UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10‑Q~~10-Q

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

For the quarterly period ended ~~September~~June 30, ~~2018~~2019

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

For the transition period from ______to________

Commission file number 0‑22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

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

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 736‑3580

(Registrant's telephone number, including area code)

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

Yes [ 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [ 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 [ ]	Accelerated filer [ X ]		Non-accelerated filer [ ]
Smaller reporting company [ ]		Emerging growth company [ ]

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

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

Yes [ ] No [ X ]

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


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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of ~~November~~August 1, ~~2018,~~2019, the Registrant had outstanding ~~15,673,883~~15,779,717 shares of common stock, $1.00 par value per share.

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


					Page Number(s)
Part I		FINANCIAL INFORMATION

		Item 1		Consolidated Financial Statements (Unaudited)

				Consolidated Balance Sheets As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018	4

				Consolidated Statements of Income For the Three Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	5

				Consolidated Statements of Income For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	6

				Consolidated Statements of Comprehensive Income For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	7

				Consolidated Statements of Changes in Stockholders' Equity For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	8

				Consolidated Statements of Cash Flows For the ~~Nine Months~~Six months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	109

				Notes to Consolidated Financial Statements	1211

				Note 1. Summary of Significant Accounting Policies	1211
				Note 2. ~~Mergers and Acquisitions~~Investment Securities	1413
				Note 3. ~~Investment Securities~~Loans/Leases Receivable	17
				Note 4. ~~Loans/Leases Receivable~~Derivatives	2127
				Note 5. ~~Derivatives~~Borrowings	3128
				Note 6. Earnings Per Share	3229
				Note 7. Fair Value	3229
				Note 8. Business Segment Information	3532
				Note 9. Regulatory Capital Requirements	3633
~~Note10. Revenue Recognition~~	37
~~Note 11. Subsequent Events - Acquisition~~	38

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

				Introduction	35
				General	35
				Executive Overview	35
				Long-Term Financial Goals	37
				Strategic Developments	38
				GAAP to Non-GAAP Reconciliations	39

		~~Introduction~~Net Interest Income - (Tax Equivalent Basis)	39
~~General~~	39
~~Executive Overview~~	40
~~Long-Term Financial Goals~~	41
~~Strategic Developments~~	42
		~~GAAP to Non-GAAP Reconciliations~~Critical Accounting Policies	43
~~Net Interest Income (Tax Equivalent Basis)~~	45
				~~Critical Accounting Policies~~Goodwill	5145
				~~Results of Operations~~Allowance for Loan and Lease Losses	52
~~Interest Income~~	5246

Table of Contents


			Results of Operations	46
			Interest Income	46
			Interest Expense	5246
			Provision for Loan/Lease Losses	46
			Noninterest Income	47
			Noninterest Expense	50
			Income Taxes	52
			Financial Condition	53
			~~Noninterest Income~~Investment Securities	53
~~Noninterest Expense~~	56
~~Income Taxes~~	58
~~Financial Condition~~	58
~~Investment Securities~~	59
Loans/Leases	6054
			Allowance for Estimated Losses on Loans/Leases	6156
			Nonperforming Assets	6357
			Deposits	6358
			Borrowings	6458
			Stockholders' Equity	6560
			Liquidity and Capital Resources	6660
			Special Note Concerning Forward-Looking Statements	62

		Item 3	Quantitative and Qualitative Disclosures About Market Risk	64

		Item 4	Controls and Procedures	66

Part II		OTHER INFORMATION		67

~~Item 3 Quantitative and Qualitative Disclosures About Market Risk~~	69

		Item ~~4 Controls and Procedures~~1	Legal Proceedings	7167

		~~Part II OTHER INFORMATION~~Item 1A	Risk Factors	7267

~~Item 1 Legal Proceedings~~	72

Item ~~1A Risk Factors~~2	72

~~Item 2~~ Unregistered Sales of Equity Securities and Use of Proceeds	7267

		Item 3	Defaults upon Senior Securities	7267

		Item 4	Mine Safety Disclosures	7267

		Item 5	Other Information	7267

		Item 6	Exhibits	7368

Signatures				7469

Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1.1 to the Consolidated Financial Statements.

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018


					June 30,		December 31,
	September 30,		December 31,		2019		2018
	2018		2017		(dollars in thousands)
Assets
Cash and due from banks	$	73,406,657	$	75,721,663	$	87,919	$	85,523
Federal funds sold		33,070,000		30,197,000		10,215		26,398
Interest-bearing deposits at financial institutions		96,590,367		55,765,012		195,282		133,198

Securities held to maturity, at amortized cost		395,421,195		379,474,205		388,713		401,913
Securities available for sale, at fair value		255,323,442		272,907,907		255,090		261,056
Total securities		650,744,637		652,382,112		643,803		662,969

Loans receivable held for sale		2,557,907		645,001		4,180		1,295
Loans/leases receivable held for investment		3,650,828,460		2,963,840,399		3,906,339		3,731,459
Gross loans/leases receivable		3,653,386,367		2,964,485,400		3,910,519		3,732,754
Less allowance for estimated losses on loans/leases		(43,077,457)		(34,355,728)		(41,104)		(39,847)
Net loans/leases receivable		3,610,308,910		2,930,129,672		3,869,415		3,692,907

Bank-owned life insurance		67,443,063		59,059,494		68,735		67,783
Premises and equipment, net		73,828,512		62,838,255		78,887		75,582
Restricted investment securities		28,679,400		19,782,525		22,195		25,689
Other real estate owned, net		12,203,780		13,558,308		8,637		9,378
Goodwill		73,618,426		28,334,092		77,748		77,832
Core deposit intangible		16,136,914		9,078,953
Intangibles						16,089		17,450
Other assets		56,701,829		45,817,687		115,927		75,001
Total assets	$	4,792,732,495	$	3,982,664,773	$	5,194,852	$	4,949,710

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	802,090,334	$	789,547,696	$	795,951	$	791,102
Interest-bearing		2,986,186,588		2,477,107,360		3,526,559		3,185,929
Total deposits		3,788,276,922		3,266,655,056		4,322,510		3,977,031

Short-term borrowings		12,929,499		13,993,122		19,191		28,774
Federal Home Loan Bank advances		359,128,925		192,000,000		105,733		266,492
Other borrowings		73,950,426		66,000,000		—		67,250
Subordinated notes						68,274		4,782
Junior subordinated debentures		37,626,070		37,486,487		37,755		37,670
Other liabilities		63,433,264		53,242,979		137,089		94,573
Total liabilities		4,335,345,106		3,629,377,644		4,690,552		4,476,572


Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 September 2018 and December 2017- No shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 September 2018 - 15,673,760 shares issued and outstanding December 2017 - 13,918,168 shares issued and outstanding		15,673,760		13,918,168
Preferred stock, $1 par value; shares authorized 250,000 June 2019 and December 2018- No shares issued or outstanding						—		—
Common stock, $1 par value; shares authorized 20,000,000 June 2019 - 15,772,939 shares issued and outstanding December 2018 - 15,718,208 shares issued and outstanding						15,773		15,718
Additional paid-in capital		269,373,303		189,077,550		272,744		270,761
Retained earnings		179,826,524		151,962,661		216,741		192,203
Accumulated other comprehensive loss:
Accumulated other comprehensive income (loss):
Securities available for sale		(7,347,979)		(866,223)		2,412		(4,268)
Derivatives		(138,219)		(805,027)		(3,370)		(1,276)
Total stockholders' equity		457,387,389		353,287,129		504,300		473,138
Total liabilities and stockholders' equity	$	4,792,732,495	$	3,982,664,773	$	5,194,852	$	4,949,710

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended June 30, 2019 and 2018


	2019		2018
	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	47,515	$	35,408
Securities:
Taxable		1,678		1,594
Nontaxable		3,474		3,295
Interest-bearing deposits at financial institutions		1,168		228
Restricted investment securities		290		212
Federal funds sold		56		62
Total interest and dividend income		54,181		40,799

Interest expense:
Deposits		13,825		6,528
Short-term borrowings		81		63
Federal Home Loan Bank advances		601		1,019
Other borrowings		92		596
Subordinated notes		993		—
Junior subordinated debentures		576		508
Total interest expense		16,168		8,714
Net interest income		38,013		32,085
Provision for loan/lease losses		1,941		2,301
Net interest income after provision for loan/lease losses		36,072		29,784

Noninterest income:
Trust department fees		2,361		2,058
Investment advisory and management fees		1,888		1,058
Deposit service fees		1,658		1,610
Gains on sales of residential real estate loans, net		489		102
Gains on sales of government guaranteed portions of loans, net		39		—
Swap fee income		7,891		1,649
Securities losses, net		(52)		—
Earnings on bank-owned life insurance		412		399
Debit card fees		914		844
Correspondent banking fees		172		213
Other		1,293		979
Total noninterest income		17,065		8,912

Noninterest expense:
Salaries and employee benefits		22,749		15,804
Occupancy and equipment expense		3,533		3,133
Professional and data processing fees		3,031		2,771
Acquisition costs		—		414
Post-acquisition compensation, transition and integration costs		708		165
FDIC insurance, other insurance and regulatory fees		926		840
Loan/lease expense		312		260
Net cost of (income from) and gains/losses on operations of other real estate		1,182		(70)
Advertising and marketing		1,037		753
Bank service charges		508		466
Correspondent banking expense		206		204
Intangibles amortization		615		305
Other		1,753		1,325
Total noninterest expense		36,560		26,370
Net income before income taxes		16,577		12,326
Federal and state income tax expense		3,073		1,881
Net income	$	13,504	$	10,445

Basic earnings per common share	$	0.86	$	0.75
Diluted earnings per common share	$	0.85	$	0.73

Weighted average common shares outstanding		15,714,588		13,919,565
Weighted average common and common equivalent shares outstanding		15,938,377		14,232,423

Cash dividends declared per common share	$	0.06	$	0.06

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

~~Three~~Six Months Ended ~~September~~June 30, 2019 and 2018


					2019		2018
	2018		2017		(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	44,033,687	$	29,245,320	$	93,082	$	69,622
Securities:
Taxable		1,521,789		1,367,212		3,344		3,150
Nontaxable		3,516,550		2,862,208		7,018		6,584
Interest-bearing deposits at financial institutions		323,636		141,331		2,091		425
Restricted investment securities		329,767		172,776		598		446
Federal funds sold		105,042		52,018		150		118
Total interest and dividend income		49,830,471		33,840,865		106,283		80,345

Interest expense:
Deposits		8,722,555		3,556,189		26,304		11,410
Short-term borrowings		78,053		33,248		152		95
Federal Home Loan Bank advances		1,272,538		607,751		1,662		2,215
Other borrowings		924,780		724,854		539		1,182
Subordinated notes						1,557		—
Junior subordinated debentures		519,062		362,475		1,148		955
Total interest expense		11,516,988		5,284,517		31,362		15,857
Net interest income		38,313,483		28,556,348		74,921		64,488
Provision for loan/lease losses		6,205,828		2,086,436		4,075		4,841
Net interest income after provision for loan/lease losses		32,107,655		26,469,912		70,846		59,647

Noninterest income:
Trust department fees		2,195,828		1,721,401		4,854		4,295
Investment advisory and management fees		1,059,413		968,452		3,624		2,010
Deposit service fees		1,655,529		1,522,461		3,212		3,142
Gains on sales of residential real estate loans, net		336,679		98,409		858		203
Gains on sales of government guaranteed portions of loans, net		46,417		91,974		70		358
Swap fee income		1,110,182		194,256		11,089		2,608
Securities losses, net		—		(63,588)		(52)		—
Earnings on bank-owned life insurance		474,426		428,002		952		817
Debit card fees		845,740		754,803		1,706		1,610
Correspondent banking fees		195,450		239,060		388		477
Other		889,161		746,073		2,357		1,934
Total noninterest income		8,808,825		6,701,303		29,058		17,454

