QCR 10K 2022 Annual report

QCR (QCRH) 10-K2022 FY Annual report

Content analysis

0000906465us-gaap:FairValueInputsLevel2Memberqcrh:NonmaturityDepositsMemberus-gaap:EstimateOfFairValueFairValueDisclosureMember2021-12-31

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2022.

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

Commission file number: 0-22208

QCR HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices)

(309) 736-3580

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange 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

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

Preferred Share Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ X ] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes [ ] No [ X ]

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 past 90 days. Yes [ X ] 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ X ] 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 [X]	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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [X]

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. [ ]

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The Nasdaq Global Market on June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $895,098,226.

As of February 15, 2023 the Registrant had outstanding 16,825,981 shares of common stock, $1.00 par value per share.

Documents incorporated by reference:

Part III of Form 10-K incorporates by reference portions of the proxy statement for annual meeting of stockholders to be held in May 2023.

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QCR HOLDINGS, INC. AND SUBSIDIARIES

INDEX


			Page Number(s)
Part I			4
	Item 1.	Business	4
	Item 1A.	Risk Factors	13
	Item 1B.	Unresolved Staff Comments	27
	Item 2.	Properties	27
	Item 3.	Legal Proceedings	27
	Item 4.	Mine Safety Disclosures	27

Part II			27
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
	Item 6.	[Reserved]	29
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
		General	30
		Critical Accounting Policies and Critical Accounting Estimates	30
		Executive Overview	32
		Strategic Financial Metrics	33
		Strategic Developments	34
		GAAP to Non-GAAP Reconciliations	35
		Net Interest Income and Margin (Tax Equivalent Basis)(Non-GAAP)	36
		Results of Operations	39
		Interest Income	39
		Interest Expense	39
		Provision for Credit Losses	40
		Noninterest Income	40
		Noninterest Expenses	42
		Income Tax Expense	44
		Financial Condition	44
		Overview	44
		Investment Securities	44
		Loans/Leases	45
		Allowance for Credit Losses on Loans/Leases and OBS Exposures	47
		Nonperforming Assets	49
		Deposits	50
		Short-Term Borrowings	51
		FHLB Advances and Other Borrowings	51
		Subordinated Notes	51
		Junior Subordinated Debentures	52
		Stockholders’ Equity	52
		Liquidity and Capital Resources	53
		Commitments, Contingencies, Contractual Obligations, and Off-Balance Sheet Arrangements	54
		Impact of Inflation and Changing Prices	55
		Forward-Looking Statements	55
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	56
	Item 8.	Consolidated Financial Statements	58
		Consolidated Balance Sheets as of December 31, 2022 and 2021	62
		Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020	63

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		Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020	64
		Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021 and 2020	65
		Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020	66
		Notes to Consolidated Financial Statements	68
		Note 1: Nature of Business and Significant Accounting Policies	68
		Note 2: Mergers/Acquisitions/Sales	84
		Note 3: Investment Securities	88
		Note 4: Loans/Leases Receivable	92
		Note 5: Premises and Equipment	105
		Note 6: Goodwill and Intangibles	106
		Note 7: Derivatives and Hedging Activities	107
		Note 8: Deposits	111
		Note 9: Short-Term Borrowings	112
		Note 10: FHLB Advances	112
		Note 11: Other Borrowings and Unused Lines of Credit	113
		Note 12: Subordinated Notes	113
		Note 13: Junior Subordinated Debentures	114
		Note 14: Federal and State Income Taxes	116
		Note 15: Employee Benefit Plans	118
		Note 16: Stock-Based Compensation	119
		Note 17: Regulatory Requirements and Restrictions on Dividends	122
		Note 18: Earnings Per Share	124
		Note 19: Commitments and Contingencies	124
		Note 20: Parent Company Only Financial Statements	126
		Note 21: Fair Value	129
		Note 22: Business Segment Information	132

	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	133
	Item 9A.	Controls and Procedures	133
	Item 9B.	Other Information	136
	Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspection	136

Part III			137
	Item 10.	Directors, Executive Officers and Corporate Governance	137
	Item 11.	Executive Compensation	137
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	137
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	138
	Item 14.	Principal Accountant Fees and Services	138

Part IV			138
	Item 15.	Exhibits and Financial Statement Schedules	138
	Item 16.	Form 10-K Summary	141

		Signatures	142
		Appendix A. Supervision and Regulation	144

Throughout the Notes to the Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations, and remaining sections of this Form 10-K (including appendices), we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.

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Part I

Item 1. Business

General. QCR Holdings, Inc. is a multi-bank holding company headquartered in Moline, Illinois, that was formed in February 1993 under the laws of the state of Delaware. In 2016, the Company elected to operate as a financial holding company under the BHCA. The Company serves the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny and Springfield communities through the following four wholly-owned banking subsidiaries (collectively, the “Banks”), which provide full-service commercial and consumer banking and trust and asset management services:

●

Quad City Bank & Trust (QCBT), which is based in Bettendorf, Iowa, and commenced operations in 1994;

●

Cedar Rapids Bank & Trust (CRBT), which is based in Cedar Rapids, Iowa, and commenced operations in 2001;

●

Community State Bank (CSB), which is based in Ankeny, Iowa, and was acquired in 2016; and

●

Guaranty Bank (GB), which is based in Springfield, Missouri, and was acquired in 2018.

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

On August 12, 2020, the Company sold the Bates Companies, headquartered in Rockford, Illinois. From October 1, 2018, through the date of the disposition, the Company provided wealth management services to the Rockford community through the Bates Companies.

See Note 2 to the Consolidated Financial Statements for further discussion on mergers, acquisitions and sales.

The Company engages in direct financing lease contracts and equipment financing agreements through m2, a wholly owned subsidiary of QCBT based in Brookfield, Wisconsin.

Subsidiary Banks. Segments of the Company have been established by management as 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 corresponding to the four subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB and GB. See the Consolidated Financial Statements incorporated herein generally, and Note 22 to the Consolidated Financial Statements specifically, for additional business segment information.

QCBT was capitalized on October 13, 1993, and commenced operations on January 7, 1994. QCBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. QCBT provides full service commercial, correspondent, and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices located in Bettendorf and Davenport, Iowa and in Moline, Illinois. QCBT, on a consolidated basis with m2, had total segment assets of $2.31 billion and $2.14 billion as of December 31, 2022 and 2021, respectively.

CRBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. The Company commenced operations in Cedar Rapids in June 2001, operating as a branch of QCBT. The Cedar Rapids branch operation then began functioning under the CRBT charter in September of 2001. Acquired branches of CNB operate as a division of CRBT under the name “Community Bank & Trust.” CRBT provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Marion and Waterloo/Cedar Falls, Iowa and adjacent communities through its eight facilities. The headquarters for CRBT is located in downtown Cedar Rapids with three other branches located in Cedar Rapids, one branch in Marion, two branches located in Waterloo and one branch located in Cedar Falls. CRBT had total segment assets of $2.19 billion and $2.03 billion as of December 31, 2022 and 2021, respectively.

CSB is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. CSB was acquired by the Company in 2016. CSB provides full-service commercial and consumer banking to Des Moines, Iowa and adjacent communities through its headquarters located in Ankeny, Iowa and its eight other branch facilities throughout the greater Des Moines area. CSB had total segment assets of $1.30 billion and $1.17 billion as of December 31, 2022 and 2021, respectively.

GB is a Missouri-chartered commercial bank that is a member of the Federal Reserve System. GB, formerly known as Springfield First Community Bank, was acquired by the Company in 2018 through a merger with Springfield Bancshares. On April 2, 2022, GFED was merged into the Company and GFED’s wholly-owned bank subsidiary was merged into GB,

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expanding GB’s footprint in southwest Missouri. GB provides full-service commercial and consumer banking to the Springfield and Joplin, Missouri area and adjacent communities through its headquarters located in Springfield, Missouri and its 13 other branch facilities throughout the greater Springfield and Joplin area. GB had total segment assets of $2.15 billion as of December 31, 2022. Total segment assets as of December 31, 2021 prior to the GFED acquisition were $882.88 million.

Other Operating Subsidiaries. m2, which is based in Brookfield, Wisconsin, is engaged in the business of lending and leasing machinery and equipment to C&I businesses under direct financing lease contracts and equipment financing agreements.

Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 2022 and 2021:


		Amount Outstanding		Amount Outstanding			Interest		Interest
		as of		as of			Rate as of		Rate as of
Name	Date Issued	December 31, 2022		December 31, 2021		Interest Rate	December 31, 2022		December 31, 2021

		(dollars in thousands)

QCR Holdings Statutory Trust II	February 2004	$	10,310	$	10,310	2.85% over 3-month LIBOR	6.52	%	3.07	%
QCR Holdings Statutory Trust III	February 2004		8,248		8,248	2.85% over 3-month LIBOR	6.52	%	3.07	%
QCR Holdings Statutory Trust V	February 2006		10,310		10,310	1.55% over 3-month LIBOR	5.63	%	1.67	%
Community National Statutory Trust II	September 2004		3,093		3,093	2.17% over 3-month LIBOR	6.92	%	2.38	%
Community National Statutory Trust III	March 2007		3,609		3,609	1.75% over 3-month LIBOR	6.52	%	1.95	%
Guaranty Bankshares Statutory Trust I	May 2005		4,640		4,640	1.75% over 3-month LIBOR	5.04	%	1.95	%
Guaranty Statutory Trust II*	December 2005		10,310		N/A	1.45% over 3-month LIBOR	6.14	%	N/A	%
		$	50,520	$	40,210	Weighted Average Rate	6.29	%	2.43	%

* Assumed in acquisition of GFED.

Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but are all currently callable at par at any time. Interest rate reset dates vary by trust.

Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and the actions of regulatory authorities, as described more fully in this Form 10-K, including in Appendix A “Supervision and Regulation.” Its operating results also can be affected by trust fees, investment advisory and management fees, deposit service charge fees, swap fee income/capital markets revenue, gains on the sale of residential real estate and government guaranteed loans, earnings from BOLI and other noninterest income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.

The Company and its subsidiaries collectively employed 973 and 726 FTEs at December 31, 2022 and 2021, respectively. The increase in FTEs during 2022 was primarily due to the acquisition of GFED.

The Federal Reserve is the primary federal regulator of the Company, QCBT, CRBT, CSB and GB. QCBT, CRBT and CSB are also regulated by the Iowa Superintendent of Banking and GB is regulated by the Missouri Division of Finance. The FDIC, as administrator of the DIF, also has regulatory authority over the subsidiary banks. See Appendix A “Supervision and Regulation” for more information on the federal and state statutes and regulations that are applicable to the Company and its subsidiaries.

Lending/Leasing. The Company and its subsidiaries provide a broad range of commercial and retail lending/leasing and investment services to corporations, partnerships, individuals, and government agencies. The subsidiary banks actively market their services to qualified lending and deposit clients. Officers actively solicit the business of new clients entering their market areas as well as long-standing members of the local business community. The Company has an established lending/leasing policy which includes a number of underwriting factors to be considered in making a loan/lease, including, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit history of the borrower.

In accordance with Iowa regulation, the legal lending limit to one borrower for QCBT, CRBT and CSB, calculated as 15% of aggregate capital, was $39.6 million, $46.3 million, and $22.2 million, respectively, as of December 31, 2022. In accordance with Missouri regulation, the legal lending limit to one borrower for GB, calculated as 15% of aggregate capital, totaled $36.5 million as of December 31, 2022.

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The Company recognizes the need to prevent excessive concentrations of credit exposure to any one borrower or group of related borrowers. As such, the Company has established an in-house lending limit, which is lower than each subsidiary bank’s legal lending limit, in an effort to manage individual borrower exposure levels.

The in-house lending limit is the maximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. The Company implements a tiered approach, based on the risk rating of the borrower. Under the most recent in-house limit, total credit exposure to a single borrowing entity or group of related entities will not exceed the following, subject to certain exceptions:


	High Quality		Medium Quality		Low Quality
	(Risk Ratings 1-3)		(Risk Rating 4)		(Risk Ratings 5-8)

	(dollars in thousands)

QCBT	$	21,500	$	18,000	$	12,500
CRBT	$	21,500	$	18,000	$	12,500
CSB	$	12,000	$	10,500	$	7,000
GB	$	21,500	$	18,000	$	12,500
QCRH Consolidated	$	32,000	$	25,500	$	15,500

The QCRH Consolidated amount represents the maximum amount of credit that all affiliated banks, when combined, will extend to a single borrowing entity or group of related entities, subject to certain exceptions.

In addition, m2’s in-house lending limit is $2.5 million to a single lending/leasing entity or group of related entities, subject to certain exceptions.

As part of the loan monitoring activity at the four subsidiary banks, credit administration personnel interact closely with senior bank management. For example, the internal loan committee of each subsidiary bank meets weekly. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks. To complement the in-house loan review, an independent third-party performs external loan reviews. Historically, management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of those situations.

The Company recognizes that a diversified loan/lease portfolio contributes to reducing risk in the overall loan/lease portfolio. The specific loan/lease portfolio mix is subject to change based on loan/lease demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan/lease portfolio to ensure appropriate diversification and concentration risk is maintained.

Specifically, each subsidiary bank’s total loans as a percentage of average assets may not exceed 85%. In addition, following are established policy limits and the actual allocations for the subsidiary banks as of December 31, 2022 for the loan portfolio organized by loan type, reflected as a percentage of the subsidiary bank’s gross loans:


	QCBT				CRBT				CSB				GB
	Maximum				Maximum				Maximum				Maximum
	Percentage		As of		Percentage		As of		Percentage		As of		Percentage		As of
	per Loan		December 31,		per Loan		December 31,		per Loan		December 31,		per Loan		December 31,
Type of Loan *	Policy***		2022		Policy***		2022		Policy***		2022		Policy***		2022
One-to-four family residential	30	%	12	%	25	%	5	%	35	%	8	%	30	%	12	%
Multi-family	15	%	15	%	15	%	20	%	15	%	13	%	20	%	14	%
Farmland	5	%	1	%	5	%	—	%	15	%	1	%	5	%	5	%
Non-farm, nonresidential	50	%	15	%	50	%	22	%	50	%	22	%	50	%	36	%
Construction and land development	20	%	15	%	15	%	18	%	35	%	33	%	15	%	18	%
C&I	60	%	29	%	60	%	30	%	50	%	17	%	25	%	12	%
Loans to individuals	10	%	1	%	10	%	—	%	10	%	—	%	5	%	1	%
Lease financing	30	%	2	%	5	%	—	%	5	%	—	%	5	%	—	%
Bank stock loans	**		**		10	%	—	%	10	%	—	%	20	%	—	%
All other loans	15	%	10	%	10	%	5	%	15	%	6	%	15	%	2	%
			100	%			100	%			100	%			100	%

* The loan types above are as defined and reported in the subsidiary banks’ quarterly Reports of Condition and Income (also known as Call Reports).

** QCBT’s maximum percentage for bank stock loans is 150% of risk-based capital (bank stock loan commitments are limited to 200% of risk-based capital). At December 31, 2022, QCBT’s bank stock loans totaled 31% of risk-based capital.

*** Policy limits are compared to average loan balances rather than the current balance for monitoring purposes.

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The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 2022 and 2021. Residential real estate loans held for sale are included in residential real estate loans below.


																		Consolidated
	QCBT				CRBT				CSB				GB					Total
	$		%		$		%		$		%		$			%		$		%
	(dollars in thousands)
As of December 31, 2022
C&I - revolving	$	63,071	3	%	$	111,319	7	%	$	54,323	5	%	$	68,156		4	%	$	296,869	5	%
C&I - other		640,472	35	%		453,829	28	%		168,816	17	%		188,576		11	%		1,451,693	24	%
CRE - owner occupied		145,528	8	%		144,399	9	%		66,890	7	%		272,550		16	%		629,367	10	%
CRE - non-owner occupied		166,349	10	%		216,756	12	%		163,960	17	%		416,174		25	%		963,239	16	%
Construction and land development		283,088	15	%		290,282	18	%		326,811	33	%		291,880		17	%		1,192,061	18	%
Multi-family		274,991	15	%		334,408	20	%		127,184	13	%		227,220		14	%		963,803	16	%
Direct financing leases		31,889	2	%		—	—	%		—	—	%		—		—	%		31,889	1	%
1-4 family real estate		191,753	10	%		76,842	5	%		66,145	7	%		164,789		10	%		499,529	8	%
Consumer		31,126	2	%		17,154	1	%		14,241	1	%		47,900		3	%		110,421	2	%
	$	1,828,267	100	%	$	1,644,989	100	%	$	988,370	100	%	$	1,677,245	%	100	%	$	6,138,871	100	%

As of December 31, 2021
C&I - revolving	$	69,179	4	%	$	92,757	7	%	$	56,072	7	%	$	30,475		4	%	$	248,483	5	%
C&I - other		602,451	37	%		437,200	30	%		194,357	22	%		112,594		16	%		1,346,602	29	%
CRE - owner occupied		114,927	7	%		145,895	10	%		75,322	9	%		85,557		12	%		421,701	9	%
CRE - non-owner occupied		171,444	9	%		202,051	14	%		122,690	14	%		150,315		21	%		646,500	14	%
Construction and land development		291,000	18	%		240,790	17	%		243,126	28	%		143,655		20	%		918,571	19	%
Multi-family		153,977	9	%		228,083	16	%		100,186	12	%		118,166		16	%		600,412	13	%
Direct financing leases		45,191	3	%		—	—	%		—	—	%		—		—	%		45,191	1	%
1-4 family real estate		177,227	11	%		73,821	5	%		64,767	7	%		61,546		8	%		377,361	8	%
Consumer		24,837	2	%		17,211	1	%		10,432	1	%		22,831		3	%		75,311	2	%
	$	1,650,233	100	%	$	1,437,808	100	%	$	866,952	100	%	$	725,139		100	%	$	4,680,132	100	%

Proper pricing of loans is necessary to provide adequate return to the Company’s stockholders. Loan pricing, as established with guidance from the subsidiary banks’ senior management and asset/liability management committees, includes consideration for the cost of funds, loan maturity and risk, origination and maintenance costs, appropriate stockholder return, competitive factors, and the economic environment. The portfolio contains a mix of loans with fixed and floating interest rates. Management attempts to maximize the use of interest rate floors on its variable rate loan portfolio. Refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for more discussion on the Company’s management of interest rate risk.

In an effort to manage interest rate risk, the subsidiary banks will consider entering into back-to-back interest rate swaps with select commercial borrowers. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the banks receive a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. The banks enter an interest rate swap with the commercial borrower and an equal and offsetting interest rate swap with a larger financial institution counterparty. The Company has increased its focus on this business which has led to significantly increased noninterest income, stronger overall loan growth, and improved management of its interest rate risk. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower 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 year to year. Future levels of swap fee income can be somewhat dependent upon prevailing interest rates and other market activity.

C&I Lending

As noted above, the subsidiary banks are active C&I lenders. The current areas of emphasis include loans to small and mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The subsidiary banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Since 2010, the subsidiary banks have been active in participating in lending programs offered by the SBA and USDA. Under these programs, the government entities will generally provide a guarantee of repayment ranging from 50% to 85% of the principal amount of the qualifying loan.

Loan 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.

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For C&I loans, the Company assigns internal risk ratings which are largely dependent upon the aforementioned approval factors. The risk rating is reviewed annually or on an as needed basis depending on the specific circumstances of the loan. See Note 1 to the Consolidated Financial Statements for additional information, including the internal risk rating scale.

As part of the underwriting process, management reviews current borrower financial statements. When appropriate, certain C&I loans may contain covenants requiring maintenance of financial performance ratios such as, but not limited to:

●

Minimum debt service coverage ratio;

●

Minimum current ratio;

●

Maximum debt to tangible net worth ratio; and/or

●

Minimum tangible net worth.

Establishment of these financial performance ratios depends on a number of factors, including risk rating and the specific industry in which the borrower is engaged.

Collateral for these loans generally includes accounts receivable, inventory and equipment. 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. Approved non-real estate collateral types and corresponding maximum advance percentages for each collateral type are listed below.


Approved Collateral Type		Maximum Advance %

Financial Instruments
U.S. Government Securities		90% of market value
Securities of Federal Agencies		90% of market value
Municipal Bonds rated by Moody’s As “A” or better		80% of market value
Listed Stocks		75% of market value
Mutual Funds		75% of market value
Cash Value Life Insurance		95%, less policy loans
Savings/Time Deposits (Bank)		100% of current value
Penny Stocks		0%

General Business
Accounts Receivable		80% of eligible accounts
Inventory		50% of value
Crop and Grain Inventories		80% of current market value
Livestock		80% of purchase price, or current market value; or higher if cross-collateralized with other assets
Fixed Assets (Existing)		50% of net book value, or 75% of orderly liquidation appraised value
Fixed Assets (New)		80% of cost, or higher if cross-collateralized with other assets
Leasehold Improvements		0%

Generally, if the above collateral is part of a cross-collateralization with other approved assets, then the maximum advance percentage may be higher.

The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally seven years. Generally, term loans range from three to five years. For lines of credit, the maximum term is typically 365 days.

In addition, the subsidiary banks often take 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.

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Following is a summary of the five largest industry concentrations within the C&I portfolio as of December 31, 2022 and 2021:


	2022		2021
	Amount		Amount
	(dollars in thousands)

Lessors of residential buildings and dwellings	$	309,784	$	387,818
Administration of urban planning and rural development		102,918		120,416
Bank holding companies		74,980		65,080
Solar electric power generation		35,947		18,983
Industrial machinery and equipment merchant wholesalers		34,808		28,123

These loan categories are defined by industry-standard NAICS codes – refer to NAICS.com for a description of each category.

CRE Lending

The subsidiary banks also make CRE loans. 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 these 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 (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits as, or in some situations, more conservative than, those established by regulatory authorities. Following is a listing of these limits as well as some of the other guidelines included in the Company’s lending policy for the major categories of CRE loans:


		Maximum
CRE Loan Types	Maximum Advance Rate **	Term
CRE loans on improved property *	80%	7 years***
Raw land	Lesser of 90% of project cost, or 65% of "as is" appraised value	12 months
Land development	Lesser of 85% of project cost, or 75% of "as-completed" appraised value	24 months
Commercial construction loans	Lesser of 85% of project cost, or 80% of "as-completed" appraised value	24 months
Residential construction loans to builders****	Lesser of 90% of project cost, or 80% of "as-completed" appraised value	15 months
LIHTC construction loans	80%	3 years
LIHTC permanent loans	80%	20 years

* Generally, the debt service coverage ratio must be a minimum of 1.25x for non-owner occupied loans and 1.15x for owner-occupied loans that are subject to a DSCR covenant. For loans greater than $500 thousand, the subsidiary banks sensitize this ratio for deteriorated economic conditions, major changes in interest rates, and/or significant increases in vacancy rates.

** These maximum rates are consistent with, or in some situations, more conservative than those established by regulatory authorities.

*** Some real estate transactions may offer a swap option whereby the maximum term is 20 years.

**** Generally, the maximum term is 12 months but can be 15 months with credit risk committee monthly review.

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

In addition, management tracks the level of owner-occupied CRE loans versus non-owner occupied CRE loans. Owner-occupied CRE loans are generally considered to have less risk. As of December 31, 2022 and 2021, approximately 16% of the CRE loan portfolio was owner-occupied.

In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied CRE lending exceeds 300% of total risk-based capital and outstanding balances have increased 50% or more during the prior 36 months or construction, land development and other land loans exceed 100% of total risk-based capital.

In addition, the banks have established policy limits around non-owner occupied CRE and total construction, land development and other land loans.

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	Non-owner CRE Loans/TRBC	Total Construction, Land Development and Other Land Loans/TRBC
QCBT	300%	100%
CRBT	400%	100%
CSB	400%	200%
GB	450%	100%

Although CSB’s loan portfolio has historically been real estate dominated and its total construction, land development and other land loans levels exceed these policy limits, it has established a Credit Risk Committee to routinely monitor its real estate loan portfolio.

Following is a listing of the significant industries within the Company’s CRE loan portfolio as of December 31, 2022 and 2021:



	2022				2021
	Amount		%		Amount		%
	(dollars in thousands)

Lessors of Residential Buildings	$	1,861,197	47	%	$	1,316,851	49	%
Lessors of Nonresidential Buildings		537,940	13	%		557,859	21	%
Hotels		145,662	4	%		73,639	3	%
New Multifamily Housing Construction		82,905	2	%		34,076	1	%
New Housing For-Sale Builders		71,991	2	%		61,028	2	%
New Single-Family Housing Construction		62,303	2	%		39,808	2	%
Other Activities Related to Real Estate		61,302	2	%		42,507	2	%
Other *		1,093,074	28	%		555,505	21	%
Total CRE Loans	$	3,916,374	100	%	$	2,681,273	100	%

* “Other” consists of all other industries. None of these had concentrations greater than $58 million, or 1.5%, of total CRE loans as of December 31, 2022.

Following is a breakdown of non-owner-occupied income-producing CRE by property type as of December 31, 2022 and 2021:


	2022				2021
	Amount		%		Amount		%
	(dollars in thousands)

Multi-family	$	1,613,440	58	%	$	1,231,937	58	%
Office		166,357	6	%		175,890	8	%
Retail		194,122	7	%		147,327	7	%
Industrial/warehouse		177,921	6	%		104,035	5	%
Hotel/motel		146,172	5	%		77,758	4	%
Other		514,639	18	%		373,872	18	%
Total income-producing CRE	$	2,812,651	100	%	$	2,110,819	100	%

Included in Multi-family non-owner occupied income-producing CRE is $1.3 billion of LIHTC loans which are financing for low-income housing tax credit real estate projects. These loans have a maximum term of 20 years. Considering the longer duration, the subsidiary banks enter into a back-to-back interest rate swap to provide the borrower a long-term fixed interest rate while the subsidiary banks receive a variable interest rate and an upfront nonrefundable fee dependent on market pricing. In addition, the financing structure of the LIHTC permanent loans includes tax credit equity investment that strengthens the overall credit profile. Including the value of the real estate and the LIHTCs, the loan-to-values of the LIHTC permanent loans are typically in the range of 25% to 65%. Lastly, the Company has policy limits on maximum exposure amounts to single developers.

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A portion of the Company’s construction portfolio is considered non-residential construction. Following is a summary of industry concentrations within that category as of December 31, 2022 and 2021:


	2022				2021
	Amount		%		Amount		%
	(dollars in thousands)

Multi-family	$	821,442	82	%	$	627,101	77	%
Industrial/warehouse		38,882	4	%		28,191	4	%
Office		17,800	2	%		23,714	3	%
Hotel/motel		14,802	1	%		6,804	1	%
Retail		4,863	1	%		11,798	1	%
Other		99,852	10	%		113,786	14	%
Total non-residential construction loans	$	997,641	100	%	$	811,394	100	%

Included in Multi-family non-residential construction is $721.6 million of LIHTC construction loans which provide financing for the construction of both new LIHTC real estate projects and the rehabilitation of existing LIHTC real estate projects. Most of these will convert to LIHTC permanent loans upon completion of construction.

Additionally, the Company had approximately $119.7 million and $78.0 million of residential construction loans outstanding as of December 31, 2022 and 2021, respectively. Of this amount, approximately 61% was considered speculative, while 39% was pre-sold at December 31, 2022, and approximately 52% was considered speculative, while 48% was pre-sold at December 31, 2021.

Direct Financing Leasing

m2 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.

The following private and public sector business assets are generally acceptable to consider for lease funding:

●

Computer systems;

●

Photocopy systems;

●

Fire trucks;

●

Specialized road maintenance equipment;

●

Medical equipment;

●

Commercial business furnishings;

●

Vehicles classified as heavy equipment;

●

Trucks and trailers;

●

Equipment classified as plant or office equipment; and

●

Marine boat lifts.

m2 will generally refrain from funding leases of the following type:

●

Leases collateralized by non-marketable items;

●

Leases collateralized by consumer items, such as vehicles, household goods, recreational vehicles, boats, etc.;

●

Leases collateralized by used equipment, unless its remaining useful life can be readily determined; and

●

Leases with a repayment schedule exceeding seven years.

Residential Real Estate Lending

Generally, the subsidiary banks 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 adjust in one to five years,

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and then retain these loans in their portfolios. Servicing rights are generally not retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.

The following table presents the originations and sales of residential real estate loans for the Company. Included in originations is activity related to the refinancing of previously held in-house mortgages.


	For the year ended December 31,
	2022			2021			2020
	(dollars in thousands)

Originations of residential real estate loans	$	148,845		$	249,892		$	281,662
Sales of residential real estate loans	$	103,705		$	201,638		$	234,512
Percentage of sales to originations		70	%		81	%		83	%

Installment and Other Consumer Lending

The consumer lending department of each subsidiary bank provides many types of consumer loans, including home improvement, home equity, motor vehicle, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type. In particular, for home equity loans and home equity lines of credit, the minimum credit bureau score is 650. For both home equity loans and lines of credit, the maximum advance rate is 90% of value for primary residences and 80% for second/vacation homes. The maximum term on home equity loans is 10 years and maximum amortization is 15 years. The maximum term on home equity lines of credit is 10 years.

In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the Company’s lending policy described above. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are generally noted as such and specifically identified in loan/lease approval documents.

Human Capital Resources. The Company is a relationship driven company and its ability to attract and retain exceptional employees is key to its success. As of December 31, 2022, the Company employed 924 full-time employees and 77 part-time employees across all locations. The employees are not represented by a collective bargaining unit.

The Company encourages and supports the growth and development of its employees and, wherever possible, seeks to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and external training opportunities. Educational reimbursement is available to employees enrolled in degree or certification programs and for seminars, conferences, and other training events employees attend in connection with their job duties.

As part of its compensation philosophy, the Company believes that it must offer and maintain market competitive total rewards programs for its employees in order to attract and retain exceptional talent. In addition to competitive base wages, additional programs include annual bonus opportunities, an employee stock purchase plan, Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, sabbaticals, flexible work schedules, an employee assistance program, and various wellness programs.

The Company is committed to fostering and preserving a culture of diversity, equity, and inclusion, and believes its differences, of every kind, make the company and its communities better. During recent years, the Company focused on several initiatives to promote diversity, equity, and inclusion across its organization. A few specific actions included rolling out a diversity survey for the third year to gather feedback from all employees, several diversity and inclusion sessions and workshops across our different entities facilitated by our Diversity Officer as well as the formation of Inclusion Committees across our different entities.

The Company strives to maintain a culture in which employees feel valued and, to that end, regularly solicits feedback from employees to understand their views about their work environment and the Company’s culture. The results from employee engagement surveys are used to implement programs and processes designed to enhance engagement and improve the employee experience. In 2022, 90% of employees participated in the annual employee engagement survey, exceeding the Company goal of 80%, and the Company received a strong employee engagement score of 78%, above the national benchmark of 74%.

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The primary regions in which the subsidiary banks operate – the Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines, Iowa and Springfield/Joplin, Missouri – generally have strong labor markets, with unemployment rates of 3.1% and 2.8% in Iowa and Missouri, respectively.

ESG Commitment. The Company is built on relationships and integrity. We adhere to those principles in all areas of our business and in our communities and believe that meaningful environmental, social and governance programs will drive shareholder value and make us a better company. We believe in responsible use of our resources with a focus on sustainability. We are committed to supporting the communities in which we live and work, to integrity in our business practices, and to strong corporate governance principles. With numerous programs and activities aligned with the ESG framework, we continue to develop and enhance our long-term plan for the future. We are advancing standard reporting processes and gathering benchmarking data to generate meaningful ESG goals for our company.

Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines, Iowa and Springfield/Joplin, Missouri markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also insurance companies, FinTech companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to traditional banking services. The Company also competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.

Appendices. The commercial banking business is a highly regulated business. See Appendix A “Supervision and Regulation” for a discussion of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries.

Internet Site, Securities Filings and Governance Documents. The Company maintains an Internet site at www.qcrh.com. The Company makes available free of charge through this site its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. These filings are available at http://www.snl.com/IRW/Docs/1024092. Also available are many of the Company’s corporate governance documents, including its Business Code of Conduct and Ethics Policy (https://qcrh.q4ir.com/governance/documents/default.aspx).

Item 1A. Risk Factors

In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:

Economic and Market Risks

Conditions in the financial market and economic conditions, including conditions in the markets in which we operate, generally may adversely affect our business.

