QCR HOLDINGS INC

The following tables set forth the various categories of noninterest expense for the three and nine months ended September 30, 2024 and 2023:

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

Salaries and employee benefits, which is the largest component of noninterest expense, decreased 1% when comparing the third quarter of 2024 to the same period of the prior year and when comparing the first nine months of 2024 to the first nine months of 2023 due to lower variable compensation and lower FTEs.

Part I

Item 2

Occupancy and equipment expense decreased 1% comparing the third quarter of 2024 to the same period of the prior year, and increased 5% comparing the first nine months of 2024 to the first nine months of 2023. The increase was due to higher IT service contracts expense and depreciation.

Professional and data processing fees remained stable comparing the third quarter of 2024 to the same period of the prior year, and increased 15% comparing the first nine months of 2024 to the first nine months of 2023. The increase was due primarily to increased CDARS and ICS expenses as well as increased data processing expenses. 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.

Restructuring expenses totaled $2.0 million for the third quarter and first nine months of 2024 due to the decision to discontinue offering new loans and leases through m2. The charges consisted primarily of severance and retention compensation as well as vendor contract termination fees. There were no restructuring expenses in 2023.

There were no post-acquisition compensation, transition and integration costs in 2024, whereas such costs totaled $207 thousand in the first nine months of 2023. These costs were comprised primarily of IT integration and data conversion costs related to the acquisition of GFED.

FDIC insurance, other insurance and regulatory fee expense remained stable when comparing the third quarter of 2024 to the same period of the prior year, and increased 10% when comparing the first nine months of 2024 to the first nine months of 2023. The increase in expense for the first nine months of 2024 was due to asset growth and higher FDIC insurance rates.

Loan/lease expense decreased 29% when comparing the third quarter of 2024 to the same quarter of the prior year, and decreased 45% comparing the first nine months of 2024 to the first nine months of 2023. The decrease was due primarily to lower legal expense on loan workouts and higher recoveries of legal expenses incurred on loan workouts. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs, as NPLs have increased 1% since September 30, 2023.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from and gains/losses on operations of other real estate for the third quarter of 2024 totaled $42 thousand, compared to net cost of and gains/losses on operations of other real estate of $3 thousand for the third quarter of 2023. Net income from and gain/losses on operations of other real estate totaled $44 thousand for the first nine months of 2024, compared to net income from and gains/losses on operations of other real estate of $64 thousand for the first nine months of 2023.

Advertising and marketing expense increased 49% comparing the third quarter of 2024 to the same period of the prior year, and increased 18% comparing the first nine months of 2024 to the first nine months of 2023. The increase in expense compared to the linked quarter was primarily due to the increased marketing of our deposit products.

Communication and data connectivity expense decreased 30% comparing the third quarter of 2024 to the same period of the prior year, and decreased 35% comparing the first nine months of 2024 to the first nine months of 2023. The decrease was primarily due to improvements to our data center connectivity channels and a reduction in cell phone and air card expenses as the Company continues to improve operational efficiencies.

Supplies expense decreased 17% comparing the third quarter of 2024 to the same period of the prior year, and decreased 12% comparing the first nine months of 2024 to the first nine months of 2023. This decrease is primarily due to the timing of purchases.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, remained stable when comparing the third quarter of 2024 to the same period of the prior year,

Part I

Item 2

and decreased 2% comparing the first nine months of 2024 to the first nine months of 2023. As transaction volumes and the number of correspondent banking clients fluctuate, the associated expenses are expected to also fluctuate.

Correspondent banking expense increased 40% when comparing the third quarter of 2024 to the same period of the prior year, and increased 50% comparing the first nine months of 2024 to the first nine months of 2023. The increase in correspondent expenses includes planned costs for an upgraded safekeeping platform. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

Intangibles amortization expense remained stable when comparing the third quarter of 2024 to the same period of the prior year, and decreased 7% comparing the first nine months of 2024 to the first nine months of 2023. The amortization expense is due to the prior acquisitions. These expenses will naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.

Goodwill impairment expense totaled $432 thousand for the third quarter and for the first nine months of 2024 due to the decision to discontinue offering new loans and leases through m2. There was no goodwill impairment expense in 2023.

Payment card processing expense increased 7% when comparing the third quarter of 2024 to the same period of the prior year, and increased 17% comparing the first nine months of 2024 to the first nine months of 2023 due to an increased volume of transactions.

Trust expense decreased 9% when comparing the third quarter of 2024 to the same period of the prior year, and increased 22% comparing the first nine months of 2024 to the first nine months of 2023. The decrease in the third quarter of 2024 as compared of the same period of the prior year was primarily due to additional costs for the planned system conversions of the trust and tax accounting platforms that occurred during the third quarter of 2023. The increase in trust expense for the first nine months of 2024 was due to assets under management growth.

Other noninterest expense increased 39% when comparing the third quarter of 2024 to the same period of the prior year, and increased 16% comparing the first nine months of 2024 to the first nine months of 2023. The increase was primarily due to increased insurance claim loss reserves at our QCRH Risk Management micro captive entity. Included in other noninterest expense are items such as meals and entertainment, subscriptions and sales and use tax.