Noninterest expense:
Noninterest expenses:
Salaries and employee benefits		17,432,632		13,423,943		43,628		31,782
Occupancy and equipment expense		3,318,470		2,516,274		7,227		6,198
Professional and data processing fees		2,537,027		2,950,839		5,781		5,479
Acquisition costs		1,292,043		407,997		—		506
Post-acquisition compensation, transition and integration costs		493,063		522,740		842		165
FDIC insurance, other insurance and regulatory fees		932,746		690,894		1,890		1,597
Loan/lease expense		369,379		257,540		526		551
Net income from operations of other real estate		(50,362)		(160,640)
Net cost of (income from) and gains/losses on operations of other real estate						1,480		62
Advertising and marketing		983,762		669,923		1,822		1,446
Bank service charges		461,656		460,153		991		907
Correspondent banking expense		205,121		204,189		410		409
CDI amortization		541,665		230,867		1,147		609
Other		1,982,408		1,221,028		3,251		2,523
Total noninterest expense		30,499,610		23,395,747
Net income before income taxes		10,416,870		9,775,468
Total noninterest expenses						68,995		52,234
Income before income taxes						30,909		24,867
Federal and state income tax expense		1,608,035		1,921,533		4,487		3,872
Net income	$	8,808,835	$	7,853,935	$	26,422	$	20,995

Basic earnings per common share	$	0.56	$	0.60	$	1.68	$	1.51
Diluted earnings per common share	$	0.55	$	0.58	$	1.66	$	1.48

Weighted average common shares outstanding		15,625,123		13,151,350		15,703,967		13,904,113
Weighted average common and common equivalent shares outstanding		15,922,324		13,507,955		15,930,659		14,219,003

Cash dividends declared per common share	$	0.06	$	0.05	$	0.12	$	0.12

See Notes to Consolidated Financial Statements (Unaudited)

~~Table of Contents~~

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)~~

~~Nine Months Ended September 30,~~

2018

2017

Interest and dividend income:

Loans/leases, including fees

$
113,655,270

$
84,571,466

Securities:

Taxable

4,671,333

3,770,022

Nontaxable

10,100,598

8,198,173

Interest-bearing deposits at financial institutions

748,953

559,697

Restricted investment securities

776,013

435,096

Federal funds sold

222,814

104,778

Total interest and dividend income

130,174,981

97,639,232

Interest expense:

Deposits

20,132,044

8,779,548

Short-term borrowings

173,469

76,365

Federal Home Loan Bank advances

3,218,769

1,365,433

Other borrowings

2,375,837

2,103,731

Junior subordinated debentures

1,473,965

1,042,227

Total interest expense

27,374,084

13,367,304

Net interest income

102,800,897

84,271,928

Provision for loan/lease losses

11,046,402

6,214,538

Net interest income after provision for loan/lease losses

91,754,495

78,057,390

Noninterest income:

Trust department fees

6,490,896

5,153,609

Investment advisory and management fees

3,069,423

2,798,886

Deposit service fees

4,797,385

4,297,210

Gains on sales of residential real estate loans, net

539,266

307,360

Gains on sales of government guaranteed portions of loans, net

404,851

1,129,668

Swap fee income

3,717,761

635,353

Securities losses, net

—

(25,124)

Earnings on bank-owned life insurance

1,291,686

1,357,049

Debit card fees

2,456,134

2,201,125

Correspondent banking fees

672,807

684,306

Other

2,822,331

2,228,133

Total noninterest income

26,262,540

20,767,575

Noninterest expenses:

Salaries and employee benefits

49,214,623

39,662,218

Occupancy and equipment expense

9,516,939

7,716,829

Professional and data processing fees

8,015,966

7,374,930

Acquisition costs

1,798,184

407,997

Post-acquisition compensation, transition and integration costs

658,377

522,740

FDIC insurance, other insurance and regulatory fees

2,529,415

1,957,413

Loan/lease expense

920,215

811,362

Net cost of (income from) operations of other real estate

11,190

(118,453)

Advertising and marketing

2,430,085

1,846,942

Bank service charges

1,368,318

1,331,499

Correspondent banking expense

614,212

604,233

CDI amortization

1,150,767

692,600

Other

4,504,639

3,263,183

Total noninterest expenses

82,732,930

66,073,493

Income before income taxes

35,284,105

32,751,472

Federal and state income tax expense

5,479,924

6,946,555

Net income

$
29,804,181

$
25,804,917

Basic earnings per common share

$
2.06

$
1.96

Diluted earnings per common share

$
2.02

$
1.91

Weighted average common shares outstanding

14,477,783

13,151,672

Weighted average common and common equivalent shares outstanding

14,786,777

13,509,566

Cash dividends declared per common share

$
0.18

$
0.15

~~See Notes to ConsolidatedFinancial Statements(Unaudited)~~

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018


					Three Months Ended June 30,
					2019		2018
	Three Months Ended September 30,				(dollars in thousands)
	2018		2017
Net income	$	8,808,835	$	7,853,935	$	13,504	$	10,445

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		(1,652,382)		289,086		4,669		(1,512)
Less reclassification adjustment for gains (losses) included in net income before tax		—		(63,588)
Less reclassification adjustment for losses included in net income before tax						(52)		—
		(1,652,382)		352,674		4,721		(1,512)
Unrealized gains (losses) on derivatives:
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		576,559		(8,446)		(1,780)		(323)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(187,087)		(95,361)		(134)		178
		763,646		86,915		(1,646)		(501)

Other comprehensive income (loss), before tax		(888,736)		439,589		3,075		(2,013)
Tax expense (benefit)		(276,849)		165,012		833		(679)
Other comprehensive income (loss), net of tax		(611,887)		274,577		2,242		(1,334)

Comprehensive income	$	8,196,948	$	8,128,512	$	15,746	$	9,111


					Six Months Ended June 30,
					2019		2018
	Nine Months Ended September 30,				(dollars in thousands)
	2018		2017
Net income	$	29,804,181	$	25,804,917	$	26,422	$	20,995

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		(8,530,983)		2,057,586		8,813		(6,879)
Less reclassification adjustment for gains (losses) included in net income before tax		—		(25,124)
Less reclassification adjustment for losses included in net income before tax						(52)		—
Less reclassification adjustment for adoption of ASU 2016-01		855,039		—		—		855
		(7,675,944)		2,082,710		8,865		(6,024)
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		404,100		(186,000)
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax						(2,942)		(172)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(89,914)		(354,813)		(291)		97
		494,014		168,813		(2,651)		(269)

Other comprehensive income (loss), before tax		(7,181,930)		2,251,523		6,214		(6,293)
Tax expense (benefit)		(2,033,882)		864,468		1,628		(1,757)
Other comprehensive income (loss), net of tax		(5,148,048)		1,387,055		4,586		(4,536)

Comprehensive income	$	24,656,133	$	27,191,972	$	31,008	$	16,459

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive


Stock

Capital

Earnings

(Loss)

Total
Balance December 31, 2017

$
13,918,168

$
189,077,550

$
151,962,661

$
(1,671,250)

$
353,287,129
Net income

—

—

10,549,961

—

10,549,961
Other comprehensive loss, net of tax

—

—

—

(3,201,540)

(3,201,540)
Impact of adoption of ASU 2016-01

—

666,900

(666,900)

—
Common cash dividends declared, $0.06 per share

—

—

(833,730)

—

(833,730)
Issuance of 2,669 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

2,669

100,262

—

—

102,931
Issuance of 13,074 shares of common stock as a result of stock options exercised

13,074

192,522

—

—

205,596
Stock-based compensation expense

—

495,493

—

—

495,493
Restricted stock awards - 6,860 shares of common stock

6,860

(6,860)

—

—

—
Exchange of 3,814 shares of common stock in connection with payroll taxes for restriced stock and in connection with stock options exercised

(3,814)

(174,109)

—

—

(177,923)
Balance, March 31, 2018

$
13,936,957

$
189,684,858

$
162,345,792

$
(5,539,690)

$
360,427,917
Net income

—

—

10,445,385

—

10,445,385
Other comprehensive loss, net of tax

—

—

—

(1,334,621)

(1,334,621)
Common cash dividends declared, $0.06 per share

—

—

(835,881)

—

(835,881)
Issuance of 5,728 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

5,728

215,173

—

—

220,901
Issuance of 26,641 shares of common stock as a result of stock options exercised

26,641

362,292

—

—

388,933
Stock-based compensation expense

—

291,912

—

—

291,912
Restricted stock awards - 3,972 shares of common stock

3,972

(3,972)

—

—

—
Exchange of 642 shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised

642

(17,023)

—

—

(16,381)
Balance, June 30, 2018

$
13,973,940

$
190,533,240

$
171,955,296

$
(6,874,311)

$
369,588,165
Net income

—

—

8,808,835

—

8,808,835
Other comprehensive loss, net of tax

—

—

—

(611,887)

(611,887)
Common cash dividends declared, $0.06 per share

—

—

(937,607)

—

(937,607)
Issuance of 1,699,414 shares of common stock, net of issuance costs as a result of merger with Springfield Bancshares

1,699,414

78,831,543

—

—

80,530,957
Issuance of 3,205 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

3,205

120,396

—

—

123,601
Issuance of 1,754 shares of common stock as a result of stock options exercised

1,754

32,300

—

—

34,054
Stock-based compensation expense

—

318,906

—

—

318,906
Restricted stock awards - 5,300 shares of common stock

5,300

(5,300)

—

—

—
Exchange of 9,853 shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised

(9,853)

(457,782)

—

—

(467,635)
Balance September 30, 2018

$
15,673,760

$
269,373,303

$
179,826,524

$
(7,486,198)

$
457,387,389


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

Balance December 31, 2018	$	15,718	$	270,761	$	192,203	$	(5,544)	$	473,138
Net income		—		—		12,918		—		12,918
Other comprehensive income, net of tax		—		—		—		2,344		2,344
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)
Issuance of 4,446 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		4		124		—		—		128
Issuance of 25,238 shares of common stock as a result of
stock options exercised		25		263		—		—		288
Stock-based compensation expense		—		722		—		—		722
Restricted stock awards and restricted stock units - 12,719
shares of common stock, net of restricted stock units
withheld for payment of taxes		13		(50)		—		—		(37)
Exchange of 5,169 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		(5)		(147)		—		—		(152)
Balance, March 31, 2019	$	15,755	$	271,673	$	204,179	$	(3,200)	$	488,407
Net income		—		—		13,504		—		13,504
Other comprehensive loss, net of tax		—		—		—		2,242		2,242
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)
Issuance of 11,346 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		11		323		—		—		334
Issuance of 2,414 shares of common stock as a result of
stock options exercised		3		41		—		—		44
Stock-based compensation expense		—		719		—		—		719
Restricted stock awards and restricted stock units- 4,769
shares of common stock, net of restricted stock units
withheld for payment of taxes		5		(5)		—		—		—
Exchange of 1,032 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		(1)		(7)		—		—		(8)
Balance, June 30, 2019	$	15,773	$	272,744	$	216,741	$	(958)	$	504,300

~~(Continued)~~

~~Table of Contents~~

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - continued~~

~~Three and Nine Months Ended September 30, 2018 and 2017~~

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive


Stock

Capital

Earnings

(Loss)

Total
Balance December 31, 2016

$
13,106,845

$
156,776,642

$
118,616,901

$
(2,459,589)

$
286,040,799
Net income

—

—

9,184,965

—

9,184,965
Other comprehensive loss, net of tax

—

—

—

410,739

410,739
Common cash dividends declared, $0.05 per share

—

—

(656,574)

—

(656,574)
Issuance of 3,573 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

3,573

83,091

—

—

86,664
Issuance of 44,284 shares of common stock as a result of stock options exercised

44,284

630,290

—

—

674,574
Stock-based compensation expense

—

388,753

—

—

388,753
Restricted stock awards - 13,289 shares of common stock

13,289

(13,289)

—

—

—
Exchange of 6,772 shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised

(6,772)

(283,518)

—

—

(290,290)
Balance, March 31, 2017

$
13,161,219

$
157,581,969

$
127,145,292

$
(2,048,850)

$
295,839,630
Net income

—

—

8,766,017

—

8,766,017
Other comprehensive loss, net of tax

—

—

—

701,739

701,739
Common cash dividends declared, $0.05 per share

—

—

(657,003)