We operate primarily in the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny, Iowa and Springfield, Missouri markets. Our general financial performance is highly dependent upon the business environment in the markets where we operate and in particular, the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services it offers. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, pandemics or a combination of these or other factors.

Uncertainty regarding economic conditions may result in changes in consumer and business spending, borrowing and savings habits. Downturns in the markets where our banking operations occur could result in a decrease in demand for our products and services, an increase in loan delinquencies and defaults, high or increased levels of problem assets and

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foreclosures and reduced wealth management fees resulting from lower asset values. Such conditions could adversely affect the credit quality of our loans, financial condition and results of operations.

Interest rates and other conditions impact our results of operations.

Our profitability is in large part a function of the spread between the interest rates earned on investments and loans/leases and the interest rates paid on deposits and other interest-bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan/lease terms, and the mix of adjustable and fixed rate loans/leases in our portfolio, the length of time deposits and borrowings and the rate sensitivity of our deposit customers could have a positive or negative effect on our net income, capital and liquidity. In addition, the size of nonrefundable swap fees earned in connection with our LIHTC permanent loans may fluctuate depending on the interest rate environment. We measure interest rate risk under various rate scenarios using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at "Quantitative and Qualitative Disclosures about Market Risk" included under Item 7A of Part II of this Annual Report on Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

It is currently expected that during 2023, and perhaps beyond, the Federal Open Market Committee of the Federal Reserve, or FOMC, will continue to increase interest rates to reduce the rate of inflation. In 2022, the FOMC increased at various dates throughout the year the target range for the federal funds rate from 0.00% to 0.25% to a range of 4.25% to 4.50%. All of these increases were expressly made in response to inflationary pressures, which are currently expected to continue in 2023. If the FOMC further increases the targeted federal funds rates, overall interest rates will likely rise, which may negatively impact the entire national economy. In addition, our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans and other assets. Rising interest rates also may reduce the demand for loans and the value of fixed-rate investment securities. These effects from interest rate changes or from other sustained economic stress or a recession, among other matter, could have a material adverse effect on our business, financial condition, liquidity, and results of operations.

Given the complex factors affecting the strength of the U.S. economy, including uncertainties regarding the persistence of inflation, geopolitical developments such as the war in Ukraine and resulting disruptions in the global energy market, the effects of the pandemic in China, and tight labor market conditions and supply chain issues, there is a meaningful risk that the Federal Reserve and other central banks may raise interest rates more than expected, thereby limiting economic growth and potentially causing an economic recession. This could decrease loan demand, harm the credit characteristics of our existing loan portfolio and decrease the value of collateral securing loans in the portfolio.

Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.

The market value of investments in our securities portfolio has become increasingly volatile in recent years, and as of December 31, 2022, we had gross unrealized losses of $116.7 million, or 11.8% of amortized cost, in our investment portfolio (offset by gross unrealized gains of $5.5 million). If we are forced to liquidate any of those investments prior to maturity, including because of a lack of liquidity, we would recognize as a charge to earnings the losses attributable to those securities. Our securities portfolio has an average duration of 8 years, so we expect an increase in realized losses if interest rates continue to increase in 2023.

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The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as changes in the interest rate environment, negative trends in the residential and commercial real estate markets, ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we formally evaluate investments and other assets for impairment indicators. Reduction in the value, or impairment of our investment securities, can impact our earnings and common stockholders' equity. We maintained a balance of $928.1 million, or 12% of our assets, in investment securities at December 31, 2022. Changes in market interest rates can affect the value of these investment securities, with increasing interest rates generally resulting in a reduction of value. Although the reduction in value from temporary increases in market rates does not affect our income until the security is sold, it does result in an unrealized loss recorded in other comprehensive income that can reduce our common stockholders’ equity. Further, we may have to record provision expense to establish an allowance for credit losses on our carried at fair value debt securities, and we must periodically test our investment securities for other-than-temporary impairment in value. In assessing whether the value of investment securities is impaired, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Based on management's evaluation, it was determined that the gross unrealized losses at December 31, 2022 were primarily a function of the changes in certain market interest rates.

A large percentage of our investment securities has fixed interest rates and are classified as available for sale. As is the case with many financial institutions, our emphasis on increasing the development of core deposits, those with no stated maturity date, has resulted in our interest-bearing liabilities having a shorter duration than our interest-earning assets. This

imbalance can create significant earnings volatility because interest rates change over time. As interest rates have increased, our cost of funds has increased more rapidly than the yields on a substantial portion of our interest-earning assets. In addition, the market value of our fixed-rate assets, for example, our investment securities, has declined in recent periods. In line with the foregoing, we have experienced and may continue to experience an increase in the cost of interest-bearing liabilities primarily due to raising the rates we pay on some of our deposit products to stay competitive within our market and an increase in borrowing costs from increases in the federal funds rate. Community banks rely more heavily than larger institutions on net interest income as a revenue source. Larger institutions generally have more diversified sources of noninterest income.

The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.

The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Market fluctuations could also adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, or international currency fluctuations, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. Our stock price could fluctuate significantly in response to our quarterly or annual results and the impact of these risk factors on our operating results or financial position.

Secondary mortgage, government guaranteed loan and interest rate swap market conditions could have a material impact on our financial condition and results of operations.

Currently, we sell a portion of the residential real estate and government guaranteed loans we originate. The profitability of these operations depends in large part upon our ability to make loans and to sell them in the secondary market at a gain. Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market.

In addition to being affected by interest rates, the secondary markets are also subject to investor demand for residential mortgages and government guaranteed loans and investor yield requirements for those loans. These conditions may fluctuate or even worsen in the future. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse effect on our financial condition and results of operations.

The interest rate swap market is dependent upon market conditions. If interest rates move, interest rate swap transactions may no longer make sense for the Company and/or its customers. Interest rate swaps are generally appropriate for

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commercial customers with a certain level of expertise and comfort with derivatives, so our success is dependent upon the ability to make loans to these types of commercial customers. Additionally, our ability to execute interest rate swaps is also dependent upon counterparties that are willing to enter into the interest rate swap that is equal and offsetting to the interest rate swap we enter into with the commercial customer. The mix of loans with interest rate swaps are heavily weighted towards LIHTC permanent loans. Future levels of swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate on the interest rate environment.

Continued elevated levels of inflation could adversely impact our business and results of operations.

The United States has recently experienced elevated levels of inflation, with the consumer price index climbing 6.5% in 2022. Continued elevated levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse. For example, elevated inflation harms consumer purchasing power, which could negatively affect our retail customers and the economic environment and, ultimately, many of our business customers, and could also negatively affect our levels of non-interest expense. In addition, if interest rates continue to continue to rise in response to elevated levels of inflation, the value of our securities portfolio could be negatively impacted. Continued elevated levels of inflation could also cause increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients ability to repay indebtedness. It is also possible that governmental responses to the current inflation environment could adversely affect our business, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls. The duration and severity of the current inflationary period cannot be estimated with precision.

Labor shortages and failure to attract and retain qualified employees could negatively impact our business, results of operations and financial condition.

A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, decreased labor force size and participation rates. Although we have not experienced any material labor shortage to date, we have recently observed an overall tightening and competitive local labor market. A sustained labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased compensation expense to attract and retain employees.

In addition, if we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we may take to respond to a decrease in labor availability have unintended negative effects, our business could be adversely affected. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation could have a material adverse impact on our operations, results of operations, liquidity or cash flows.

The COVID-19 pandemic could continue to have adverse effects on our business.

The COVID-19 pandemic has had a significant economic impact on the communities in which we operate, our borrowers and depositors, and the national economy generally. These effects have diminished in the past year, but future developments and uncertainties will be difficult to predict, such as the potential emergence of a new variant, the course of the pandemic in China and other major economies, the persistence of pandemic-related work and lifestyle changes, changes in consumer preferences associated with the emergence of the pandemic, and other market disruptions. Any such developments could have a complex and negative effect on our business, including with respect to the prevailing economic environment, our lending and investment activities, and our business operations.

Regulatory and Legal Risks

We may be materially and adversely affected by the highly regulated environment in which we operate.

The Company and its bank subsidiaries are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors' funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

As a bank holding company, we are subject to regulation and supervision primarily by the Federal Reserve. QCBT, CRBT and CSB, as Iowa-chartered state member banks, are subject to regulation and supervision primarily by both the Iowa Superintendent and the Federal Reserve. GB, as a Missouri-chartered commercial bank, is subject to regulation by both

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the Missouri Division of Finance and the Federal Reserve. We and our banks undergo periodic examinations by these regulators, who have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. The primary federal and state banking laws and regulations that affect us are described in Appendix A “Supervision and Regulation” to this report. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time.

U.S. financial institutions are also subject to numerous monitoring, recordkeeping, and reporting requirements designed to detect and prevent illegal activities such as money laundering and terrorist financing. These requirements are imposed primarily through the Bank Secrecy Act which was most recently amended by the USA Patriot Act. We have instituted policies and procedures to protect us and our employees, to the extent reasonably possible, from being used to facilitate money laundering, terrorist financing and other financial crimes. There can be no guarantee, however, that these policies and procedures are effective.

Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on us. Although we have policies and procedures designed to mitigate the risk of any such violations, there can be no assurance that such violations will not occur.

Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.

We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

The Company and each of its banking subsidiaries are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations, which have recently increased due to the effectiveness of the Basel III regulatory capital reforms. We intend to grow our business organically and to explore opportunities to grow our business by taking advantage of attractive acquisition opportunities, and such growth plans may require us to raise additional capital to ensure that we have adequate levels of capital to support such growth on top of our current operations. Our ability to raise additional capital, when and if needed or desired, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market conditions, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. In particular, if we were required to raise additional capital in the current interest rate environment, we believe the pricing and other terms investors may require in such an offering may not be attractive to us. Our failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and preferred stock and to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition.

Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.

The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions. The U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. Consumers and businesses may also change their behavior on their own as a result of these concerns. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

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Given the lack of empirical data on the credit and other financial risks posed by climate change, it is difficult to predict how climate change may impact our financial condition and operations; however, as a banking organization, the physical effects of climate change may present certain unique risks. For example, weather disasters, shifts in local climates and other disruptions related to climate change may adversely affect the value of real properties securing our loans, which could diminish the value of our loan portfolio. Such events may also cause reductions in regional and local economic activity that may have an adverse effect on our customers, which could limit our ability to raise and invest capital in these areas and communities.

Evolving law impacting cannabis-related businesses in Illinois and other states may have an impact on the Company's operations and risk profile.

The Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana. Starting January 1, 2020, however, the Illinois Cannabis Regulation and Tax Act began permitting adults to legally purchase marijuana for recreational use from licensed dispensaries. It is the Banks' current policy to avoid knowingly providing banking products or services to entities or individuals that: (i) directly or indirectly manufacture, distribute, or dispense marijuana or hemp products, or those with a significant financial interest in such entities; or (ii) derive a significant percentage of revenue from providing products or services to, or other involvement with, such entities. The Banks are taking reasonable measures, including appropriate new account screening and customer due diligence measures, to ensure that existing and potential customers do not engage in any such activities. Nonetheless, the shift in Illinois law legalizing cannabis use has increased the number of direct and indirect cannabis-related businesses in Illinois, and therefore has increased the likelihood that the Banks could interact with such businesses, as well as their owners and employees. Such interactions could create additional legal, regulatory, strategic, and reputational risk to the Banks and the Company.

Credit and Lending Risks

We must effectively manage our credit risk.

There are risks inherent in making any loan, including risks inherent in dealing with specific borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. In general, these risks have increased as a result of the recent increases in prevailing interest rates and uncertainties associated with inflation, which have potentially increased the risk of a near-term decline in growth or an economic downturn. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.

The majority of our subsidiary banks' loan portfolios are invested in C&I and CRE loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area's largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to C&I and CRE loans, our subsidiary banks are also active in residential mortgage and consumer lending. Our borrowers may experience financial difficulties, and the level of nonperforming loans, charge-offs and delinquencies could rise, which could negatively impact our business through increased provision, reduced interest income on loans/leases, and increased expenses incurred to carry and resolve problem loans/leases.

C&I loans make up a large portion of our loan/lease portfolio.

C&I loans were $1.7 billion, or approximately 28% of our total loan/lease portfolio, as of December 31, 2022. Our C&I loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Because payments on such loans are often dependent on the successful operation of the borrower involved, repayment of such loans is often more sensitive than the other types of loans to adverse condition in the general economy. For example, the cumulative effects of decreased economic activity, changes in the economy and overall business environment, labor availability shortages and supply chain constraints as a result of the COVID-19 pandemic

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have adversely affected C&I loans, and we expect this trend to continue for certain portions of our loan portfolio, depending on the strength and speed of economic recovery and other factors, particularly if general economic conditions worsen.

Most often, the collateral for C&I loans is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers, which could decline in the case of an economic recession. The collateral securing these loans may lose value over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. As a result of the recent increase in interest rates and other factors, we have observed a corresponding decline in the value of commercial real estate securing these loans.

Our loan/lease portfolio has a significant concentration of CRE loans, which involve risks specific to real estate values.

CRE lending comprises a significant portion of our lending business. Specifically, CRE loans were $3.9 billion, or approximately 64% of our total loan/lease portfolio, as of December 31, 2022. Of this amount, $629.4 million, or approximately 16%, was owner-occupied. The market value of real estate securing our CRE loans can fluctuate significantly in a short period of time as a result of interest rates and market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

Included in our CRE lending portfolio are our LIHTC construction and permanent loans, which have the same inherent risks as our other non-owner occupied CRE loans. However, the LIHTC construction and permanent loans, and related nonrefundable swap fee income, rely on federal LIHTCs to help finance the overall real estate projects and are dependent on the continued availability of such LIHTC programs. Changes to the LIHTC programs, including changes to the level of tax credits provided by the federal government on low income housing, may have an adverse effect on our business, results of operations and financial condition.

Capital and Liquidity Risks

Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of securities and/or loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, deposits, investment maturities, repayments, and calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from the FRB or other correspondent banks, FHLB advances, wholesale and customer repurchase agreements, brokered deposits, and the ability to borrow at the FRB's Discount Window. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. In addition, increased competition with the largest banks and Fintechs for retail deposits may impact our ability to raise funds through deposits and could have a negative effect on our liquidity.

Any decline in available funding could adversely impact our ability to originate loans/leases, invest in securities, meet our expenses, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.

As a bank holding company, our sources of funds are limited.

We are a bank holding company, and our operations are primarily conducted by our subsidiary banks, which are subject to significant federal and state regulation. When available, cash to pay dividends to our stockholders is derived primarily

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from dividends received from our subsidiary banks. Our ability to receive dividends or loans from our subsidiary banks is restricted. Dividend payments by our subsidiaries to us in the future will require generation of future earnings by them and could require regulatory approval if any proposed dividends are in excess of prescribed guidelines. Further, as a structural matter, our right to participate in the assets of our subsidiary banks in the event of a liquidation or reorganization of any of the banks would be subject to the claims of the creditors of such bank, including depositors, which would take priority except to the extent we may be a creditor with a recognized claim. As of December 31, 2022, our subsidiary banks had deposits, borrowings and other liabilities in the aggregate of approximately $11.9 billion.

Our allowance may prove to be insufficient to absorb losses in our loan/lease portfolio.

We establish our allowance for credit losses in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2022, our allowance as a percentage of total gross loans/leases was 1.43%, and as a percentage of total NPLs was 1,000.07%.

In addition, we had net charge-offs as a percentage of gross average loans/leases of 0.06% for the year ended December 31, 2022. Because of the concentration of C&I and CRE loans in our loan portfolio, which tend to be larger in amount than residential real estate and installment loans, the movement of a small number of loans to nonperforming status can have a significant impact on these ratios. Although management believes that the allowance as of December 31, 2022 was adequate to absorb losses on any existing loans/leases that may become uncollectible, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance will prove sufficient to cover actual loan/lease losses in the future, particularly if economic conditions are more difficult than what management currently expects. Additional provisions and loan/lease losses in excess of our allowance may adversely affect our business, financial condition and results of operations.

Competitive and Strategic Risks

We face intense competition in all phases of our business from other banks, financial institutions and non-bank financial services providers.

The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, Fintech companies, money market mutual funds, credit unions, online lenders and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services.

While we do not offer products relating to digital assets, including cryptocurrencies, stablecoins and other similar assets, there has been a significant increase in digital asset adoption globally over the past several years. Certain characteristics of digital asset transactions, such as the speed with which such transactions can be conducted, the ability to transact without the involvement of regulated intermediaries, the ability to engage in transactions across multiple jurisdictions, and the anonymous nature of the transactions, are appealing to certain consumers notwithstanding the various risks posed by such transactions. Accordingly, digital asset service providers—which at present are not subject to the same degree of scrutiny and oversight as banking organizations and other financial institutions—are becoming active competitors to more traditional financial institutions.

The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations. Potential partnerships with digital asset companies, moreover, could also entail significant investment.

Increased competition may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan/lease rates and deposit rates or loan/lease terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modify our underwriting standards, we could be

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exposed to higher losses from lending and leasing activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and offer a broader range of financial services than we can offer.

Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

As part of our business strategy, we may consider acquisitions of other banks or financial institutions or branches, assets or deposits of such organizations. There is no assurance, however, that we will determine to pursue any of these opportunities or that if we determine to pursue them that we will be successful. Acquisitions involve numerous risks, any of which could harm our business, including:

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difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target company and realizing the anticipated synergies of the combined businesses;

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difficulties in supporting and transitioning customers of the target company;

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diversion of financial and management resources from existing operations;

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the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

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risks of entering new markets or areas in which we have limited or no experience or are outside our core competencies;

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potential loss of key employees, customers and strategic alliances from either our current business or the business of the target company;

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risks of acquiring loans with deteriorated credit quality;

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assumption of unanticipated problems or latent liabilities; and

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inability to generate sufficient revenue to offset acquisition costs.

Future acquisitions may involve the issuance of our equity securities as payment or in connection with financing the business or assets acquired, and as a result, could dilute the ownership interests of existing stockholders. In addition, consummating these transactions could result in the incurrence of additional debt and related interest expense, as well as unforeseen liabilities, all of which could have a material adverse effect on our business, results of operations and financial condition. The failure to successfully evaluate and execute acquisitions or otherwise adequately address the risks associated with acquisitions could have a material adverse effect on our business, results of operations and financial condition.

New lines of business or new products and services may subject us to additional risks.

From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business in our current markets or new markets. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible, which could in turn have a material negative effect on our operating results.

If securities or industry analysts do not publish or cease publishing research reports about us, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, the price of our stock could decline.

The trading market for our common stock can be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If there is limited or no securities or industry analyst

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coverage of us, the market price for our stock could be negatively impacted. Moreover, if any of the analysts who elect to cover us downgrade our common stock, provide more favorable relative recommendations about our competitors or if our operating results or prospects do not meet their expectations, the market price of our common stock may decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Our reputation could be damaged by negative publicity.

Reputational risk, or the risk to our business, financial condition or results of operations from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from actions taken by regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships.

Accounting and Tax Risks

The FASB has issued an accounting standard update that has resulted in a significant change in how the Company recognizes credit losses and may have a material impact on our financial condition or results of operations.

In June 2016, the FASB issued an accounting standard update, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaced the "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. The new CECL standard became effective for us on January 1, 2021. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. CECL also requires that an allowance for credit losses be established for any unfunded loan commitments that are not cancelable. The measurement of expected credit losses requires significant use of management judgments and is based on information from past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the incurred loss model previously required under GAAP, which delayed recognition until it is probable a loss has been incurred. Accordingly, the adoption of the CECL model materially affected how we determine our allowance for credit losses and could require us to significantly increase our allowance in future periods. Moreover, the CECL model may create more volatility in the level of the allowance for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations. See Note 1 “Nature of Business and Significant Accounting Policies” of the notes to the consolidated financial statements for additional information on the impact of the adoption of this standard.

The preparation of our Consolidated Financial Statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.

Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP and general reporting practices within the financial services industry, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies, such as those pertaining to our allowance, require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions, which may have a material adverse effect on our financial condition or results of operations in subsequent periods.

From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. In addition, trends in financial and business reporting, including environmental, social and governance (ESG) related disclosures, could require us to incur additional reporting expense. These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial condition and results of operations.

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Operational Risks

The transition to an alternative reference rate could cause instability and have a negative effect on financial market conditions.

LIBOR represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. The end date for LIBOR has now been set for June 30, 2023, and U.S. Regulators have issued guidance that urges market participants to address their existing LIBOR exposures and transition to robust and sustainable alternative rates. The Alternative Reference Rate Committee has proposed that the SOFR is the rate that represents best practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR but has also advised participants to conduct a comprehensive evaluation of any alternative reference rates being considered for use.

Contracts linked to LIBOR are vast in number and value, are intertwined with numerous financial products and services, and have diverse parties. Although the Company has actively worked to plan for the transition away from LIBOR, the transition is both complex and challenging and the downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact financial markets and individual institutions. If the Company’s selected alternative rate is based on small transaction volume, it could be susceptible to volatility and disruption during times of market stress. Furthermore, if the Company fails to properly address legacy contracts by adding robust fallback positions, it will be exposed to interest rate risks and potential loss of yields. Finally, if the Company or other market participants fail to properly plan to implement alternative rates other than LIBOR it could have an adverse effect on the Company and the financial system as a whole.

The Company's information systems may experience an interruption or breach in security and cyber-attacks, all of which could have a material adverse effect on the Company's business.

The Company relies heavily on internal and outsourced technologies, communications, and information systems to conduct its business, particularly with respect to our core processing provider and our mobile banking provider. Additionally, in the normal course of business, the Company collects, processes and retains sensitive and confidential information regarding our customers. As the Company's reliance on technology has increased, so have the potential risks of a technology-related operation interruption (such as disruptions in the Company's customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of a cyber-attacks (such as unauthorized access to the Company's systems). These risks have increased for all financial institutions as new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others have also increased. In addition, cyber attackers have taken advantage of the pandemic to create campaigns to leverage individuals fears and uncertainties as well as capitalize on the increased number of transactions occurring on digital channels. Industry trends in ransomware, phishing, and other intrusion methods have increased significantly and will continue to pose increased risk while the Company’s operations remain partially remote.

In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged in attacks against financial institutions, retailers and government agencies, particularly denial of service attacks that are designed to disrupt key business or government services, such as customer-facing web sites. The Company is not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. It is also possible that a cyber incident, such as a security breach, may remain undetected for a period of time, further exposing the Company to technology-related risks.

The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card, debit card and other payment related transactions that typically involve the transmission of sensitive information regarding the Company's customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and its processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks

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relating to them. Further cyber-attacks or other breaches in the future, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in increased costs, all of which could have a material adverse effect on the Company's business. To the extent we are involved in any future cyber-attacks or other breaches, the Company's reputation could be affected, which could also have a material adverse effect on the Company's business, financial condition or results of operations.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, as well as that of our customers engaging in internet banking activities, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us.

Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. Any interruption in, or breach of security of, our computer systems and network infrastructure, or that of our internet banking customers, could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. The Company may also need to spend additional resources to enhance protective and detective measures or to conduct investigations to remediate any vulnerabilities that arise.

We are subject to certain operational risks, including, but not limited to, customer or employee misconduct or fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. Despite having business continuity plans and other safeguards, the Company could still be affected. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a preferred lender under the SBA loan programs and our ability to comply with applicable SBA lending requirements.

As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose other restrictions, including revocation of the lender's SBA Preferred Lender status. If we lose our status as an SBA Preferred Lender, we may lose our ability to compete effectively with other SBA Preferred Lenders, and as a result we would experience a material adverse effect to our financial results. Any changes to the SBA program, including changes to the level of guaranty provided by the federal government on SBA loans or changes to the level of funds appropriated by the federal government to the various SBA programs, may also have an adverse effect on our business, results of operations and financial condition.

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Historically we have sold the guaranteed portion of our SBA loans in the secondary market. These sales have resulted in our earning premium income and/or have created a stream of future servicing income. There can be no assurance that we will be able to continue originating these loans, that a secondary market will exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of our SBA loans, we incur credit risk on the retained, non-guaranteed portion of the loans.

In the event of a loss resulting from default and the SBA determines there is a deficiency in the manner in which the loan was originated, funded or serviced by the us, the SBA may require us to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from us, any of which could adversely affect our business, results of operations and financial condition.

Our community banking strategy relies heavily on our subsidiaries' independent management teams, and the unexpected loss of key managers may adversely affect our operations.

We rely heavily on the success of our bank subsidiaries' independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain the executive officers and current management teams of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we manage our existing portfolio and grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. Recent changes in labor market conditions have contributed to heightened levels of employee attrition and increased competition for talent, which has in turn driven wage rates higher and may contribute to an increase in operating expenses. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.

The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. The widespread adoption of new technologies, including mobile banking services, cryptocurrencies and payment systems, could require us in the future to make substantial expenditures to modify or adapt our existing products and services as we grow and develop new products to satisfy our customers’ expectations and comply with regulatory guidance. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

We have a substantial amount of debt outstanding and may incur additional indebtedness in the future, which could restrict our operations.

As of December 31, 2022, we had $281.3 million of total indebtedness outstanding at the holding company level. In the future, it is possible that we may not generate sufficient revenues to service or repay our debt, and have sufficient funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs, and to pay dividends to our common stockholders. Moreover, the degree to which we are leveraged could have important consequences for our stockholders, including:

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●

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

●

making it more difficult for us to satisfy our debt and other obligations;

●

limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes;

●

increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates; and

●

placing us at a competitive disadvantage compared to our competitors that have less debt.

Severe weather, natural disasters, pandemic, acts of terrorism or war or other adverse external events could significantly impact the Company's business.

As the Company's operating and market footprint continues to grow, severe weather, natural disasters, pandemic, acts of terrorism or war and other adverse external events could have a significant impact on the Company's ability to conduct business. The Company's current footprint poses a wide variety of potential weather, natural disaster, or other adverse events that could impact the Company in various ways. In addition, such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The occurrence of any such event could have a material adverse effect on the Company's business, which in turn, could have a material adverse effect on the financial condition and results of operation.

The Company is or may become involved from time to time in suits, legal proceedings, information-gathering requests, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.

Many aspects of our business and operations involve the risk of legal liability, and in some cases we or our subsidiaries have been named or threatened to be named as defendants in various lawsuits arising from our business activities. In addition, companies in our industry are frequently the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which we conduct our business, or reputational harm.

Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to us from the legal proceedings in question. Accordingly, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies, which could adversely affect our financial condition and results of operations.

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Item 1B. Unresolved Staff Comments

There are no unresolved staff comments.

Item 2. Properties

The Company’s headquarters is located at 3551 7^th Street, Moline, Illinois. The Company and its subsidiaries maintain numerous other facilities, including bank branch locations, which are occupied by the Company and its subsidiaries, and which house the executive and primary administrative offices of each respective entity or otherwise facilitate the business operations of the Company and its subsidiaries. Each such property is leased or owned by the Company or its subsidiaries and no such property is subject to any material encumbrance.

The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured, and are adequately equipped for carrying on the business of the Company.

No individual real estate property amounts to 10% or more of consolidated assets.

Item 3. 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 4. Mine Safety Disclosures

Not applicable.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information. The common stock, par value $1.00 per share, of the Company is listed on The Nasdaq Global Market under the symbol “QCRH”. The stock began trading on Nasdaq on October 6, 1993. As of February 15, 2023, there were 16,825,981 shares of common stock outstanding held by 663 holders of record. Additionally, there are an estimated 3,700 beneficial holders whose stock was held in the street name by brokerage houses and other nominees as of that date.

Dividends on Common Stock. The Company is heavily dependent on dividend payments from its subsidiary banks to provide cash flow for the operations of the holding company and dividend payments on the Company’s common stock. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Applicable Iowa and Missouri laws provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits.

The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital

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adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. See Appendix A “Supervision and Regulation” for additional information regarding regulatory restrictions on the payment of dividends.

The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued debt securities in public offerings and in private placements. Under the terms of the securities, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances existed through the date of filing of this Annual Report on Form 10-K. See Note 17 to the Consolidated Financial Statements for additional information regarding dividend restrictions.

Purchase of Equity Securities by the Company. There were 970,000, 293,153 and 100,932 shares of common stock purchased by the Company during the years ending December 31, 2022, 2021 and 2020, respectively. On February 13, 2020, the board of directors of the Company approved a share repurchase program under which the Company was authorized to repurchase, from time to time as the Company deemed appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. On May 19, 2022, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to an additional 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021. All shares that were repurchased under the share repurchase program were retired.


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

January 1-31, 2022	—	—	394,085	405,915
February 1-28, 2022	—	—	394,085	405,915
March 1-31, 2022	77,500	$ 56.98	471,585	328,415
April 1-30, 2022	200,000	56.55	671,585	128,415
May 1-31, 2022	192,500	53.29	864,085	1,435,915
June 1-30, 2022	210,000	54.40	1,074,085	1,225,915
July 1-31, 2022	190,000	55.18	1,264,085	1,035,915
August 1-31, 2022	—	—	—	1,035,915
September 1-30, 2022	—	—	—	1,035,915
October 1-31, 2022	—	—	—	1,035,915
November 1-30, 2022	34,506	51.63	1,298,591	1,001,409
December 1-31, 2022	65,494	50.20	1,364,085	935,915

Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2017 and ending December 31, 2022, a comparison of cumulative total returns for the Company, the Nasdaq Composite Index, and the SNL Bank Nasdaq Index prepared by S&P Global, Charlottesville, Virginia. The graph was prepared at the Company’s request by S&P Global. The information assumes that $100 was invested at the closing price on December 31, 2017 in the common stock of the Company and in each index, and that all dividends were reinvested.

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Index	12/31/17	12/31/18	12/31/19	12/31/20	12/31/21	12/31/22
QCR Holdings, Inc.	100.00	75.33	103.62	94.27	133.99	119.32
Nasdaq Composite Index	100.00	97.16	132.81	192.47	235.15	158.65
SNL Bank Nasdaq Index	100.00	82.29	112.01	100.46	138.97	109.23

Item 6. [Reserved]

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section generally discusses 2022 and 2021 items and annual comparison between our fiscal 2022 performance compared to our fiscal 2021 performance. A detailed review of our fiscal 2021 performance compared to our fiscal 2020 performance can be found in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This discussion should be read in conjunction with our Consolidated Financial Statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.

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

GENERAL

The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty-nine years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2022, the Company had $7.9 billion in consolidated assets, including $6.1 billion in total loans/leases, and $6.0 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger. On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into the Company’s Springfield-based charter, Springfield First Community Bank. The combined bank changed its name to Guaranty Bank.

CRITICAL ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, determination of the fair value of loans acquired in business combinations, impairment of goodwill and the fair value of financial instruments. A more detailed discussion of these critical accounting policies and estimates can be found in Note 1 to the Consolidated Financial Statements.

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

GOODWILL

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

The initial recognition of goodwill and subsequent impairment analysis requires us to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods, which may include using the current market price of stock or discounted cash flow analyses. Additionally, estimated cash flows may extend beyond five years and, by their nature, are difficult to determine over an extended timeframe. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors, changes in revenue growth trends, cost structures, technology, changes in discount rates and market conditions. In determining the reasonableness of cash flow estimates, the Company reviews historical performance of the underlying assets or similar assets in an effort to assess and validate assumptions utilized in its estimates.

In assessing the fair value of reporting units, we may consider the stage of the current business cycle and potential changes in market conditions. We may also utilize other information to validate the reasonableness of our valuations, including

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public market comparables and multiples of recent mergers and acquisitions of similar businesses. Valuation multiples may be based on tangible capital ratios of comparable companies and business segments. These multiples may be adjusted to consider competitive differences, including size, operating leverage and other factors. The carrying amount of a reporting unit is determined based on the capital required to support the reporting unit’s activities, including its tangible and intangible assets. The determination of a reporting unit’s capital allocation requires judgment and considers many factors, including the regulatory capital regulations and capital characteristics of comparably situated companies in relevant industry sectors. In certain circumstances, the Company will engage a third-party to independently validate our assessment of the fair value of our reporting units.

