~~September 30, 2021, there were no Bank modifications and 29eight m2 modifications of loans and leases totaling ~~$4.7~~$2.9 million

~~Table of Contents~~

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~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

representing ~~0.11%~~0.06% of the total loan and lease portfolio currently on deferral. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators have clarified that this guidance may continue to be applied in 2021.

DEPOSITS

Deposits increased ~~$57.2~~$182.9 million during the ~~second~~third quarter of 2021, primarily due to ~~an increase~~increases in both noninterest bearing and interest bearing deposits. The table below presents the composition of the Company's deposit portfolio.


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

	(dollars in thousands)																(dollars in thousands)

Noninterest bearing demand deposits	$	1,258,885	27	%	$	1,269,578	27	%	$	1,145,378	25	%	$	1,177,482	27	%	$	1,342,273	28	%	$	1,258,885	27	%	$	1,145,378	25	%	$	1,175,085	25	%
Interest bearing demand deposits		2,976,696	63	%		2,916,054	63	%		2,987,469	65	%		2,488,755	57	%		3,086,711	63	%		2,976,696	63	%		2,987,469	65	%		2,938,194	63	%
Time deposits		452,171	10	%		445,067	10	%		460,659	10	%		560,982	13	%		441,743	9	%		452,171	10	%		460,659	10	%		499,021	11	%
Brokered deposits		1,183	0	%		1,084	0	%		5,631	0	%		122,556	3	%		1,101	0	%		1,183	0	%		5,631	0	%		59,968	1	%
	$	4,688,935	100	%	$	4,631,782	100	%	$	4,599,137	100	%	$	4,349,775	100	%	$	4,871,828	100	%	$	4,688,935	100	%	$	4,599,137	100	%	$	4,672,268	100	%

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

of strong core deposit growth since ~~June~~September 2020, the Company reduced its reliance on higher cost CDs and brokered deposits.

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

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~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

BORROWINGS

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


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

	(dollars in thousands)								(dollars in thousands)

Overnight repurchase agreements	$	—	$	—	$	—	$	2,368
Federal funds purchased		7,070		6,840		5,430		22,450	$	1,600	$	7,070	$	5,430	$	30,430
Overnight federal reserve borrowings		—		—		—		100,000
	$	7,070	$	6,840	$	5,430	$	124,818

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

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

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


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

Term FHLB advances	$	—	$	—	$	—	$	90,000	$	—	$	—	$	—	$	40,000
Overnight FHLB advances		40,000		25,000		15,000		55,000		30,000		40,000		15,000		—
	$	40,000	$	25,000	$	15,000	$	145,000	$	30,000	$	40,000	$	15,000	$	40,000

FHLB advances ~~increased $15.0~~decreased $10.0 million in the current quarter compared to the prior quarter due to temporary changes in liquidity.

The Company renewed its revolving credit note in the second quarter of 2021. At renewal, the line amount was $25.0 million. Interest on the revolving line of credit was calculated at the effective Prime Rate plus 2.25% per ~~annum (5.50% at June 30, 2021).~~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~~September 30, 2021.

The Company had subordinated notes totaling $113.8 million ~~and $118.7 million~~ as of ~~June~~September 30, 2021 and ~~March 31, 2021, respectively.~~June 30, 2021. The Company prepaid $5.0 million in subordinated debt in the second quarter of 2021 with no gain/loss.

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

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	June 30, 2021				December 31, 2020				September 30, 2021				December 31, 2020
			Weighted				Weighted				Weighted				Weighted
			Average				Average				Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate

	(dollars in thousands)								(dollars in thousands)
Year ending December 31:
2021	$	41,183	0.26	%	$	20,631	0.21	%	$	31,101	0.29	%	$	20,631	0.21	%
2022		—	—			—	—			—	—			—	—
2023		—	—			—	—			—	—			—	—
2024		—	—			—	—			—	—			—	—
Total Wholesale Funding	$	41,183	0.26	%	$	20,631	0.21	%	$	31,101	0.29	%	$	20,631	0.21	%

During the first ~~six~~nine months of 2021, wholesale funding increased ~~$20.6~~$10.5 million due to temporary changes in liquidity, $15.0 million of which was overnight FHLB ~~advances.~~advances offset by decrease in brokered deposits of $4.5 million.

STOCKHOLDERS' EQUITY

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


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

	(dollars in thousands)												(dollars in thousands)

Common stock	$	15,764		$	15,844		$	15,806		$	15,791		$	15,590		$	15,764		$	15,806		$	15,792
Additional paid in capital		275,485			276,350			275,807			274,315			272,964			275,485			275,807			275,122
Retained earnings		335,424			316,900			300,804			267,081			360,003			335,424			300,804			283,480
AOCI (loss)		3,803			(375)			1,376			(1,167)			1,257			3,803			1,376			(1,781)
Total stockholders' equity	$	630,476		$	608,719		$	593,793		$	556,020		$	649,814		$	630,476		$	593,793		$	572,613

TCE / TA ratio (non-GAAP)		9.55	%		9.42	%		9.08	%		8.48	%		9.54	%		9.55	%		9.08	%		8.42	%

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

Excluding the impact of PPP loans, the adjusted TCE/TA at ~~June~~September 30, 2021 was ~~9.60%~~9.47% (non-GAAP).

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged ~~$90.2~~$102.1 million during the ~~second~~third quarter of 2021 and ~~$104.2~~$102.7 million during the first ~~six~~nine months of 2021. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

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

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

At ~~June~~September 30, 2021, the subsidiary banks had 2831 lines of credit totaling ~~$639.8~~$560.6 million, of which ~~$183.8~~$104.6 million was secured and $456.0 million was unsecured. At ~~June~~September 30, 2021, the full ~~$639.8~~$560.6 million was available.