—

(657,003)
Issuance of 4,582 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

4,582

170,061

—

—

174,643
Issuance of 8,027 shares of common stock as a result of stock options exercised

8,027

109,392

—

—

117,419
Stock-based compensation expense

—

168,314

—

—

168,314
Restricted stock awards - 2,000 shares of common stock

2,000

(2,000)

—

—

—
Exchange of 594 shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised

(594)

(26,730)

—

—

(27,324)
Balance, June 30, 2017

$
13,175,234

$
158,001,006

$
135,254,306

$
(1,347,111)

$
305,083,435
Net income

—

—

7,853,935

—

7,853,935
Other comprehensive income, net of tax

—

—

—

274,577

274,577
Common cash dividends declared, $0.05 per share

—

—

(658,110)

—

(658,110)
Issuance of 2,319 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

2,319

88,052

—

—

90,371
Issuance of 19,906 shares of common stock as a result of stock options exercised

19,906

73,915

—

—

93,821
Stock-based compensation expense

—

300,599

—

—

300,599
Restricted stock awards - 4,500 shares of common stock

4,500

(4,500)

—

—

—
Balance September 30, 2017

$
13,201,959

$
158,459,072

$
142,450,131

$
(1,072,534)

$
313,038,628


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

Balance December 31, 2017	$	13,918	$	189,077	$	151,963	$	(1,671)	$	353,287
Net income		—		—		10,550		—		10,550
Other comprehensive loss, net of tax		—		—		—		(3,202)		(3,202)
Impact of adoption of ASU 2016-01		—				667		(667)		—
Common cash dividends declared, $0.06 per share		—		—		(834)		—		(834)
Issuance of 2,669 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		3		100		—		—		103
Issuance of 13,074 shares of common stock as a result of stock
options exercised		13		193		—		—		206
Stock-based compensation expense		—		496		—		—		496
Restricted stock awards - 6,860 shares of common stock		7		(7)		—		—		—
Exchange of 3,814 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		(4)		(174)		—		—		(178)
Balance, March 31, 2018	$	13,937	$	189,685	$	162,346	$	(5,540)	$	360,428
Net income		—		—		10,445		—		10,445
Other comprehensive loss, net of tax		—		—		—		(1,334)		(1,334)
Common cash dividends declared, $0.06 per share		—		—		(836)		—		(836)
Issuance of 5,728 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		6		215		—		—		221
Issuance of 26,641 shares of common stock as a result of stock
options exercised		26		362		—		—		388
Stock-based compensation expense		—		292		—		—		292
Restricted stock awards - 3,972 shares of common stock		4		(4)		—		—		—
Exchange of 642 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		1		(17)		—		—		(16)
Balance, June 30, 2018	$	13,974	$	190,533	$	171,955	$	(6,874)	$	369,588

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018


					2019			2018
	2018		2017		(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	29,804,181	$	25,804,917	$	26,422		$	20,995
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		3,256,799		2,810,971		2,518			2,075
Provision for loan/lease losses		11,046,402		6,214,538		4,075			4,841
Stock-based compensation expense		1,106,311		857,666		1,441			787
Deferred compensation expense accrued		1,453,042		1,098,741		1,323			1,004
Losses (gains) on other real estate owned, net		48,598		(154,743)
Losses on other real estate owned, net						1,214			118
Amortization of premiums on securities, net		1,201,320		1,330,946		854			829
Securities losses, net		—		25,124		52			—
Loans originated for sale		(39,923,078)		(40,423,117)		(45,926)			(21,899)
Proceeds on sales of loans		38,954,289		42,705,325		43,969			22,072
Gains on sales of residential real estate loans		(539,266)		(307,360)		(858)			(203)
Gains on sales of government guaranteed portions of loans		(404,851)		(1,129,668)		(70)			(358)
Amortization of core deposit intangible		1,150,767		692,600
Gains on sales of premises and equipment						(67)			—
Amortization of intangibles						1,147			609
Accretion of acquisition fair value adjustments, net		(2,951,021)		(4,063,435)		(2,145)			(1,244)
Increase in cash value of bank-owned life insurance		(1,291,686)		(1,357,049)		(952)			(817)
Increase (decrease) in other assets		(8,292,864)		1,666,921
Decrease (increase) in other liabilities		2,252,939		(8,610,333)
Decrease (increase) in other assets						942			(5,132)
Increase (decrease) in other liabilities						(4,615)			5,688
Net cash provided by operating activities	$	36,871,882	$	27,162,044	$	29,324		$	29,365

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold		(2,873,000)		1,689,000
Net decrease in interest-bearing deposits at financial institutions		22,099,041		22,727,542
Net decrease in federal funds sold						16,183			19,331
Net decrease (increase) in interest-bearing deposits at financial institutions						(62,084)			14,964
Proceeds from sales of other real estate owned		1,288,208		829,213		539			736
Activity in securities portfolio:
Purchases		(66,419,802)		(103,509,208)		(10,709)			(54,951)
Calls, maturities and redemptions		22,915,126		40,435,714		5,958			12,619
Paydowns		36,279,229		30,123,674		27,088			27,187
Sales		1,938,043		21,969,870		4,661			—
Activity in restricted investment securities:
Purchases		(5,351,875)		(3,788,275)		(3,868)			(4,215)
Redemptions		109,200		199,900		7,362			109
Net increase in loans/leases originated and held for investment		(208,737,932)		(269,891,345)		(176,394)			(150,993)
Purchase of premises and equipment		(7,112,494)		(4,045,217)		(6,032)			(2,666)
Net cash paid for SFC Bank acquisition		(3,747,209)		—
Cash prepaid for Guaranty Bank acquisition		—		(7,803,420)
Proceeds from sales of premises and equipment						146	��		—
Net cash used in investing activities	$	(209,613,465)	$	(271,062,552)	$	(197,150)		$	(137,879)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts		82,308,885		225,109,315		345,614			31,652
Net decrease in short-term borrowings		(2,207,101)		(23,960,582)
Net increase (decrease) in short-term borrowings						(9,583)			3,592
Activity in Federal Home Loan Bank advances:
Term advances		—		1,600,000		5,000			—
Calls and maturities		(27,000,000)		(6,000,000)		(35,000)			(10,000)
Net change in short-term and overnight advances		120,330,000		35,955,000		(130,865)			72,100
Activity in other borrowings:
Proceeds from other borrowings		9,000,000		7,000,000		—			9,000
Calls, maturities and scheduled principal payments		(10,612,500)		(9,500,000)		(11,937)			(3,875)
Prepayments						(46,313)			—
Paydown of revolving line of credit						(9,000)			—
Proceeds from subordinated notes						63,393			—
Payment of cash dividends on common stock		(2,362,486)		(1,836,150)		(1,881)			(1,526)
Proceeds from issuance of common stock, net		969,779		1,237,492		794			918
Net cash provided by financing activities	$	170,426,577	$	229,605,075	$	170,222		$	101,861
Net decrease in cash and due from banks		(2,315,006)		(14,295,433)
Net increase (decrease) in cash and due from banks						2,396			(6,653)

Cash and due from banks, beginning		75,721,663		70,569,993		85,523			75,722
Cash and due from banks, ending	$	73,406,657	$	56,274,560	$	87,919		$	69,069

(Continued)

109

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018

2018

2017

Supplemental disclosure of cash flow information, cash payments (receipts) for:





Interest

$
23,102,221

$
13,140,273

Income/franchise taxes

$
(1,099,902)

$
10,881,610





Supplemental schedule of noncash investing activities:





Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net

$
(5,148,048)

$
1,387,055

Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised

$
(661,939)

$
(314,614)

Transfers of loans to other real estate owned

$
46,243

$
286,212

Due to broker for purchases of securities

$
—

$
1,300,000

Dividends payable

$
937,606

$
658,110

Decrease in the fair value of interest rate swap assets and liabilities

$
2,440,649

$
264,721

Transfer of equity securities from securities available for sale to other assets at fair value

$
2,614,261

$
—

Supplemental disclosure of cash flow information for acquisitions:





Fair value of assets acquired:





Cash and due from banks

$
4,586,326

$
—

Interest-bearing deposits at financial institutions

62,924,396

—

Securities

4,845,441

—

Loans receivable, net

477,336,699

—

Bank-owned life insurance

7,091,883

Premises and equipment, net

6,091,978

—

Restricted investment securities

3,654,200

—

Core deposit intangible

8,208,728

—

Other assets

989,056

—

Total assets acquired

$
575,728,707

$
—





Fair value of liabilities assumed:





Deposits

$
439,579,328

$
—

Short-term borrowings

1,143,478

—

FHLB advances

73,610,427

—

Other borrowings

9,543,810

Other liabilities

8,408,464

—

Total liabilities assumed

532,285,507

—

Net assets acquired

$
43,443,200

$
—

Consideration paid:





Cash paid *

$
8,333,535

$
—

Common stock

80,637,194

—

Total consideration paid

88,970,729

—

Goodwill

$
45,527,529

$
—

* Net cash paid at closing totalted $3,747,209


	2019		2018
Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest	$	29,346	$	12,304
Income/franchise taxes		(1,032)		1,010

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net		4,586		(4,536)
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised		(160)		(194)
Transfers of loans to other real estate owned		1,012		46
Increase in the fair value of back-to-back interest rate swap assets and liabilities		43,628		1,775
Dividends payable		942		836
Transfer of equity securities from securities available for sale to other assets at fair value		—		2,614

See Notes to Consolidated Financial Statements (Unaudited)

1110

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~September~~June 30, ~~2018~~2019

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, ~~2017,~~2018, included in the Company's Annual Report on Form 10‑K filed with the SEC on March ~~12, 2018.~~15, 2019. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10‑Q and Rule 10‑01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended ~~September~~June 30, ~~2018~~2019 are not necessarily indicative of the results expected for the year ending December 31, ~~2018,~~2019, or for any other period.

The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10‑Q. It may be helpful to refer back to this page as you read this report.



Allowance: Allowance for estimated losses on loans/leases	Guaranty: Guaranty Bankshares, Ltd.
AOCI: Accumulated other comprehensive income (loss)	Guaranty Bank: Guaranty Bank and Trust Company
AFS: Available for sale	HTM: Held to maturity
ASC: Accounting Standards Codification	m2: m2 Lease Funds, LLC
ASU: Accounting Standards Update	NIM: Net interest margin
Bates Companies: Bates Financial Advisors, Inc., Bates	NPA: Nonperforming asset
Financial Services, Inc., Bates Securities, Inc. and	NPL: Nonperforming loan
Bates Financial Group, Inc.	OREO: Other real estate owned
BOLI: Bank-owned life insurance	OTTI: Other-than-temporary impairment
Caps: Interest rate cap derivatives	PCI: Purchased credit impaired
CDI: Core deposit intangible	Provision: Provision for loan/lease losses
Community National: Community National Bancorporation	QCBT: Quad City Bank & Trust Company
CRBT: Cedar Rapids Bank & Trust Company	RB&T: Rockford Bank & Trust Company
CRE: Commercial real estate	ROAA: Return on Average Assets
CSB: Community State Bank	SBA: U.S. Small Business Administration
C&I: Commercial and industrial	SEC: Securities and Exchange Commission
~~Dodd-Frank Act: Dodd-Frank Wall Street Reform and~~EPS: Earnings per share	SFC Bank: Springfield First Community Bank
~~Consumer Protection~~Exchange Act: Securities Exchange Act of 1934, as	Springfield Bancshares: Springfield Bancshares, Inc.
~~EPS: Earnings per share~~amended	TA: Tangible assets
~~Exchange Act:Securities Exchange Act of 1934, as amended~~	~~Tax Act: Tax Cuts and Jobs Act of 2017~~
FASB: Financial Accounting Standards Board	TCE: Tangible common equity
FDIC: Federal Deposit Insurance Corporation	TDRs: Troubled debt restructurings
FHLB: Federal Home Loan Bank	TEY: Tax equivalent yield
FRB: Federal Reserve Bank of Chicago	The Company: QCR Holdings, Inc.
GAAP: Generally Accepted Accounting Principles	USDA: U.S. Department of Agriculture

1211

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of five commercial banks: QCBT, CRBT, CSB, ~~RB&T~~SFC Bank and ~~SFC Bank.~~RB&T. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company also engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. The Company also engages in wealth management services through its banking subsidiaries and its subsidiaries, the Bates Companies. All material intercompany transactions and balances have been eliminated in consolidation.