The Company assesses the impairment of goodwill whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following:

●

Significant under-performance relative to expected historical or projected future operating results;

●

Significant changes in the manner of use of the acquired assets or the strategy for the overall business;

●

Significant negative industry or economic trends;

●

Significant decline in the market price for our common stock over a sustained period; or

●

Market capitalization relative to net book value.

As of November 30, 2022, the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.

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

On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326),” which replaces the incurred loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures and HTM securities 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. The Company’s methodologies for estimating the ACL 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. If a loan is determined to no longer share similar risk characteristics with other assets in the segmented pool, it is evaluated on an individual basis.

The Company also 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 for OBS exposures is calculated using probability of default and loss given default using the same segmentation and qualitative factors used for loans and leases.

Although management believes the level of the ACL as of December 31, 2022 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.

FAIR VALUE OF LOANS ACQUIRED IN BUSINESS COMBINATIONS

Loans acquired in business combinations are initially recorded at fair value as adjusted for credit risk and an allowance for credit losses at the date of acquisition. For loans with no significant evidence of credit deterioration since origination, the difference between the fair value and the unpaid principal balance of the loan at the acquisition date is amortized into interest income using the effective interest method over the remaining period to contractual maturity.

Loans acquired with evidence of deterioration in credit quality since origination, or PCD loans, are accounted for in accordance with ASC Topic 326-20 “Financial instruments - credit losses.” Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and

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discounting those cash flows at an appropriate market rate of interest. An allowance for credit losses is recognized by estimating the expected credit losses of the purchased asset and recording an adjustment to the acquisition date fair value to establish the initial amortized cost basis of the asset. Differences between the established fair value, or amortized cost basis, and the unpaid principal balance of the asset is considered to be a non-credit discount/premium and is accreted/amortized into interest income using the interest method in accordance with ASC 310-10. Subsequent changes to the allowance for credit losses are recorded through provision for credit loss expense using the same methodology as other loans held for investment.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as investment securities and derivatives, are not actively traded the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, LIBOR yield curve, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3.

FAIR VALUE OF SECURITIES

The fair value of securities is determined monthly and the securities are stated at fair value. For available for sale securities, unrealized gains and losses are reported as a component of stockholders’ equity, net of the related tax effect. For both available for sale and held to maturity debt securities, any portion of a decline in value associated with credit loss is recognized in income with the remaining noncredit related component being recognized in other comprehensive income.

EXECUTIVE OVERVIEW

The Company reported net income of $99.1 million for the year ended December 31, 2022, and diluted EPS of $5.87. For the same period in 2021 the Company reported net income of $98.9 million and diluted EPS of $6.20.

The year ended December 31, 2022 was highlighted by several significant items:

●

Annual net income of $99.1 million, or $5.87 per diluted share;

●

Record adjusted net income (non-GAAP) of $114.9 million, or $6.80 per diluted share, an increase of 14.8% and 8.5%, respectively, excluding one-time expenses associated with the GFED acquisition; and

●

Full year loan and lease growth of 14.6% for the year, excluding PPP and GFED acquired loans (non-GAAP).

Following is a table that represents the various net income measurements for the years ended December 31, 2022 and 2021.


	Year Ended December 31,
		2022		2021
	(dollars in thousands, except per share data)

Net income	$	99,066	$	98,905

Diluted earnings per common share	$	5.87	$	6.20

Weighted average common and common equivalent shares outstanding		16,890,007		15,944,708

The Company reported adjusted net income (non-GAAP) of $114.9 million, with adjusted diluted EPS of $6.80. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the��year excludes a number of non-recurring items, after-tax, most significantly:

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$9.8 million of CECL Day 2 provision for credit losses related to the GFED acquisition;

●

$4.4 million of post-acquisition compensation, transition and integration costs; and

●

$3.2 million of acquisition costs.

The increase in weighted average common shares outstanding when comparing the year ended December 31, 2022 to December 31, 2021 was primarily due to the common stock issuance in connection with the acquisition of GFED as discussed in Note 2 to the Consolidated Financial Statements.

Following is a table that represents the major income and expense categories.


	Year Ended December 31,
	2022		2021
	(dollars are in thousands)

Net interest income	$	231,120	$	178,233
Provision for credit losses		8,284		3,486
Noninterest income		80,729		100,422
Noninterest expense		190,016		153,702
Federal and state income tax expense		14,483		22,562
Net income	$	99,066	$	98,905

The following are some noteworthy developments in the Company’s financial results:

●

Net interest income grew $52.9 million, or 29.7%, in 2022 compared to the prior year. The increase in 2022 was primarily due to an improved net interest margin, driven primarily by our asset-sensitive balance sheet in the rising interest rate environment.

●

Provision expense increased $4.8 million when comparing 2022 to 2021. The increase in 2022 was due to a CECL Day 2 provision for credit losses on acquired loans with the GFED transaction. See the “Provision for Credit Losses” section of this report for additional details.

●

Noninterest income decreased $19.7 million, or 19.6% when compared to the prior year. The decrease in 2022 was primarily attributable to lower capital markets revenue from swap fee income. Lower capital markets revenue was due to delays in client projects caused by ongoing supply chain disruptions, inflationary pressures and higher interest rates. The demand for low-income housing remains healthy and the economics associated with these tax credit projects continue to be favorable. The Company has a strong pipeline for this business and expects it to be a solid source of fee income in 2023.

●

Noninterest expense increased $36.3 million, or 23.6%, in 2022 compared to the prior year, primarily due to acquisition costs and post-acquisition compensation, transition and integration costs of $9.2 million associated with the acquisition of GFED as well as nine months of operating expenses in 2022 for the combined Guaranty Bank entity as compared to 2021. See Note 2 of the Consolidated Financial Statements for further discussion.

STRATEGIC FINANCIAL METRICS

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

●

Grow loans/leases by 9% per year, funded by core deposits;

●

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

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

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


			For the Year Ending
Strategic Financial Metric*	Key Metric	Target	December 31, 2022			December 31, 2021
Loan and lease growth organically **	Loans and leases growth	> 9% annually		14.6	%		16.9	%
Fee income growth ***	Fee income growth	> 6% annually		(21.5)	%		(10.1)	%
Improve operational efficiencies and hold noninterest expense growth	Noninterest expense growth	< 5% annually		18.8	%		4.0	%

* The calculations provided exclude non-core noninterest income and noninterest expense.

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

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

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

STRATEGIC DEVELOPMENTS

The Company took the following actions in 2022 to support our corporate strategy and further the strategic financial metrics shown above:

●

The Company grew loans and leases in 2022 by 31.2%. Loan and lease growth excluding PPP and GFED acquired loans (non-GAAP) was 14.6%. The loan growth was driven by both our specialty finance group and our traditional commercial lending and leasing businesses.

●

Correspondent banking continues 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 it currently serves – Iowa, Wisconsin, Missouri and Illinois. The Company acts as the correspondent bank for 185 downstream banks with total average noninterest bearing deposits of $246.0 million and total average interest-bearing deposits of $330.7 million for 2022. This line of business provides a strong source of noninterest bearing and interest-bearing deposits, fee income, high-quality loan participations and bank stock loans. The Company also manages off-balance sheet liquidity held at the Federal Reserve on behalf of the downstream banks of $339.5 million as of December 31, 2022.

●

The Company is focused on executing interest rate swaps on select commercial loans, including LIHTC permanent loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. Levels of capital markets revenue from swap fee income are influenced by prevailing interest rates. Capital markets revenue from swap fee income totaled $41.3 million in 2022 as compared to $61.0 million in 2021. Capital markets revenue from swap fees averaged $10.3 million per quarter for the year 2022 and $15.2 million per quarter for the year 2021.

●

In recent years, the Company has been successful in expanding its wealth management client base. Trust fees continue to be a significant contributor to noninterest income. Assets under management decreased by $842.4 million in 2022 due to market volatility. There were 340 new relationships added in 2022 totaling $481.0 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 fees are determined based on the value of the investments within the fully-managed trusts. The Company expects trust fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

●

Noninterest expense in 2022 totaled $190.0 million as compared to $153.7 million in 2021. The increase was primarily due to $9.2 million of acquisition costs and post-acquisition compensation, transition and integration costs in 2022 related to the acquisition of GFED, as discussed in the Company’s financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K. In addition, the increase is due to nine months of operating expenses in 2022 for the combined Guaranty Bank entity as compared to 2021.

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GAAP TO NON-GAAP RECONCILIATIONS

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

●

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

●

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

●

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

●

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

●

Loan growth excluding acquired and PPP loans (non-GAAP) is reconciled to total loans and leases.

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

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

NIM (TEY) is a financial measure that the Company’s management utilizes to take into account the tax benefit associated with certain 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 a great deal, making comparisons difficult.

The efficiency ratio is a ratio that management utilizes to compare the Company to peers. It is standard in the banking industry and widely utilized by investors.

Loan growth, excluding acquired and PPP loans, is a ratio that management utilizes to compare the Company to its peers. The Company’s management believes this financial measure is important to investors as total loans and leases for the years ended December 31, 2022 and 2021 were materially higher due to the addition of acquired and PPP loans. By excluding the acquired and PPP loans, the investor is provided a better comparison to prior years for analysis.

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


	As of
GAAP TO NON-GAAP	December 31,			December 31,
RECONCILIATIONS	2022			2021

	(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	772,724		$	677,010
Less: Intangible assets		154,366			83,415
TCE (non-GAAP)	$	618,358		$	593,595

Total assets (GAAP)	$	7,948,837		$	6,096,132
Less: Intangible assets		154,366			83,415
TA (non-GAAP)	$	7,794,471		$	6,012,717

TCE/TA ratio (non-GAAP)		7.93	%		9.87

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	For the Year Ended
	December 31,			December 31,
	2022			2021

ADJUSTED NET INCOME
Net income (GAAP)	$	99,066		$	98,905
Less non-core items (post-tax) (*):
Income:
Securities losses, net	$	—		$	(69)
Fair value gain (loss) on derivatives		1,560			135
Gain on sale of loan		—			28
Total non-core income (non-GAAP)	$	1,560		$	94
Expense:
Disposition costs	$	—		$	10
Acquisition costs		3,198			493
Post-acquisition compensation, transition and integration costs		4,366			—
CECL Day 2 credit loss expense on acquired non-PCD loans		8,651			—
CECL Day 2 credit loss expense on acquired OBS exposure		1,140			—
Separation agreement		—			734
Total non-core expense (non-GAAP)	$	17,355		$	1,237


Adjusted net income (non-GAAP)	$	114,861		$	100,048

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	114,861		$	100,048

Weighted average common shares outstanding		16,681,844			15,708,744
Weighted average common and common equivalent shares outstanding		16,890,007			15,944,708

Adjusted EPS (non-GAAP):
Basic	$	6.89		$	6.37
Diluted	$	6.80		$	6.27

ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	114,861		$	100,048

Average Assets	$	7,206,180		$	5,890,042

Adjusted ROAA (non-GAAP)		1.59	%		1.70	%

ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	231,120		$	178,233
Plus: Tax equivalent adjustment		16,340			10,211
Net interest income - tax equivalent (non-GAAP)	$	247,460		$	188,444
Less: Acquisition accounting net accretion		8,581			1,340
Adjusted net interest income	$	238,879		$	187,104

Average earning assets	$	6,628,224		$	5,398,868

NIM (GAAP)		3.49	%		3.30	%
NIM (TEY) (non-GAAP)		3.73	%		3.49	%
Adjusted NIM (TEY) (non-GAAP)		3.60	%		3.47	%

EFFICIENCY RATIO
Noninterest expense (GAAP)	$	190,016		$	153,702

Net interest income (GAAP)	$	231,120		$	178,233
Noninterest income (GAAP)		80,729			100,422
Total income	$	311,849		$	278,655

Efficiency ratio (noninterest expense/total income) (non-GAAP)		60.93	%		55.16	%

LOAN GROWTH, EXCLUDING ACQUIRED AND PPP LOANS
Total loans and leases	$	6,138,871		$	4,680,132
Less: Acquired loans		807,599			—
Less: PPP loans		69			28,181
Total loans and leases, excluding acquired and PPP loans	$	5,331,203		$	4,651,951

Loan growth, excluding acquired and PPP loans		14.60	%		16.94	%

* Non-core or non-recurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of acquisition costs which has an estimated effective tax rate of 13.62%.

NET INTEREST INCOME AND MARGIN (TAX EQUIVALENT BASIS)

Net interest income, on a GAAP basis, increased 30% for the year ended December 31, 2022, compared to the prior year. Net interest income, on a tax equivalent basis (non-GAAP), increased 31% to $247.5 million for the year ended December

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31, 2022, as compared to the prior year. Net interest income improved primarily due to the Company’s asset-sensitive balance sheet in the rising interest rate environment.

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


	GAAP				Tax Equivalent Basis
	For the Year Ended				For the Year Ended
	December 31,		December 31,		December 31,		December 31,
	2022		2021		2022		2021
Average Yield on Interest-Earning Assets	4.41	%	3.71	%	4.66	%		3.90	%
Average Cost of Interest-Bearing Liabilities	1.28	%	0.59	%	1.28	%		0.59	%
Net Interest Spread	3.13	%	3.12	%	3.38	%		3.31	%
NIM (TEY) (Non-GAAP)	3.49	%	3.30	%	3.73	%		3.49	%
NIM Excluding Acquisition Accounting Net Accretion	3.36	%	3.28	%	3.60	%		3.47	%

Acquisition accounting net accretion can fluctuate, mostly depending on the payoff or renewal 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 Year Ended
		December 31,		December 31,
		2022		2021
		(dollars in thousands)

Acquisition Accounting Net Accretion in NIM	$	8,581	$	1,340

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 management strategies which included better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate increases and finding additional ways to manage cost of funds through derivatives.

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The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories are presented in the following table:


	Year Ended December 31,
	2022								2021							2020
				Interest		Average						Interest		Average					Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or		Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost		Balance			or Paid		Cost

	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	14,436		$	410		2.84	%	$	1,964		$	2	0.10	%	$	2,398		$	19	0.79	%
Interest-bearing deposits at financial institutions		63,448			1,089		1.72			116,421			173	0.15			315,616			669	0.21
Investment securities (1)		910,712			36,359		3.99			804,636			29,504	3.66			715,808			26,773	3.74
Restricted investment securities		35,554			2,068		5.73			19,386			950	4.83			20,270			1,031	5.00
Gross loans/leases receivable (1) (2) (3)		5,604,074			268,985		4.80			4,456,461			179,738	4.03			4,031,567			178,097	4.42
Total interest earning assets	$	6,628,224			308,911		4.66		$	5,398,868			210,367	3.90		$	5,085,659			206,589	4.06

Noninterest-earning assets:
Cash and due from banks	$	75,975							$	60,298						$	80,208
Premises and equipment		106,591								75,015							73,063
Less allowance		(85,745)								(81,633)							(55,275)
Other		481,135								420,809							420,419
Total assets	$	7,206,180							$	5,873,357						$	5,604,074

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	3,715,017			35,359		0.95	%	$	3,058,917			8,621	0.28	%	$	2,797,669			11,980	0.43	%
Time deposits		568,245			7,003		1.23			448,191			4,679	1.04			690,222			11,289	1.64
Short-term borrowings		8,637			299		3.46			6,281			5	0.08			22,625			84	0.37
FHLB advances		286,474			6,954		2.39			23,389			70	0.30			74,167			1,087	1.44
Other borrowings		1,068			53		4.96			—			—	—			—			—	—
Subordinated notes		165,685			9,200		5.55			115,398			6,272	5.44			83,404			4,697	5.63
Junior subordinated debentures		45,497			2,583		5.60			38,067			2,276	5.90			37,913			2,286	5.93
Total interest-bearing liabilities	$	4,790,623			61,451		1.28		$	3,690,243			21,923	0.59		$	3,706,000			31,423	0.85

Noninterest-bearing demand deposits	$	1,393,284							$	1,269,467						$	1,052,375
Other noninterest-bearing liabilities		274,241								276,457							279,459
Total liabilities	$	6,458,148							$	5,236,167						$	5,037,834

Stockholders' equity		748,032								637,190							566,240
Total liabilities and stockholders' equity	$	7,206,180							$	5,873,357						$	5,604,074
Net interest income				$	247,460							$	188,444						$	175,166
Net interest spread							3.38	%						3.31	%						3.21	%
Net interest margin							3.49	%						3.30	%						3.28	%
Net interest margin (TEY)(Non-GAAP)							3.73	%						3.49	%						3.44	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.60	%						3.47	%						3.38	%

Ratio of average interest-earning assets to average interest-bearing liabilities		138.36	%							146.30	%						137.23	%

(1)	Interest earned and yields on nontaxable investment securities and 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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The Company’s components of change in net interest income are presented in the following table:


	For the years ended December 31, 2022 and 2021
	Inc./(Dec.)		Components				Inc./(Dec.)		Components
	from		of Change (1)				from		of Change (1)
	Prior Year		Rate		Volume		Prior Year		Rate		Volume

	2022 vs. 2021						2021 vs. 2020
	(dollars in thousands)						(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	408	$	334	$	74	$	(17)	$	(14)	$	(3)
Interest-bearing deposits at financial institutions		916		1,030		(114)		(496)		(154)		(342)
Investment securities (2)		6,855		2,784		4,071		2,731		(576)		3,307
Restricted investment securities		1,118		204		914		(81)		(35)		(46)
Gross loans/leases receivable (2) (3)		89,247		38,013		51,234		1,641		(16,368)		18,009
Total change in interest income	$	98,544	$	42,365	$	56,179	$	3,778	$	(17,147)	$	20,925

INTEREST EXPENSE
Interest-bearing deposits		26,738		24,539		2,199		(3,359)		(4,422)		1,063
Time deposits		2,324		942		1,382		(6,610)		(3,375)		(3,235)
Short-term borrowings		294		291		3		(79)		(41)		(38)
Federal Home Loan Bank advances		6,884		2,634		4,250		(1,017)		(546)		(471)
Other borrowings		53		—		53		—		—		—
Subordinated notes		2,928		130		2,798		1,575		—		1,575
Junior subordinated debentures		307		(118)		425		(10)		—		(10)
Total change in interest expense	$	39,528	$	28,418	$	11,110	$	(9,500)	$	(8,384)	$	(1,116)

Total change in net interest income	$	59,016	$	13,947	$	45,069	$	13,278	$	(8,763)	$	22,041

(1)	The column "Inc/(Dec) from Prior Year" 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 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 fees, investment advisory and management fees, deposit service fees, swap fee income, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.

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

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2022 and 2021

INTEREST INCOME

For 2022, interest income increased $92.4 million, or 46%, compared to 2021. For 2022, interest income (tax equivalent) increased $98.5 million, or 47%, compared to 2021. This was due to an increase in the yield of average securities and average loans/leases as well as an increased volume of average loans/leases.

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

Comparing 2022 to 2021, interest expense increased $39.5 million, or 180%, year-over-year. The increase is primarily due to an increase in cost of funds given the rising rate environment. The Company’s cost of funds was 1.28% for the year ending December 31, 2022, which was up from 0.59% for the year ending December 31, 2021.

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PROVISION FOR CREDIT LOSSES

The ACL is established through provision for credit losses expense to provide an estimated ACL. The following table shows the components for the provision for credit losses for the years ended December 31, 2022 and 2021.


	Year Ended
	December 31,		December 31,
	2022		2021

	(dollars in thousands)

Provision for credit losses - loans and leases	$	9,636	$	5,702
Provision for credit losses - off-balance sheet exposures		(1,334)		(2,231)
Provision for credit losses - held to maturity securities		(18)		15
Total provision for credit losses	$	8,284	$	3,486

The Company’s total provision for credit losses was $8.3 million for 2022, an increase of $4.8 million from 2021. The increase in provision on loans and leases was driven by the CECL Day 2 credit loss expense on performing loans of $11.0 million (pre-tax) as a result of the GFED acquisition, offset by negative provision recorded at the other three charters. For the year ended December 31, 2022, the provision related to OBS was a negative $1.3 million which included a $1.4 million provision related to the acquisition of GFED, compared to a negative $2.2 million for the year ended December 31, 2021. The decrease was due a reduction in the qualitative factors related to economic improvement in the CECL forecast along with improvement in economic factors and credit quality within the qualitative factor matrix.

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 the risk associated with the loans/leases and securities in the portfolio as described in more detail in the “Critical Accounting Policies and Critical Accounting Estimates” section.

The Company had an ACL on loans/leases of 1.43% of total gross loans/leases at December 31, 2022, compared to 1.68% of total gross loans/leases at December 31, 2021. Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $6.1 million and $1.5 million at December 31, 2022 and 2021, respectively.

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 years ended December 31, 2022 and 2021.


	Year Ended
	December 31,		December 31,
	2022		2021		$ Change		% Change

	(dollars in thousands)

Trust fees	$	10,641	$	11,206	$	(565)	(5.0)	%
Investment advisory and management fees		3,858		4,080		(222)	(5.4)
Deposit service fees		8,134		6,132		2,002	32.6
Gains on sales of residential real estate loans, net		2,411		4,397		(1,986)	(45.2)
Gains on sales of government guaranteed portions of loans, net		119		227		(108)	(47.6)
Swap fee income/capital markets revenue		41,309		60,992		(19,683)	(32.3)
Securities gains (losses), net		—		(88)		88	(100.0)
Earnings on bank-owned life insurance		2,056		1,838		218	11.9
Debit card fees		5,459		4,216		1,243	29.5
Correspondent banking fees		967		1,114		(147)	(13.2)
Loan related fee income		2,428		2,268		160	7.1
Fair value gain (loss) on derivatives		1,975		170		1,805	1061.8
Other		1,372		3,870		(2,498)	(64.5)
Total noninterest income	$	80,729	$	100,422	$	(19,693)	(19.6)	%

In recent years, the Company has been successful in expanding its wealth management customer base. Trust fees continue to be a significant contributor to noninterest income. Assets under management decreased by $842.4 million in 2022 due

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to market volatility. 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 fees are determined based on the value of the investments within the fully-managed trusts. Trust fees decreased 5% in 2022 as compared to 2021 due to market volatility. The Company expects trust fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuation.

Investment advisory and management fees decreased 5% in 2022 as compared to 2021. Similar to trust fees, fees from these services are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations.

Deposit service fees increased 33% in 2022 as compared to 2021. The increase was primarily due to the GFED acquisition. The Company continues to emphasize shifting the mix of deposits from retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in-service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, decreased 45% in 2022 as compared to 2021. The decrease was primarily due to decreased residential real estate purchases and the refinancing of residential real estate loans with higher interest rates in 2022.

The Company’s gains on the sale of government-guaranteed portions of loans for 2022 decreased 48% as compared to 2021. Over the past few years, competitors have been offering SBA and USDA loan candidates traditional financing without such a guarantee and the Company is not willing to relax its structure for those lending opportunities.

The Company has grown its interest rate swap program significantly over the past several years. The Company’s interest rate swap program consists of back-to-back interest rate swaps with two types of commercial borrowers: (1) traditional commercial loans of a certain minimum size and sophistication, and (2) LIHTC permanent loans. Most of the growth has been in the latter category as the Company has grown relationships with strong LIHTC developers with many years of experience. The LIHTC industry is strong and growing with an increased need for affordable housing. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent upon the pricing. Swap fee income/capital markets revenue totaled $41.3 million in 2022 as compared to $61.0 million in 2021. The decrease was due to delays in client projects caused by ongoing supply chain disruptions, inflationary pressures and higher interest rates. Swap fee income relative to the increase in notional amount of the non-hedging interest rate swap contracts was 8.2% in 2022 and 9.9% in 2021. The decrease in the ratio was primarily due to the steepening of the yield curve. In the traditional commercial portfolio, the pricing is more competitive and the duration is shorter as compared to the LIHTC permanent loans. The mix of loans with interest rate swaps continued to be heavily weighted towards LIHTC permanent loans. Future levels of swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate depending on the interest rate environment.

There were no securities gains or losses in 2022. Securities losses, net of gains totaled $88 thousand in 2021.

Earnings on BOLI increased 12% in 2022. There were $10.0 million of purchases of BOLI in 2022 and there were no purchases of BOLI in 2021. Yields on BOLI (based on a simple average and excluding the impact of the federal income tax exemption) were 1.92% for 2022 and 2.94% for 2021. Notably, a portion of the Company’s BOLI is variable rate whereby the 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 30% in 2022. The increase was primarily due to the GFED acquisition. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees decreased 13% in 2022 due to higher earnings credits as the Federal Reserve increased rates continually in 2022. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue

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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 noninterest bearing deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves 185 banks in Iowa, Illinois, Missouri and Wisconsin.

Loan related fee income increased 7% in 2022. The increase was primarily due to the increase in loan volume with the GFED acquisition.

Fair value gain (loss) on derivatives increased 1062% in 2022. The increase was due to the rapidly rising interest rate environment. The Company uses cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates. See Note 7 to the Consolidated Financial Statements for additional information.

Other noninterest income decreased 65% in 2022 primarily due to lower equity investment income and lower gains on disposal of leased assets.

NONINTEREST EXPENSES

The following tables set forth the various categories of noninterest expenses for the years ended December 31, 2022 and 2021.


	Year Ended
	December 31,		December 31,
	2022		2021		$ Change		% Change

	(dollars in thousands)

Salaries and employee benefits	$	115,368	$	100,907	$	14,461	14.3	%
Occupancy and equipment expense		21,975		15,918		6,057	38.1
Professional and data processing fees		16,282		14,579		1,703	11.7
Acquisition costs		3,715		624		3,091	495.4
Post-acquisition compensation, transition and integration costs		5,526		—		5,526	100.0
Disposition costs		—		13		(13)	(100.0)
FDIC insurance, other insurance and regulatory fees		5,806		4,475		1,331	29.7
Loan/lease expense		1,829		1,671		158	9.5
Net cost of (income from) and gains/losses on operations of other real estate		(40)		(1,420)		1,380	(97.2)
Advertising and marketing		4,958		4,254		704	16.5
Communication and data connectivity		2,213		1,798		415	23.1
Supplies		1,109		1,053		56	5.3
Bank service charges		2,282		2,173		109	5.0
Correspondent banking expense		840		799		41	5.1
Intangibles amortization		2,854		2,032		822	40.5
Payment card processing		1,964		1,412		552	39.1
Trust expense		775		758		17	2.2
Other		2,560		2,656		(96)	(3.6)
Total noninterest expense	$	190,016	$	153,702	$	36,314	23.6	%

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

Salaries and employee benefits, which is the largest component of noninterest expense, increased 14% in 2022 as compared to 2021. This increase was primarily related to the GFED acquisition, which resulted in an increase of 165 full-time equivalent employees.

Occupancy and equipment expense increased 38% in 2022 as compared to 2021. This increase was due to higher depreciation expense and computer hardware expense related to the GFED acquisition.

Professional and data processing fees increased 12% in 2022 as compared to 2021. The increase was primarily due to the GFED acquisition. 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.

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Acquisition costs totaled $3.7 million in 2022 and $624 thousand in 2021. These costs were comprised of primarily legal, accounting and other professional fees related to the GFED acquisition described in Note 2 to the Consolidated Financial Statements.

Post-acquisition compensation, transition and integration costs totaled $5.5 million in 2022. There were no post-acquisition compensation, transition and integration costs in 2021. These costs were comprised primarily of personnel costs, IT integration, and conversion costs related to the acquisition of GFED.

There were no disposition costs in 2022. Disposition costs totaled $13 thousand for 2021. The costs were comprised primarily of legal, accounting, disposal of fixed assets and prepaids, personnel costs and IT deconversion costs related to the sale of the Bates Companies. See Note 2 to the Consolidated Financial Statements for further discussion.

FDIC insurance, other insurance and regulatory fee expense increased 30% in 2022. The increase in expense was due to the GFED acquisition as well as an increase in the asset size of the Company in 2022 which increased the Company’s insurance rates and expenses.

Loan/lease expense increased 10% in 2022 as compared to 2021. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from operations totaled $40 thousand for 2022 as compared to net income of operations of $1.4 million for 2021. The higher amount in 2021 is due primarily to the gain on sale of a large property.

Advertising and marketing expense increased 17% in 2022 as compared to 2021. The increase in expense was primarily due to the return to more normal operations during the second half of 2021 and the full year of 2022 in response to improvements in the general economic environment due to COVID-19 as well as the GFED acquisition.

Communication and data connectivity expense increased 23% in 2022 as compared to 2021. The increase is primarily due to the GFED acquisition.

Supplies expense increased 5% in 2022 as compared to 2021. The increase is primarily due to the GFED acquisition.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT’s correspondent banking customer portfolio, increased 5% in 2022 as compared to 2021. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses is expected to also increase.

Correspondent banking expense increased 5% in 2022 as compared to 2021. These are direct costs incurred to provide services to QCBT’s correspondent banking customer portfolio, including safekeeping and cash management services.

Intangible amortization expense increased 41% in 2022 as compared to 2021. The increase is due to the GFED acquisition. These expenses naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.

Payment card processing expense increased 39% in 2022 as compared to 2021. The increase is due to the GFED acquisition.

Trust expense increased 2% in 2022 as compared to 2021. The increase was due to new relationships added in 2022 totaling $481.0 million of new assets under management.

Other noninterest expense decreased 4% in 2022 as compared to 2021. The decrease was due primarily to losses on disposal of fixed assets no longer in service. Also included in other noninterest expense are other items such as subscriptions, sales and use tax and expenses related to wealth management.

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INCOME TAX EXPENSE

The provision for income taxes was $14.5 million for 2022, or an effective tax rate of 12.7%, compared to $22.6 million for 2021, or an effective tax rate of 18.6%. Refer to the reconciliation of the expected income tax rate to the effective tax rate that is included in Note 14 to the Consolidated Financial Statements for additional details.

FINANCIAL CONDITION AS OF DECEMBER 31, 2022 AND 2021

OVERVIEW

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


		As of December 31,
		2022				2021

		(dollars in thousands)

	Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	183,993	2	%	$	125,152	2	%
Securities		928,102	12	%		810,215	13	%
Net loans/leases		6,051,165	76	%		4,601,411	75	%
Derivatives		177,631	2	%		222,220	4	%
Other assets		607,946	8	%		337,134	6	%
Total assets	$	7,948,837	100	%	$	6,096,132	100	%

Total deposits	$	5,984,217	75	%	$	4,922,772	80	%
Total borrowings		825,894	10	%		170,805	3	%
Derivatives		200,701	3	%		225,135	4	%
Other liabilities		165,301	2	%		100,410	2	%
Total stockholders' equity		772,724	10	%		677,010	11	%
Total liabilities and stockholders' equity	$	7,948,837	100	%	$	6,096,132	100	%

In 2022, total assets increased $1.9 billion, or 30%. The Company’s securities portfolio increased $117.9 million, or 15%, during 2022. The Company’s loan/lease portfolio increased $1.5 billion, or 32%, during 2022. Deposits grew $1.1 billion, or 22%, during 2022. Borrowings increased $655.1 million, or 384%, during 2022. The increases were primarily due to the GFED acquisition and strong growth.

INVESTMENT SECURITIES

The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk and maximizing return, while minimizing credit risk. Over the recent years, the Company has continued to change the mix of the portfolio by decreasing U.S government sponsored agency securities, while 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) that require a thorough underwriting process before investment and are generated by our specialty finance group.

Following is a breakdown of the Company’s securities portfolio by type, the percentage of net unrealized gains (losses) to carrying value on the total portfolio, and the portfolio duration as of December 31, 2022 and 2021.

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	2022					2021
	Amount			%		Amount			%
	(dollars in thousands)

U.S. treasuries and govt. sponsored agency securities	$	16,981		2	%	$	23,328		3	%
Municipal securities		779,270		84	%		639,601		79	%
Residential mortgage-backed and related securities		66,215		7	%		94,323		12	%
Asset-backed securities		18,728		2	%		27,124		3	%
Other securities		46,908		5	%		25,839		3	%
	$	928,102		100	%	$	810,215		100	%

Securities as a % of total assets		11.68	%				13.29	%
Net unrealized gains (losses) as a % of Amortized Cost		(11.26)	%				7.17	%
Duration (in years)		7.7					8.2
Quarterly yield on investment securities (tax equivalent)		3.99	%				3.66	%

Due to the sharp increase in intermediate and long-term interest rates during 2022, the valuation of the Company’s AFS portfolio declined significantly. As a result, the Company’s net unrealized gains as a percentage for amortized cost changed from 7.17% as of December 31, 2021 to a net unrealized loss as a percentage of amortized cost of (11.26)% as of December 31, 2022.