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

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

As of ~~June~~September 30, 2021, the Company had ~~$684.0~~$667.4 million in average correspondent banking deposits spread over 186 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.

Investing activities used cash of ~~$143.4~~$330.5 million during the first ~~six~~nine months of 2021, compared to ~~$557.6~~$837.8 million for the same period of 2020. The net ~~increase~~decrease in interest-bearing deposits at financial institutions was ~~$844 thousand~~$22.8 million for the first ~~six~~nine months of 2021, compared to a net ~~decrease~~increase of ~~$7.1~~$154.2 million for the same period of 2020. Proceeds from calls, maturities, and paydowns of securities were ~~$110.9~~$131.1 million for the first ~~six~~nine months of 2021, compared to ~~$34.5~~$72.3 million for the same period of 2020. Purchases of securities used cash of ~~$108.6~~$151.7 million for the first ~~six~~nine months of 2021, compared to ~~$166.7~~$255.5 million for the same period of 2020. Proceeds from sales of securities were ~~$23.9~~$23.8 million for the first ~~six~~nine months of 2021, compared to ~~$4.6~~$28.6 million for the same period of 2020. The net increase in loans/leases used cash of ~~$171.0~~$353.6 million for the first ~~six~~nine months of 2021 compared to ~~$447.4~~$555.3 million for the same period of 2020.

Financing activities provided cash of ~~$104.9~~$262.2 million for the first ~~six~~nine months of 2021, compared to ~~$530.6~~$701.2 million for same period of 2020. Net increases in deposits totaled ~~$89.8~~$272.7 million for the first ~~six~~nine months of 2021, compared to ~~$409.0~~$731.4 million for the same period of 2020. During the first ~~six~~nine months of 2021, the Company's short-term borrowings ~~increased $1.6~~decreased $3.8 million, compared to an increase in short-term borrowings of ~~$111.4~~$17.0 million for the same period of 2020. There were no long-term FHLB advances during the first ~~six~~nine months of 2021. There were no maturities and principal payments on FHLB term advances in the first ~~six~~nine months of 2021. Net increase in overnight advances totaled ~~$25.0~~$15.0 million for the first ~~six~~nine months of 2021. In the first ~~six~~nine months of 2020, the Company decreased short-term and overnight FHLB advances by ~~$40.0~~$16.0 million. Prepayments on brokered and public time deposits totaled ~~$29.2~~$29.4 million during the first ~~six~~nine months of 2020. Prepayment of subordinated notes totaled $5.0 million during the first ~~six~~nine months of 2021.

Total cash provided by operating activities was ~~$32.7~~$64.3 million for the first ~~six~~nine months of 2021, compared to ~~$39.3~~$129.3 million for the same period of 2020.

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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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

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

●

The strength of the local, state, and national and international economies (including the impact of the ~~new~~current presidential administration).

●

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

●

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

●

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

●

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

●

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

●

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

●

Unexpected results of acquisitions which may include failure to realize the anticipated benefits of the acquisition.

●

The loss of key executives or employees.

●

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

●

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

●

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

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

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

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

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

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

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

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

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

100 basis point downward shift	(10.0)	%	(0.1)	%	—	%	0.5	%	(10.0)	%	(0.1)	%	—	%	0.5	%
200 basis point upward shift	(10.0)	%	2.1	%	2.5	%	1.2	%	(10.0)	%	2.1	%	2.5	%	1.2	%
300 basis point upward shock	(30.0)	%	9.5	%	10.3	%	4.9	%	(30.0)	%	9.4	%	10.3	%	4.9	%

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~~September 30, 2021 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~~September 30, 2021. 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, 2020. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The program was paused for a period of time during the pandemic and then restarted on May 24, 2021. All shares repurchased under the share repurchase program during the second and third quarter were retired.


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

April 1-30, 2021	—	—	—	699,068
May 1-31, 2021	12,000	47.45	12,000	687,068
June 1-30, 2021	88,000	48.04	100,000	599,068
July 1-31, 2021					84,000	47.21	284,932	515,068
August 1-31, 2021					84,904	49.32	369,836	430,164
September 1-30, 2021					24,249	49.82	394,085	405,915

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

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

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 6,~~November 5, 2021	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer


Date	~~August 6,~~November 5, 2021	/s/ Todd A. Gipple
		Todd A. Gipple, President
		Chief Operating Officer
		Chief Financial Officer


Date	~~August 6,~~November 5, 2021	/s/ Nick W. Anderson
		Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)


	Three Months Ended June 30,
	2021		2020

	(dollars in thousands)

Net income	$	22,349	$	13,739

Other comprehensive income:

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during the period before tax		4,663		5,336
Less reclassification adjustment for gains (losses) included in net income before tax		(88)		65
		4,751		5,271

Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		492		(654)
Less reclassification adjustment for caplet amortization before tax		(163)		(124)
		655		(530)

Other comprehensive income, before tax		5,406		4,741
Tax expense		1,227		1,119
Other comprehensive income, net of tax		4,179		3,622

Comprehensive income	$	26,528	$	17,361


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

	(dollars in thousands)
CONCESSION - Significant Payment Delay
C&I	—	$	—	$	—	$	—	2	$	111	$	111		$	—
Direct Financing Leases	2		78		78		—	3		145		145			—
	2	$	78	$	78	$	—	5	$	256	$	256		$	—

TOTAL	2	$	78	$	78	$	—	5	$	256	$	256		$	—
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