The acquisition of ~~Guaranty~~the Bates Companies, headquartered in Rockford, Illinois, occurred on October 1, 2018. The merger with Springfield Bancshares, the holding company of SFC Bank, headquartered in ~~Cedar Rapids, Iowa~~Springfield, Missouri, occurred on ~~October 2, 2017 and Guaranty Bank was merged into CRBT on December 2, 2017.~~July 1, 2018. The financial results for the periods since ~~acquisition~~acquisition/merger are ~~included in this report. See Note 2 of the Company's Annual Report on Form 10‑K for the year ended December 31, 2017 for additional information about the acquisition.~~

~~The merger with Springfield Bancshares occurred on July 1, 2018; therefore, the financial results for the period since acquisition is~~ included in this report. See Note 2 to the ~~Consolidated Financial Statements~~Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for additional information about the acquisition and merger.

Recent accounting developments: ~~In May 2014, FASB issued ASU 2014‑09,~~ ~~Revenue from Contracts with Customers~~. ASU 2014‑09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014‑09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014‑09 was originally effective for the Company on January 1, 2017; however, FASB issued ASU 2015‑14 which defers the effective date in order to provide additional time for both public and private entities to evaluate the impact. ASU 2014‑09 was adopted by the Company on January 1, 2018 and did not have a significant impact on the Company's consolidated financial statements.

~~In January 2016, FASB issued ASU 2016‑01,~~ ~~Financial Instruments–Overall~~. ASU 2016‑01 makes targeted adjustments to GAAP by eliminating the AFS classification for equity securities and requiring equity investments to be measured at fair value with changes in fair value recognized in net income. The standard also requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes. The standard clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to AFS securities in combination with the entity's other deferred tax assets. It also requires an entity to present separately (within other comprehensive income) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, the standard eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Upon adoption of ASU 2016‑01 by the Company on January 1, 2018, the fair value of the Company's loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update had no significant impact on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016‑02, Leases. Under ASU 2016‑02, lessees will be required to recognize a lease liability measured on a discounted basis and a right-of-use asset for all leases (with the exception of short-term leases). Lessor accounting is largely unchanged under ASU 2016‑02. However, the definition of initial direct costs was updated to include only initial direct costs that are considered incremental. This change in definition will change the manner in which the Company recognizes the costs associated with originating leases. ASU 2016‑02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The ~~Company has analyzed the impact of adoption~~standard was adopted on January 1, 2019 and ~~has concluded that it will~~did not have a significant impact on the ~~consolidated financial statements.~~Company’s Consolidated Financial Statements.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

In June 2016, the FASB issued ASU 2016‑13, Financial Instruments – Credit Losses. Under the standard, assets measured at amortized costs (including loans, leases and AFS securities) will be presented at the net amount expected to be collected. Rather than the “incurred” model that is currently being utilized, the standard will require the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset's life. For public companies, ASU 2016‑13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Companies may choose to early adopt for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of analyzing the impact of adoption on the Company's ~~consolidated financial statements.~~Consolidated Financial Statements.

In ~~February 2018,~~January 2017, the FASB issued ASU ~~2018‑02,~~2017-04, ~~Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated~~Intangibles - Goodwill and Other ~~Comprehensive Income.~~(Topic 350). ~~Under~~ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the standard, entities are allowed to make a one-time reclassification from AOCI to retained earnings for the effect of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a resultsecond step of the ~~change in~~analysis. ASU 2017-04 requires entities to compare the ~~federal tax rate as defined~~fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the ~~Tax Act. ASU 2018‑02~~carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. This guidance is effective for ~~fiscal years~~annual and interim periods beginning after December 15, ~~2018, including interim periods within those years. Companies may choose to~~2019, with early ~~adopt for fiscal years or interim periods that have not been issued or made available for issuance as of February 14, 2018.~~adoption permitted. The Company ~~chose to early adopt ASU 2018‑02 and apply the~~does not expect this guidance to ~~the consolidated financial statements for the year ended December 31, 2017.~~have a significant impact on its Consolidated Financial Statements.

Reclassifications: Certain amounts in the prior year's consolidated financial statements have been reclassified, with no effect on net income or stockholders' equity, to conform with the current period presentation.

~~NOTE 2 – MERGERS/ACQUISITIONS~~

~~SPRINGFIELD BANCSHARES, INC.~~

On July 1, 2018, the Company completed its previously announced merger with Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri. The Company acquired 100% of Springfield Bancshares common stock in the merger. SFC Bank is a Missouri-chartered bank that operates one location in the Springfield, Missouri market. As a result of the transaction, SFC Bank became the Company’s fifth independent charter.

The merger with Springfield Bancshares allowed the Company to enter the Springfield, Missouri market which is consistent with the Company’s strategic plan to selectively acquire other high-performing financial institutions in vibrant mid-sized metropolitan markets with a concentration of commercial clients. Financial metrics related to the transaction were favorable, as measured by EPS and ROAA accretion.

Stockholders of Springfield Bancshares received 0.3060 shares of the Company’s common stock and $1.50 in cash in exchange for each common share of Springfield Bancshares held. On June 29, 2018, the last trading date before the closing, the Company’s common stock closed at $47.45, resulting in stock consideration valued at $80.6 million and total consideration paid by the Company of $89.0 million. To help fund the cash portion of the purchase price, on June 29, 2018, the Company borrowed $4.1 million on its existing $10.0 million revolving line of credit. The Company also borrowed $4.9 million on this same revolving line of credit to fund the repayment of certain debt assumed in the merger shortly after closing. This note is included within other borrowings on the September 30, 2018 Consolidated Balance Sheet. The remaining cash consideration paid to the shareholders of Springfield Bancshares came from operating cash.

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.

~~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.~~

1412

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

As of

July 1, 2018
ASSETS


Cash and due from banks

$
4,586,326
Interest-bearing deposits at financial institutions

62,924,396
Securities

4,845,441
Loans/leases receivable, net

477,336,699
Bank-owned life insurance

7,091,883
Premises and equipment

6,091,978
Restricted investment securities

3,654,200
Core deposit intangible

8,208,728
Other assets

989,056
Total assets acquired

$
575,728,707


LIABILITIES


Deposits

$
439,579,328
Short-term borrowings

1,143,478
FHLB advances

73,610,427
Other borrowings

9,543,810
Other liabilities

8,408,464
Total liabilities assumed

$
532,285,507
Net assets acquired

$
43,443,200


CONSIDERATION PAID:


Cash

$
8,333,535
Common stock

80,637,194
Total consideration paid

$
88,970,729
Goodwill

$
45,527,529

Loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date. Credit discounts are included in the determination of fair value. A third party valuation consultant assisted with the determination of fair value.

Purchased loans are segregated into two categories: PCI loans and non-PCI (performing) loans. PCI loans are accounted for in accordance with ASC 310-30, as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower. Performing loans are accounted for in accordance with ASC 310-20, as these loans do not have evidence of significant credit deterioration since origination and it is probable that the contractually required payments will be received from the borrower.

For PCI loans, the difference between the contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable discount. Further, any excess cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the expected remaining life of the loan. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording and allowance for loan and lease losses and provision for loan losses.

~~For performing loans, the difference between the estimated fair value of the loans and the principal balance outstanding is accreted over the remaining life of the loans.~~

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

~~The following table presents the purchased loans as of the acquisition date:~~

PCI

Performing



Loans

Loans

Total
Contractually required principal payments

$
7,552,912

$
479,439,547

$
486,992,459
Nonaccretable discount

(1,562,455)

—

(1,562,455)
Principal cash flows expected to be collected

$
5,990,457

$
479,439,547

$
485,430,004
Accretable discount

(293,445)

(7,799,860)

(8,093,305)
Fair Value of acquired loans

$
5,697,012

$
471,639,687

$
477,336,699

~~Changes in accretable yield for the loans acquired were as follows for the three months ended September 30, 2018:~~

PCI

Performing


Loans

Loans

Total
Discount added at acquisition

$
(293,445)

$
(7,799,860)

$
(8,093,305)
     Reclassification of nonaccretable discount to accretable

(891,569)

—

(891,569)
Accretion recognized

262,852

951,592

1,214,444
Balance at the end of the period

$
(922,162)

$
(6,848,268)

$
(7,770,430)

During the current quarter, there was no nonaccretable discount that was accelerated due to the early repayment of PCI loans. However, $891,569 of nonaccretable discount was reclassified to accretable during the third quarter of 2018 due to significant improvement on one specific credit subsequent to the acquisition date. Of this amount, $262,852 was accreted to income in the third quarter of 2018, while the remainder will be accreted over the next 11 months, which is the remaining contractual life of the loan.

Premises and equipment acquired with a fair value of $6,091,978 includes one branch location including a write-up of $617,286. 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 $8,208,728 which is the portion of the acquisition purchase price which 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 changes in the carrying amount of core deposit intangibles, gross carrying amount, accumulated amortization, and net book value:~~

September 30, 2018
Balance at acquisition

$
8,208,728
Amortization expense

(237,114)
Balance at the end of the period

$
7,971,614

Gross carrying amount

$
8,208,728
Accumulated amortization

(237,114)
Net book value

$
7,971,614

~~The following presents the remaining estimated amortization of the core deposit intangible:~~

Years ending December 31,

Amount
2018

$
237,114
2019

932,810
2020

915,051
2021

893,192
2022

867,227
Thereafter

4,126,220

$
7,971,614

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

FHLB advances and other borrowings assumed with a fair value of $83,154,237 included $40,000,000 in overnight FHLB advances, $33,610,427 of FHLB term advances, $4,743,810 in subordinated debentures and a $4,800,000 bank stock loan. The $4.8 million bank stock loan was paid off immediately after the acquisition date on JulyNOTE 2 ~~2018, at its book value.~~

~~The following table presents the assumed FHLB advances and other borrowings as of the acquisition date:~~

Amount
Rate
Terms
Maturity Date
Collateral
FHLB advance

$ 40,000,000
2.10%
daily interest payments; principal due at maturity
7/2/2018
commercial and residential real estate loans
FHLB advance

4,991,962
2.01%
monthly interest payments; principal due at maturity
7/30/2018
commercial and residential real estate loans
FHLB advance

4,966,060
2.09%
monthly interest payments; principal due at maturity
10/1/2018
commercial and residential real estate loans
FHLB advance

4,848,879
2.09%
monthly interest payments; principal due at maturity
9/30/2019
commercial and residential real estate loans
FHLB advance

4,787,502
1.50%
monthly interest payments; principal due at maturity
2/10/2020
commercial and residential real estate loans
FHLB advance

4,756,169
1.93%
monthly interest payments; principal due at maturity
5/27/2020
commercial and residential real estate loans
FHLB advance

4,664,663
1.96%
monthly interest payments; principal due at maturity
1/27/2021
commercial and residential real estate loans
FHLB advance

4,595,192
2.00%
monthly interest payments; principal due at maturity
7/29/2021
commercial and residential real estate loans
Subordinated debenture

952,566
4.00%
monthly interest payments; principal due at maturity
4/30/2021
unsecured
Subordinated debenture

952,566
4.00%
monthly interest payments; principal due at maturity
4/30/2021
unsecured
Subordinated debenture

946,226
4.00%
monthly interest payments; principal due at maturity
9/15/2021
unsecured
Subordinated debenture

946,226
4.00%
monthly interest payments; principal due at maturity
9/15/2021
unsecured
Subordinated debenture

946,226
4.00%
monthly interest payments; principal due at maturity
9/15/2021
unsecured
Bank stock loan

4,800,000
5.25%
monthly interest payments; principal due at maturity
3/13/2020
4,000,000 issued and outstanding shares of common stock of SFC Bank
Fair value of FHLB and other borrowings assumed

$ 83,154,237

During the first nine months of 2018, the Company incurred $1.4 million of expenses related to the acquisition, comprised primarily of legal, accounting, investment banking costs and personnel costs. SFC Bank results are included in the consolidated statements of income effective on the merger date. For the period July 1, 2018 to September 30, 2018, SFC Bank reported revenues of $7.4 million and net income of $2.2 million, which included $279 thousand of after tax post-acquisition, compensation, transition and integration costs.