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

The following is a breakdown of the weighted-average yield for each range of maturities by category of debt securities that are not held at fair value:



			Weighted
	Amortized		Average
	Cost*		Yield

	(dollars in thousands)
Municipal securities:
Within 1 year	$	3,069	2.11	%
After 1 but within 5 years		18,448	4.06	%
After 5 but within 10 years		70,972	3.93	%
After 10 years		493,783	4.14	%
Total	$	586,272	4.10	%

Other securities:
Within 1 year	$	500	4.39	%
After 1 but within 5 years		550	3.97	%
Total	$	1,050	4.17	%

Total HTM Securities	$	587,322

* Amortized cost above excludes ACL of $180 thousand.

The weighted-average yield is calculated by dividing the total interest for each security per maturity range by the total amortized cost within that maturity range. Yields are not computed on a tax equivalent basis.

There have been no major changes within the tax-exempt portfolio.

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s investment securities.

LOANS/LEASES

Total loans/leases grew 31.2% in 2022 over 2021. Total loans/leases, excluding acquired and PPP loans (non-GAAP) grew 14.6% in 2022 over 2021. The mix of loan/lease types within the Company’s loan/lease portfolio is presented in the following tables.

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

	(dollars in thousands)

C&I - revolving	$	296,869	5	%	$	248,483	5	%
C&I - other *		1,451,693	23	%		1,346,602	29
CRE - owner occupied		629,367	10	%		421,701	9
CRE - non-owner occupied		963,239	16	%		646,500	14
Construction and land development		1,192,061	19	%		918,571	20
Multi-family		963,803	16	%		600,412	12
Direct financing leases		31,889	1	%		45,191	1
1-4 family real estate		499,529	8	%		377,361	8
Consumer		110,421	2	%		75,311	2
Total loans/leases	$	6,138,871	100	%	$	4,680,132	100	%
Less allowance		(87,706)				(78,721)
Net loans/leases	$	6,051,165			$	4,601,411

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 December 31, 2022, approximately 16% of the CRE loan portfolio was owner-occupied.

Historically, the Company structures most residential real estate loans to conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell the loans on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans and recognizing noninterest income from the gain on sale. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans in the table above. Historically, 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, and then retain these loans in their portfolios. The Company holds a limited amount of 15-year fixed rate residential real estate loans originated in prior years that met certain credit guidelines. In addition, the Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

The following tables set forth the remaining maturities by loan/lease type as of December 31, 2022 and 2021. Maturities are based on contractual dates.


	As of December 31, 2022
									Maturities After One Year
	Due in one		Due after one		Due after 5		Due after		Predetermined		Adjustable
	year or less		through 5 years		through 15 years		15 years		interest rates		interest rates
	(dollars in thousands)

C&I - revolving	$	209,006	$	80,044	$	7,819	$	—	$	19,239	$	68,624
C&I - other		289,733		722,893		269,304		169,763		836,744		325,216
CRE - owner occupied		52,577		330,659		206,539		39,592		380,984		195,806
CRE - non-owner occupied		96,455		604,487		217,310		44,987		629,656		237,128
Construction and land development		229,992		240,920		42,180		678,969		221,366		740,703
Multi-family		23,053		105,504		312,482		522,764		124,793		815,957
Direct financing leases		1,843		28,694		1,352		—		30,046		—
1-4 family real estate		26,753		146,524		170,636		155,616		374,875		97,901
Consumer		13,965		44,403		50,878		1,175		36,218		60,238
	$	943,377	$	2,304,128	$	1,278,500	$	1,612,866	$	2,653,921	$	2,541,573

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	As of December 31, 2021
									Maturities After One Year
	Due in one		Due after one		Due after			Due after	Predetermined		Adjustable
	year or less		through 5 years		5 years			15 years	interest rates		interest rates
	(dollars in thousands)

C&I - revolving	$	198,861	$	44,927	$	4,695	$	—	$	10,852	$	38,770
C&I - other		320,932		591,103		222,408		212,159		725,568		300,102
CRE - owner occupied		39,959		188,408		163,862		29,472		228,247		153,495
CRE - non-owner occupied		97,300		347,215		156,558		45,427		342,349		206,851
Construction and land development		144,624		159,408		45,608		568,931		161,195		612,752
Multi-family		27,483		67,407		134,919		370,603		67,055		505,874
Direct financing leases		2,514		42,253		424		—		42,677		—
1-4 family real estate		21,190		92,443		113,049		150,679		316,356		39,815
Consumer		8,968		32,787		32,654		902		17,860		48,483
	$	861,831	$	1,565,951	$	874,177	$	1,378,173	$	1,912,159	$	1,906,142

See Note 4 to the Consolidated Financial Statements for additional information on the Company’s loan/lease portfolio.

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

The adequacy of the ACL was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate ACL was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality” as described in Note 1 to the Consolidated Financial Statements 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 years ended December 31, 2022, 2021 and 2020 are presented as follows:


	Year Ended
	December 31, 2022		December 31, 2021		December 31, 2020

	(dollars in thousands)

Balance, beginning	$	78,721	$	84,376	$	36,001
Impact of adopting ASU 2016-13		—		(8,102)		—
Initial ACL recorded for acquired PCD loans		5,902		—		—
Provision		9,636		5,702		55,704
Charge-offs		(7,525)		(4,538)		(8,383)
Recoveries		972		1,283		1,054
Balance, ending	$	87,706	$	78,721	$	84,376

The Company recorded an $11.0 million (pre-tax) provision for credit losses on loans in 2022, for the CECL Day 2 provision as a result of the GFED acquisition.

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Net charge-offs by segment and their percentage of average loans and leases are as follows:



	Year ended December 31,
	2022			2021
		Amount	% of Average Loans		Amount	% of Average Loans

	(dollars in thousands)

Average amount of loans/leases outstanding, before allowance	$	5,604,074		$	4,456,461

Net charge-offs:
C&I - Revolving		—	0.00		—	0.00
C&I - Other		(5,600)	0.10		(1,697)	0.04
CRE owner occupied		6	0.00		3	0.00
CRE non-owner occupied		(96)	0.00		(1,791)	0.04
Construction and land development		(829)	0.01		—	0.00
Multi-family		43	(0.00)		(150)	0.00
1-4 family real estate		(21)	0.00		102	0.00
Consumer	��	(56)	0.00		278	(0.01)
Total net charge-offs	$	(6,553)		$	(3,255)

Changes in the ACL for OBS exposures for the years ended December 31, 2022 and 2021:


	Year Ended December 31,
	2022		2021

	(dollars in thousands)

Balance, beginning	$	6,886	$	—
Impact of adopting ASU 2016-13		—		9,117
Provisions (credited) to expense		(1,334)		(2,231)
Balance, ending	$	5,552	$	6,886

The ACL for OBS exposures totaled $9.1 million at the adoption of CECL on January 1, 2021. The Company recorded negative $1.3 million of provision for credit losses related to OBS exposures. Negative provision is due to increased line of credit usage resulting in lower exposure, offset by Day 2 provision related to the acquisition of GFED of $1.4 million. At December 31, 2022, the allowance for OBS exposures was $5.6 million.

The following is a table that reports the criticized and classified loan totals as of December 31, 2022 and 2021.


		As of December 31,
Internally Assigned Risk Rating *		2022			2021

		(dollars in thousands)

Special Mention (Rating 6)	$	98,333		$	62,510
Substandard (Rating 7)		66,021			53,296
Doubtful (Rating 8)		—			—
	$	164,354		$	115,806

Criticized Loans **	$	164,354		$	115,806
Classified Loans ***	$	66,021		$	53,296

Criticized Loans as a % of Total Loans/Leases		2.68	%		2.47	%
Classified Loans as a % of Total Loans/Leases		1.08	%		1.14	%

* Amounts above exclude the government guaranteed portion, if any. The Company assigns internal risk ratings of Pass (Rating 2) for the government

guaranteed portion.

** Criticized loans are defined as C&I and CRE loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

*** Classified loans are defined as C&I and CRE loans with internally assigned risk ratings of 7 or 8, regardless of performance.

Criticized loans increased 42% and classified loans increased 24% in 2022 as compared to 2021. Increases are due to the acquisition of GFED. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

The following table summarizes the trend in allowance as a percentage of gross loans/leases and as a percentage of NPLs as of December 31, 2022 and 2021.


	As of December 31,
	2022		2021
ACL on loans/leases / Gross loans/leases	1.43	%	1.68	%
ACL on loans/leases / NPLs	1,000.07	%	2,825.21	%

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The following table presents the allowance by type and the percentage of loan/lease type to total loans/leases.


	As of December 31,
	2022				2021
	Amount		%		Amount		%
	(dollars in thousands)

C&I - revolving	$	4,457	5	%	$	3,907	5	%
C&I – other*		27,753	24	%		25,982	30	%
CRE - owner occupied		9,965	10	%		8,501	9	%
CRE - non-owner occupied		11,749	16	%		8,549	14	%
Construction and land development		14,262	19	%		16,972	20	%
Multi-family		13,186	16	%		9,339	12	%
1-4 family real estate		4,963	8	%		4,541	8	%
Consumer		1,371	2	%		930	2	%
	$	87,706	100	%	$	78,721	100	%

* Included within the C&I – Other segment is an ACL on leases of $970 thousand and $1.5 million as of December 31, 2022 and 2021, respectively. Leases represent 1% of to total loans/leases.

Although management believes that the ACL for loans/leases at December 31, 2022 is 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 may require additional increases in the provision for credit losses. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and its leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.

See Note 4 to the Consolidated Financial Statements for additional information on the Company’s ACL.

NONPERFORMING ASSETS

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




	As of December 31,
	2022			2021
	(dollars in thousands)

Nonaccrual loans/leases (1)	$	8,765		$	2,759
Accruing loans/leases past due 90 days or more		5			1
Total NPLs		8,770			2,760
Other repossessed assets		—			—
OREO		133			—
Total NPAs	$	8,903		$	2,760


NPLs to total loans/leases		0.14	%		0.06	%
NPAs to total loans/leases plus repossessed property		0.15	%		0.06	%
NPAs to total assets		0.11	%		0.05	%
Nonaccrual loans/leases to total loans/leases		0.14	%		0.06	%
ACL to nonaccrual loans		1000.64	%		2853.24	%

(1)	Includes government guaranteed portions of loans, if applicable.

NPAs at December 31, 2022 were $8.9 million, up $6.1 million from December 31, 2021. The increase from prior year was primarily the result of the GFED acquisition. The ratio of NPAs to total assets was 0.11% at December 31, 2022, up from 0.05% at December 31, 2021.

The majority of the Company’s NPAs consists of nonaccrual loans/leases. For nonaccrual loans/leases, management thoroughly reviewed these loans/leases and provided specific allowances as appropriate.

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

The policy of the Company is to place a loan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected; or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. A loan/lease is well secured if it is secured by collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status.

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

DEPOSITS

Deposits grew $1.1 billion, or 21.6%, during 2022, primarily due to an increase in both non-interest bearing and interest-bearing deposits with the GFED acquisition. The table below presents the composition of the Company’s deposit portfolio.


	As of December 31,
	2022				2021
	Amount		%		Amount		%
	(dollars in thousands)

Noninterest bearing demand deposits	$	1,262,981	21	%	$	1,268,788	26	%
Interest bearing demand deposits		3,875,497	65	%		3,232,633	65	%
Time deposits		744,593	12	%		421,348	9	%
Brokered deposits		101,146	2	%		3	—	%
	$	5,984,217	100	%	$	4,922,772	100	%

Deposit balances can fluctuate a great deal due to large customer and correspondent bank activity. During recent years, the Company had significant core deposit growth mostly from its correspondent banking clients.

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

●

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

●

Money market deposits which represent some excess liquidity, and

●

EBA balances of the correspondent banks at the FRB.

Generally, the Company can modify the structure and interest rates paid for those correspondent bank deposits on the balance sheet which are the noninterest bearing deposits and the money market deposits. This has led to more of the correspondent bank portfolio’s excess liquidity to shift to the EBAs at the FRB, which is managed by the Company, but is off the Company’s balance sheet. On average, over the past two years, the correspondent banks’ EBA ranges from $800 million to $1.5 billion which is approximately $500 million more than pre-pandemic levels. In the second half of 2022, the Company’s correspondent bank deposit portfolio shifted to more normalized levels of liquidity and the related deposits on and off the Company’s balance sheet.

The Company had total uninsured deposits of $1.6 billion and $1.9 billion as of December 31, 2022 and 2021 respectively. The table below represents the time deposits in FDIC uninsured accounts by maturity:


	As of December 31,
	2022		2021

	(dollars in thousands)

U.S. Time Deposits in Amounts in Excess of FDIC insurance limit:
One to three months	$	183,837	$	61,278
Three to six months		113,065		45,451
Six to twelve months		118,311		81,290
Over twelve months		27,441		37,038
	$	442,654	$	225,058

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There were no other time deposits otherwise uninsured. The Company had no deposits by foreign depositors in domestic offices as of December 31, 2022 and 2021.

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 committee. See discussion regarding policy limits on bank stock loans in the Lending/Leasing section under Item 1 – Business in Part I of this Annual Report on Form 10-K.

SHORT-TERM 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 December 31,
	2022		2021
	(dollars in thousands)

Federal funds purchased	$	129,630	$	3,800

The Company’s federal funds purchased fluctuates based on the short-term funding needs of the Company’s subsidiary banks. See Note 9 to the Consolidated Financial Statements for additional information on the Company’s short-term borrowings.

FHLB ADVANCES AND OTHER BORROWINGS

As a result of their membership in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short-term 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 or when these advances provide a less costly or more readily available source of funds than customer deposits.


	As of December 31,
	2022			2021
	(dollars in thousands)

FHLB Advances	$	415,000		$	15,000
Weighted Average Interest Rate at Year-End		4.58	%		0.31	%

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

The Company renewed its revolving credit note in the second quarter of 2022. At renewal, the available line amount was increased from $25.0 million to $50.0 million. Interest on the revolving line of credit was calculated at the greater of: (a) the effective Prime Rate less 0.50% and (b) 3.00% per annum. The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries. There was no outstanding balance on the revolving line of credit at December 31, 2022.

See Notes 10 and 11 to the Consolidated Financial Statements for additional information regarding FHLB advances and other borrowings.

SUBORDINATED NOTES

The Company had subordinated notes totaling $232.7 million and $113.9 million as of December 31, 2022 and 2021, respectively. The Company completed private placements of $100.0 million in aggregate principal amount of fixed-to-

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floating subordinated notes in the third quarter of 2022. The Company acquired $19.6 million of subordinated notes during 2022 with the GFED acquisition. The Company prepaid $5.0 million in subordinated debt in 2021 with no gain/loss.

See Note 12 to the Consolidated Financial Statements for additional information regarding the subordinated notes.

JUNIOR SUBORDINATED DEBENTURES

The Company had junior subordinated debentures totaling $48.6 million and $38.2 million as of December 31, 2022 and 2021, respectively. The Company acquired $10.3 million of junior subordinated debentures during 2022 with the GFED acquisition.

STOCKHOLDERS’ EQUITY

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


	As of December 31,
	2022			2021
	(dollars in thousands)

Common stock	$	16,796		$	15,613
Additional paid in capital		370,712			273,768
Retained earnings		450,114			386,077
AOCI		(64,898)			1,552
Total stockholders' equity	$	772,724		$	677,010

TCE / TA ratio (non-GAAP)*		7.93	%		9.87	%

* TCE/TA ratio is defined as total common stockholders’ equity excluding goodwill and other intangibles divided by total assets. This ratio is a non-GAAP measure. Refer to the GAAP to Non-GAAP Reconciliations section of this report for more information.

As of December 31, 2022 and 2021, no preferred stock was outstanding.

Due to the sharp increase in intermediate and long-term interest rates, the valuation of the Company’s AFS securities portfolio and certain hedged financial instruments declined significantly. The valuation change, net of taxes, which flows through the Company’s AOCI was a net decline of $66.5 million in 2022.

On February 13, 2020, the board of directors of the Company approved a share repurchase program under which the Company was authorized to repurchase, from time to time as the Company deemed appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. On May 19, 2022, the board of directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to an additional 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021. As of December 31, 2022, the Company had repurchased 570,000 shares under the program and all shares purchased have been retired.

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The following table presents the rollforward of stockholders’ equity for the years ended December 31, 2022 and 2021, respectively.


	For the Year Ended December 31,
	2022		2021

	(dollars in thousands)

Beginning balance	$	677,010	$	593,793
Impact of adoption of ASU 2016-13		—		(937)
Net income		99,066		98,905
Other comprehensive income (loss), net of tax		(66,450)		176
Issuance of 2,071,291 shares of common stock as a result of acquisition of GFED		117,214		—
Repurchase and cancellation of 970,000 shares of common stock as a result of a share repurchase program		(52,954)		(14,168)
Common cash dividends declared		(4,022)		(3,781)
Other *		2,860		3,022
Ending balance	$	772,724	$	677,010

* Includes primarily stock-based compensation.

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, cash and due from banks and federal funds sold, which averaged $153.9 million and $178.7 million during 2022 and 2021, respectively. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

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

At December 31, 2022, the subsidiary banks had 28 lines of credit totaling $501.8 million, of which $31.0 million was secured and $470.8 million was unsecured. At December 31, 2022, $372.8 million was available.

At December 31, 2021, the subsidiary banks had 31 lines of credit totaling $517.7 million, of which $61.7 million was secured and $456.0 million was unsecured. At December 31, 2021, all of the $517.7 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $50.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2023. At December 31, 2022, the full $50.0 million was available. See Note 11 to the Consolidated Financial Statements for additional information.

As of December 31, 2022, the Company had $576.8 million in average correspondent banking deposits spread over 185 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 $634.7 million during 2022 compared to $411.8 million during 2021. Proceeds from calls, maturities, pay downs, and sales of securities were $186.8 million for 2022 compared to $195.7 million for 2021. Purchases of securities used cash of $230.5 million for 2022 compared to $173.2 million for 2021. The net increase in loans/leases used cash of $654.9 million for 2022 compared to $433.5 million for 2021.

Financing activities provided cash of $538.2 million for 2022 compared to $299.7 million for 2021. Net decreases in deposits totaled $15.1 million for 2022 as compared to net increases of $323.6 million for 2021. Net short-term borrowings

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increased $125.8 million for 2022 and decreased $1.6 million for 2021. In 2021 the Company used $5.0 million to prepay select subordinated notes. Short-term FHLB advances increased $400.0 million in 2022. Proceeds from subordinated notes totaled $100.0 million in 2022. Repurchase and cancellation of shares totaled $53.0 million in 2022 as compared to $14.2 million in 2021.

Total cash provided by operating activities was $118.7 million for 2022 compared to $88.2 million for 2021.

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

As of December 31, 2022 and 2021, the subsidiary banks remained “well-capitalized” in accordance with regulatory capital requirements administered by the federal banking authorities. See Note 17 to the Consolidated Financial Statements for detail of the capital amounts and ratios for the Company and its subsidiary banks.

COMMITMENTS, CONTINGENCIES, CONTRACTUAL OBLIGATIONS, AND OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying Consolidated Financial Statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the banks would be required to fund the commitments. The maximum potential amount of future payments the banks could be required to make is represented by the contractual amount. If the commitment is funded, the banks would be entitled to seek recovery from the customer. At December 31, 2021 and 2020, no amounts had been recorded as liabilities for the banks’ potential obligations under these guarantees.

As of December 31, 2022 and 2021, commitments to extend credit aggregated $1.7 billion and $1.2 billion, respectively. As of December 31, 2022 and 2021, standby letters of credit aggregated $25.8 million and $21.7 million, respectively. Management does not expect that all of these commitments will be funded.

Additional information regarding commitments, contingencies, and off-balance sheet arrangements is described in Note 19 to the Consolidated Financial Statements.

The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The significant fixed and determinable contractual obligations to third parties are deposits without a stated maturity, certificates of deposit, short-term borrowings, subordinated notes, and junior subordinated debentures and totaled $6.8 billion as of December 31, 2022.

The Company’s operating contract obligations represent short and long-term contractual payments for data processing equipment and services, software, and other equipment and professional services and totaled $56.6 million as of December 31, 2022.

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IMPACT OF INFLATION AND CHANGING PRICES

The Consolidated Financial Statements of the Company and the accompanying notes have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

FORWARD LOOKING STATEMENTS

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

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A. of Part I of this Annual Report on Form 10-K. In addition to the risk factors described in that section, there are other factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

The loss of key executives and employees.

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●

Changes in consumer spending.

●

Unexpected outcomes of existing or new litigation involving the Company.

●

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

●

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

●

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

●

The level of non-performing assets on our balance sheets.

●

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

●

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

●

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

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Item 7A. 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 its board of directors that meets quarterly to review the bank’s interest rate risk position and profitability, and to make or recommend adjustments, as necessary, for consideration by the full board of each bank.

Internal asset/liability management teams consisting of members of the subsidiary banks’ management meet bi-weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks’ securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board’s objectives in the most 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

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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 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, 200, 300 and 400 basis points. The Company will run additional interest rate scenarios on an as-needed basis.

The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift, the 100 basis point downward parallel shift and the 200 basis point downward parallel shift. For the 300 basis point upward shock and 300 basis point downward shock, the established policy limit is a 30% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

Application of the simulation model analysis for select interest rate scenarios at December 31, 2022 and 2021 demonstrated the following:


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

300 basis point downward shock	(30.0)	%	(6.1)	%	n/a	%
200 basis point downward shift	(10.0)	%	(0.2)	%	n/a	%
100 basis point downward shift	(10.0)	%	0.2	%	(0.1)	%
200 basis point upward shift	(10.0)	%	(1.3)	%	3.1	%
300 basis point upward shock	(30.0)	%	(2.3)	%	11.6	%

Despite the shift in model results to a more neutral position, the Company remains moderately asset sensitive. Management is conservative with the repricing assumptions on loans and deposits. For example, management does not model any delay in deposit betas despite historical experience and practice of delays in deposit betas. Finally, management models a variety of scenarios including some that stress key assumptions to help capture and isolate the impact of the management’s more conservative approach to the assumptions in the base model.

The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at December 31, 2022 were well 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 8. Financial Statements

QCR HOLDINGS, INC.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB ID: 49)	59

Financial Statements

Consolidated Balance Sheets as of December 31, 2022 and 2021	62

Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020	63

Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021, and 2020	64

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021, and 2020	65

Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020	66

Notes to Consolidated Financial Statements:

● Note 1: Nature of Business and Significant Accounting Policies	68
● Note 2: Mergers/Acquisitions/Sales	84
● Note 3: Investment Securities	88
● Note 4: Loans/Leases Receivable	92
● Note 5: Premises and Equipment	105
● Note 6: Goodwill and Intangibles	106
● Note 7: Derivatives and Hedging Activities	107
● Note 8: Deposits	111
● Note 9: Short-Term Borrowings	112
● Note 10: FHLB Advances	112
● Note 11: Other Borrowings and Unused Lines of Credit	113
● Note 12: Subordinated Notes	113
● Note 13: Junior Subordinated Debentures	114
● Note 14: Federal and State Income Taxes	116
● Note 15: Employee Benefit Plans	118
● Note 16: Stock-Based Compensation	119
● Note 17: Regulatory Capital Requirements and Restrictions on Dividends	122
● Note 18: Earnings Per Share	124
● Note 19: Commitments and Contingencies	124
● Note 20: Parent Company Only Financial Statements	126
● Note 21: Fair Value	129
● Note 22: Business Segment Information	132

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of QCR Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 1, 2023, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee

and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)

involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are

not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses on Loans and Leases

As described in Notes 1 and 4 to the consolidated financial statements, the allowance for credit losses on loans and leases (allowance) totaled $87.7 million at December 31, 2022. The allowance is measured on

a collective (pool) basis when similar risk characteristics exist (general reserve). Loans that do not share similar risk characteristics are evaluated on an individual basis at the balance sheet date (specific

reserve). At December 31, 2022 the general reserve on loans and leases collectively evaluated for impairment totaled $80.8 million and the specific reserve on loans and leases individually evaluated

totaled $6.9 million.

The measurement of the general reserve is based on relevant past events, including historical

experience, current conditions and reasonable and supportable forecasts that affect collectability. The Company’s reserve on collectively evaluated loans and leases includes a quantitative allowance based

upon estimates of losses over the life of the loans and leases that is calculated using an existing

probability of default and loss given default framework, as well as a qualitative component for factors not reflected in the historical loss experience. The qualitative component is determined based on an

assessment of internal and external influences on credit quality at the present time (qualitative factors), as well as a projection of the impact in the future (future factors). Qualitative factors of significant influence include the general economic environment in the Company’s markets, both locally and nationally, as well

as the impact of economic conditions on certain industries and credit quality indicators. The Company’s

future factors represent an estimate of forecasted economic conditions. The calculation also

contemplates that the Company may not have sufficient information to make reasonable and supportable forecasts for the entire life of the loans and leases, which would result in a reversion to historical credit

loss information. The evaluation of these qualitative factors and future factors requires that management make significant judgments, which may significantly impact the estimated allowance.

We identified the qualitative and future factors applied to the general reserve of the allowance as a critical audit matter, as auditing management’s determination of the qualitative and future factors required

significant auditor judgement as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.

Our audit procedures related to the Company’s qualitative factors and future factors in the general reserve included the following, among others:

●

We obtained an understanding of the relevant controls related to the qualitative and future factors of the general reserve and tested such controls for design and operating effectiveness, including

controls relating to management’s review and approval of the qualitative and future factors and the underlying data used in determining those factors.

●	We tested management’s process and evaluated the reasonableness of their judgments and assumptions to develop the qualitative and future factors, which included:

Testing the accuracy and relevancy of the data inputs used by management as a basis for the adjustments for qualitative and future factors by comparing to internal and external source data.

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Evaluating the magnitude and directional consistency of the adjustments.

Evaluating whether management’s conclusions were consistent with Company provided internal

data and external, independently sourced data and agreeing the impact to the allowance

calculation.

Business Combination—Fair Value of Acquired Loans

As described in Notes 1 and 2 to the consolidated financial statements, on April 1, 2022, the Company completed its acquisition of Guaranty Federal Bancshares (GFED). The Company recorded $63.5

million of goodwill as a result of the acquisition, which represents the excess of the purchase price over

the fair value of net assets acquired using the acquisition method of accounting. As part of the

acquisition, the Company acquired $801.7 million in loans. Acquired loans are initially recorded at their acquisition-date fair values. The Company prepared loan fair value adjustments that it believed a

market participant might employ in estimating the fair value for the acquired loan portfolio. This analysis

was performed for loans with signs of credit deterioration (purchase credit deteriorated loans (PCD)) as

well as those without signs of credit deterioration (non-PCD loans). The acquired non-PCD loan

portfolio was recorded at an estimated fair value of $770.3 million at the acquisition date without

carryover of GFED’s previously established allowance.

We identified the fair value of acquired non-PCD loans as a critical audit matter, because of the

judgments necessary to determine the fair value of the loans, the high degree of auditor judgment

involved and the extensive audit effort involved in testing management estimates and assumptions,

including the use of valuation specialists.

Our audit procedures related to the valuation of the acquired non-PCD loan portfolio included the

following, among others:

●

We obtained an understanding of the relevant controls related to the business combination, including the valuation of the acquired non-PCD loan portfolio and management’s development of significant assumptions, and tested such controls for design and operating effectiveness.

●

We obtained management’s valuation report and tested the completeness and accuracy of data inputs including non-PCD loan balances and interest rates utilized in the calculation.

●

We utilized internal valuation specialists to assist in evaluating the reasonableness of the valuation methodology applied on non-PCD loans and significant assumptions utilized in management’s determination of fair value such as yield curves, prepayment rates, expected losses, recovery periods and discount rates.

/s/ RSM US LLP

We have served as the Company's auditor since 1993.

Davenport, Iowa

March 1, 2023

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QCR Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2022 and 2021


	December 31,		December 31,
	2022		2021

	(dollars in thousands)
Assets
Cash and due from banks	$	59,723	$	37,490
Federal funds sold		56,910		12,370
Interest-bearing deposits at financial institutions		67,360		75,292

Securities held to maturity, at amortized cost, net of allowance for credit losses		587,142		472,385
Securities available for sale, at fair value		340,960		337,830
Total securities		928,102		810,215

Loans receivable held for sale		1,480		3,828
Loans/leases receivable held for investment		6,137,391		4,676,304
Gross loans/leases receivable		6,138,871		4,680,132
Less allowance for credit losses		(87,706)		(78,721)
Net loans/leases receivable		6,051,165		4,601,411

Bank-owned life insurance		106,580		62,424
Premises and equipment, net		117,948		78,530
Restricted investment securities		42,501		19,353
Other real estate owned, net		133		—
Goodwill		137,607		74,066
Intangibles		16,759		9,349
Derivatives		177,631		222,220
Other assets		186,418		93,412
Total assets	$	7,948,837	$	6,096,132

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,262,981	$	1,268,788
Interest-bearing		4,721,236		3,653,984
Total deposits		5,984,217		4,922,772

Short-term borrowings		129,630		3,800
Federal Home Loan Bank advances		415,000		15,000
Subordinated notes		232,662		113,850
Junior subordinated debentures		48,602		38,155
Derivatives		200,701		225,135
Other liabilities		165,301		100,410
Total liabilities		7,176,113		5,419,122


Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 December 2022 and December 2021 - no shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 December 2022 - 16,795,942 shares issued and outstanding December 2021 - 15,613,460 shares issued and outstanding		16,796		15,613
Additional paid-in capital		370,712		273,768
Retained earnings		450,114		386,077
Accumulated other comprehensive income (loss):
Securities available for sale		(44,677)		5,925
Derivatives		(20,221)		(4,373)
Total stockholders' equity		772,724		677,010
Total liabilities and stockholders' equity	$	7,948,837	$	6,096,132

See Notes to Consolidated Financial Statements.

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QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Income

Years Ended December 31, 2022, 2021, and 2020


	2022		2021		2020

	(dollars in thousands)
Interest and dividend income:
Loans/leases, including fees	$	257,837	$	173,940	$	173,967
Securities:
Taxable		12,078		8,923		7,787
Nontaxable		19,089		16,167		14,900
Interest-bearing deposits at financial institutions		1,089		173		669
Restricted investment securities		2,068		950		1,031
Federal funds sold		410		2		19
Total interest and dividend income		292,571		200,155		198,373

Interest expense:
Deposits		42,362		13,300		23,269
Short-term borrowings		299		5		84
Federal Home Loan Bank advances		6,954		70		1,087
Other borrowings		53		—		—
Subordinated notes		9,200		6,272		4,697
Junior subordinated debentures		2,583		2,275		2,286
Total interest expense		61,451		21,922		31,423
Net interest income		231,120		178,233		166,950
Provision for credit losses		8,284		3,486		55,704
Net interest income after provision for credit losses		222,836		174,747		111,246

Noninterest income:
Trust fees		10,641		11,206		9,207
Investment advisory and management fees		3,858		4,080		5,318
Deposit service fees		8,134		6,132		6,041
Gains on sales of residential real estate loans, net		2,411		4,397		4,680
Gains on sales of government guaranteed portions of loans, net		119		227		224
Swap fee income/capital markets revenue		41,309		60,992		74,821
Securities gains (losses), net		—		(88)		2,484
Earnings on bank-owned life insurance		2,056		1,838		1,904
Debit card fees		5,459		4,216		3,402
Correspondent banking fees		967		1,114		903
Loan related fee income		2,428		2,268		2,200
Fair value gain on derivatives		1,975		170		—
Other		1,372		3,870		2,614
Total noninterest income		80,729		100,422		113,798

Noninterest expense:
Salaries and employee benefits		115,368		100,907		96,268
Occupancy and equipment expense		21,975		15,918		16,504
Professional and data processing fees		16,282		14,579		14,644
Acquisition costs		3,715		624		—
Post-acquisition compensation, transition and integration costs		5,526		—		214
Disposition costs		—		13		690
FDIC insurance, other insurance and regulatory fees		5,806		4,475		4,164
Loan/lease expense		1,829		1,671		1,435
Net cost of (income from) and gains/losses on operations of other real estate		(40)		(1,420)		(307)
Advertising and marketing		4,958		4,254		3,260
Communication and data connectivity		2,213		1,798		1,642
Supplies		1,109		1,053		1,097
Bank service charges		2,282		2,173		2,016
Losses on liability extinguishment		—		—		3,907
Correspondent banking expense		840		799		838
Intangibles amortization		2,854		2,032		2,149
Goodwill impairment		—		—		500
Payment card processing		1,964		1,412		556
Trust expense		775		758		740
Loss on sale of subsidiary		—		—		158
Other		2,560		2,656		1,280
Total noninterest expense		190,016		153,702		151,755
Net income before income taxes		113,549		121,467		73,289
Federal and state income tax expense		14,483		22,562		12,707
Net income	$	99,066	$	98,905	$	60,582

Basic earnings per common share	$	5.94	$	6.30	$	3.84
Diluted earnings per common share	$	5.87	$	6.20	$	3.80

Weighted average common shares outstanding		16,681,844		15,708,744		15,771,650
Weighted average common and common equivalent shares outstanding		16,890,007		15,944,708		15,952,637

Cash dividends declared per common share	$	0.24	$	0.24	$	0.24

See Notes to Consolidated Financial Statements.