~~NOTE 3~~ – INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are summarized as follows:


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value		Cost		Gains		(Losses)		Value
September 30, 2018:
									(dollars in thousands)
June 30, 2019:
Securities HTM:
Municipal securities	$	394,371,195	$	3,887,422	$	(10,753,857)	$	387,504,760	$	387,663	$	17,967	$	(468)	$	405,162
Other securities		1,050,000		—		(13,480)		1,036,520		1,050		—		—		1,050
	$	395,421,195	$	3,887,422	$	(10,767,337)	$	388,541,280	$	388,713	$	17,967	$	(468)	$	406,212

Securities AFS:
U.S. govt. sponsored agency securities	$	37,715,802	$	9,963	$	(1,234,016)	$	36,491,749	$	35,430	$	431	$	(99)	$	35,762
Residential mortgage-backed and related securities		162,933,727		35,691		(7,236,822)		155,732,596		157,760		2,053		(585)		159,228
Municipal securities		60,101,620		150,615		(1,348,028)		58,904,207		51,948		1,259		(18)		53,189
Other securities		4,254,364		—		(59,474)		4,194,890		6,754		157		—		6,911
	$	265,005,513	$	196,269	$	(9,878,340)	$	255,323,442	$	251,892	$	3,900	$	(702)	$	255,090

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value		Cost		Gains		(Losses)		Value
December 31, 2017:
									(dollars in thousands)
December 31, 2018:
Securities HTM:
Municipal securities	$	378,424,205	$	2,763,718	$	(2,488,119)	$	378,699,804	$	400,863	$	5,661	$	(6,803)	$	399,721
Other securities		1,050,000		—		—		1,050,000		1,050		—		(1)		1,049
	$	379,474,205	$	2,763,718	$	(2,488,119)	$	379,749,804	$	401,913	$	5,661	$	(6,804)	$	400,770

Securities AFS:
U.S. govt. sponsored agency securities	$	38,409,157	$	37,344	$	(349,967)	$	38,096,534	$	37,150	$	39	$	(778)	$	36,411
Residential mortgage-backed and related securities		165,459,470		155,363		(2,313,529)		163,301,304		163,698		182		(4,631)		159,249
Municipal securities		66,176,364		660,232		(211,100)		66,625,496		59,069		180		(703)		58,546
Other securities		4,014,004		896,384		(25,815)		4,884,573		6,754		100		(4)		6,850
	$	274,058,995	$	1,749,323	$	(2,900,411)	$	272,907,907	$	266,671	$	501	$	(6,116)	$	261,056

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

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, are summarized as follows:


	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross				Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
September 30, 2018:
													(dollars in thousands)
June 30, 2019:
Securities HTM:
Municipal securities	$	170,633,644	$	(5,439,521)	$	64,984,249	$	(5,314,336)	$	235,617,893	$	(10,753,857)	$	513	$	(3)	$	21,731	$	(465)	$	22,244	$	(468)
Other securities		536,520		(13,480)		—		—		536,520		(13,480)		—		—		—		—		—		—
	$	171,170,164	$	(5,453,001)	$	64,984,249	$	(5,314,336)	$	236,154,413	$	(10,767,337)	$	513	$	(3)	$	21,731	$	(465)	$	22,244	$	(468)

Securities AFS:
U.S. govt. sponsored agency securities	$	18,437,573	$	(521,633)	$	15,829,173	$	(712,383)	$	34,266,746	$	(1,234,016)	$	—	$	—	$	6,652	$	(99)	$	6,652	$	(99)
Residential mortgage-backed and related securities		44,903,593		(1,712,003)		105,007,537		(5,524,819)		149,911,130		(7,236,822)		—		—		47,176		(585)		47,176		(585)
Municipal securities		79,442,346		(976,811)		10,952,533		(371,217)		90,394,879		(1,348,028)		—		—		2,914		(18)		2,914		(18)
Other securities		4,194,890		(59,474)		—				4,194,890		(59,474)		248		—		—		—		248		—
	$	146,978,402	$	(3,269,921)	$	131,789,243	$	(6,608,419)	$	278,767,645	$	(9,878,340)	$	248	$	—	$	56,742	$	(702)	$	56,990	$	(702)


	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross				Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
December 31, 2017:
													(dollars in thousands)
December 31, 2018:
Securities HTM:
Municipal securities	$	23,750,826	$	(354,460)	$	72,611,780	$	(2,133,659)	$	96,362,606	$	(2,488,119)	$	114,201	$	(2,187)	$	69,412	$	(4,616)	$	183,613	$	(6,803)
Other securities														549		(1)		—		—		549		(1)
													$	114,750	$	(2,188)	$	69,412	$	(4,616)	$	184,162	$	(6,804)
Securities AFS:
U.S. govt. sponsored agency securities	$	28,576,258	$	(200,022)	$	3,640,477	$	(149,945)	$	32,216,735	$	(349,967)	$	1,565	$	(34)	$	29,605	$	(744)	$	31,170	$	(778)
Residential mortgage-backed and related securities		88,927,779		(871,855)		57,931,731		(1,441,674)		146,859,510		(2,313,529)		12,810		(148)		133,535		(4,483)		146,345		(4,631)
Municipal securities		10,229,337		(41,151)		9,997,433		(169,949)		20,226,770		(211,100)		28,356		(394)		15,932		(309)		44,288		(703)
Other securities		923,535		(25,815)		—		—		923,535		(25,815)		4,249		(4)		—		—		4,249		(4)
	$	128,656,909	$	(1,138,843)	$	71,569,641	$	(1,761,568)	$	200,226,550	$	(2,900,411)	$	46,980	$	(580)	$	179,072	$	(5,536)	$	226,052	$	(6,116)

At ~~September~~June 30, ~~2018,~~2019, the investment portfolio included ~~613~~587 securities. Of this number, ~~434~~69 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~3.2%~~0.2% of the total amortized cost of

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~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

the portfolio. Of these ~~434~~69 securities, ~~171~~67 securities had an unrealized loss for twelve months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

The Company did not recognize OTTI on any investment securities for the three or ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

All sales of securities for the three and nine months ended September 30, 2018 and 2017 were from securities identified as AFS. Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:

Three Months Ended

Nine Months Ended

September 30, 2018

September 30, 2017

September 30, 2018

September 30, 2017

Proceeds from sales of securities

$
1,938,043

$
8,415,795

$
1,938,043

$
21,969,870

Gross gains from sales of securities

—

6,312

—

65,880

Gross losses from sales of securities

—

(69,900)

—

(91,004)

The amortized cost and fair value of securities as of September 30, 2018 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because

1914

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

All sales of securities for the three and six months ended June 30, 2019 were securities identified as AFS. There were no sales for the three and six months ended June 30, 2018. Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:


	Three and Six Months Ended
	June 30, 2019
	(dollars in thousands)

Proceeds from sales of securities	$	4,661
Gross gains from sales of securities		—
Gross losses from sales of securities		(52)

The amortized cost and fair value of securities as of June 30, 2019 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.


					Amortized Cost		Fair Value
	Amortized Cost		Fair Value		(dollars in thousands)
Securities HTM:
Due in one year or less	$	1,710,335	$	1,711,153	$	2,781	$	2,794
Due after one year through five years		27,876,391		27,826,476		32,323		32,929
Due after five years		365,834,469		359,003,651		353,609		370,489
	$	395,421,195	$	388,541,280	$	388,713	$	406,212
Securities AFS:
Due in one year or less	$	3,153,996	$	3,156,871	$	1,624	$	1,633
Due after one year through five years		25,663,131		25,220,152		27,466		27,638
Due after five years		73,254,659		71,213,823		65,042		66,591
		102,071,786		99,590,846		94,132		95,862
Residential mortgage-backed and related securities		162,933,727		155,732,596		157,760		159,228
	$	265,005,513	$	255,323,442	$	251,892	$	255,090

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


					Amortized Cost		Fair Value
	Amortized Cost		Fair Value		(dollars in thousands)
Securities HTM:
Municipal securities	$	229,992,901	$	226,439,711	$	188,313	$	193,173

Securities AFS:
U.S. govt. sponsored agency securities		4,998,969		4,847,750		4,999		5,003
Municipal securities		50,248,182		49,027,162		44,184		45,185
Corporate securities		4,006,462		3,948,640
Other securities						6,505		6,662
	$	59,253,613	$	57,823,552	$	55,688	$	56,850

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

As of ~~September~~June 30, ~~2018,~~2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by ~~113~~101 issuers with fair values totaling ~~$86.2~~$81.0 million and revenue bonds issued by ~~163~~159 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$360.2~~$377.3 million. The Company held investments in general obligation bonds in 2724 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 19 states, including seven states in which the aggregate fair value exceeded $5.0 million.

As of December 31, ~~2017,~~2018, the Company's municipal securities portfolios were comprised of general obligation bonds issued by ~~131~~110 issuers with fair values totaling ~~$108.0~~$86.4 million and revenue bonds issued by ~~145~~160 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$337.3~~$371.9 million. The Company held investments in general obligation bonds in 26 states, including ~~nine~~six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 1619 states, including seven states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018 the Company ~~did not hold general obligation or~~held revenue bonds of ~~any~~one single issuer, located in Ohio, of which the aggregate book or market value ~~of which~~ exceeded 5% of the ~~Company's stockholders'~~Company’s stockholders’ equity. The issuer’s 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 loan risk rating of 2, indicating very high

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by each of the five charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of ~~September~~June 30, ~~2018,~~2019, all were well within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of ~~September~~June 30, ~~2018,~~2019, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 43 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 is presented as follows:


	As of		As of
	September 30,		December 31,		As of June 30,		As of December 31,
	2018		2017		2019		2018
					(dollars in thousands)
C&I loans*	$	1,380,542,524	$	1,134,516,315

C&I loans *					$	1,548,657	$	1,429,410
CRE loans
Owner-occupied CRE		449,056,125		332,742,477		494,638		500,654
Commercial construction, land development, and other land		224,295,259		186,402,404		312,578		236,787
Other non owner-occupied CRE		1,053,974,806		784,347,000		1,030,257		1,028,670
						1,837,473		1,766,111
		1,727,326,190		1,303,491,882
Direct financing leases **		126,751,783		141,448,232		101,180		117,969
Residential real estate loans ***		309,287,535		258,646,265		293,479		290,759
Installment and other consumer loans		100,191,471		118,610,799		120,947		119,381
		3,644,099,503		2,956,713,493		3,901,736		3,723,630
Plus deferred loan/lease origination costs, net of fees		9,286,864		7,771,907		8,783		9,124
		3,653,386,367		2,964,485,400		3,910,519		3,732,754
Less allowance		(43,077,457)		(34,355,728)		(41,104)		(39,847)
	$	3,610,308,910	$	2,930,129,672	$	3,869,415	$	3,692,907
** Direct financing leases:
Net minimum lease payments to be received	$	140,055,010	$	156,583,887	$	111,764	$	130,371
Estimated unguaranteed residual values of leased assets		929,932		929,932		690		828
Unearned lease/residual income		(14,233,159)		(16,065,587)		(11,274)		(13,230)
		126,751,783		141,448,232		101,180		117,969
Plus deferred lease origination costs, net of fees		4,039,635		4,624,027		2,760		3,642
		130,791,418		146,072,259		103,940		121,611
Less allowance		(2,632,247)		(2,382,098)		(1,459)		(1,792)
	$	128,159,171	$	143,690,161	$	102,481	$	119,819

* Includes equipment financing agreements outstanding at m2, totaling ~~$98,823,351~~$122.6 million and ~~$66,758,397~~$103.4 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

** Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large 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. There were no losses related to residual values for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

*** Includes residential real estate loans held for sale totaling ~~$2,557,907~~$4.2 million and ~~$645,001~~$1.3 million as of ~~September~~June 30, ~~2018,~~2019 and December 31, ~~2017,~~2018, respectively.

~~Changes in accretable yield for acquired loans were as follows:~~

Three months ended September 30, 2018

Nine months ended September 30, 2018


PCI

Performing


PCI

Performing


Loans

Loans

Total

Loans

Loans

Total

Balance at the beginning of the period

$
(142,048)

$
(5,051,424)

$
(5,193,472)

$
(191,132)

$
(6,280,075)

$
(6,471,207)

Discount added at acquisition

(293,445)

(7,799,860)

(8,093,305)

(293,445)

(7,799,860)

(8,093,305)

Reclassification of nonaccretable discount to accretable

(891,569)

—

(891,569)

(891,569)

—

(891,569)

Accretion recognized

268,694

1,579,568

1,848,262

317,778

2,808,219

3,125,997

Balance at the end of the period

$
(1,058,368)

$
(11,271,716)

$
(12,330,084)

$
(1,058,368)

$
(11,271,716)

$
(12,330,084)

Three months ended September 30, 2017

Nine months ended September 30, 2017


PCI

Performing


PCI

Performing


Loans

Loans

Total

Loans

Loans

Total

Balance at the beginning of the period

$
(83,860)

$
(5,325,471)

$
(5,409,331)

$
(194,306)

$
(9,115,614)

$
(9,309,920)

Accretion recognized

25,158

658,547

683,705

135,604

4,448,690

4,584,294

Balance at the end of the period

$
(58,702)

$
(4,666,924)

$
(4,725,626)

$
(58,702)

$
(4,666,924)

$
(4,725,626)

~~The aging of the loan/lease portfolio by classes of loans/leases as of September 30, 2018 and December 31, 2017 is presented as follows:~~

As of September 30, 2018

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

C&I

$
1,371,826,021

$
143,866

$
526,049

$
—

$
8,046,588

$
1,380,542,524

CRE









Owner-Occupied CRE

447,031,462

1,506,334

109,681

—

408,648

449,056,125

Commercial Construction, Land Development, and Other Land

217,512,489

3,994,986

—

1,131,975

1,655,809

224,295,259

Other Non Owner-Occupied CRE

1,043,267,553

413,292

—

—

10,293,961

1,053,974,806

Direct Financing Leases

123,407,592

1,153,460

224,015

—

1,966,716

126,751,783

Residential Real Estate

306,900,388

—

1,142,787

270,413

973,947

309,287,535

Installment and Other Consumer

99,501,411

38,912

413,565

6,967

230,616

100,191,471

$
3,609,446,916

$
7,250,850

$
2,416,097

$
1,409,355

$
23,576,285

$
3,644,099,503













As a percentage of total loan/lease portfolio

99.05
%

0.20
%

0.07
%

0.04
%

0.65
%

100.00
%

2217

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Changes in accretable yield for acquired loans were as follows:

As of December 31, 2017

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

C&I

$
1,124,734,486

$
8,306,829

$
243,647

$
—

$
1,231,353

$
1,134,516,315

CRE













Owner-Occupied CRE

331,868,142

540,435

—

—

333,900

332,742,477

Commercial Construction, Land Development, and Other Land

181,558,092

—

—

—

4,844,312

186,402,404

Other Non Owner-Occupied CRE

782,526,249

572,877

4,146

—

1,243,728

784,347,000

Direct Financing Leases

137,708,397

1,305,191

259,600

—

2,175,044

141,448,232

Residential Real Estate

253,261,821

3,552,709

393,410

74,519

1,363,806

258,646,265

Installment and Other Consumer

117,773,259

517,537

56,760

14,152

249,091

118,610,799

$
2,929,430,446

$
14,795,578

$
957,563

$
88,671

$
11,441,234

$
2,956,713,493

As a percentage of total loan/lease portfolio

99.08
%

0.50
%

0.03
%

0.00
%

0.39
%

100.00
%


	Three months ended June 30, 2019						Six months ended June 30, 2019
	PCI		Performing				PCI		Performing
	Loans		Loans		Total		Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(319)	$	(8,830)	$	(9,149)	$	(667)	$	(9,656)	$	(10,323)
Reclassification of nonaccretable discount to accretable		(159)		—		(159)		(159)		—		(159)
Accretion recognized		327		812		1,139		675		1,638		2,313
Balance at the end of the period	$	(151)	$	(8,018)	$	(8,169)	$	(151)	$	(8,018)	$	(8,169)


	Three months ended June 30, 2018						Six months ended June 30, 2018
	PCI		Performing				PCI		Performing
	Loans		Loans		Total		Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(157)	$	(5,659)	$	(5,816)	$	(191)	$	(6,280)	$	(6,471)
Accretion recognized		15		608		623		49		1,229		1,278
Balance at the end of the period	$	(142)	$	(5,051)	$	(5,193)	$	(142)	$	(5,051)	$	(5,193)

The aging of the loan/lease portfolio by classes of loans/leases as of June 30, 2019 and December 31, 2018 is presented as follows:


	As of June 30, 2019
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total
	(dollars in thousands)

C&I	$	1,540,661		$	4,136		$	307		$	—		$	3,553		$	1,548,657
CRE
Owner-Occupied CRE		493,877			571			—			—			190			494,638
Commercial Construction, Land Development, and Other Land		312,288			96			—			—			194			312,578
Other Non Owner-Occupied CRE		1,024,769			67			11			—			5,410			1,030,257
Direct Financing Leases		98,581			971			80			—			1,548			101,180
Residential Real Estate		291,605			190			160			54			1,470			293,479
Installment and Other Consumer		120,082			78			—			4			783			120,947
	$	3,881,863		$	6,109		$	558		$	58		$	13,148		$	3,901,736

As a percentage of total loan/lease portfolio		99.49	%		0.16	%		0.01	%		0.00	%		0.34	%		100.00	%


	As of December 31, 2018
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total
	(dollars in thousands)

C&I	$	1,423,406		$	930		$	597		$	389		$	4,088		$	1,429,410
CRE
Owner-Occupied CRE		500,138			—			193			107			216			500,654
Commercial Construction, Land Development, and Other Land		234,704			1,764			—			—			319			236,787
Other Non Owner-Occupied CRE		1,022,664			484			—			—			5,522			1,028,670
Direct Financing Leases		114,078			1,642			488			—			1,761			117,969
Residential Real Estate		284,844			3,877			206			89			1,743			290,759
Installment and Other Consumer		118,343			356			24			47			611			119,381
	$	3,698,177		$	9,053		$	1,508		$	632		$	14,260		$	3,723,630

As a percentage of total loan/lease portfolio		99.32	%		0.24	%		0.04	%		0.02	%		0.38	%		100.00	%

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NPLs by classes of loans/leases as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are presented as follows:


	As of September 30, 2018										As of June 30, 2019
	Accruing Past										Accruing Past
	Due 90 Days or		Nonaccrual						Percentage of		Due 90 Days or		Nonaccrual						Percentage of
Classes of Loans/Leases	More		Loans/Leases*		Accruing TDRs		Total NPLs		Total NPLs		More*		Loans/Leases*		Accruing TDRs		Total NPLs		Total NPLs
											(dollars in thousands)

C&I	$	—	$	8,046,588	$	677,859	$	8,724,447	29.85	%	$	—	$	3,553	$	1,112	$	4,665	32.13	%
CRE
Owner-Occupied CRE		—		408,648		106,470		515,118	1.76	%		—		190		104		294	2.02	%
Commercial Construction, Land Development, and Other Land		1,131,975		1,655,809		—		2,787,784	9.54	%		—		194		—		194	1.34	%
Other Non Owner-Occupied CRE		—		10,293,961		2,975,703		13,269,664	45.41	%		—		5,410		—		5,410	37.26	%
Direct Financing Leases		—		1,966,716		163,681		2,130,397	7.29	%		—		1,548		97		1,645	11.33	%
Residential Real Estate		270,413		973,947		305,792		1,550,152	5.30	%		54		1,470		—		1,524	10.50	%
Installment and Other Consumer		6,967		230,616		10,410		247,993	0.85	%		4		783		—		787	5.42	%
	$	1,409,355	$	23,576,285	$	4,239,915	$	29,225,555	100.00	%	$	58	$	13,148	$	1,313	$	14,519	100.00	%

* Nonaccrual loans/leases included ~~$3,036,422~~$2.8 million of TDRs, including ~~$336,168~~$28 thousand in C&I loans, ~~$2,026,376~~$2.2 million in CRE loans, ~~$587,613~~$314 thousand in direct financing leases, ~~$82,151~~$286 thousand in residential real estate loans, and ~~$4,114~~$2 thousand in installment loans.


	As of December 31, 2017										As of December 31, 2018
	Accruing Past										Accruing Past
	Due 90 Days or		Nonaccrual						Percentage of		Due 90 Days or		Nonaccrual						Percentage of
Classes of Loans/Leases	More		Loans/Leases **		Accruing TDRs		Total NPLs		Total NPLs		More*		Loans/Leases **		Accruing TDRs		Total NPLs		Total NPLs
												(dollars in thousands)

C&I	$	—	$	1,231,353	$	5,224,182	$	6,455,535	34.63	%	$	389	$	4,088	$	454	$	4,931	26.58	%
CRE
Owner-Occupied CRE		—		333,900		107,322		441,222	2.37	%		107		216		—		323	1.74	%
Commercial Construction, Land Development, and Other Land		—		4,844,312		—		4,844,312	25.99	%		—		319		—		319	1.72	%
Other Non Owner-Occupied CRE		—		1,243,728		—		1,243,728	6.67	%		—		5,522		2,984		8,506	45.86	%
Direct Financing Leases		—		2,175,044		1,494,448		3,669,492	19.68	%		—		1,761		111		1,872	10.09	%
Residential Real Estate		74,519		1,363,806		272,493		1,710,818	9.18	%		89		1,743		100		1,932	10.41	%
Installment and Other Consumer		14,152		249,091		14,027		277,270	1.49	%		47		611		9		667	3.60	%
	$	88,671	$	11,441,234	$	7,112,472	$	18,642,377	100.00	%	$	632	$	14,260	$	3,658	$	18,550	100.00	%

* As of December 31, 2018 accruing past due 90 days or more included $496 thousand of TDRs, including $389 thousand in C&I loans and $107 thousand in CRE loans.

** Nonaccrual loans/leases included ~~$2,282,495~~$2.3 million of TDRs, including ~~$122,598~~$265 thousand in C&I loans, ~~$1,336,871~~$1.4 million in CRE loans, ~~$700,255~~$321 thousand in direct financing leases, ~~$115,190~~$344 thousand in residential real estate loans, and ~~$7,581~~$3 thousand in installment loans.