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QCR HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2022, 2021, and 2020



	2022		2021		2020

	(dollars in thousands)

Net income	$	99,066	$	98,905	$	60,582

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		(67,387)		(4,158)		10,657
Less reclassification adjustment for gains (losses) included in net income before tax		—		(88)		2,484
		(67,387)		(4,070)		8,173

Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		(22,130)		3,427		(6,854)
Less reclassification adjustment for unhedging caplet		—		—		(649)
Less reclassification adjustment for swap termination		—		—		(792)
Less reclassification adjustment for caplet amortization before tax		(1,001)		(697)		(551)
		(21,129)		4,124		(4,862)

Other comprehensive income (loss), before tax		(88,516)		54		3,311
Tax expense (benefit)		(22,066)		(122)		837
Other comprehensive income (loss), net of tax		(66,450)		176		2,474

Comprehensive income	$	32,616	$	99,081	$	63,056

See Notes to Consolidated Financial Statements.

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QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2022, 2021, and 2020


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

	(dollars in thousands)

Balance December 31, 2019	$	15,828	$	274,785	$	245,836	$	(1,098)	$	535,351
Net income		—		—		60,582		—		60,582
Other comprehensive income, net of tax		—		—		—		2,474		2,474
Common cash dividends declared, $0.24 per share		—		—		(3,779)		—		(3,779)
Repurchase and cancellation of 100,932 shares of common stock
as a result of a share repurchase program		(101)		(1,843)		(1,835)		—		(3,779)
Stock-based compensation expense		—		2,150		—		—		2,150
Issuance of common stock under employee benefit plans		79		715		—		—		794
Balance, December 31, 2020	$	15,806	$	275,807	$	300,804	$	1,376	$	593,793
Impact of adoption of ASU 2016-01		—		—		(937)		—		(937)
Net income		—		—		98,905		—		98,905
Other comprehensive income, net of tax		—		—		—		176		176
Common cash dividends declared, $0.24 per share		—		—		(3,781)		—		(3,781)
Repurchase and cancellation of 293,153 shares of common stock
as a result of a share repurchase program		(293)		(4,961)		(8,914)		—		(14,168)
Stock-based compensation expense		—		2,352		—		—		2,352
Issuance of common stock under employee benefit plans		100		570		—		—		670
Balance, December 31, 2021	$	15,613	$	273,768	$	386,077	$	1,552	$	677,010
Net income		—		—		99,066		—		99,066
Other comprehensive (loss), net of tax		—		—		—		(66,450)		(66,450)
Issuance of 2,071,291 shares of common stock
as a result of acquisition of Guaranty Federal Bancshares		2,071		115,143		—		—		117,214
Repurchase and cancellation of 970,000 shares of common stock
as a result of a share repurchase program		(970)		(20,977)		(31,007)		—		(52,954)
Common cash dividends declared, $0.24 per share		—		—		(4,022)		—		(4,022)
Stock-based compensation expense		—		2,438		—		—		2,438
Issuance of common stock under employee benefit plans		82		340		—		—		422
Balance, December 31, 2022	$	16,796	$	370,712	$	450,114	$	(64,898)	$	772,724

See Notes to Consolidated Financial Statements.

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QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2022, 2021, and 2020


	2022		2021		2020

	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	99,066	$	98,905	$	60,582
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		7,662		5,359		5,333
Provision for credit losses		8,284		3,486		55,704
Deferred income taxes		(4,682)		15,272		(14,530)
Stock-based compensation expense		2,438		2,352		2,150
Deferred compensation expense accrued		4,062		4,580		3,821
Gains on other real estate owned, net		(129)		(1,754)		(317)
Amortization of premiums on securities, net		1,337		1,933		969
Caplet amortization		1,001		697		551
Fair value gain on derivatives		(1,975)		(170)		—
Securities (gains) losses, net		—		88		(2,484)
Loans originated for sale		(99,394)		(204,449)		(236,734)
Proceeds on sales of loans		107,487		209,003		241,553
Gains on sales of residential real estate loans		(2,411)		(4,397)		(4,680)
Gains on sales of government guaranteed portions of loans		(119)		(227)		(224)
Loss on liability extinguishment, net		—		—		3,907
Losses (gains) on sales and disposals of premises and equipment		378		1,059		(19)
Amortization of intangibles		2,854		2,032		2,149
Accretion of acquisition fair value adjustments, net		(8,581)		(1,340)		(3,271)
Increase in cash value of bank-owned life insurance		(2,056)		(1,838)		(1,904)
Loss on sale of subsidiary/certain assets and liabilities of subsidiary		—		—		158
Goodwill impairment		—		—		500
Increase in other assets		(42,572)		(47,006)		(9,445)
Increase in other liabilities		46,049		4,633		8,408
Net cash provided by operating activities		118,699		88,218		112,177

CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold		(44,540)		(3,290)		720
Net decrease in interest-bearing deposits at financial institutions		25,066		11,304		61,295
Proceeds from sales of other real estate owned		482		4,742		4,477
Activity in securities portfolio:
Purchases		(230,501)		(173,204)		(356,127)
Calls, maturities and redemptions		43,638		106,442		53,007
Paydowns		31,805		65,410		47,313
Sales		111,375		23,874		38,562
Activity in restricted investment securities:
Purchases		(23,086)		(1,280)		(4,600)
Redemptions		2,158		30		9,749
Proceeds from the liquidation of bank-owned life insurance		—		—		10,999
Net increase in loans/leases originated and held for investment		(654,861)		(433,544)		(564,748)
Purchase of premises and equipment		(33,261)		(13,981)		(4,268)
Proceeds from sales of premises and equipment		2,060		1,726		101
Payment for termination of derivative		—		—		(808)
Net cash transferred out in sale of subsidiary		—		—		(154)
Purchase of bank-owned life insurance		(10,000)		—		—
Net cash acquired from acquisition		144,973		—		—
Net cash used in investing activities		(634,692)		(411,771)		(704,482)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts		(15,128)		323,635		716,898
Net increase (decrease) in short-term borrowings		125,830		(1,630)		(7,993)
Activity in Federal Home Loan Bank advances:
Term advances		—		—		125,000
Calls and maturities		—		—		(121,600)
Net change in short-term and overnight advances		400,000		—		(94,300)
Prepayments		(16,000)		—		(55,274)
Activity in other borrowings:
Proceeds from other borrowings		10,000		—		—
Paydown of revolving line of credit		(10,000)		—		—
Prepayments on brokered and public time deposits		—		—		(29,153)
Prepayments of subordinated notes		—		(5,000)		—
Proceeds from subordinated notes		100,000		—		50,000
Payment of cash dividends on common stock		(3,944)		(3,793)		(3,779)
Proceeds from issuance of common stock, net		422		670		1,360
Repurchase and cancellation of shares		(52,954)		(14,168)		(3,779)
Net cash provided by financing activities		538,226		299,714		577,380

Net increase (decrease) in cash and due from banks		22,233		(23,839)		(14,925)

Cash and due from banks, beginning		37,490		61,329		76,254
Cash and due from banks, ending	$	59,723	$	37,490	$	61,329

Table of Contents

QCR Holdings, Inc. and Subsidiaries - Continued

Consolidated Statements of Cash Flows

Years Ended December 31, 2022, 2021, and 2020


	2022		2021		2020

	(dollars in thousands)
Supplemental disclosure of cash flow information, cash payments for:
Interest	$	58,652	$	23,373	$	32,178
Income/franchise taxes		1,057		48,988		24,567

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale and derivative instruments, net		(66,450)		176		2,474
Change in retained earnings from adoption of ASU 2016-13		—		(937)		—
Transfers of loans to other real estate owned		431		2,962		51
Due to broker for purchases of securities		—		1,000		—
(Decrease) increase in the fair value of back-to-back interest rate swap assets and liabilities		(54,441)		(1,376)		137,752
Dividends payable		1,013		935		947
Consideration received on sale of the Bates Companies		—		—		1,523

Supplemental disclosure of cash flow information for acquisitions:
Fair value of assets acquired:
Cash and due from banks	$	171,844	$	—	$	—
Interest-bearing deposits at financial institutions		17,134		—		—
Securities		143,017		—		—
Loans receivable, net		801,697		—		—
Bank-owned life insurance		32,100		—		—
Premises and equipment, net		16,257		—		—
Restricted investment securities		2,220		—		—
Other real estate owned		55		—		—
Intangibles		10,264		—		—
Other assets		23,685		—		—
Total assets acquired	$	1,218,273	$	—	$	—

Fair value of liabilities assumed:
Deposits	$	1,076,573	$	—	$	—
FHLB advances		16,000		—		—
Subordinated debentures		19,621
Junior subordinated debentures		10,310		—		—
Other liabilities		15,225		—		—
Total liabilities assumed		1,137,729		—		—
Net assets acquired	$	80,544	$	—	$	—

Consideration paid:
Cash paid *	$	26,871	$	—	$	—
Common stock		117,214		—		—
Total consideration paid		144,085		—		—
Goodwill	$	63,541	$	—	$	—

Supplemental disclosure of cash flow information for sale of subsidiary/certain assets and certain liabilities of subsidiary:
Cash proceeds**	$	—	$	—	$	195
Assets Sold:
Cash and due from banks	$	—	$	—	$	349
Premises and equipment, net		—		—		19
Other assets		—		—		2,259
Total assets sold	$	—	$	—	$	2,627
Liabilities Sold:
Other liabilities	$	—	$	—	$	946
Total liabilities sold	$	—	$	—	$	946

Net Assets Sold	$	—		—		1,681

Forgiveness of earn-out consideration	$	—	$	—	$	880
Note receivable consideration		—		—		448
Loss on sale of subsidiary and certain assets and certain liabilities of subsidiary:	$	—	$	—	$	(158)

*Net cash acquired at closing totaled $145.0 million for acquisition of GFED in 2022.

**Net cash transferred at closing totaled $154 thousand for the sale of the Bates Companies in 2020.

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

able of Contents

Note 1. Nature of Business and Significant Accounting Policies

Basis of presentation:

The acronyms and abbreviations identified below are used in the Notes to the Consolidated Financial Statements, as well as in the other sections of this Annual Report on Form 10-K (including appendices). It may be helpful to refer back to this page as you read this report.

ACL: Allowance for credit losses	Guaranty Bank: Guaranty Bank and Trust Company
AFS: Available for sale	HTM: Held to maturity
Allowance: Allowance for credit losses	Iowa Superintendent: Iowa Superintendent of Banking
AOCI: Accumulated other comprehensive income (loss)	LCR: Liquidity Coverage Ratio
ASC: Accounting Standards Codification	LIBOR: London Inter-Bank Offered Rate
ASC 805: Business Combination Standard	LIHTC: Low-income housing tax credit
ASU: Accounting Standards Update	m2: m2 Equipment Finance, LLC
Bates Companies: Bates Financial Advisors, Inc., Bates	MD&A: Management’s Discussion & Analysis
Financial Services, Inc., Bates Securities, Inc. and Bates	Missouri Division of Finance: Missouri Department of
Financial Group, Inc.	Commerce and Insurance
BHCA: Bank Holding Company Act of 1956	NIM: Net interest margin
BOLI: Bank-owned life insurance	NOL: Net operating loss
Caps: Interest rate cap derivatives	NPA: Nonperforming asset
CARES Act: Coronavirus Aid, Relief and Economy Security Act CECL: Current Expected Credit Losses CFPB: Bureau of Consumer Financial Protection	NPL: Nonperforming loan NSFR: Net Stable Funding Ratio OBS: Off-balance sheet OREO: Other real estate owned
CNB: Community National Bank	OTTI: Other-than-temporary impairment
Community National: Community National Bancorporation COVID-19: Coronavirus Disease 2019 CRA: Community Reinvestment Act	PCAOB: Public Company Accounting Oversight Board PCD: Purchased credit deteriorated loan PCI: Purchased credit impaired
CRBT: Cedar Rapids Bank & Trust Company	PPP: Paycheck Protection Program
CRE: Commercial real estate	Provision: Provision for credit losses
CRE Guidance: Interagency Concentrations in Commercial	PUD LOC: Public Unit Deposit Letter of Credit
Real Estate Lending, Sound Risk Management Practices	QCBT: Quad City Bank & Trust Company
guidance	ROAA: Return on Average Assets
CSB: Community State Bank	ROACE: Return on Average Common Equity
C&I: Commercial and industrial	ROAE: Return on Average Equity
Dodd-Frank Act: Dodd-Frank Wall Street Reform and	ROU: Right of use
Consumer Protection Act	SBA: U.S. Small Business Administration
DGCL: Delaware General Corporation Law	SEC: Securities and Exchange Commission
DIF: Deposit Insurance Fund	SERPs: Supplemental Executive Retirement Plans
EBA: Excess Balance Account	SFCB: Springfield First Community Bank
EPS: Earnings per share	SFG: Specialty Finance Group
ESG: Environmental, Social and Governance	SOFR: Secured Overnight Financing Rate
Exchange Act: Securities Exchange Act of 1934, as amended	Springfield Bancshares: Springfield Bancshares, Inc.
FASB: Financial Accounting Standards Board	TA: Tangible assets
FDIC: Federal Deposit Insurance Corporation	TCE: Tangible common equity
Federal Reserve: Board of Governors of the Federal Reserve	TDRs: Troubled debt restructurings
System	TEY: Tax equivalent yield
FHLB: Federal Home Loan Bank	The Company: QCR Holdings, Inc.
FRB: Federal Reserve Bank of Chicago	TRBC: Total risk-based capital
FTEs: Full-time equivalents	Treasury: U.S. Department of the Treasury
GAAP: Generally Accepted Accounting Principles	USA Patriot Act: Uniting and Strengthening America by
GB: Guaranty Bank	Providing Appropriate Tools Required to Intercept
GFED: Guaranty Federal Bancshares	and Obstruct Terrorism Act of 2001
Goldman Sachs: Goldman Sachs and Company	USDA: U.S. Department of Agriculture
Guaranty: Guaranty Bankshares, Ltd.

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

Nature of business:

QCR Holdings, Inc. is a bank holding company that has elected to operate as a financial holding company under the BHCA. The Company provides bank and bank-related services through its banking subsidiaries, QCBT, CRBT, CSB and GB. The Company also engages in direct financing lease and equipment financing contracts through its wholly-owned equity investment by QCBT in m2, headquartered in Brookfield, Wisconsin. The Company also engages in wealth management services through its banking subsidiaries.

On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged GB into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank. See Note 2 to the Consolidated Financial Statements for additional information.

On August 12, 2020, the Company sold the Company’s wholly-owned subsidiaries, the Bates Companies, which were originally acquired on October 1, 2018. The financial results of the Bates Companies prior to their respective sales are included in this report. See Note 2 to the Consolidated Financial Statements for additional information.

QCBT is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. CRBT is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities including Cedar Falls and Waterloo, Iowa. CSB is a commercial bank that serves Des Moines, Iowa, and adjacent communities. GB is a commercial bank that serves Springfield and Joplin, Missouri and adjacent communities.

QCBT, CRBT, and CSB are chartered and regulated under the laws of the state of Iowa. GB is chartered and regulated under the laws of the state of Missouri. All four subsidiary banks are insured and subject to regulation by the FDIC. All four subsidiary banks are members of and regulated by the Federal Reserve System.

The remaining direct subsidiaries of the Company consist of a consolidated subsidiary formed during 2021 for the risk management of insurance and seven non-consolidated subsidiaries formed for the issuance of trust preferred securities. See Note 13 to the Consolidated Financial Statements for a listing of these subsidiaries and additional information.

Significant accounting policies:

Accounting estimates: The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, determination of the fair value of loans acquired in business combinations, impairment of goodwill, fair value of financial instruments, and the fair value of securities.

Principles of consolidation: The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries, except those seven subsidiaries formed for the issuance of trust preferred securities which do not meet the criteria for consolidation. All material intercompany accounts and transactions have been eliminated in consolidation.

Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and noninterest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, short-term borrowings and overnight and short-term FHLB advances are treated as net increases or decreases.

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. There was no reserve requirement as of December 31, 2022 and 2021.

Investment securities: Investment securities HTM are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost, net of ACL, adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered AFS as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities AFS are carried at fair value. Unrealized gains or losses, net of taxes, are reported as increases or decreases in AOCI. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.

All debt securities are evaluated to determine whether declines in fair value below their amortized cost require an allowance. See further discussion in the Allowance section following.

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 $24.3 million at December 31, 2022 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 4 to the Consolidated Financial Statements.

The Company’s portfolio segments 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

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

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 30 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.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

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 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.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

Allowance:

Allowance for Credit Losses on Loans and Leases

The ACL on loans/leases is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the eight 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 uncollectability of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company’s methodologies for estimating the ACL 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 portfolio segment follows:

For C&I loans, 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 and equipment. 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 seven years with average terms ranging from three to five 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. The Company is an active lender of LIHTC project loans which includes both the construction and permanent loan. CRE loans are subject to underwriting standards and processes similar

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

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, or in some situations, more conservative than those established by regulatory authorities.

Multi-family loans are typically repaid from rental income. LIHTC permanent loans are included in multi-family loans and the maximum term is generally up to 20 years.

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, low-income housing project or major rehabilitation or expansion of existing commercial structures. Construction lending carries a higher degree of risk because of the difficulty of protecting the bank against various factors. The following components 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 take into consideration changes in current conditions that are not reflected in the quantitative analysis performed in determining its base credit loss rates.

The Company utilizes the following qualitative factors:

●

National and local economy

●

Loan volume and trend

●

Loan quality

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Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

●

Loan policies and procedures

●

Management and staff experience

●

Concentrations

●

Collateral

●

Loan review system

●

Regulatory environment and oversight

The Company also provides for unique circumstances with qualitative adjustments as needed. The Company removed the separate qualitative allocation for the COVID-19 pandemic in the first quarter of 2022, which had been in place since the second quarter of 2020. The qualitative adjustments are based on the current conditions and applied as a percentage adjustment in addition to the calculated historical loss rates. The adjustment amount can be either positive or negative. 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. These forecasted adjustments are added to the qualitative adjustments and applied as a percentage adjustment in addition to the historical loss rates.

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, but not limited to, 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 uncollectability 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 with outstanding principal balances greater than $250,000 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.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

Low quality loans with principal balances equal to or less than $250,000 are placed into a unique pool and have the overall effective loss rate for that period applied to this low quality pool. However, should an asset within the low quality pool no longer have the same risk characteristic of the unique pool, it will be removed and individually analyzed as described above.

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 peer, 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

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

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 sound 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, OREO, 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 equal to or greater than $1,000,000, the subsidiary banks with an asset size of $1.0 billion or less as of the most recent fiscal year-end require a term loan review within 15 months of the most recent credit review. For the subsidiary banks with an asset size of over $1.0 billion as of the most recent fiscal year-end, a term loan review is required within 15 months of the most recent credit review for term C&I and CRE loans of $2.0 million or more. A credit review encompasses any new debt issuances or renewed debt facilities that are part of the borrower’s credit relationship. The term loan/credit 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, 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.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

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 OBS exposures 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 Other Liabilities section of the consolidated balance sheet. The Company recorded an ACL on OBS exposures upon adoption of ASU 2016-13. See Note 4.

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. The Company recorded an ACL on HTM debt securities upon adoption of ASU 2016-13. See Note 3.

Allowance for Credit Losses on 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 the changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issues, 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 ACL on AFS debt securities upon adoption of ASU 2016-13. See Note 3.

Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In addition, for transfers of a portion of financial assets (for example, participations of loan

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

receivables), the transfer must meet the definition of a “participating interest” in order to account for the transfer as a sale.

Following are the characteristics of a “participating interest”:

●

Pro-rata ownership in an entire financial asset.

●

From the date of the transfer, all cash flows received from entire financial assets are divided proportionately among the participating interest holders in an amount equal to their share of ownership.

●

The rights of each participating interest holder have the same priority, and no participating interest holder’s interest is subordinated to the interest of another participating interest holder. That is, no participating interest

holder is entitled to receive cash before any other participating interest holder under its contractual rights as a participating interest holder.

●

No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset.

BOLI: BOLI is carried at cash surrender value with increases/decreases reflected as income/expense in the statement of income.

Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets.

Restricted investment securities: Restricted investment securities represent FHLB and FRB common stock. The stock is carried at cost. These equity securities are “restricted” in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other tradable equity securities. The Company views its investment in restricted stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value, rather than recognizing temporary declines in value. There have been no other-than-temporary write-downs recorded on these securities.

OREO: Real estate acquired through, or in lieu of, loan foreclosures, is held for sale and initially recorded at fair value less costs to sell, establishing a new cost basis. Any write down to fair value taken at the time of foreclosure is charged to the allowance. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Subsequent write-downs to fair value are charged to earnings.

Goodwill: The Company has recorded goodwill from various business combinations. The goodwill is not being amortized but is evaluated at least annually for impairment. The Company’s most recent analysis was performed as of November 30, 2022 and it was determined no goodwill impairment existed. See further information in Note 6 to the Consolidated Financial Statements.

Core deposit intangible: The Company has recorded a core deposit intangible from historical acquisitions. The core deposit intangible was the portion of the acquisition purchase price which represented the value assigned to the existing deposit base at acquisition. See Notes 2 and 6 to the Consolidated Financial Statements for additional information. The core deposit intangibles have a finite life and are amortized over the estimated useful life of the deposits (estimated to be 10 years).

Customer list intangible: The Company had recorded a customer list intangible from the Bates Companies acquisition. The customer list intangible was the portion of the acquisition purchase price which represented the value assigned to the existing customer base at acquisition. See Notes 2 and 6 to the Consolidated Financial Statements for addition information. The customer list intangible had a finite life and was to be amortized over the estimated useful life

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

(estimated to be fifteen years). With the sale of the Bates Companies in August 2020, the remaining balance of the customer list intangible was written off.

Swap transactions: The Company offers a loan swap program to certain commercial loan customers including C&I, CRE, and multi-family which includes LIHTC permanent loans. Through this program, the Company originates a variable rate loan with the customer. The Company and the swap customer will then enter into a fixed interest rate swap. Separately, an identical offsetting swap is entered into by the Company with a counterparty. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities.

Additionally, the Company receives an upfront, non-refundable fee from the counterparty, dependent upon the pricing, which is recognized upon receipt from the counterparty. This upfront, non-refundable fee is recorded as noninterest income and classified as swap fee income/capital markets revenue.

Derivatives and hedging activities: The Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates.

Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying index (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying index.

The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market (although this type of derivative is negligible); (2) interest rate caps to manage the interest rate risk of certain variable rate deposits and short-term fixed rate liabilities; (3) interest rate swaps on variable rate trust preferred securities and floating rate loans; and (4) interest rate collars on floating rate loans.

Interest rate caps, swaps and collars are valued by a third party monthly and corroborated by the transaction counterparty. The Company uses the hypothetical derivative method to assess and measure effectiveness in accordance with ASC 815, Derivative and Hedging.

Preferred stock: The Company currently has 250,000 shares of preferred stock authorized, but none outstanding as of December 31, 2022 and 2021. Should the Company have preferred stock outstanding in the future, dividends declared on those shares would be deducted from net income to arrive at net income available to common stockholders. Net income available to common stockholders would then be used in the earnings per share computation.

Stock-based compensation plans: The Company accounts for stock-based compensation with measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation over the requisite service period for awards expected to vest.

As discussed in Note 16 to the Consolidated Financial Statements, during the years ended December 31, 2022, 2021, and 2020, the Company recognized stock-based compensation expense for the grant-date fair value of stock based awards that are expected to vest over the requisite service period of $2.4 million, $2.4 million and $2.2 million, respectively. As required, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with the following assumptions for the indicated periods:


	2022		2021		2020
Dividend yield		0.43% to 0.45%		0.55%		0.60% to 0.81%
Expected volatility		22.65% to 23.52%		23.57%		25.49% to 25.70%
Risk-free interest rate		1.87% to 3.12%		1.62%		0.79% to 1.31%
Expected life of option grants		6.25 years		6.25 years		6.25 years
Weighted-average grant date fair value	$	13.94 to 15.09	$	10.85	$	10.07

The Company also uses the Black-Scholes option pricing model to estimate the fair value of stock purchase grants with the following assumptions for the indicated periods:


	2022		2021		2020
Dividend yield		0.43% to 0.44%		0.49% to 0.61%		0.55% to 0.81%
Expected volatility		17.97% to 21.16%		37.51% to 38.65%		24.59% to 36.38%
Risk-free interest rate		0.14% to 2.24%		0% to 0.06%		0.15% to 1.65%
Expected life of purchase grants		3 to 6 months		3 to 6 months		3 to 6 months
Weighted-average grant date fair value	$	7.88	$	7.67	$	6.03

The fair value is amortized on a straight-line basis over the vesting periods of the grants and will be adjusted for subsequent changes in estimated forfeitures. The expected dividend yield assumption is based on the Company’s current expectations about its anticipated dividend policy. Expected volatility is based on historical volatility of the Company’s common stock price. The risk-free interest rate for periods within the contractual life of the option or purchase is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the option and purchase grants is derived using the “simplified” method and represents the period of time that options and purchases are expected to be outstanding. Historical data is used to estimate forfeitures used in the model. Two separate groups of employees (employees subject to broad based grants, and executive employees and directors) are used.

As of December 31, 2022, there was $438 thousand of unrecognized compensation cost related to stock options granted, which is expected to be recognized over a weighted average period of 1.79 years.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 324,503 options that were in-the-money at December 31, 2022. The aggregate intrinsic value at December 31, 2022 was $7.7 million on options outstanding and $7.5 million on options exercisable. During the years ended December 31, 2022, 2021 and 2020, the aggregate intrinsic value of options exercised under the Company’s stock-based compensation was $387 thousand, $419 thousand, and $270 thousand, respectively, and determined as of the date of the option exercise.

Restricted stock awards granted may not be sold or otherwise transferred until the service periods have lapsed. During the vesting periods, participants have voting rights and receive dividends. Upon termination of employment, common shares upon which the service periods have not lapsed must be returned to the Company.

All restricted share awards are classified as equity awards. The grant-date fair value of equity-classified restricted stock awards is amortized as compensation expense on a straight-line basis over the period restrictions lapse.

As of December 31, 2022, there was $2.7 million of unrecognized compensation cost related to nonvested restricted stock awards expected to be recognized over a period of 1.6 years.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company.

Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of income.

Trust assets: Trust assets held by the subsidiary banks in a fiduciary, agency, or custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not included in the accompanying Consolidated Financial Statements since such items are not assets of the subsidiary banks.

Earnings per share: See Note 18 to the Consolidated Financial Statements for a complete description and calculation of basic and diluted earnings per share.

Revenue Recognition:

Trust and Investment advisory and management fees: This is a contract between the Company and its customers for fiduciary and/or investment administration services on trust and brokerage accounts. Trust services and brokerage fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust account is serviced. Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.

Deposit service fees: The deposit contract obligates the Company to serve as a custodian of the customer's deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services related to the deposit account. Deposit account related fees, including analysis charges, overdraft/nonsufficient fund charges, service charges, debit card usage fees, overdraft fees and wire transfer fees are within the scope of the guidance; however, revenue recognition practices did not change under the guidance, as deposit agreements are considered day-to-day contracts. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

Correspondent banking fees: This is a contract between the Company and its correspondent banks for corresponding banking services. 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. Correspondent banking fee income is tied to transaction activity and revenue is recognized monthly as earned for services provided.

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

Recent accounting developments: The Company adopted ASU 2016-13, Financial Instruments – Credit Losses on January 1, 2021. 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.

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. 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 the standard.

The following table illustrated 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

	(dollars in thousands)
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.

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 arrangements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. In December 2022, in response to the

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (continued)

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

Management has assessed the impacts of ASU 2020-4 and the related opportunities and risks involved in the LIBOR transition. Specifically, management has identified all of the financial instruments with LIBOR exposure which includes certain commercial loans, certain derivatives, and certain securities. In all cases, management has determined a plan of transition from LIBOR to a different index. The transition will happen prior to the expiration of published LIBOR rates on June 30, 2023. Management expects the transition to have a minimal impact to the Company’s financial statements.

In April 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. Under the standard, the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 is eliminated and guidance on “vintage disclosures” is amended to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. For public companies that have adopted ASC 326, the changes take effect in reporting periods beginning after December 15, 2022. The standard will be effective for the Company for the reporting period beginning on January 1, 2023 and is not expected to have a significant impact on the Company’s consolidated financial statements. New disclosures required by the standard will be provided beginning with the quarter ending March 31, 2023.

Note 2. Mergers/Acquisitions/Sales

GFED Acquisition

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

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

The acquisition of GFED supports the strategic goals of the Company. It allows for increased product and service capabilities of the combined bank and the Company anticipates it will result in strong growth in Springfield, MO and its surrounding communities.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects. The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date due to timing of third party reports and management’s reviews of reports.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill. This goodwill is not deductible for tax purposes.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2. Mergers/Acquisitions/Sales (continued)

The fair values of the assets acquired and liabilities assumed including the consideration paid and resulting goodwill is as follows:


	As of
	April 1, 2022
	(dollars in thousands)
ASSETS
Cash and due from banks	$	171,844
Interest-bearing deposits at financial institutions		17,134
Securities		143,017
Loans/leases receivable, net		801,697
Bank-owned life insurance		32,100
Premises and equipment		16,257
Restricted investment securities		2,220
Other real estate owned		55
Intangibles		10,264
Other assets		23,685
Total assets acquired	$	1,218,273

LIABILITIES
Deposits	$	1,076,573
FHLB advances		16,000
Subordinated notes		19,621
Junior subordinated debentures		10,310
Other liabilities		15,225
Total liabilities assumed	$	1,137,729
Net assets acquired	$	80,544

CONSIDERATION PAID:
Cash	$	26,871
Common stock		117,214
Total consideration paid	$	144,085
Goodwill	$	63,541

The Company acquired $143.0 million of securities and subsequent to the closing, the Company sold $111.4 million of the acquired securities portfolio to improve the efficiency of the combined balance sheets.

The Company acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution’s previously recorded allowance for loan and lease losses. Acquired loans are accounted for under ASC 326, Financial Instruments – Credit Losses.

The fair value of acquired loans recorded at the time of acquisition is based upon several factors, including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of a premium or discount to the unpaid principal balance of the respective loans. As it relates to acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD”), the net premium or net discount is adjusted to reflect the Company’s allowance for credit losses recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the respective loans. As it relates to loans not classified as PCD (“non-PCD”) loans, the credit loss and yield components of their fair value adjustment are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the remaining life of the respective loans. The Company recorded an accretable discount of $12.0 million on the non-PCD loans. The Company also recorded an ACL for non-PCD loans at the time of acquisition through provision expense of $11.0 million (pre-tax).

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2. Mergers/Acquisitions/Sales (continued)

The carrying amount of loans acquired and classified as PCD is as follows:


	Guaranty Bank
	April 1, 2022
	(dollars in thousands)

Principal balance of PCD loans at acquisition	$	38,711
Allowance for credit losses at acquisition		(5,902)
Non-credit discount at acquisition		(1,366)
Fair value of PCD loans at acquisition	$	31,443

Premises and equipment acquired with a fair value of $16.3 million includes sixteen branch locations. The fair value was determined with the assistance of a third party appraiser. The assets and related fair value adjustments will be recognized as an increase in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $10.3 million, which is the portion of the acquisition purchase price that represents the value assigned to the existing deposit base. The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years).

The following table presents the assumed borrowings as of the acquisition date:



	Amount	Rate	Terms	Maturity Date	Collateral
	(dollars in thousands)
FHLB advance	6,500	0.59%	monthly interest payments; principal due at maturity	5/15/2023	commercial and residential real estate loans
FHLB advance	6,500	0.82%	monthly interest payments; principal due at maturity	5/15/2025	commercial and residential real estate loans
FHLB advance	3,000	1.12%	monthly interest payments; principal due at maturity	5/17/2027	commercial and residential real estate loans
Subordinated notes	19,621	5.25%	monthly interest payments; principal due at maturity	9/30/2030	unsecured
Junior subordinated debentures	10,310	4.09%	monthly interest payments; principal due at maturity	2/23/2036	unsecured
Fair value of borrowings assumed	$ 45,931

The Company prepaid the $16.0 million of FHLB advances in full shortly after closing.

During 2022, the Company incurred $3.7 million of expenses related to the acquisition, comprised primarily of legal, accounting, investment banking costs and personnel costs, and $5.5 million of post-acquisition, compensation, transition and integration costs, comprised primarily of personnel costs, IT integration and data conversion costs related to the acquisition. GB results are included in the consolidated statements of income effective on the acquisition date.

Unaudited pro forma combined operating results for the year ended December 31, 2022 and 2021, giving effect to the GFED acquisition as if it had occurred as of January 1, 2021, are as follows:


	For the Year Ended December 31,
	2022			2021


Net interest income	$	242,161	$	222,839
Noninterest income	$	82,966	$	114,095
Net income	$	119,899	$	99,606

Earnings per common share:
Basic	$	6.97	$	5.60
Diluted	$	6.89	$	5.53

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2. Mergers/Acquisitions/Sales (continued)

Sale of the Bates Companies

On August 12, 2020, the Company sold all of the issued and outstanding capital stock of the Bates Companies. The aggregate consideration paid to the Company was a $500 thousand note receivable, less imputed interest of $52 thousand, plus cancellation of all future amounts otherwise to become payable to the purchaser by the Company under an earn-out agreement entered into between the same parties in 2018 with a non-discounted value of approximately $880 thousand at the sale date.

Assets and liabilities of the Bates Companies sold are summarized as follows as of the date of closing:


	As of
	August 12, 2020
	(dollars in thousands)

ASSETS
Cash and due from banks	$	349
Premises and equipment, net		19
Other assets		2,259
Total assets sold	$	2,627

LIABILITIES
Other liabilities	$	946
Total liabilities sold	$	946

Net assets sold	$	1,681


Cash consideration	$	195
Forgiveness of earn-out consideration		880
Note receivable consideration		448
Loss on sale of subsidiary	$	158

Disposition costs in 2020 related to the sale totaled $227 thousand and were comprised primarily of legal, accounting and personnel costs.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities

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


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

	(dollars in thousands)
December 31, 2022:
Securities HTM:
Municipal securities	$	586,272	$	5,292	$	(56,978)	$	534,586
Other securities		1,050		—		—		1,050
	$	587,322	$	5,292	$	(56,978)	$	535,636

Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	19,745	$	19	$	(2,783)	$	16,981
Residential mortgage-backed and related securities		73,438		—		(7,223)		66,215
Municipal securities		239,812		66		(46,700)		193,178
Asset-backed securities		18,885		48		(205)		18,728
Other securities		48,631		27		(2,800)		45,858
	$	400,511	$	160	$	(59,711)	$	340,960

* HTM securities shown on the balance sheet of $587.1 million represent amortized cost of $587.3 million, net of allowance for credit losses of $180 thousand as of December 31, 2022.


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

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

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

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

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

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

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 commercial 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 December 31, 2022 and 2021, are summarized as follows:


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

	(dollars in thousands)
December 31, 2022:
Securities HTM:
Municipal securities	$	347,651	$	(56,978)	$	—	$	—	$	347,651	$	(56,978)
	$	347,651	$	(56,978)	$	—	$	—	$	347,651	$	(56,978)

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


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

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

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

At December 31, 2022, the investment portfolio included 695 securities. Of this number, 607 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 11.81% of the total aggregate amortized cost. Of these 607 securities, 39 securities had an unrealized loss for 12 months or more.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

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 held to maturity securities by major security type for the years ended December 31, 2022 and 2021.


	Year Ended December 31, 2022						Year Ended December 31, 2021
	Municipal		Other				Municipal		Other
	securities		securities		Total		securities		securities		Total

	(dollars in thousands)
Allowance for credit losses:
Beginning balance	$	198	$	—	$	198	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		—		182		1		183
Provision for credit loss expense		(18)		—		(18)		16		(1)		15
Balance, ending	$	180	$	—	$	180	$	198	$	—	$	198

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 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in this Form 10-K, for a discussion of the impact of the adoption of ASU 2016-13.

All sales of securities for the years ended December 31, 2022, 2021 and 2020, respectively, were from securities identified as AFS. Information on proceeds received, as well as the gains and losses from the sale of those securities are as follows:


	2022		2021		2020

	(dollars in thousands)

Proceeds from sales of securities	$	111,375	$	23,874	$	38,562
Gross gains from sales of securities		—		—		2,553
Gross losses from sales of securities		—		(88)		(69)

Subsequent to the closing of the GFED acquisition, the Company sold $111.4 million of the acquired securities portfolio to improve the efficiency of the combined balance sheets. These were the only securities sales for the year ended December 31, 2022.

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


	Amortized Cost		Fair Value

	(dollars in thousands)
Securities HTM:
Due in one year or less	$	2,902	$	2,895
Due after one year through five years		18,998		19,359
Due after five years		565,422		513,382
	$	587,322	$	535,636
Securities AFS:
Due in one year or less	$	4,522	$	4,510
Due after one year through five years		4,159		4,135
Due after five years		299,507		247,372
		308,188		256,017
Residential mortgage-backed and related securities		73,438		66,215
Asset-backed securities		18,885		18,728
	$	400,511	$	340,960

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

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


	Amortized Cost		Fair Value

	(dollars in thousands)
Securities HTM:
Municipal securities	$	330,576	$	296,851

Securities AFS:
Municipal securities		235,334		188,707
Other securities		47,681		44,923
	$	283,015	$	233,630

As of December 31, 2022 and 2021, investment securities with a carrying value of $47.0 million and $246.5 million, respectively, were pledged on public deposits, FHLB advances, derivative liabilities, and in connection with a Goldman Sachs cash management program.

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

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

Both general obligation and revenue bonds are diversified across many issuers. As of December 31, 2022 and 2021, the Company held revenue bonds of two issuers, located in Ohio, the aggregate book or market value of which exceeded 5% of the Company’s stockholders’ equity. The issuers’ financial condition is strong and the source of repayment is diversified. The Company monitors the investment 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 risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services (water, sewer, education, medical facilities).

The Company’s municipal securities are owned by each of the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of December 31, 2022, all were within policy limitations approved by the Company’s board of directors. Policy limits are calculated as a percentage of each charter’s total risk-based capital.

As of December 31, 2022, the Company’s standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credits 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.

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable

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


	December 31, 2022		December 31, 2021

	(dollars in thousands)

C&I:
C&I - revolving	$	296,869	$	248,483
C&I - other *		1,451,693		1,346,602
		1,748,562		1,595,085

CRE - owner occupied		629,367		421,701
CRE - non-owner occupied		963,239		646,500
Construction and land development		1,192,061		918,571
Multi-family		963,803		600,412
Direct financing leases**		31,889		45,191
1-4 family real estate***		499,529		377,361
Consumer		110,421		75,311
		6,138,871		4,680,132
Allowance for credit losses		(87,706)		(78,721)
	$	6,051,165	$	4,601,411
** Direct financing leases:
Net minimum lease payments to be received	$	34,754	$	49,362
Estimated unguaranteed residual values of leased assets		165		165
Unearned lease/residual income		(3,030)		(4,336)
		31,889		45,191
Plus deferred lease origination costs, net of fees		226		568
		32,115		45,759
Less allowance for credit losses		(970)		(1,546)
	$	31,145	$	44,213

* Includes equipment financing agreements outstanding at m2, totaling $278.0 million and $225.1 million as of December 31, 2022 and 2021, respectively and PPP loans totaling $68.3 thousand and $28.2 million as of December 31, 2022 and December 31, 2021, respectively.

Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors and 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.

At December 31, 2022 and December 31, 2021, the Company had two leases remaining with residual values totaling $165 thousand that were not protected with a lease end options rider. Management has performed specific evaluations of these unguaranteed residual values and determined that the valuations are appropriate. There were no losses related to unguaranteed residual values during the years ended December 31, 2022, 2021, and 2020.

***Includes residential real estate loans held for sale totaling $1.5 million and $3.8 million as of December 31, 2022 and 2021, respectively.

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $24.3 million and $15.3 million at December 31, 2022 and December 31, 2021, respectively, and was included in other assets on the consolidated balance sheets.

Changes in accretable discounts on acquired loans for the years ended December 31, 2022, 2021 and 2020, respectively, are presented as follows:


	Year ended
	December 31, 2022		December 31, 2021
	Total		Total

	(dollars in thousands)

Balance at the beginning of the period	$	(1,533)	$	(3,139)
Discount added at acquisition		(13,381)		—
Accretion recognized		8,826		1,606
Balance at the end of the period	$	(6,088)	$	(1,533)


	Year ended December 31, 2020
	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(57)	$	(6,378)	$	(6,435)
Reclassification of nonaccretable discount to accretable		(530)		—		(530)
Reclassification of nonaccretable discount to allowance		—		353		353
Accretion recognized		587		2,886		3,473
Balance at the end of the period	$	—	$	(3,139)	$	(3,139)

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

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


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

	(dollars in thousands)
C&I:
C&I - revolving	$	296,869		$	—		$	—		$	—		$	—	$		296,869
C&I - other		1,442,629			4,800			1,124			5			3,135			1,451,693
CRE - owner occupied		625,611			1,166			—			—			2,590			629,367
CRE - non-owner occupied		962,444			421			—			—			374			963,239
Construction and land development		1,191,929			—			—			—			132			1,192,061
Multi-family		963,803			—			—			—			—			963,803
Direct financing leases		31,557			141			56			—			135			31,889
1-4 family real estate		495,936			1,030			517			—			2,046			499,529
Consumer		110,041			27			—			—			353			110,421
	$	6,120,819		$	7,585		$	1,697		$	5		$	8,765		$	6,138,871

As a percentage of total loan/lease portfolio		99.71	%		0.12	%		0.03	%		0.00	%		0.14	%		100.00	%


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

	(dollars in thousands)

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

As a percentage of total loan/lease portfolio		99.72	%		0.05	%		0.17	%		0.00	%		0.06	%		100.00	%

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

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


	2022
	Accruing Past		Nonaccrual		Nonaccrual
	Due 90 Days or		Loans/Leases		Loans/Leases				Percentage of
Classes of Loans/Leases	More		with an ACL		without an ACL		Total NPLs		Total NPLs

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


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

		(dollars in thousands)

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

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

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

Changes in the ACL loans/leases by portfolio segment for the years ended December 31, 2022, 2021, and 2020 are presented as follows:


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

	(dollars in thousands)

Balance, beginning	$	—	$	3,907	$	25,982	$	8,501	$	8,549	$	16,972	$	9,339	$	4,541	$	930	$	78,721
Initial ACL recorded for PCD loans		—		600		7		2,481		1,076		1,100		481		137		20		5,902
Provision**		—		(50)		7,364		(1,023)		2,220		(2,981)		3,323		306		477		9,636
Charge-offs		—		—		(6,417)		—		(193)		(829)		—		(21)		(65)		(7,525)
Recoveries		—		—		817		6		97		—		43		—		9		972
Balance, ending	$	—	$	4,457	$	27,753	$	9,965	$	11,749	$	14,262	$	13,186	$	4,963	$	1,371	$	87,706

*Included within the C&I-other column are ACL on leases with a beginning balance of $1.5 million, provision of $269 thousand, charge-offs of $1.1 million and recoveries of $273 thousand. ACL on leases was $970 thousand as of December 31, 2022.

** Provision of the year ended December 31, 2022, included $11.0 million related to the acquired Guaranty Bank non-PCD loans.


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

	(dollars in thousands)

Balance, beginning	$	35,421	$	—	$	—	$	42,161	$	—	$	—	$	—	$	—	$	1,764	$	3,732		$	—	$	1,298	$	84,376
Adoption of ASU 2016-13		(35,421)		2,982		29,130		(42,161)		8,696		11,428		11,999		5,836		(1,764)		(3,732)			5,042		(137)		(8,102)
Provision		—		925		(1,451)		—		(198)		(1,088)		4,973		3,653		—		—	��		(603)		(509)		5,702
Charge-offs		—		—		(2,287)		—		—		(1,876)		—		(150)		—		—			(179)		(46)		(4,538)
Recoveries		—		—		590		—		3		85		—		—		—		—			281		324		1,283
Balance, ending	$	—	$	3,907	$	25,982	$	—	$	8,501	$	8,549	$	16,972	$	9,339	$	—	$	—		$	4,541	$	930	$	78,721

*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 $703 thousand, charge-offs of $458 thousand and recoveries of $258 thousand. ACL on leases was $1.5 million as of December 31, 2021.


	Year Ended December 31, 2020
					Direct Financing		Residential Real		Installment and
	C&I			CRE	Leases		Estate		Other Consumer		Total

	(dollars in thousands)

Balance, beginning	$	16,072	$	15,379	$	1,464	$	1,948	$	1,138	$	36,001
Provisions charged to expense		22,899		28,671		2,148		1,755		231		55,704
Loans/leases charged off		(4,199)		(2,071)		(1,993)		—		(120)		(8,383)
Recoveries on loans/leases previously charged off		649		182		145		29		49		1,054
Balance, ending	$	35,421	$	42,161	$	1,764	$	3,732	$	1,298	$	84,376

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

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


	Year ended December 31, 2022
	Amortized Cost of Loans Receivable						Allowance for Credit Losses
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total

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

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


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

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

*Included within the C&I – other category are leases individually evaluated of $847 thousand with a related allowance for credit losses of $35 thousand and leases collectively evaluated of $44.4 million with a related allowance for credit losses of $1.5 million.

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

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:



	Year ended December 31, 2022
					Non
	Commercial		Owner-occupied		Owner-Occupied		Owner Occupied
	Assets		CRE		Real Estate		Real Estate		Securities		Equipment		Other		Total

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

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


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

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

*Included within the C&I – other category are leases individually evaluated of $847 thousand with primary collateral of equipment.

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

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

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

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


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

	(dollars in thousands)
C&I - revolving
Pass (Ratings 1 through 5)	$	—	$	—	$	—	$	—	$	—	$	—	$	275,888	$	275,888
Special Mention (Rating 6)		—		—		—		—		—		—		17,595		17,595
Substandard (Rating 7)		—		—		—		—		—		—		3,386		3,386
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	296,869	$	296,869

C&I - other
Pass (Ratings 1 through 5)	$	496,445	$	279,412	$	127,803	$	87,054	$	59,675	$	105,184	$	—	$	1,155,573
Special Mention (Rating 6)		9,542		679		901		723		—		308		—		12,153
Substandard (Rating 7)		187		125		661		4,535		310		106		—		5,924
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - other	$	506,174	$	280,216	$	129,365	$	92,312	$	59,985	$	105,598	$	—	$	1,173,650

CRE - owner occupied
Pass (Ratings 1 through 5)	$	146,211	$	182,440	$	142,596	$	33,571	$	27,088	$	45,993	$	13,460	$	591,359
Special Mention (Rating 6)		6,190		—		6,379		484		—		1,346		269		14,668
Substandard (Rating 7)		3,750		171		16,336		1,396		1,197		490		—		23,340
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	156,151	$	182,611	$	165,311	$	35,451	$	28,285	$	47,829	$	13,729	$	629,367

CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	310,163	$	221,953	$	173,478	$	89,337	$	56,898	$	40,923	$	7,510	$	900,262
Special Mention (Rating 6)		2,824		882		18,920		—		12,917		6,198		—		41,741
Substandard (Rating 7)		5,651		—		157		15,217		—		—		211		21,236
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	318,638	$	222,835	$	192,555	$	104,554	$	69,815	$	47,121	$	7,721	$	963,239

Construction and land development
Pass (Ratings 1 through 5)	$	479,016	$	330,434	$	240,778	$	31,607	$	30,300	$	—	$	29,647	$	1,141,782
Special Mention (Rating 6)		1,465		9,200		—		—		—		—		—		10,665
Substandard (Rating 7)		132		10,262		—		—		—		—		—		10,394
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Construction and land development	$	480,613	$	349,896	$	240,778	$	31,607	$	30,300	$	—	$	29,647	$	1,162,841

Multi-family
Pass (Ratings 1 through 5)	$	237,839	$	254,056	$	224,920	$	134,378	$	99,695	$	7,875	$	2,227	$	960,990
Special Mention (Rating 6)		—		44		—		1,467		—		—		—		1,511
Substandard (Rating 7)		—		—		1,302		—		—		—		—		1,302
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Multi-family	$	237,839	$	254,100	$	226,222	$	135,845	$	99,695	$	7,875	$	2,227	$	963,803

1-4 family real estate
Pass (Ratings 1 through 5)	$	61,953	$	57,731	$	33,737	$	12,687	$	5,813	$	6,002	$	5,855	$	183,778
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		28		—		—		5		—		—		—		33
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	61,981	$	57,731	$	33,737	$	12,692	$	5,813	$	6,002	$	5,855	$	183,811

Consumer
Pass (Ratings 1 through 5)	$	511	$	801	$	493	$	122	$	254	$	621	$	10,226	$	13,028
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		282		—		12		—		112		—		—		406
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Consumer	$	793	$	801	$	505	$	122	$	366	$	621	$	10,226	$	13,434

Total	$	1,762,189	$	1,348,190	$	988,473	$	412,583	$	294,259	$	215,046	$	366,274	$	5,387,014

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Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)


	2022
	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
Delinquency Status *	2022		2021		2020		2019		2018		Prior		Cost Basis		Total

	(dollars in thousands)
C&I - other
Performing	$	170,180	$	69,694	$	25,540	$	8,066	$	1,804	$	79	$	—	$	275,363
Nonperforming		1,110		1,320		155		95		—		—		—		2,680
Total C&I - other	$	171,290	$	71,014	$	25,695	$	8,161	$	1,804	$	79	$	—	$	278,043

Construction and land development
Performing	$	28,785	$	360	$	10	$	3	$	62	$	—	$	—	$	29,220
Nonperforming		—		—		—		—		—		—		—		—
Total Construction and land development	$	28,785	$	360	$	10	$	3	$	62	$	—	$	—	$	29,220

Direct financing leases
Performing	$	14,578	$	5,172	$	5,700	$	4,398	$	1,536	$	370	$	—	$	31,754
Nonperforming		—		32		88		7		8		—		—		135
Total Direct financing leases	$	14,578	$	5,204	$	5,788	$	4,405	$	1,544	$	370	$	—	$	31,889

1-4 family real estate
Performing	$	69,094	$	92,762	$	75,153	$	17,089	$	11,381	$	48,136	$	90	$	313,705
Nonperforming		267		524		487		279		8		448		—		2,013
Total 1-4 family real estate	$	69,361	$	93,286	$	75,640	$	17,368	$	11,389	$	48,584	$	90	$	315,718

Consumer
Performing	$	14,685	$	3,844	$	3,717	$	1,123	$	1,140	$	1,325	$	70,974	$	96,808
Nonperforming		7		—		—		—		3		59		110		179
Total Consumer	$	14,692	$	3,844	$	3,717	$	1,123	$	1,143	$	1,384	$	71,084	$	96,987

Total	$	298,706	$	173,708	$	110,850	$	31,060	$	15,942	$	50,417	$	71,174	$	751,857

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

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Note 4. Loans/Leases Receivable (continued)



	2021
	Term Loans
	Amortized Cost Basis by Origination Year
													Revolving
													Loans
Internally Assigned													Amortized
Risk Rating	2021		2020		2019		2018		2017		Prior		Cost Basis		Total

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

C&I - other
Pass (Ratings 1 through 5)	$	391,532	$	362,256	$	133,678	$	82,177	$	83,419	$	53,310	$	—	$	1,106,372
Special Mention (Rating 6)		3,580		373		349		—		336		2		—		4,640
Substandard (Rating 7)		506		2,366		7,138		396		55		46		—		10,507
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - other	$	395,618	$	364,995	$	141,165	$	82,573	$	83,810	$	53,358	$	—	$	1,121,519

CRE - owner occupied
Pass (Ratings 1 through 5)	$	118,014	$	143,045	$	47,660	$	30,523	$	17,038	$	46,185	$	11,477	$	413,942
Special Mention (Rating 6)		637		—		—		233		1,846		1,202		—		3,918
Substandard (Rating 7)		—		—		2,080		1,239		522		—		—		3,841
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	118,651	$	143,045	$	49,740	$	31,995	$	19,406	$	47,387	$	11,477	$	421,701

CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	176,813	$	145,712	$	88,697	$	63,849	$	55,752	$	28,808	$	8,592	$	568,223
Special Mention (Rating 6)		7,295		20,881		1,802		12,230		5,494		5,580		—		53,282
Substandard (Rating 7)		1,105		6,297		15,563		1,087		943		—		—		24,995
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	185,213	$	172,890	$	106,062	$	77,166	$	62,189	$	34,388	$	8,592	$	646,500

Construction and land development
Pass (Ratings 1 through 5)	$	394,045	$	248,360	$	126,941	$	106,790	$	3,012	$	—	$	13,277	$	892,425
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		10,362		—		—		—		—		—		—		10,362
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Construction and land development	$	404,407	$	248,360	$	126,941	$	106,790	$	3,012	$	—	$	13,277	$	902,787

Multi-family
Pass (Ratings 1 through 5)	$	266,120	$	197,224	$	74,033	$	47,486	$	5,609	$	7,376	$	2,564	$	600,412
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		—		—		—		—		—		—
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Multi-family	$	266,120	$	197,224	$	74,033	$	47,486	$	5,609	$	7,376	$	2,564	$	600,412

1-4 family real estate
Pass (Ratings 1 through 5)	$	47,097	$	24,029	$	16,188	$	7,569	$	5,845	$	5,213	$	3,079	$	109,020
Special Mention (Rating 6)		37		—		—		—		—		—		—		37
Substandard (Rating 7)		—		178		—		437		201		—		—		816
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	47,134	$	24,207	$	16,188	$	8,006	$	6,046	$	5,213	$	3,079	$	109,873

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

Total	$	1,418,701	$	1,151,208	$	514,237	$	354,369	$	180,072	$	148,546	$	289,503	$	4,056,636

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Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)




	2021
	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
Delinquency Status *	2021		2020		2019		2018		2017		Prior		Cost Basis		Total

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

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

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

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

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

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

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Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

TDRs totaled $331 thousand and $494 thousand as of December 31, 2022 and 2021, 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 years ended December 31, 2022 and 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 restructuring.


	2022
		Pre-		Post-
		Modification		Modification
	Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans / Leases	Investment		Investment		Allowance

	(dollars in thousands)
CONCESSION - Significant Payment Delay
Direct Financing Leases	3	$	232	$	232	$	—

TOTAL	3	$	232	$	232	$	—


	2021
		Pre-		Post-
		Modification		Modification
	Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans / Leases	Investment		Investment		Allowance

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

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

TOTAL	3	$	2,599	$	2,599	$	189

Of the loans restructured reported above, none were on nonaccrual as of December 31, 2022 and one with a post-modification recorded investment totaling $54 thousand was on nonaccrual as of December 31, 2021.

For the year ended December 31, 2022 and 2021, the Company did not have any TDRs that redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. The Company did not have any TDRs that were restructured and charged off in 2022 or 2021.

Changes in the ACL for OBS exposures for the year ended December 31, 2022 and 2021 is presented as follows:


	For the Year Ended
	December 31, 2022		December 31, 2021

	(dollars in thousands)

Balance, beginning	$	6,886	$	—
Impact of adopting ASU 2016-13		—		9,117
Provisions (credited) to expense		(1,334)		(2,231)
Balance, ending	$	5,552	$	6,886

Loans are made in the normal course of business to directors, executive officers, and their related interests. All such loans, in the opinion of management, were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the lenders and did not involve more than the normal risk of collectability or present other unfavorable

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Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

features. An analysis of the changes in the aggregate committed amount of loans to insiders greater than or equal to $60,000 during the years ended December 31, 2022, 2021, and 2020, is as follows:


	2022		2021		2020

	(dollars in thousands)

Balance, beginning	$	100,898	$	100,361	$	112,830
Net increase (decrease) due to change in related parties		3,496		(18,832)		(1,601)
Advances		51,683		42,817		43,238
Repayments		(42,877)		(23,448)		(54,106)
Balance, ending	$	113,200	$	100,898	$	100,361

The Company’s loan portfolio includes a geographic concentration in the Midwest. Additionally, the loan portfolio includes a concentration of loans in certain industries as of December 31, 2022 and 2021 as follows:


	2022				2021
			Percentage of				Percentage of
			Total				Total
Industry Name	Balance		Loans/Leases		Balance		Loans/Leases

	(dollars in thousands)

Lessors of Residential Buildings*	$	2,168,431	35	%	$	1,706,092	36	%
Lessors of Non-Residential Buildings		558,719	9	%		586,672	13	%

* Includes loans on LIHTC projects

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Notes to Consolidated Financial Statements

Note 5. Premises and Equipment

The following summarizes the components of premises and equipment as of December 31, 2022 and 2021:


	2022		2021

	(dollars in thousands)

Land	$	17,804	$	12,513
Buildings (useful lives 15 to 39 years)		108,777		70,860
Furniture and equipment (useful lives 3 to 15 years)		54,305		47,517
Premises and equipment		180,886		130,890
Less accumulated depreciation		62,938		52,360
Premises and equipment, net	$	117,948	$	78,530

As a lessee, the Company has entered into operating leases for certain branch locations. Total lease expenses were $412 thousand and $636 thousand for the year ended December 31, 2022 and 2021, respectively.

At December 31, 2022 and 2021, the Company’s ROU assets (included in other assets on the consolidated balance sheets) and operating lease liabilities (included in other liabilities on the consolidated balance sheets) were both $3.0 million and $1.3 million, respectively. During the year ended December 31, 2022, the Company acquired $8.4 million of ROU assets as part of the acquisition of GFED. Additionally, there was one ROU asset added for a lease in which the Company was the lessee, offset by a negative ROU for a lease in which the Company was the lessor. The addition of capitalized ROU assets was also offset by the termination of one lease from the Company purchasing a building previously leased and the termination of one lease for the sale of a branch location that was previously leased. One ROU asset was capitalized during the year ended December 31, 2021.

At December 31, 2022, the contractual maturities of operating lease liabilities were as follows:


	Amount
Year ending December 31:	(dollars in thousands)
2023		571
2024		336
2025		262
2026		240
2027		230
Thereafter		2,635
	$	4,274

As a lessor, the Company leases certain types of commercial vehicles and industrial equipment to its customers. The Company recognized lease-related revenue, primarily interest income from direct financing leases of $2.3 million and $4.0 million for the years ended December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the Company’s net investment in direct financing leases was $31.1 million and $44.2 million, respectively.

As of December 31, 2022, the contractual maturities of sales-type and direct financing lease receivables were as follows:


	Amount
Year ending December 31:	(dollars in thousands)
2023		1,854
2024		8,910
2025		11,046
2026		4,723
2027		6,741
Thereafter		1,480
Total lease payments receivable	$	34,754
Unguaranteed residual values		165
Unearned lease/residual income		(3,030)
	$	31,889
Plus deferred origination costs, net of fees		226
	$	32,115
Less allowance		(970)
Total lease payments receivable	$	31,145

The

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Notes to Consolidated Financial Statements

Note 6. Goodwill and Intangibles

The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2022, 2021 and 2020:


	2022		2021		2020

	(dollars in thousands)

Balance at the beginning of period	$	74,066	$	74,066	$	74,748
Acquisition of GFED		63,541		—		—
Sale of Bates Companies		—		—		(182)
Goodwill impairment - Bates Companies		—		—		(500)
Balance at the end of period	$	137,607	$	74,066	$	74,066

The following table presents the goodwill by reportable segment:



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

	(dollars in thousands)
Commercial banking:
QCBT	$	3,223	$	3,223	$	3,223
CRBT		14,980		14,980		14,980
CSB		9,888		9,888		9,888
GB		109,516		45,975		45,975
	$	137,607	$	74,066	$	74,066

At November 30, 2022 and 2021 the Company’s management performed an annual internal assessment of goodwill at the reporting unit level and determined no impairment existed.

During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies reporting unit. This was the result of the announcement of a sale of the Bates Companies, as discussed in Note 2 to the Consolidated Financial Statements.

The following table presents the changes in core deposit intangibles (included in Intangibles on the consolidated balance sheets) during the years ended December 31, 2022, 2021 and 2020:


	2022		2021		2020
	(dollars in thousands)

Balance at the beginning of the period	$	9,349	$	11,381	$	13,466
Acquisition of GFED		10,264		—		—
Amortization expense		(2,854)		(2,032)		(2,085)
Balance at the end of the period	$	16,759	$	9,349	$	11,381

Gross carrying amount	$	29,519	$	19,255	$	19,255
Accumulated amortization		(12,760)		(9,906)		(7,874)
Net book value	$	16,759	$	9,349	$	11,381

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Notes to Consolidated Financial Statements

Note 6. Goodwill and Intangibles (continued)

The following table presents the core deposit intangibles by reportable segment:



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

	(dollars in thousands)
Commercial Banking:
CRBT	$	1,225	$	1,702	$	2,189
CSB		2,027		2,653		3,305
GB		13,507		4,994		5,887
	$	16,759	$	9,349	$	11,381

The following table presents the estimated amortization of the core deposit intangibles:


	Amount
Years ending December 31,	(dollars in thousands)
2023	$	2,938
2024		2,761
2025		2,645
2026		2,360
2027		1,874
Thereafter		4,181
	$	16,759

The following table presents the changes in customer list intangible (included in Intangibles on the Consolidated Balance Sheets) during the years ended December 31, 2020. There was no activity during the year ended December 31, 2022 or 2021.


	2020

Balance at the beginning of period	$	1,504
Sale of Bates Companies		(1,440)
Amortization		(64)
Balance at the end of period	$	—

The customer list intangible relates to the Parent Company Only (“All Other”) reportable segment.

Note 7. Derivatives and Hedging Activities

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


	December 31, 2022		December 31, 2021

	(dollars in thousands)
Assets:
Interest rate caps - hedged	$	8,327	$	927
Interest rate caps		2,213		238
Interest rate swaps - hedged		477		—
Interest rate swaps		166,614		221,055
	$	177,631	$	222,220

Liabilities:
Interest rate collars - hedged	$	(263)	$	—
Interest rate swaps - hedged		(33,824)		(4,080)
Interest rate swaps		(166,614)		(221,055)
	$	(200,701)	$	(225,135)

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Notes to Consolidated Financial Statements

Note 7. Derivatives and Hedging Activities (continued)

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

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

The details of the interest rate caps are as follows:


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

Deposits	1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.75	%	$	(50)	$	5
Deposits	1/1/2020	1/1/2023	Derivatives - Assets		50,000	1.57	%		-		11
Deposits	1/1/2020	1/1/2023	Derivatives - Assets		25,000	1.80	%		-		5
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.75	%		714		60
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		50,000	1.57	%		1,566		125
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.80	%		783		62
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.75	%		1,264		161
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		50,000	1.57	%		2,700		332
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.80	%		1,350		166
				$	300,000			$	8,327	$	927

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


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

(dollars in thousands)

1/1/2020	1/3/2023	Derivatives - Assets	$	25,000	1.90	%	$	3	$	3
2/1/2020	2/1/2024	Derivatives - Assets		25,000	1.90	%		822		62
3/1/2020	3/3/2025	Derivatives - Assets		25,000	1.90	%		1,388		173
			$	75,000			$	2,213	$	238

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

Fair Value as of

Hedged Item

Effective Date

Maturity Date

Location

Notional Amount

Cap Strike Rate

Floor Strike Rate

December 31, 2022

December 31, 2021

Loans

10/1/2022

10/1/2026

Derivatives - Liabilities

50,000

4.40

2.44

(263)

N/A

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


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

Loans	7/1/2021	7/1/2031	Derivatives - Liabilities	$	35,000	1.40	%	4.12	%	$	(5,646)	$	(17)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		50,000	1.40	%	4.12	%		(8,066)		(25)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		40,000	1.40	%	4.12	%		(6,464)		(34)
Loans	10/1/2022	7/1/2031	Derivatives - Liabilities		25,000	1.30	%	4.12	%		(4,018)		(13)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		15,000	1.91	%	4.12	%		(1,144)		N/A
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	4.12	%		(3,812)		N/A
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		35,000	1.91	%	4.12	%		(2,669)		N/A
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	4.12	%		(3,812)		N/A
				$	300,000					$	(35,631)	$	(89)

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Notes to Consolidated Financial Statements

Note 7. Derivatives and Hedging Activities (continued)

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


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

		(dollars in thousands)

QCR Holdings Statutory Trust II	9/30/2018		9/30/2028	Derivatives - Liabilities	$	10,000	6.52	%	5.85	%	$	464	$	(1,035)
QCR Holdings Statutory Trust III	9/30/2018		9/30/2028	Derivatives - Liabilities		8,000	6.52	%	5.85	%		372		(828)
QCR Holdings Statutory Trust V	7/7/2018		7/7/2028	Derivatives - Liabilities		10,000	4.06	%	4.54	%		459		(996)
Community National Statutory Trust II	9/20/2018		9/20/2028	Derivatives - Liabilities		3,000	6.92	%	5.17	%		140		(309)
Community National Statutory Trust III	9/15//2018		9/15/2028	Derivatives - Liabilities		3,500	5.04	%	4.75	%		163		(360)
Guaranty Bankshares Statutory Trust I	9/15/2018		9/15/2028	Derivatives - Liabilities		4,500	5.04	%	4.75	%		209		(463)
Guaranty Statutory Trust II*	5/23/2019		2/23/2026	Derivatives - Assets		10,310	6.14	%	4.09	%		477		N/A
					$	49,310					$	2,284	$	(3,991)

* As part of the acquisition of GFED in 2022, the Company assumed one interest rate swap.

In the first quarter of 2020, the Company entered into $40 million of interest rate swaps which were then terminated in the fourth quarter of 2020, resulting in a loss of $808 thousand.

Changes in the fair values of derivative financial instruments accounted for as cash flow hedges to the extent they are included in the assessment of effectiveness, are recorded as a component of AOCI. The following is a summary of how AOCI was impacted during the reporting periods:


	Year Ended
	December 31, 2022		December 31, 2021

	(dollars in thousands)

Unrealized loss at beginning of period, net of tax	$	(4,373)	$	(7,632)
Amount reclassified from accumulated other comprehensive income to interest expense related to caplet amortization		(1,001)		697
Amount of gain (loss) recognized in other comprehensive income, net of tax		(14,847)		2,562
Unrealized loss at end of period, net of tax	$	(20,221)	$	(4,373)

As discussed under “Swap Transactions” in Note 1 to the Consolidated Financial Statements, the Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third party financial institution. Additionally, the Company receives an upfront, non-refundable fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.

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


		December 31, 2022			December 31, 2021
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value

	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	2,528,949	$	166,614	$	2,024,599	$	221,055
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	2,528,949	$	166,614	$	2,024,599	$	221,055

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Notes to Consolidated Financial Statements

Note 7. Derivatives and Hedging Activities (continued)

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the years ended December 31, 2022, 2021 and 2020 are as follows:


	Year Ended December 31, 2022				Year Ended December 31, 2021				Year Ended December 31, 2020
	Interest and		Interest		Interest and		Interest		Interest and		Interest
	Dividend Income		Expense		Dividend Income		Expense		Dividend Income		Expense

	(dollars in thousands)

Income and expense line items presented in the consolidated statements of income	$	292,571	$	61,451	$	200,155	$	21,922	$	198,373	$	31,423

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:
Interest rate caps on deposits		-		(1,405)		-		697				551
Interest rate swaps on variable rate loans		(829)		-		1,006		-		-		185
Interest rate swaps on junior subordinated debentures		-		462		-		1,114		-		832

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:


	December 31, 2022		December 31, 2021

	(dollars in thousands)

Cash	$	1,272	$	21,100
U.S treasuries and govt. sponsored agency securities		—		3,555
Municipal securities		8,227		139,166
Residential mortgage-backed and related securities		29,257		65,104
	$	38,756	$	228,925

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

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Notes to Consolidated Financial Statements

Note 8. Deposits

The aggregate amount of certificates of deposit, each with a minimum denomination of $250,000, was $371.7 million and $169.0 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2022, the scheduled maturities of certificates of deposit were as follows:


	Amount
	(dollars in thousands)
Year ending December 31:
2023	$	710,100
2024		53,029
2025		11,274
2026		4,209
2027		5,571
Thereafter		401
	$	784,584

The Company has public entity interest-bearing demand deposits and certificates of deposit that are collateralized by investment securities with carrying values as follows:


	2022		��	2021
	(dollars in thousands)

U.S. govt. sponsored agency securities	$	2,081		$	3,080
Residential mortgage-backed and related securities		1,796			3,270
	$	3,877		$	6,350

The Company had a $188.8 million PUD LOC with the FHLB of Des Moines for the purpose of providing additional collateral on public deposits as of December 31, 2022. As of December 31, 2021, the Company had a $129.5 million PUD LOC with the FHLB of Des Moines. There were no amounts outstanding under these letters of credit as of December 31, 2022 or 2021.

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Notes to Consolidated Financial Statements

Note 9. Short-Term Borrowings

Short-term borrowings as of December 31, 2022 and 2021 are summarized as follows:

Information concerning federal funds purchased is summarized as follows for the years ended December 31, 2022 and 2021:


	2022			2021
	(dollars in thousands)

Average daily balance	$	8,637		$	6,280
Average daily interest rate		1.76	%		0.08	%
Maximum month-end balance	$	129,630		$	11,320
Weighted average rate as of December 31		4.70	%		0.08	%

Note 10. FHLB Advances

The subsidiary banks are members of the FHLB of Des Moines. Maturity and interest rate information on advances from the FHLB as of December 31, 2022 and 2021 is as follows:


	December 31, 2022				December 31, 2021
			Weighted				Weighted
			Average				Average
			Interest Rate				Interest Rate
	Amount Due		at Year-End		Amount Due		at Year-End

	(dollars in thousands)
Maturity:
Year ending December 31:
2022	$	—	—	%	$	15,000	0.31	%
2023		415,000	4.58			—	—
Total FHLB advances	$	415,000	4.58	%	$	15,000	0.31	%

The Company prepaid $55.3 million of FHLB advances in 2020 with excess funds generated by strong deposit growth. The loss on the prepayment of the FHLB advances totaled $1.9 million for the year ended December 31, 2020.

Advances are collateralized by loans of $1.7 billion and $1.3 billion as of December 31, 2022 and 2021, respectively, in aggregate. On pledged loans, the FHLB applies varying collateral maintenance levels from 125% to 333% based on the loan type. Advances are also collateralized by securities of $290 thousand and $334 thousand as of December 31, 2022 and 2021, respectively, in aggregate. The Company continues to pledge loans under blanket liens to provide off balance sheet liquidity.

All advances outstanding as of December 31, 2022 and 2021 are short-term advances from the FHLB. These advances have maturities ranging from 1 day to 2 weeks.

As of December 31, 2022 and 2021, the subsidiary banks held $25.6 million and $7.8 million, respectively, of FHLB stock, which is included in restricted investment securities on the consolidated balance sheet.

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Notes to Consolidated Financial Statements

Note 11. Other Borrowings and Unused Lines of Credit

In the second quarter of 2022, the Company renewed its revolving line of credit. At renewal, the available line amount increased from $25.0 million to $50.0 million for which there was no outstanding balance as of December 31, 2022. Interest on the revolving line of credit is calculated at the greater of: (a) the effective Prime Rate less 0.50% and (b) 3.00% per annum. The collateral on the revolving line of credit is 100% of the outstanding capital stock of the Company’s bank subsidiaries.

Unused lines of credit of the subsidiary banks as of December 31, 2022 and 2021 are summarized as follows:


	2022		2021
	(dollars in thousands)

Secured	$	30,990	$	61,657
Unsecured		470,800		456,000
	$	501,790	$	517,657

Included in the Secured category above, the Company pledges select C&I and CRE loans to the Federal Reserve Bank of Chicago for borrowing as part of the Borrower-In-Custody program.

Note 12. Subordinated Notes

Subordinated notes as of December 31, 2022 and 2021 are summarized as follows:


		Amount Outstanding	Interest Rate			Amount Outstanding	Interest Rate
		as of December 31, 2022	as of December 31, 2022			as of December 31, 2021	as of December 31, 2021		Maturity Date
		(dollars in thousands)

Subordinated debenture dated 9/14/20	$	50,000	5.125	%	$	50,000	5.125	%	9/15/2030
Subordinated debenture dated 2/1/19		65,000	5.375	%		65,000	5.375	%	2/15/2029
Subordinated debenture dated 7/29/20*		20,000	5.250	%		N/A	N/A		9/30/2030
Subordinated debenture dated 8/18/22		55,000	5.950	%		N/A	N/A		9/1/2037
Subordinated debenture dated 8/18/22		45,000	5.500	%		N/A	N/A		9/1/2032
Debt issuance costs		(2,338)				(1,150)
Total Subordinated Debentures	$	232,662			$	113,850

*Assumed in acquisition of GFED

On April 1, 2022, the Company acquired through the GFED acquisition $20.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 30, 2030. The subordinated notes, which qualify as Tier 2 capital for the Company, will bear interest at a fixed rate of 5.25% per year, from and including July 29, 2020 to, but excluding September 30, 2025 or earlier redemption. From and including September 30, 2025 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then three-month Term SOFR, plus 519 basis points. Interest on the subordinated notes is payable semi-annually, commencing on September 30, 2020 through September 30, 2025. The subordinated notes may be redeemed at the Company’s option, in whole or in part, on any interest payment date on or after September 30, 2025. At a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.

On August 18, 2022, the Company completed a private offering of $55.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 1, 2037. The subordinated notes, which qualify as Tier 2 capital for the Company, will bear interest at a fixed rate of 5.95% per year, from and including September 1, 2022 to, but excluding September 1, 2032 or earlier redemption. From and including September 1, 2032 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then three-month Term SOFR, plus 300 basis points. Interest on the subordinated notes is payable quarterly, commencing on December 1, 2022. The notes are redeemable, in whole or in part, at any time upon the occurrence

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Notes to Consolidated Financial Statements

Note 12. Subordinated Notes (continued)

of certain events. The subordinated notes may be redeemed at the Company’s option, in whole or in part, on any interest payment date on or after September 1, 2032, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.

On August 18, 2022, the Company also completed a private offering of $45.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 1, 2032, of which $43.25 million have been exchanged for subordinated notes registered under the Securities Act of 1933. The subordinated notes, which qualify as Tier 2 capital for the Company, will bear interest at a fixed rate of 5.50% per year, from and including September 1, 2022 to, but excluding September 1, 2027 or earlier redemption. From and including September 1, 2027 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then three-month Term SOFR, plus 279 basis points. Interest on the subordinated notes is payable semi-annually, commencing on March 1, 2023 through September 1, 2027 and quarterly thereafter. The notes are redeemable, in whole or in part, at any time upon the occurrence of certain events. The subordinated notes may be redeemed at the Company’s option, in whole or in part, on any interest payment date on or after September 1, 2027, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.

Note 13. Junior Subordinated Debentures

Junior subordinated debentures are summarized as of December 31, 2022 and 2021 as follows:


	2022		2021
	(dollars in thousands)

Note Payable to QCR Holdings Capital Trust II	$	10,310	$	10,310
Note Payable to QCR Holdings Capital Trust III		8,248		8,248
Note Payable to QCR Holdings Capital Trust V		10,310		10,310
Note Payable to Community National Trust II*		3,093		3,093
Note Payable to Community National Trust III*		3,609		3,609
Note Payable to Guaranty Bankshares Statutory Trust I**		4,640		4,640
Note Payable to Guaranty Statutory Trust II***		10,310		N/A
Market Value Discount per ASC 805****		(1,918)		(2,055)
	$	48,602	$	38,155

* As part of the acquisition of Community National in 2013, the Company assumed two junior subordinated debentures with a total fair value of $4.2 million.

** As part of the acquisition of Guaranty Bank in 2017, the Company assumed one junior subordinated debenture with a fair value of $3.9 million.

*** As part of the acquisition of GFED in 2022, the Company assumed one junior subordinated debenture with a fair value of $10.3 million.

**** Market value discount includes discount on junior subordinated debt acquired as described in * and **.

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Notes to Consolidated Financial Statements

Note 13. Junior Subordinated Debentures (continued)

A schedule of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including the amounts outstanding as of December 31, 2022 and 2021, is as follows:


		Amount		Amount
		Outstanding		Outstanding
		December 31,		December 31,			Interest Rate as of		Interest Rate as of
Name	Date Issued	2022		2021		Interest Rate	December 31, 2022		December 31, 2021

		(dollars in thousands)

QCR Holdings Statutory Trust II*	February 2004	$	10,310	$	10,310	2.85% over 3-month LIBOR	6.52	%	3.07	%
QCR Holdings Statutory Trust III	February 2004		8,248		8,248	2.85% over 3-month LIBOR	6.52	%	3.07	%
QCR Holdings Statutory Trust V	February 2006		10,310		10,310	1.55% over 3-month LIBOR	5.63	%	1.67	%
Community National Statutory Trust II	September 2004		3,093		3,093	2.17% over 3-month LIBOR	6.92	%	2.38	%
Community National Statutory Trust III	March 2007		3,609		3,609	1.75% over 3-month LIBOR	6.52	%	1.95	%
Guaranty Bankshares Statutory Trust I	May 2005		4,640		4,640	1.75% over 3-month LIBOR	6.52	%	1.95	%
Guaranty Statutory Trust II	December 2005		10,310		N/A	1.45% over 3-month LIBOR	6.14	%	N/A	%
		$	50,520	$	40,210	Weighted Average Rate	6.29	%	2.43	%

* Original amount issued for QCR Holdings Statutory Trust II was $12,372,000.

Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but all are currently callable at par at any time. Interest rate reset dates vary by Trust.

The Company uses interest rate swaps for the purpose of hedging interest rate risk on the variable rate junior subordinated debt. See Note 7 to the Consolidated Financial Statements for the details of these instruments.

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Notes to Consolidated Financial Statements

Note 14. Federal and State Income Taxes

Federal and state income tax expense was comprised of the following components for the years ended December 31, 2022, 2021, and 2020:


	2022		2021		2020
	(dollars in thousands)

Current	$	19,165	$	7,290	$	27,237
Deferred		(4,682)		15,272		(14,530)
	$	14,483	$	22,562	$	12,707

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended December 31, 2022, 2021, and 2020:


	Year Ended December 31,
	2022				2021				2020
			% of				% of				% of
			Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income

	(dollars in thousands)

Computed "expected" tax expense	$	23,845	21.0	%	$	25,508	21.0	%	$	15,391	21.0	%
Tax exempt income, net		(10,689)	(9.4)			(7,537)	(6.2)			(5,943)	(8.1)
Bank-owned life insurance		(432)	(0.4)			(386)	(0.3)			(308)	(0.4)
State income taxes, net of federal benefit, current year		4,482	3.9			5,089	4.2			3,622	4.9
Change in unrecognized tax benefits		498	0.4			578	0.5			546	0.7
Goodwill impairment		—	—			—	—			105	0.1
Provision adjustment from accounting method change		(1,181)	(1.0)			—	—			—	—
Tax credits		(1,362)	(1.2)			34	—			(456)	(0.6)
Acquisition costs		276	0.2			95	0.1			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(503)	(0.4)			(436)	(0.4)			(242)	(0.3)
Re-measurement of deferred tax asset to incorporate newly enacted tax rates		—	—			—	—			207	0.3
Other		(451)	(0.4)			(383)	(0.3)			(215)	(0.3)
Federal and state income tax expense	$	14,483	12.7	%	$	22,562	18.6	%	$	12,707	17.3	%

Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended December 31, 2022 and 2021:


	2022		2021
	(dollars in thousands)

Balance, beginning	$	2,182	$	1,893
Impact of tax positions taken during current year		758		1,326
Gross increase (decrease) related to tax positions of prior years		75		(646)
Reduction as a result of a lapse of the applicable statute of limitations		(335)		(391)
Balance, ending	$	2,680	$	2,182

Included in the unrecognized tax benefits liability at December 31, 2022 are potential benefits of approximately $2.2 million that, if recognized, would affect the effective tax rate.

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Notes to Consolidated Financial Statements

Note 14. Federal and State Income Taxes (continued)

The liability for unrecognized tax benefits includes accrued interest for tax positions, which either do not meet the more-likely-than-not recognition threshold or where the tax benefit is measured at an amount less than the tax benefit claimed or expected to be claimed on an income tax return. At December 31, 2022 and 2021, accrued interest on uncertain tax positions was approximately $333 thousand and $236 thousand, respectively. Estimated interest related to the underpayment of income taxes is classified as a component of “income tax expense” in the statements of income.

The Company’s federal income tax returns are open and subject to examination from the 2019 tax return year and later. Various state franchise and income tax returns are generally open from the 2018 and later tax return years based on individual state statutes of limitations.

The net deferred tax assets consisted of the following as of December 31, 2022 and 2021:


	2022		2021
	(dollars in thousands)
Deferred tax assets:
Historic tax credits	$	68	$	68
Low income housing tax credits		226		—
Net unrealized losses on securities available for sale and derivative instruments		21,319		—
Compensation		13,413		11,912
Loan/lease losses		20,466		19,023
Net operating loss carryforwards, federal and state		1,262		1,354
Other		—		17
		56,754		32,374
Deferred tax liabilities:
Net unrealized gains on securities available for sale and derivative instruments		—		747
Premises and equipment		6,271		6,099
Equipment financing leases		2,484		6,462
Acquisition fair value adjustments		3,816		3,269
Investment accretion		27		27
Deferred loan origination fees, net		1,624		1,403
Other		2,094		677
		16,316		18,684
Net deferred tax assets	$	40,438	$	13,690

At December 31, 2022, the Company had $5.4 million of federal tax NOL carryforwards and $2.1 million of state tax NOL carryforwards. $1.9 million of the federal tax NOL carryforwards are related to the acquisition of Community National and CNB and these losses are set to expire in varying amounts between 2029 and 2033. The $2.1 million of the state tax NOL carryforwards are also related to the acquisition of Community National and CNB and are set to expire in varying amounts between 2023 and 2028. The additional $3.5 million of federal tax NOLs were acquired in 2022 with the Guaranty Bank acquisition. The newly acquired federal tax NOLs are expected to be utilized prior to their expiration dates.

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Notes to Consolidated Financial Statements

Note 14. Federal and State Income Taxes (continued)

The change in deferred income taxes was reflected in the Consolidated Financial Statements as follows for the years ended December 31, 2022, 2021, and 2020:


	2022		2021		2020
	(dollars in thousands)

Provision for income taxes	$	(4,682)	$	15,272	$	(14,530)
Net deferred tax assets resulting from sale of other subsidiary		—		—		363
Statement of stockholders' equity- Other comprehensive income (loss)		(22,066)		(122)		837
	$	(26,748)	$	15,150	$	(13,330)

Note 15. Employee Benefit Plans

The Company has a profit sharing plan, which includes a provision designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, to allow for participants to defer a portion of their annual compensation under the profit sharing plan. Substantially all employees who are at least 18 years of age are eligible to participate in the plan. The Company matches 100% of an employee’s deferrals up to the first 3% of an employee’s annual compensation, and 50% of the next 3% of an employee’s deferred annual compensation, up to a maximum amount of 4.5% of an employee’s annual compensation. Additionally, at its discretion, the Company may make additional contributions to the plan, which are allocated to the accounts of participants in the plan based on relative compensation. There were no discretionary contributions for the years ended December 31, 2022, 2021 and 2020. Company matching contributions for the years ended December 31, 2022, 2021, and 2020 were as follows:


	2022		2021		2020
	(dollars in thousands)

Matching contribution	$	3,071	$	2,446	$	2,520

The Company has entered into nonqualified supplemental executive retirement plans (SERPs) with certain executive officers. The SERPs allow certain executives to accumulate retirement benefits beyond those provided by the qualified retirement plan. Changes in the liability related to the SERPs, included in other liabilities, are as follows for the years ended December 31, 2022, 2021 and 2020:


	2022		2021		2020
	(dollars in thousands)

Balance, beginning	$	7,273	$	6,189	$	5,160
Expense accrued		1,286		1,532		1,193
Cash payments made		(394)		(448)		(164)
Balance, ending	$	8,165	$	7,273	$	6,189

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Notes to Consolidated Financial Statements

Note 15. Employee Benefit Plans (continued)

The Company has a deferred compensation plan under which it has entered into deferred compensation agreements with certain officers. Under the provisions of the agreements, the executive officers may defer compensation and the Company matches the deferral up to certain maximums. The Company’s matching contribution varies by officer as well. Certain officers have a 100% match and have a maximum of between $10 thousand and $25 thousand annually as set forth in each officer’s participation agreement. Interest on the deferred amounts is earned at prime rate subject to a minimum of 4% and a maximum of 12%, with such limits differing by officer. Other officers have a 50% match and have a maximum between 4% and 12% of compensation as set forth in each officers’ participation agreement. Interest on the deferred amounts is earned at prime rate plus one percentage point and has a minimum of 4% and shall not exceed 8%.

Upon retirement, each executive officer and other officer will, subject to a potential six month deferral, receive the deferral balance in 180 equal monthly installments. As of December 31, 2022 and 2021, the liability related to the agreements totaled $ 38.2 million and $32.3 million, respectively.

Changes in the deferred compensation agreements, included in other liabilities, are as follows for the years ended December 31, 2022, 2021, and 2020:


	2022		2021		2020
	(dollars in thousands)

Balance, beginning	$	32,353	$	24,713	$	19,474
Employee deferrals		3,615		4,900		3,959
Company match and interest		2,776		3,048		2,628
Cash payments made		(489)		(308)		(1,348)
Balance, ending	$	38,255	$	32,353	$	24,713

Note 16. Stock-Based Compensation

The Company’s Board of Directors adopted in February 2010, and the stockholders approved in May 2010, the QCR Holdings, Inc. 2010 Equity Incentive Plan (“2010 Equity Incentive Plan”). The Company’s Board of Directors adopted in February 2013, and the stockholders approved in May 2013, the QCR Holdings, Inc. 2013 Equity Incentive Plan (“2013 Equity Incentive Plan”). The Company’s Board of Directors adopted in February 2016, and the stockholders approved in May 2016, the QCR Holdings, Inc. 2016 Equity Incentive Plan (“2016 Equity Incentive Plan”). Up to 350,000, 350,000, and 400,000 shares of common stock, respectively, may be issued to employees and directors of the Company and its subsidiaries pursuant to equity incentive awards granted under these plans.

The 2010 Equity Incentive Plan, the 2013 Equity Incentive Plan and the 2016 Equity Incentive Plan (collectively, the “Equity Plans”) are administered by the Compensation Committee of the Board of Directors (the “Committee”). As of December 31, 2022, there were 100,271 remaining shares of common stock available for the grant of future awards under the Equity Plans; however, such future awards may be granted only under the 2016 Equity Incentive Plan.

The number and exercise price of options granted under the Equity Plans are determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for stock options. All options have a 10-year life and will vest and become exercisable from 3-to-7 years after the date of the grant. The value of restricted stock awards is estimated by using the market price of the Company’s common stock at the date of grant.

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Notes to Consolidated Financial Statements

Note 16. Stock-Based Compensation (continued)

Stock-based compensation expense was reflected in the Consolidated Financial Statements as follows for the years ended December 31, 2022, 2021, and 2020.


	2022		2021		2020
	(dollars in thousands)

Stock options	$	246	$	270	$	297
Restricted stock awards		1,967		1,864		1,619
Stock purchase plan		225		218		234
	$	2,438	$	2,352	$	2,150

Stock options:

A summary of the stock option plans as of December 31, 2022, 2021, and 2020 and changes during the years then ended is presented below:


	December 31,
	2022				2021				2020
			Weighted				Weighted				Weighted
			Average				Average				Average
			Exercise				Exercise				Exercise
	Shares		Price		Shares		Price		Shares		Price
Outstanding, beginning		367,998	$	24.46		407,763	$	22.24		426,913	$	20.14
Granted		22,400		53.87		22,150		43.61		23,350		39.12
Exercised		(41,695)		14.07		(60,317)		15.76		(41,650)		10.67
Forfeited		(2,025)		26.72		(1,598)		38.50		(850)		19.94
Outstanding, ending		346,678		27.60		367,998		24.46		407,763		22.24

Exercisable, ending		295,077				318,266				354,899

Weighted average fair value per option granted	$	13.97			$	10.85			$	10.07

A further summary of options outstanding as of December 31, 2022 is presented below:


	Options Outstanding
		Weighted			Options Exercisable
		Average	Weighted			Weighted
		Remaining	Average			Average
Range of	Number	Contractual	Exercise		Number	Exercise
Exercise Prices	Outstanding	Life	Price		Exercisable	Price
$15.50 to $15.65	57,616	0.25	$	15.64	57,616	$	15.64
$17.10 to $18.00	108,890	1.57		17.32	108,890		17.32
$22.64 to $22.64	53,316	3.08		22.64	53,316		22.64
$36.00 to $41.95	36,773	6.67		38.30	23,060		38.06
$42.65 to $48.50	67,908	5.63		43.76	51,995		43.80
$53.87 to $56.26	22,175	9.17		53.89	200		53.87
	346,678				295,077

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Notes to Consolidated Financial Statements

Note 16. Stock-Based Compensation (continued)

Restricted stock and unit awards:

A summary of changes in the Company’s nonvested restricted stock, restricted stock unit and performance stock unit awards as of December 31, 2022, 2021 and 2020 is presented below:


	December 31,
	2022		2021		2020
Outstanding, beginning		97,107		102,489		106,826
Granted*		35,525		38,360		34,559
Released		(47,766)		(43,691)		(37,296)
Forfeited		(751)		(51)		(1,600)
Outstanding, ending		84,115		97,107		102,489

Weighted average fair value per share granted	$	54.20	$	45.18	$	39.39

* At December 31, 2022, includes 8,527 shares of restricted stock, 64,494 restricted stock units.

At December 31, 2021, includes 12,412 shares of restricted stock and 25,948 restricted stock units.

At December 31, 2020, includes 8,913 shares of restricted stock and 25,646 restricted stock units.

The total grant value of restricted stock, restricted stock unit and performance share unit awards that were released during the years ended December 31, 2022, 2021 and 2020 was $2.6 million, $1.9 million and $1.4 million, respectively.

Employee stock purchase plan:

In October 2002, the Company’s Board of Directors and its stockholders adopted the QCR Holdings, Inc. Employee Stock Purchase Plan (the “Prior Purchase Plan”) which was amended and restated on May 2, 2012 and terminated on July 1, 2022. On May 19, 2022, the Company’s stockholders approved the QCR Holdings, Inc. 2022 Stock Purchase Plan (the “2022 Purchase Plan”). The 2022 Purchase Plan has an effective date of July 1, 2022 and a share reserve equal to 350,000 shares plus the shares remaining under the Prior Purchase Plan immediately prior to its termination. As of January 1, 2023, there were 382,765 shares of common stock available for issuance under the Purchase Plan. For each six-month offering period, the Board of Directors will determine how many of the total number of available shares will be offered. The purchase price is the lesser of 85% or the fair market value at the date of the grant or the investment date. The investment date, as established by the Board of Directors, is the date common stock is purchased after the end of each calendar quarter during an offering period. The maximum dollar amount any one participant can elect to contribute in a year is $21,250. Additionally, the maximum percentage that any one participant can elect to contribute is 15% of his or her compensation for the years ended December 31, 2022, 2021 and 2020. Information for the stock purchase plan for the years ended December 31, 2022, 2021 and 2020 is presented below:


	2022		2021		2020
Shares granted		28,421		28,396		38,738
Shares purchased		27,103		30,543		37,114
Weighted average fair value per share granted	$	7.88	$	7.67	$	6.03

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Notes to Consolidated Financial Statements

Note 17. Regulatory Capital Requirements and Restrictions on Dividends

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

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

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


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

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

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Notes to Consolidated Financial Statements

Note 17. Regulatory Capital Requirements and Restrictions on Dividends (continued)


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

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

The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.

The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the subsidiary banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice.

The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debentures in four private placements and assumed four issues of junior subordinated debentures in connection with the acquisitions. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. These circumstances did not exist at December 31, 2022 or 2021.

On February 13, 2020, the board of directors of the Company approved a share repurchase program under which the Company was authorized to repurchase, from time to time as the Company deemed appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. On May 19, 2022, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to an additional 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021. There were 970,000 and 293,153 shares of common stock purchased by the Company during the year ended December 31, 2022 and 2021, respectively. There were 935,915 shares of common stock remaining for repurchase as of December 31, 2022.

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Notes to Consolidated Financial Statements

Note 18. Earnings per Share

The following information was used in the computation of basic and diluted EPS for the years ended December 31, 2022, 2021, and 2020:




	2022		2021		2020
	(dollars in thousands, except per share data)

Net income	$	99,066	$	98,905	$	60,582


Basic EPS	$	5.94	$	6.30	$	3.84
Diluted EPS	$	5.87	$	6.20	$	3.80

Weighted average common shares outstanding		16,681,844		15,708,744		15,771,650
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan*		208,163		235,964		180,987
Weighted average common and common equivalent shares outstanding		16,890,007		15,944,708		15,952,637

* Excludes anti-dilutive shares of 1,706, 0 and 104,636 at December 31, 2022, 2021 and 2020, respectively.

Note 19. Commitments and Contingencies

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary banks upon extension of credit, is based upon management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the subsidiary banks would be required to fund the commitments. The maximum potential amount of future payments the subsidiary banks could be required to make is represented by the contractual amount. If the commitment is funded, the subsidiary banks would be entitled to seek recovery from the customer. At December 31, 2022 and 2021, no amounts had been recorded as liabilities for the subsidiary banks’ potential obligations under these guarantees.

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Notes to Consolidated Financial Statements

Note 19. Commitments and Contingencies (continued)

The Company has also executed contracts for the sale of mortgage loans in the secondary market in the amount of $1.5 million and $3.8 million as of December 31, 2022 and 2021, respectively. These amounts are included in loans held for sale at the respective balance sheet dates.

Residential mortgage loans sold to investors in the secondary market are sold with varying recourse provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by the seller in situations such as breach of representation, warranty, or covenant, untimely document delivery, false or misleading statements, failure to obtain certain certificates of insurance, unmarketability, etc. Certain loan sales agreements contain repurchase requirements based on payment-related defects that are defined in terms of the number of days/months since the purchase, the sequence number of the payment, and/or the number of days of payment delinquency. Based on the specific terms stated in the agreements of investors purchasing residential mortgage loans from the Company’s subsidiary banks, the Company had $14.5 million and $20.8 million of sold residential mortgage loans with recourse provisions still in effect at December 31, 2022 and 2021, respectively. The subsidiary banks did not repurchase any loans from secondary market investors under the terms of loans sales agreements during the years ended December 31, 2022, 2021, and 2020. In the opinion of management, the risk of recourse and the subsequent requirement of loan repurchase to the subsidiary banks is not significant, and accordingly no liabilities have been established related to such.

Aside from cash on-hand and in-vault, the majority of the Company’s cash is maintained at upstream correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal funds sold exceeded federal insured limits by approximately $67.7 million and $48.2 million as of December 31, 2022 and 2021, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks.

In an arrangement with Goldman Sachs, CRBT offers a cash management program for select customers. Based on a predetermined minimum balance, which must be maintained in the customer’s account, excess funds are automatically swept daily to an institutional money market fund administered by Goldman Sachs. At December 31, 2022 and 2021, the Company had $69.4 million and $107.0 million, respectively of customer funds invested in this cash management program. In the opinion of management, no material risk of loss exists due to the financial condition of Goldman Sachs. As of December 31, 2022 and 2021, there were $5.3 million and $31.5 million of investment securities pledged on the Goldman Sachs program, respectively, as a cover to the swap exposure.

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Notes to Consolidated Financial Statements

Note 20. Parent Company Only Financial Statements

The following is condensed financial information of QCR Holdings, Inc. (parent company only):

Condensed Balance Sheets
December 31, 2022 and 2021


	2022		2021
	(dollars in thousands)
Assets
Cash and due from banks	$	84,172	$	41,531
Interest-bearing deposits at financial institutions		—		5,750
Investment in bank subsidiaries		965,973		769,628
Investment in nonbank subsidiaries		7,196		5,341
Premises and equipment, net		9,639		8,632
Other assets		10,157		7,716
Total assets	$	1,077,137	$	838,598

Liabilities and Stockholders' Equity
Liabilities:
Subordinated notes	$	232,662	$	113,850
Junior subordinated debentures		48,602		38,155
Other liabilities		23,149		9,583
Total liabilities		304,413		161,588

Stockholders' Equity:
Common stock		16,796		15,613
Additional paid-in capital		370,712		273,768
Retained earnings		450,114		386,077
Accumulated other comprehensive income (loss)		(64,898)		1,552
Total stockholders' equity		772,724		677,010
Total liabilities and stockholders' equity	$	1,077,137	$	838,598

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 20. Parent Company Only Financial Statements (continued)

Condensed Statements of Income
Years Ended December 31, 2022, 2021, and 2020


	2022		2021		2020
	(dollars in thousands)

Total interest income	$	26	$	3	$	29
Equity in net income of bank subsidiaries		128,941		117,408		79,624
Equity in net income (loss) of nonbank subsidiaries		1,294		456		(261)
Other		(53)		853		289
Total income		130,208		118,720		79,681

Interest expense		11,836		8,482		6,662
Salaries and employee benefits		15,551		12,446		11,825
Professional fees		1,789		1,983		2,558
Acquisition costs		3,715		624		—
Post-acquisition compensation, transition and integration costs		5,526		—		145
Disposition costs		—		13		312
Goodwill impairment		—		—		500
Other		3,331		2,784		2,505
Total expenses		41,748		26,332		24,507

Income before income tax benefit		88,460		92,388		55,174

Income tax benefit		10,606		6,517		5,408
Net income	$	99,066	$	98,905	$	60,582

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 20. Parent Company Only Financial Statements (continued)

Condensed Statements of Cash Flows
Years Ended December 31, 2022, 2021, and 2020


	2022		2021		2020
	(dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	99,066	$	98,905	$	60,582
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Earnings of bank subsidiaries		(128,941)		(117,408)		(79,624)
(Earnings) losses of nonbank subsidiaries		(1,294)		(456)		261
Distributions from bank subsidiaries		36,000		—		—
Distributions from nonbank subsidiaries		40		30		40
Deferred income taxes		(2,443)		(1,093)		6,909
Accretion of acquisition fair value adjustments		137		321		378
Depreciation		477		486		454
Deferred compensation expense accrued		4,062		573		—
Stock-based compensation expense		2,438		2,352		2,150
Loss on sale of subsidiary		—		—		158
Gain on sale of fixed assets		—		155		—
Goodwill impairment		—		—		500
Decrease (increase) in other assets		621		5		(7,380)
Increase (decrease) in other liabilities		10,827		(14,702)		(5,923)
Net cash provided by (used in) operating activities		20,990		(30,832)		(21,495)

Cash Flows from Investing Activities:
Net increase (decrease) in interest-bearing deposits at financial institutions		5,950		1,450		(1,599)
Capital infusion, non-bank subsidiaries		(300)		(375)		—
Net cash received in dissolution of subsidiary		—		—		8,450
Net cash paid for acquisitions		(26,039)		—		—
Net cash received in sale of subsidiary		—		—		195
Purchase of premises and equipment		(1,484)		(31)		(272)
Net cash provided by (used in) investing activities		(21,873)		1,044		6,774

Cash Flows from Financing Activities:
Proceeds from subordinated notes		100,000		—		50,000
Payment of cash dividends		(3,944)		(3,793)		(3,779)
Proceeds from issuance of common stock, net		422		670		1,360
Repurchase and cancellation of shares		(52,954)		(14,168)		(3,779)
Net cash provided by (used in) financing activities		43,524		(17,291)		43,802

Net increase (decrease) in cash and due from banks		42,641		(47,079)		29,081

Cash and due from banks:
Beginning		41,531		88,610		59,529
Ending	$	84,172	$	41,531	$	88,610

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 21. Fair Value

Accounting guidance on fair value measurements 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 measured at fair value on a recurring basis comprised the following at December 31, 2022 and 2021:


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

	(dollars in thousands)
December 31, 2022:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	16,981	$	—	$	16,981	$	—
Residential mortgage-backed and related securities		66,215		—		66,215		—
Municipal securities		193,178		—		193,178		—
Asset-backed securities		18,728		—		18,728		—
Other securities		45,858		—		45,858		—
Derivatives		177,631		—		177,631		—
Total assets measured at fair value	$	518,591	$	—	$	518,591	$	—

Derivatives	$	200,701	$	—	$	200,701	$	—
Total liabilities measured at fair value	$	200,701	$	—	$	200,701	$	—


December 31, 2021:
Securities AFS:
U.S. govt. sponsored agency securities	$	23,328	$	—	$	23,328	$	—
Residential mortgage-backed and related securities		94,323		—		94,323		—
Municipal securities		168,266		—		168,266		—
Asset-backed securities		27,124		—		27,124		—
Other securities		24,789		—		24,789		—
Derivatives		222,220		—		222,220		—
Total assets measured at fair value	$	560,050	$	—	$	560,050	$	—

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

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).

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Notes to Consolidated Financial Statements

Note 21. Fair Value (continued)

Interest rate caps, swaps and collars are used for the purpose of hedging interest rate risk on various financial assets and liabilities. See Note 7 to the Consolidated Financial Statements for the details of these instruments. Interest rate swaps are also executed for select commercial customers. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Assets measured at fair value on a non-recurring basis comprised the following at December 31, 2022 and 2021:


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

	(dollars in thousands)

December 31, 2022:
Loans/leases evaluated individually	$	30,765	$	—	$	—	$	30,765
OREO		144		—		—		144
	$	30,909	$	—	$	—	$	30,909

December 31, 2021:
Loans/leases evaluated individually	$	6,618	$	—	$	—	$	6,618

Loans/leases evaluated individually are valued at the lower of cost or fair value and are classified as a 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 may be 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 a Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. 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.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 21. Fair Value (continued)

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


	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	December 31,		December 31,
	2022		2021		Valuation Technique	Unobservable Input	Range

	(dollars in thousands)

Loans/leases evaluated individually	$	30,765	$	6,618	Appraisal of collateral	Appraisal adjustments	-10.00	%	to	-30.00	%
OREO		144		—	Appraisal of collateral	Appraisal adjustments	0.00	%	to	-35.00	%

For 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 measured at fair value during the years ended December 31, 2022 or 2021.

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company’s consolidated balance sheet, 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 December 31, 2022				As of December 31, 2021
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value

		(dollars in thousands)

Cash and due from banks	Level 1	$	59,723	$	59,723	$	37,490	$	37,490
Federal funds sold	Level 2		56,910		56,910		12,370		12,370
Interest-bearing deposits at financial institutions	Level 2		67,360		67,360		75,292		75,292
Investment securities:
HTM	Level 2		587,142		535,636		472,385		522,297
AFS	Level 2		340,960		340,960		337,830		337,830
Loans/leases receivable, net	Level 3		28,486		30,765		6,128		6,618
Loans/leases receivable, net	Level 2		6,022,679		5,896,443		4,595,283		4,478,899
Derivatives	Level 2		177,631		177,631		222,220		222,220

Deposits:
Nonmaturity deposits	Level 2		5,199,633		5,199,633		4,501,424		4,501,424
Time deposits	Level 2		784,584		766,294		421,348		419,453
Short-term borrowings	Level 2		129,630		129,630		3,800		3,800
FHLB advances	Level 2		415,000		415,000		15,000		15,000
Subordinated notes	Level 2		232,662		250,613		113,850		116,203
Junior subordinated debentures	Level 2		48,602		41,545		38,155		31,072
Derivatives	Level 2		200,701		200,701		225,135		225,135

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 22. Business Segment Information

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

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

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

Selected financial information on the Company’s business segments is presented as follows as of and for the years ended December 31, 2022, 2021, and 2020:


	Commercial Banking										Intercompany		Consolidated
	QCBT		CRBT		CSB		GB*		All other		Eliminations		Total

	(dollars in thousands)

Year Ended December 31, 2022
Total revenue	$	103,621	$	128,070	$	54,129	$	87,880	$	131,922	$	(132,322)	$	373,300
Net interest income		71,604		65,392		40,781		63,734		(11,779)		1,388		231,120
Provision for loan/lease losses		1,073		(961)		(1,335)		9,507		—		—		8,284
Net income (loss) from continuing operations		33,850		53,576		17,225		24,289		100,303		(130,177)		99,066
Goodwill		3,223		14,980		9,888		109,516		—		—		137,607
Intangibles		—		1,225		2,027		13,507		—		—		16,759
Total assets		2,312,013		2,185,500		1,297,812		2,146,474		1,086,351		(1,079,313)		7,948,837

Year Ended December 31, 2021
Total revenue	$	88,689	$	129,080	$	43,945	$	38,342	$	119,451	$	(118,930)	$	300,577
Net interest income		66,232		57,354		35,512		26,351		(8,479)		1,263		178,233
Provision for loan/lease losses		1,519		(697)		2,219		445		—		—		3,486
Net income (loss) from continuing operations		34,616		55,411		12,802		14,579		99,331		(117,834)		98,905
Goodwill		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		1,702		2,653		4,994		—		—		9,349
Total assets		2,142,344		2,030,279		1,168,606		882,885		845,120		(973,102)		6,096,132

Year Ended December 31, 2020
Total revenue	$	92,336	$	125,416	$	50,448	$	42,036	$	2,197	$	(262)	$	312,171
Net interest income		63,366		52,857		31,570		24,759		(6,633)		1,031		166,950
Provision for loan/lease losses		21,612		19,438		9,243		5,411		—		—		55,704
Net income (loss) from continuing operations		21,557		33,890		11,379		12,797		(19,041)		—		60,582
Goodwill		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		2,189		3,305		5,887		—		—		11,381
Total assets		2,153,773		1,957,695		1,004,183		779,956		134,407		(324,971)		5,705,043

* On April 1, 2022, the Company acquired GFED and merged its subsidiary bank, Guaranty Bank, into Springfield First Community Bank with the combined bank operating under the Guaranty Bank name.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. 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) as of December 31, 2022. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was: (1) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures; and (2) recorded, processed, summarized and reported as and when required.

Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting includes controls and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

The Company’s management has excluded Guaranty Bank from its assessment of internal control over financial reporting from April 1, 2022 through October 10, 2022 because it was acquired by the Company in a purchase business combination on April 1, 2022 and its systems merged into the Company’s on October 11, 2022.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. Management’s assessment is based on the criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and was designed to provide reasonable assurance that the Company maintained effective internal control over financial reporting as of December 31, 2022. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2022.

RSM US LLP, the Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2022, which is included on the following pages of this Form 10-K.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of QCR Holdings, Inc.

Opinion on the Internal Control Over Financial Reporting

We have audited QCR Holdings, Inc.'s and its subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company which comprise the consolidated balance sheets as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements and our report dated March 1, 2023, expressed an unqualified opinion.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Guaranty Bank from its assessment of internal control over financial reporting from April 1, 2022 through October 10, 2022 because it was acquired by the Company in a purchase business combination on April 1, 2022 and its systems merged into the Company’s on October 11, 2022. We have also excluded Guaranty Bank from our audit of internal control over financial reporting for the period from April 1, 2022 through October 10, 2022. Guaranty Bank represented approximately 19.7% of the Company’s consolidated assets as of the acquisition date.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ RSM US LLP

Davenport, Iowa

March 1, 2023

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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 like to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.

Not Applicable.

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Part III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is set forth under the captions “Proposal 1: Election of Directors,” “Corporate Governance and the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2023 Proxy Statement and is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this item is set forth under the captions “Executive Compensation” and “Director Compensation” in the Company’s 2023 Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is set forth under the caption “Security Ownership of Certain Beneficial Owners” in the Company’s 2023 Proxy Statement and is incorporated herein by reference.

The table below sets forth the following information as of December 31, 2022 for (i) all compensation plans previously approved by the Company’s stockholders and (ii) all compensation plans not previously approved by the Company’s stockholders:

(a)

The number of securities to be issued upon the exercise of outstanding options, warrants, and rights;

(b)

The weighted-average exercise price of such outstanding options, warrants, and rights; and

(c)

Other than securities to be issued upon the exercise of such outstanding options, warrants, and rights, the number of securities remaining available for future issuance under the plans.


	EQUITY COMPENSATION PLAN INFORMATION
					Number of securities remaining
	Number of securities to be				available for future issuance
	issued upon exercise of		Weighted-average exercise price		under equity compensation
	outstanding options, warrants,		of outstanding options,		plans (excluding securities
Plan category	and rights		warrants, and rights (1)		reflected in column (a))
	(a)			(b)	(c)
Equity compensation plans approved by stockholders	428,614	(2)	$	27.82	483,036	(3)

Equity compensation plans not approved by stockholders	—			—	—

Total	428,614	(2)	$	27.82	483,036	(3)

(1)

The weighted average exercise price only relates to outstanding option awards.

(2)

Includes 346,678 outstanding option awards and 69,494 outstanding restricted stock units and 6,094 performance share units granted under the Equity Plans.

(3)

Includes 132,375 and 61,186 shares available under the QCR Holdings, Inc. 2016 Equity Incentive Plan and QCR Holdings, Inc. Employee Stock Purchase Plan.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is set forth under the captions “Corporate Governance and the Board of Directors” and “Transactions with Management and Directors” in the Company’s 2023 Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this item is set forth under the caption “Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s 2023 Proxy Statement and is incorporated herein by reference.

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a)

1. Financial Statements

These documents are listed in the Index to Consolidated Financial Statements under Item 8.

(a)

2. Financial Statement Schedules

Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the Consolidated Financial Statements and the accompanying notes thereto.

(a)

3. Exhibits

The following exhibits are either filed as a part of this Annual Report on Form 10-K or are incorporated herein by reference:

Exhibit Number		Exhibit Description


3.1		Certificate of Incorporation of QCR Holdings, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q/A Amendment No. 1 for the period ended September 30, 2011).

3.2		Bylaws of QCR Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on August 19, 2022).

4.1		Certain instruments defining the rights of holders of long-term debt of the Company, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the Securities and Exchange Commission upon request.

4.2		Description of the Company’s Securities (incorporated by reference to Exhibit 4.2 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).

10.1		Dividend Reinvestment Plan of QCR Holdings, Inc. (incorporated by reference to Exhibit 99.1 of Company’s Form S-3D, File No. 333-102699 dated January 24, 2003).

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10.2+		Amended and Restated Executive Deferred Compensation Plan Participation Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 19, 2013 (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.3+		Amended and Restated Executive Deferred Compensation Plan Participation Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 19, 2013 (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.4+		Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 31, 2008 (incorporated by reference to Exhibit 10.29 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
10.5+		Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 31, 2008 (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.6+		QCR Holdings, Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A dated March 21, 2012).

10.7+		QCR Holdings, Inc. 2013 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A dated March 20, 2013).

10.8+		Form of Participation Agreement under the QCR Holdings, Inc. Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).

10.9+		QCR Holdings, Inc. 2016 Equity Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A filed on April 1, 2016).

10.10+		QCR Holdings, Inc., Non-Qualified Supplemental Executive Retirement Plan, as amended and restated December 22, 2016 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 28, 2016).

10.11+		Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between Quad City Bank and Trust Company and John H. Anderson dated December 22, 2016 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on December 28, 2016).

10.12+		Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 4.5 of the Company’s Form S-8 filed on October 27, 2016 (File No. 333-214282)).

10.13+		Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 4.6 of the Company’s Form S-8 filed on October 27, 2016 (File No. 333-214282)).


10.14+		Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.7 of the Company’s Form S-8 filed on October 27, 2016 (File No. 333-214282)).

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10.15+		Employment Agreement, dated November 19, 2018, between QCR Holdings, Inc. and Larry Helling (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed November 19, 2018).
10.16+		Employment Agreement, dated November 19, 2018, between QCR Holdings, Inc. and Todd Gipple (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed November 19, 2018).

10.17+		Employment Agreement, dated January 9, 2019, between QCR Holdings, Inc., Quad City Bank and Trust Company, and John Anderson (incorporated by reference to Exhibit 10.37 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).

10.18+		Executive Deferred Compensation Plan Participation Agreement, dated December 16, 2016, between Quad City Bank and Trust Company and John Anderson (incorporated by reference to Exhibit 10.38 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).

10.19+		QCR Holdings, Inc. 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A dated March 22, 2010).

10.20+		QCR Holdings, Inc. 2022 Employee Stock Purchase Plan (incorporated by reference to Appendix A to QCRH Holdings, Inc.’s Proxy Statement on Form DEF 14A filed with the Commission on April 8, 2022).

10.21+		QCR Holdings Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).

21.1		Subsidiaries of QCR Holdings, Inc. (filed herewith).

23.1		Consent of Independent Registered Public Accounting Firm - RSM US LLP (filed herewith).

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

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

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 (filed herewith).

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 (filed herewith).

101		Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at December 31, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the years ended December 31, 2022, December 31, 2021 and December 31, 2020; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022, December 31, 2021, and December 31, 2020; (iv) Consolidated Statements of Changes in Stockholders; Equity for the years ended December 31, 2022, December 31, 2021 and December 31, 2020; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2022, December 31, 2021 and December 31, 2020; and (vi) Notes to Consolidated Financial Statements.

104		Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibit 101).

+		A compensatory arrangement.

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*		QCR Holdings, Inc. has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b) of Regulation S-K. QCR Holdings, Inc. will furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

Item 16. Form 10-K Summary

None

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	QCR HOLDINGS, INC.

Dated: March 1, 2023	By:	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer

Dated: March 1, 2023	By:	/s/ Todd A. Gipple
		Todd A. Gipple
		President, Chief Operating Officer and Chief Financial Officer

Dated: March 1, 2023	By:	/s/ Nick W. Anderson
		Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

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SIGNATURES


Signature	Title	Date

/s/ Marie Ziegler	Chair of the Board of Directors	March 1, 2023
Marie Ziegler

/s/ James Field	Vice-Chair of the Board of Directors	March 1, 2023
James Field

/s/ Larry J. Helling	Chief Executive Officer and Director	March 1, 2023
Larry J. Helling

/s/ John Paul E. Besong	Director	March 1, 2023
John Paul E. Besong

/s/ Todd A. Gipple	President, Chief Operating Officer	March 1, 2023
Todd A. Gipple	Chief Financial Officer and Director

/s/ Mary Kay Bates	Director	March 1, 2023
Mary Kay Bates

/s/ Mark C. Kilmer	Director	March 1, 2023
Mark C. Kilmer

/s/ John Griesemer	Director	March 1, 2023
John Griesemer

/s/ Brent R. Cobb	Director	March 1, 2023
Brent R. Cobb

/s/ Elizabeth S. Jacobs	Director	March 1, 2023
Elizabeth S. Jacobs

/s/ Donna J. Sorensen, J.D.	Director	March 1, 2023
Donna J. Sorensen, J.D.

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Appendix A

SUPERVISION AND REGULATION

General

FDIC-insured institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Iowa Division of Banking, the Missouri Division of Finance, the Federal Reserve, the FDIC and the CFPB. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board, securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the Treasury have an impact on the business of the Company. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the Company’s operations and results.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than stockholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of the Company’s business, the kinds and amounts of investments the Company and the Banks may make, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Company’s and the Banks’ insiders and affiliates and the Company’s payment of dividends.

In reaction to the global financial crisis and particularly following the passage of the Dodd-Frank Act, the Company experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused the Company’s compliance and risk management processes, and the costs thereof, to increase. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (“Regulatory Relief Act”) eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving the Company of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. These reforms have been favorable to the Company’s operations.

The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Banks. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

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The Role of Capital

Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions generally are required to hold more capital than other businesses, which directly affects the Company’s earnings capabilities. Although capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress.

Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of “capital” divided by “total assets.” The capital guidelines for U.S. banks beginning in 1989 have been based upon international capital accords (known as “Basel” rules) adopted by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accords recognized that bank assets for the purpose of the capital ratio calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations. Following the global financial crisis, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.

The Basel III Rule. The United States bank regulatory agencies adopted the Basel III regulatory capital reforms, and, at the same time, effected changes required by the Dodd-Frank Act, in regulations that were effective (with certain phase-ins) in 2015 (the “Basel III Rule”). Basel III established capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously: it increased the required quantity and quality of capital; and it required a more complex, detailed and calibrated assessment of risk in the calculation of risk weightings.

The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to most bank and savings and loan holding companies. The Company and the Banks are each subject to the Basel III Rule.

Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but in requiring that forms of capital be of higher quality to absorb loss, it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and required deductions from Common Equity Tier 1 Capital in the event that such assets exceeded a percentage of a banking institution’s Common Equity Tier 1 Capital.

The Basel III Rule requires minimum capital ratios as follows:

●

A ratio of Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;

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●

A ratio of Tier 1 Capital equal to 6% of risk-weighted assets;

●

A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and

●

A leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

Well-Capitalized Requirements. The ratios described above are minimum standards for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Under the capital regulations of the Federal Reserve, in order to be well-capitalized, a banking organization must maintain:

●

A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;

●

A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;

●

A ratio of Total Capital to total risk-weighted assets of 10% or more; and

●

A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.

It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.

As of December 31, 2022: (i) none of the Banks was subject to a directive from the Iowa Division of Banking, the Missouri Division of Finance, or the Federal Reserve, as applicable, to increase its capital and (ii) the Banks were well-capitalized, as defined by Federal Reserve regulations. As of December 31, 2022, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized. The Company also is in compliance with the capital conservation buffer.

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Prompt Corrective Action. The concept of an institution being “well-capitalized” is part of a regulatory enforcement regime that provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of depository institutions based on the capital level of each particular institution. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp” for institutions, like the Company, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8 and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The Company may elect the CBLR framework at any time but has not currently determined to do so.

Supervision and Regulation of the Company

General. The Company, as the sole stockholder of the Banks, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation, supervision and enforcement by, the Federal Reserve under the BHCA. The Company is legally obligated to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require.

Acquisitions, Activities and Financial Holding Company Election. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “—The Role of Capital” above.

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The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority permits the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity, as long as the activity does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. The Company has elected to operate as a financial holding company.

In order to maintain its status as a financial holding company, the Company and the Banks must be well-capitalized, well-managed, and the Banks must have a least a satisfactory CRA rating. If the Federal Reserve determines that a financial holding company is not well-capitalized or well-managed, the Federal Reserve will provide a period of time in which to achieve compliance, but, during the period of noncompliance, the Federal Reserve may place any limitations on the Company that it deems appropriate. Furthermore, if the Federal Reserve determines that a financial holding company’s subsidiary bank has not received a satisfactory CRA rating, that company will not be able to commence any new financial activities or acquire a company that engages in such activities.

Change in Control. Federal law prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements. For a discussion of capital requirements, see “—The Role of Capital” above.

Dividend Payments. The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the Company is subject to the limitations of the DGCL, which allow the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to stockholders if: (i) the company’s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is

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inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above.

Incentive Compensation. There have been a number of developments in recent years focused on incentive compensation plans sponsored by bank holding companies and banks, reflecting recognition by the bank regulatory agencies and Congress that flawed incentive compensation practices in the financial industry were one of many factors contributing to the global financial crisis. Layered on top of that are the abuses in the headlines dealing with product cross-selling incentive plans. The result is interagency guidance on sound incentive compensation practices.

The interagency guidance recognized three core principles. Effective incentive plans should: (i) provide employees incentives that appropriately balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Much of the guidance addresses large banking organizations and, because of the size and complexity of their operations, the regulators expect those organizations to maintain systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation arrangements for all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards. Smaller banking organizations, like the Company, that use incentive compensation arrangements are expected to be less extensive, formalized, and detailed than those of the larger banks.

Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities and changes in the discount rate on bank borrowings. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Exchange Act. Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. It increased stockholder influence over boards of directors by requiring companies to give stockholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

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Supervision and Regulation of the Banks

General. The Company owns four subsidiary banks: QCBT, CRBT and CSB are chartered under Iowa law (collectively, the “Iowa Banks”) and GB is chartered under Missouri law. The deposit accounts of the Banks are insured by the FDIC’s DIF to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category. All four of the Company’s subsidiary banks are members of the Federal Reserve System (“member banks”). QCBT owns QCIA, a registered investment adviser, as a wholly-owned subsidiary.

As Iowa-chartered, FDIC-insured banks, the Iowa Banks are subject to the examination, supervision, reporting and enforcement requirements of the Iowa Division of Banking, as the chartering authority for Iowa banks. As a Missouri-chartered, FDIC-insured bank, GB is subject to the examination, supervision, reporting and enforcement requirements of the Missouri Division of Finance, as the chartering authority for Missouri banks. All four of the Company’s subsidiary banks also are subject to the examination, reporting and enforcement requirements of the Federal Reserve, as the primary federal regulator of member banks. In addition, the FDIC, as administrator of the DIF, has regulatory authority over the Banks.

Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. For institutions like the Banks that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking.

The reserve ratio is the DIF balance divided by estimated insured deposits. In response to the global financial crisis, the Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35% of the estimated amount of total insured deposits. The reserve briefly exceed the statutory threshold, but because of extraordinary insured deposit growth caused by an unprecedented inflow of deposits during the pandemic, the reserve ratio fell below 1.35% and continues to be below the threshold. The FDIC staff closely monitors the factors that affect the reserve ratio, and, in order to raise the reserve ratios to 1.35% by September 30, 2028, the FDIC increased the initial deposit insurance rates by two basis points, beginning with the first quarterly assessment period of the 2023 assessment. As a result of this change, the Bank’s FDIC insurance assessment will increase beginning in 2023.

The DIF balance was approximately $125.5 billion on September 30, 2022, up $1.0 billion from the end of the second quarter. The reserve ratio remained at 1.26%, as growth in the fund balance kept pace with growth in insured deposits. The FDIC staff continues to closely monitor the factors that affect the reserve ratio, and any change could impact FDIC assessments.

Supervisory Assessments. Each of the Banks is required to pay supervisory assessments to its respective state banking regulator to fund the operations of that agency. The amount of the assessment payable by each Bank is calculated on the basis of that Bank’s total assets. During the year ended December 31, 2022, the Iowa Banks paid supervisory assessments to the Iowa Division of Banking totaling $323,165 and GB paid supervisory assessments to the Missouri Division of Finance totaling $73,895.

Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “—The Role of Capital” above.

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Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio or LCR, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the net stable funding ratio or NSFR, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).

In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the NSFR. While these rules do not, and will not, apply to the Banks, they continue to review their liquidity risk management policies in light of developments.

Liability of Commonly Controlled Institutions. Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in danger of default. Because the Company controls each of the Banks, the Banks are commonly-controlled for purposes of these provisions of federal law.

Dividend Payments. The primary source of funds for the Company is dividends from the Banks. In general, the Banks may only pay dividends either out of their historical net income after any required transfers to surplus or reserves have been made or out of their retained earnings. The Federal Reserve Act also imposes limitations on the amount of dividends paid by state member banks, such as the Banks. Without Federal Reserve approval, a state member bank may not pay dividends in any calendar year that, in the aggregate, exceed that bank’s calendar year-to-date net income plus the bank’s retained income for the two preceding calendar years.

The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Banks exceeded its minimum capital requirements under applicable guidelines as of December 31, 2022. Notwithstanding the availability of funds for dividends, however, the Federal Reserve, the FDIC, the Missouri Division of Finance or the Iowa Division of Banking, as applicable, may prohibit the payment of dividends by one of the Banks if it determines such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay unrestricted dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above.

State Bank Investments and Activities. The Banks are permitted to make investments and engage in activities directly or through subsidiaries as authorized by Iowa or Missouri law, as applicable. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain

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exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Banks.

Insider Transactions. The Banks are subject to certain restrictions imposed by federal law on “covered transactions” between each Bank and its “affiliates.” The Company is an affiliate of the Banks for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by any of the Banks. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by each Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company and to “related interests” of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms on which any person who is a director or officer of the Company or the Banks, or a principal stockholder of the Company, may obtain credit from banks with which any of the Banks maintains a correspondent relationship.

Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The standards apply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. Although regulatory standards do not have the force of law, if an institution operates in an unsafe and unsound manner, the FDIC-insured institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates that the institution pays on deposits, or require the institution to take any action that the regulator deems appropriate under the circumstances. Noncompliance with safety and soundness also may constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions that they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk. Each Bank is expected to have active board and

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senior management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and management information systems; and comprehensive internal controls.

Privacy and Cybersecurity. The Banks are subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers. These laws require each Bank to periodically disclose its privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances. They also impact each Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, the Banks are required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures are in effect across all businesses and geographic locations.

Branching Authority. The Iowa Banks have the authority under Iowa law to establish branches anywhere in the State of Iowa, subject to receipt of all required regulatory approvals. Similarly, GB has the authority under Missouri law to establish branches anywhere in the State of Missouri, subject to receipt of all required regulatory approvals. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or acquire individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments. In addition, federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.

Transaction Account Reserves. Federal law requires FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts) to provide liquidity. The amount of reserves is established by the Federal Reserve based on tranches of zero, three and ten percent of a bank’s transaction account deposits. However, in March 2020, in an unprecedented move, the Federal Reserve announced that the banking system had ample reserves, and, as reserve requirements no longer played a significant role in this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the legally mandated reserve maintenance requirement. The action permits the Banks to loan or invest funds that were previously unavailable. The Federal Reserve has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.

Federal Home Loan Bank System. The Banks are each a member of the FHLB, which serves as a central credit facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.

Community Reinvestment Act Requirements. The CRA requires the Banks to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess each Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements. In May 2022, the bank regulatory agencies issued a notice of proposed rulemaking called the Joint Proposal to Strengthen and Modernize Community Reinvestment Act Regulations (the “CRA Proposal”). The CRA Proposal is designed to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. More specifically, the bank regulatory agencies described the goals of the CRA Proposal as follows: (i) to expand access to credit, investment and basic banking services in low and moderated income communities; (ii) to adapt to changes in the banking industry, including mobile and

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internet banking by modernizing assessment areas while maintaining a focus on branch based areas; (iii) to provide greater clarity, consistency, and transparency in the application of the regulations through the use of standardized metrics as part of CRA evaluation and clarifying eligible CRA activities focused on low-and moderate-income communities and under-served rural communities; (iv) to tailor CRA rules and data collection to bank size and business model; and (v) to maintain a unified approach among the regulators. A final rule has not yet been issued.

Anti-Money Laundering. The USA PATRIOT Act, the Bank Secrecy Act and other similar laws are designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and have significant implications for FDIC-insured institutions and other businesses involved in the transfer of money. These laws mandate financial services companies to have policies and procedures with respect to measures designed to address the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in CRE is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) CRE loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of CRE lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. As of December 31, 2022, QCBT, CRBT and GB were in compliance with the 300% guideline for commercial real estate loans. Although CSB’s loan portfolio has historically been real estate dominated and its real estate portfolio levels exceed these policy limits, it has established a Credit Risk Committee to routinely monitor its real estate portfolio.

Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Banks, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Banks, continue to be examined by their applicable bank regulators.

Because abuses in connection with residential mortgages were a significant factor contributing to the global financial crisis, many rules issued by the CFPB, as required by the Dodd-Frank Act, addressed mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to

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numerous disclosure requirements, the Dodd-Frank Act and the CFPB’s enabling rules imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The CFPB’s rules have not had a significant impact on any Bank operations, except for higher compliance costs.

Regulation of QCIA

QCIA provides financial investment services as part of the wealth management operations of the Company. QCIA is an investment adviser registered with the SEC. The SEC has supervisory, examination and enforcement authority over its operations. The SEC’s focus is primarily for the protection of investors under the federal securities laws.

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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

(dollars in thousands)

Federal funds purchased