2319

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Changes in the allowance by portfolio segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, are presented as follows:


													Three Months Ended June 30, 2019
	Three Months Ended September 30, 2018																Direct Financing		Residential Real		Installment and
					Direct Financing		Residential Real		Installment and				C&I		CRE		Leases		Estate		Other Consumer		Total
	C&I		CRE		Leases		Estate		Other Consumer		Total		(dollars in thousands)

Balance, beginning	$	15,233,871	$	15,819,040	$	2,724,355	$	2,433,102	$	1,334,708	$	37,545,076	$	17,260	$	18,303	$	1,606	$	2,538	$	1,457	$	41,164
Provisions (credits) charged to expense		3,698,588		2,254,313		124,803		131,977		(3,853)		6,205,828		1,116		414		331		86		(6)		1,941
Loans/leases charged off		(87,040)		(387,499)		(427,638)		(58,241)		(30,230)		(990,648)		(193)		(1,369)		(497)		(73)		(20)		(2,152)
Recoveries on loans/leases previously charged off		71,440		30,344		210,727		—		4,690		317,201		65		15		19		31		21		151
Balance, ending	$	18,916,859	$	17,716,198	$	2,632,247	$	2,506,838	$	1,305,315	$	43,077,457	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104


													Three Months Ended June 30, 2018
	Three Months Ended September 30, 2017																Direct Financing		Residential Real		Installment and
					Direct Financing		Residential Real		Installment and				C&I		CRE		Leases		Estate		Other Consumer		Total
	C&I		CRE		Leases		Estate		Other Consumer		Total		(dollars in thousands)

Balance, beginning	$	14,207,733	$	12,999,233	$	2,638,301	$	2,430,454	$	1,080,911	$	33,356,632	$	15,065	$	14,938	$	2,730	$	2,375	$	1,424	$	36,532
Provisions (credits) charged to expense		469,977		1,349,393		179,190		(11,654)		99,530		2,086,436		777		872		688		57		(93)		2,301
Loans/leases charged off		(338,361)		—		(268,669)		(25,822)		(16,872)		(649,724)		(729)		—		(794)		—		(1)		(1,524)
Recoveries on loans/leases previously charged off		63,366		10,748		103,936		6,000		4,947		188,997		121		9		100		1		5		236
Balance, ending	$	14,402,715	$	14,359,374	$	2,652,758	$	2,398,978	$	1,168,516	$	34,982,341	$	15,234	$	15,819	$	2,724	$	2,433	$	1,335	$	37,545


													Six Months Ended June 30, 2019
	Nine Months Ended September 30, 2018																Direct Financing		Residential Real		Installment and
					Direct Financing		Residential Real		Installment and				C&I		CRE		Leases		Estate		Other Consumer		Total
	C&I		CRE		Leases		Estate		Other Consumer		Total		(dollars in thousands)

Balance, beginning	$	14,323,036	$	13,962,688	$	2,382,098	$	2,466,431	$	1,221,475	$	34,355,728	$	16,420	$	17,719	$	1,792	$	2,557	$	1,359	$	39,847
Provisions charged to expense		5,283,763		4,091,170		1,417,494		149,923		104,052		11,046,402		2,123		948		776		68		160		4,075
Loans/leases charged off		(911,429)		(387,499)		(1,505,824)		(110,566)		(36,063)		(2,951,381)		(527)		(1,369)		(1,149)		(73)		(94)		(3,212)
Recoveries on loans/leases previously charged off		221,489		49,839		338,479		1,050		15,851		626,708		232		65		40		30		27		394
Balance, ending	$	18,916,859	$	17,716,198	$	2,632,247	$	2,506,838	$	1,305,315	$	43,077,457	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104

Nine Months Ended September 30, 2017






Direct Financing

Residential Real

Installment and


C&I

CRE

Leases

Estate

Other Consumer

Total

Balance, beginning

$
12,545,110

$
11,670,609

$
3,111,898

$
2,342,344

$
1,087,487

$
30,757,448

Provisions charged to expense

2,345,121

2,655,521

981,877

148,017

84,002

6,214,538

Loans/leases charged off

(630,704)

(10,375)

(1,611,432)

(101,006)

(40,436)

(2,393,953)

Recoveries on loans/leases previously charged off

143,188

43,619

170,415

9,623

37,463

404,308

Balance, ending

$
14,402,715

$
14,359,374

$
2,652,758

$
2,398,978

$
1,168,516

$
34,982,341

~~The allowance by impairment evaluation and by portfolio segment as of September 30, 2018 and December 31, 2017 is presented as follows:~~

As of September 30, 2018

Direct Financing

Residential Real

Installment and


C&I

CRE

Leases

Estate

Other Consumer

Total

Allowance for impaired loans/leases

$
4,787,321

$
3,555,829

$
363,439

$
226,263

$
102,649

$
9,035,501

Allowance for nonimpaired loans/leases

14,129,538

14,160,369

2,268,808

2,280,575

1,202,666

34,041,956

$
18,916,859

$
17,716,198

$
2,632,247

$
2,506,838

$
1,305,315

$
43,077,457













Impaired loans/leases

$
11,064,848

$
15,944,006

$
2,147,125

$
1,148,009

$
241,614

$
30,545,602

Nonimpaired loans/leases

1,369,477,676

1,711,382,184

124,604,658

308,139,526

99,949,857

3,613,553,901

$
1,380,542,524

$
1,727,326,190

$
126,751,783

$
309,287,535

$
100,191,471

$
3,644,099,503













Allowance as a percentage of impaired loans/leases

43.27
%

22.30
%

16.93
%

19.71
%

42.48
%

29.58
%
Allowance as a percentage of nonimpaired loans/leases

1.03
%

0.83
%

1.82
%

0.74
%

1.20
%

0.94
%
Total allowance as a percentage of total loans/leases

1.37
%

1.03
%

2.08
%

0.81
%

1.30
%

1.18
%


	Six Months Ended June 30, 2018
					Direct Financing		Residential Real		Installment and
	C&I		CRE		Leases		Estate		Other Consumer		Total
	(dollars in thousands)

Balance, beginning	$	14,323	$	13,963	$	2,382	$	2,466	$	1,222	$	34,356
Provisions charged to expense		1,585		1,837		1,293		18		108		4,841
Loans/leases charged off		(824)		—		(1,079)		(52)		(6)		(1,961)
Recoveries on loans/leases previously charged off		150		19		128		1		11		309
Balance, ending	$	15,234	$	15,819	$	2,724	$	2,433	$	1,335	$	37,545

2420

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The allowance by impairment evaluation and by portfolio segment as of June 30, 2019 and December 31, 2018 is presented as follows:


																			As of June 30, 2019
	As of December 31, 2017																								Direct Financing			Residential Real			Installment and
							Direct Financing			Residential Real			Installment and						C&I			CRE			Leases			Estate			Other Consumer			Total
	C&I			CRE			Leases			Estate			Other Consumer			Total			(dollars in thousands)

Allowance for impaired loans/leases	$	715,627		$	1,429,460		$	504,469		$	355,167		$	38,596		$	3,043,319		$	1,085		$	445		$	93		$	192		$	152		$	1,967
Allowance for nonimpaired loans/leases		13,607,409			12,533,228			1,877,629			2,111,264			1,182,879			31,312,409			17,163			16,918			1,366			2,390			1,300			39,137
	$	14,323,036		$	13,962,688		$	2,382,098		$	2,466,431		$	1,221,475		$	34,355,728		$	18,248		$	17,363		$	1,459		$	2,582		$	1,452		$	41,104

Impaired loans/leases	$	6,248,209		$	6,529,262		$	3,669,492		$	1,704,846		$	202,354		$	18,354,163		$	4,520		$	7,736		$	1,860		$	1,628		$	1,052		$	16,796
Nonimpaired loans/leases		1,128,268,106			1,296,962,620			137,778,740			256,941,419			118,408,445			2,938,359,330			1,544,137			1,829,737			99,320			291,851			119,895			3,884,940
	$	1,134,516,315		$	1,303,491,882		$	141,448,232		$	258,646,265		$	118,610,799		$	2,956,713,493		$	1,548,657		$	1,837,473		$	101,180		$	293,479		$	120,947		$	3,901,736

Allowance as a percentage of impaired loans/leases		11.45	%		21.89	%		13.75	%		20.83	%		19.07	%		16.58	%		24.00	%		5.75	%		5.00	%		11.79	%		14.45	%		11.71	%
Allowance as a percentage of nonimpaired loans/leases		1.21	%		0.97	%		1.36	%		0.82	%		1.00	%		1.07	%		1.11	%		0.92	%		1.38	%		0.82	%		1.08	%		1.01	%
Total allowance as a percentage of total loans/leases		1.26	%		1.07	%		1.68	%		0.95	%		1.03	%		1.16	%		1.18	%		0.94	%		1.44	%		0.88	%		1.20	%		1.05	%


	As of December 31, 2018
							Direct Financing			Residential Real			Installment and
	C&I			CRE			Leases			Estate			Other Consumer			Total
	(dollars in thousands)

Allowance for impaired loans/leases	$	973		$	2,124		$	194		$	257		$	111		$	3,659
Allowance for nonimpaired loans/leases		15,447			15,595			1,598			2,300			1,248			36,188
	$	16,420		$	17,719		$	1,792		$	2,557		$	1,359		$	39,847

Impaired loans/leases	$	4,499		$	10,447		$	2,249		$	2,110		$	898		$	20,203
Nonimpaired loans/leases		1,424,911			1,755,664			115,720			288,649			118,483			3,703,427
	$	1,429,410		$	1,766,111		$	117,969		$	290,759		$	119,381		$	3,723,630

Allowance as a percentage of impaired loans/leases		21.62	%		20.33	%		8.63	%		12.18	%		12.38	%		18.11	%
Allowance as a percentage of nonimpaired loans/leases		1.08	%		0.89	%		1.38	%		0.80	%		1.05	%		0.98	%
Total allowance as a percentage of total loans/leases		1.15	%		1.00	%		1.52	%		0.88	%		1.14	%		1.07	%

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

2521

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 are presented as follows:



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

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	4,549,509	$	4,563,785	$	—	$	2,139,521	$	145,605	$	145,605	$	2,048	$	2,088	$	—	$	1,680	$	52	$	52
CRE
Owner-Occupied CRE		288,409		288,409		—		288,936		—		—		216		232		—		187		11		11
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—		546		902		—		628		13		13
Other Non Owner-Occupied CRE		2,018,910		2,018,910		—		504,880		26,649		26,649		3,417		4,296		—		4,183		92		92
Direct Financing Leases		1,569,905		1,569,905		—		2,295,387		10,852		10,852		1,600		1,600		—		1,901		16		16
Residential Real Estate		663,167		737,946		—		649,064		207		207		810		1,001		—		765		1		1
Installment and Other Consumer		130,814		130,814		—		104,290		—		—		875		875		—		797		7		7
	$	9,220,714	$	9,309,769	$	—	$	5,982,078	$	183,313	$	183,313	$	9,512	$	10,994	$	—	$	10,141	$	192	$	192

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	6,515,339	$	6,515,339	$	4,787,321	$	1,845,156	$	5,878	$	5,878	$	2,472	$	2,478	$	1,085	$	1,917	$	18	$	18
CRE
Owner-Occupied CRE		138,201		138,201		34,701		145,082		—		—		124		124		21		129		—		—
Commercial Construction, Land Development, and Other Land		5,801,618		5,801,618		2,145,425		5,116,524		—		—		142		142		31		145		—		—
Other Non Owner-Occupied CRE		7,696,868		7,696,868		1,375,703		1,924,217		8,506		8,506		3,291		3,291		393		1,588		—		—
Direct Financing Leases		577,220		577,220		363,439		532,999		—		—		260		260		93		196		1		1
Residential Real Estate		484,842		507,918		226,263		447,006		8,877		8,877		818		818		192		829		3		3
Installment and Other Consumer		110,800		110,800		102,649		127,434		229		229		177		177		152		136		—		—
	$	21,324,888	$	21,347,964	$	9,035,501	$	10,138,418	$	23,490	$	23,490	$	7,284	$	7,290	$	1,967	$	4,940	$	22	$	22

Total Impaired Loans/Leases:
C&I	$	11,064,848	$	11,079,124	$	4,787,321	$	3,984,677	$	151,483	$	151,483	$	4,520	$	4,566	$	1,085	$	3,597	$	70	$	70
CRE
Owner-Occupied CRE		426,610		426,610		34,701		434,018		—		—		340		356		21		316		11		11
Commercial Construction, Land Development, and Other Land		5,801,618		5,801,618		2,145,425		5,116,524		—		—		688		1,044		31		773		13		13
Other Non Owner-Occupied CRE		9,715,778		9,715,778		1,375,703		2,429,097		35,155		35,155		6,708		7,587		393		5,771		92		92
Direct Financing Leases		2,147,125		2,147,125		363,439		2,828,386		10,852		10,852		1,860		1,860		93		2,097		17		17
Residential Real Estate		1,148,009		1,245,864		226,263		1,096,070		9,084		9,084		1,628		1,819		192		1,594		4		4
Installment and Other Consumer		241,614		241,614		102,649		231,724		229		229		1,052		1,052		152		933		7		7
	$	30,545,602	$	30,657,733	$	9,035,501	$	16,120,496	$	206,803	$	206,803	$	16,796	$	18,284	$	1,967	$	15,081	$	214	$	214

~~Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management's current estimates.~~

2622

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively are presented as follows:


	Three Months Ended September 30, 2018						Three Months Ended September 30, 2017						Three Months Ended June 30, 2019						Three Months Ended June 30, 2018
					Interest Income						Interest Income						Interest Income						Interest Income
	Average				Recognized for		Average				Recognized for		Average				Recognized for		Average				Recognized for
	Recorded		Interest Income		Cash Payments		Recorded		Interest Income		Cash Payments		Recorded		Interest Income		Cash Payments		Recorded		Interest Income		Cash Payments
Classes of Loans/Leases	Investment		Recognized		Received		Investment		Recognized		Received		Investment		Recognized		Received		Investment		Recognized		Received
													(dollars in thousands)

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	2,794,748	$	16,792	$	16,792	$	1,301,977	$	25,816	$	25,816	$	1,683	$	29	$	29	$	1,401	$	59	$	59
CRE
Owner-Occupied CRE		288,611		—		—		53,661		6,783		6,783		194		7		7		289		6		6
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—		603		6		6		—		—		—
Other Non Owner-Occupied CRE		1,009,590		9,189		9,189		1,173,629		—		—		3,985		22		22		1,105		—		—
Direct Financing Leases		1,780,494		2,483		2,483		2,820,518		39,759		39,759		1,795		7		7		2,199		3		3
Residential Real Estate		665,567		207		207		690,791		—		—		801		—		—		929		—		—
Installment and Other Consumer		115,314		—		—		139,533		—		—		816		3		3		101		—		—
	$	6,654,324	$	28,671	$	28,671	$	6,180,109	$	72,358	$	72,358	$	9,877	$	74	$	74	$	6,024	$	68	$	68

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	3,401,073	$	1,916	$	1,916	$	5,157,671	$	53,127	$	53,127	$	2,046	$	9	$	9	$	353	$	2	$	2
CRE
Owner-Occupied CRE		140,495		—		—		155,020		—		—		127		—		—		145		—		—
Commercial Construction, Land Development, and Other Land		5,483,757		—		—		4,345,880		—		—		143		—		—		5,492		—		—
Other Non Owner-Occupied CRE		3,848,434		8,506		8,506		4,929,960		—		—		1,980		—		—		—		—		—
Direct Financing Leases		557,572		—		—		893,042		—		—		227		—		—		566		—		—
Residential Real Estate		461,398		2,984		2,984		550,476		5,601		5,601		822		1		1		512		3		3
Installment and Other Consumer		113,122		69		69		48,164		99		99		150		—		—		117		—		—
	$	14,005,851	$	13,475	$	13,475	$	16,080,213	$	58,827	$	58,827	$	5,495	$	10	$	10	$	7,185	$	5	$	5

Total Impaired Loans/Leases:
C&I	$	6,195,821	$	18,708	$	18,708	$	6,459,648	$	78,943	$	78,943	$	3,729	$	38	$	38	$	1,754	$	61	$	61
CRE
Owner-Occupied CRE		429,106		—		—		208,681		6,783		6,783		321		7		7		434		6		6
Commercial Construction, Land Development, and Other Land		5,483,757		—		—		4,345,880		—		—		746		6		6		5,492		—		—
Other Non Owner-Occupied CRE		4,858,024		17,695		17,695		6,103,589		—		—		5,965		22		22		1,105		—		—
Direct Financing Leases		2,338,066		2,483		2,483		3,713,560		39,759		39,759		2,022		7		7		2,765		3		3
Residential Real Estate		1,126,965		3,191		3,191		1,241,267		5,601		5,601		1,623		1		1		1,441		3		3
Installment and Other Consumer		228,436		69		69		187,697		99		99		966		3		3		218		—		—
	$	20,660,175	$	42,146	$	42,146	$	22,260,322	$	131,185	$	131,185	$	15,372	$	84	$	84	$	13,209	$	73	$	73

~~Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management's current estimates.~~

2723

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, ~~2017~~2018 are presented as follows:


			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
Classes of Loans/Leases	Investment		Balance		Allowance		Investment		Balance		Allowance
							(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	1,634,269	$	1,644,706	$	—	$	1,846	$	4,540	$	—
CRE
Owner-Occupied CRE		289,261		289,261		—		106		106		—
Commercial Construction, Land Development, and Other Land		—		—		—		507		507		—
Other Non Owner-Occupied CRE		1,171,565		1,171,565		—		1,804		1,804		—
Direct Financing Leases		2,944,540		2,944,540		—		1,929		1,929		—
Residential Real Estate		943,388		1,018,167		—		984		1,058		—
Installment and Other Consumer		134,245		134,245		—		762		762		—
	$	7,117,268	$	7,202,484	$	—	$	7,938	$	10,706	$	—

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	4,613,940	$	4,617,879	$	715,627	$	2,653	$	2,653	$	973
CRE
Owner-Occupied CRE		151,962		151,962		48,462		304		660		39
Commercial Construction, Land Development, and Other Land		4,844,312		4,844,312		1,379,235		149		149		33
Other Non Owner-Occupied CRE		72,163		72,163		1,763		7,577		7,577		2,052
Direct Financing Leases		724,953		724,953		504,469		320		320		194
Residential Real Estate		761,458		761,458		355,167		1,126		1,126		257
Installment and Other Consumer		68,109		68,109		38,596		136		136		111
	$	11,236,897	$	11,240,836	$	3,043,319	$	12,265	$	12,621	$	3,659

Total Impaired Loans/Leases:
C&I	$	6,248,209	$	6,262,585	$	715,627	$	4,499	$	7,193	$	973
CRE
Owner-Occupied CRE		441,222		441,222		48,462		410		766		39
Commercial Construction, Land Development, and Other Land		4,844,312		4,844,312		1,379,235		656		656		33
Other Non Owner-Occupied CRE		1,243,728		1,243,728		1,763		9,381		9,381		2,052
Direct Financing Leases		3,669,492		3,669,492		504,469		2,249		2,249		194
Residential Real Estate		1,704,846		1,779,625		355,167		2,110		2,184		257
Installment and Other Consumer		202,354		202,354		38,596		898		898		111
	$	18,354,163	$	18,443,318	$	3,043,319	$	20,203	$	23,327	$	3,659

Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management's current estimates.

For C&I and CRE loans, the Company's credit quality indicator consists of internally assigned risk ratings. Each commercial 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 (equipment financing agreements), direct financing leases, residential real estate loans, and installment and other 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.

2824

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	As of September 30, 2018												As of June 30, 2019
			CRE												CRE
					Non Owner-Occupied												Non-Owner Occupied
					Commercial												Commercial
					Construction,												Construction,
					Land												Land
			Owner-Occupied		Development,						As a % of				Owner-Occupied		Development,						As a % of
Internally Assigned Risk Rating	C&I		CRE		and Other Land		Other CRE		Total		Total		C&I		CRE		and Other Land		Other CRE		Total		Total
													(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,236,971,045	$	438,799,404	$	216,655,705	$	1,021,710,298	$	2,914,136,452	96.85	%	$	1,398,762	$	487,200	$	308,269	$	1,008,427	$	3,202,658	98.14	%
Special Mention (Rating 6)		28,051,461		6,972,157		3,850,042		10,356,053		49,229,713	1.64	%		9,811		4,236		64		5,802		19,913	0.61	%
Substandard (Rating 7)		16,693,746		3,284,564		3,789,512		21,908,455		45,676,277	1.51	%		17,460		3,202		4,245		16,028		40,935	1.25	%
Doubtful (Rating 8)		2,921		—		—		—		2,921	—	%		—		—		—		—		—	—	%
	$	1,281,719,173	$	449,056,125	$	224,295,259	$	1,053,974,806	$	3,009,045,363	100.00	%	$	1,426,033	$	494,638	$	312,578	$	1,030,257	$	3,263,506	100.00	%


	As of September 30, 2018												As of June 30, 2019
			Direct Financing		Residential Real		Installment and				As a % of				Direct Financing		Residential Real		Installment and				As a % of
Delinquency Status *	C&I		Leases		Estate		Other Consumer		Total		Total		C&I		Leases		Estate		Other Consumer		Total		Total
													(dollars in thousands)

Performing	$	98,150,050	$	124,621,386	$	307,737,383	$	99,943,478	$	630,452,297	99.28	%	$	121,836	$	99,536	$	291,955	$	120,160	$	633,487	99.26	%
Nonperforming		673,301		2,130,397		1,550,152		247,993		4,601,843	0.72	%		788		1,644		1,524		787		4,743	0.74	%
	$	98,823,351	$	126,751,783	$	309,287,535	$	100,191,471	$	635,054,140	100.00	%	$	122,624	$	101,180	$	293,479	$	120,947	$	638,230	100.00	%


	As of December 31, 2017												As of December 31, 2018
			CRE												CRE
					Non Owner-Occupied												Non-Owner Occupied
					Commercial												Commercial
					Construction,												Construction,
					Land												Land
			Owner-Occupied		Development,						As a % of				Owner-Occupied		Development,						As a % of
Internally Assigned Risk Rating	C&I		CRE		and Other Land		Other CRE		Total		Total		C&I		CRE		and Other Land		Other CRE		Total		Total
													(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,031,963,703	$	318,293,608	$	179,142,839	$	767,119,909	$	2,296,520,059	96.85	%	$	1,294,418	$	487,949	$	230,473	$	1,008,626	$	3,021,466	97.72	%
Special Mention (Rating 6)		10,944,924		8,230,060		1,780,000		10,068,870		31,023,854	1.31	%		23,302		9,599		3,848		5,309		42,058	1.36	%
Substandard (Rating 7)		24,578,731		6,218,809		5,479,565		7,158,221		43,435,326	1.83	%		8,286		3,106		2,466		14,735		28,593	0.92	%
Doubtful (Rating 8)		270,559		—		—		—		270,559	0.01	%		—		—		—		—		—	—	%
	$	1,067,757,917	$	332,742,477	$	186,402,404	$	784,347,000	$	2,371,249,799	100.00	%	$	1,326,006	$	500,654	$	236,787	$	1,028,670	$	3,092,117	100.00	%


	As of December 31, 2017												As of December 31, 2018
			Direct Financing		Residential Real		Installment and				As a % of				Direct Financing		Residential Real		Installment and				As a % of
Delinquency Status *	C&I		Leases		Estate		Other Consumer		Total		Total		C&I		Leases		Estate		Other Consumer		Total		Total
													(dollars in thousands)

Performing	$	65,847,177	$	137,778,740	$	256,935,447	$	118,333,529	$	578,894,893	98.88	%	$	102,713	$	116,097	$	288,827	$	118,714	$	626,351	99.18	%
Nonperforming		911,220		3,669,492		1,710,818		277,270		6,568,800	1.12	%		691		1,872		1,932		667		5,162	0.82	%
	$	66,758,397	$	141,448,232	$	258,646,265	$	118,610,799	$	585,463,693	100.00	%	$	103,404	$	117,969	$	290,759	$	119,381	$	631,513	100.00	%

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, TDRs totaled ~~$7,276,337~~$4.1 million and ~~$9,394,967,~~$6.5 million, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

charge-offs at the time of the restructuring. ~~No loans were restructured during the three months ended September 30, 2018.~~

For the three months ended September 30, 2018

For the three months ended September 30, 2017




Pre-

Post-





Pre-

Post-


Modification

Modification

Modification

Modification

Number of

Recorded

Recorded

Specific

Number of

Recorded

Recorded

Specific

Classes of Loans/Leases

Loans / Leases

Investment

Investment

Allowance

Loans / Leases

Investment

Investment

Allowance

CONCESSION - Significant Payment Delay

















C&I

1

$
273,717

$
273,717

$
273,717

4

$
620,452

$
620,452

$
—

Other Non Owner-Occupied CRE

2

980,899

980,899

60,000

—

—

—

—

Direct Financing Leases

2

44,374

44,374

—

4

416,597

416,597

—

5

$
1,298,990

$
1,298,990

$
333,717

8

$
1,037,049

$
1,037,049

$
—

















CONCESSION - Extension of Maturity

















Other Non Owner-Occupied CRE

2

$
2,975,703

$
2,975,703

$
815,703

—

$
—

$
—

$
—

Residential Real Estate

1

35,287

35,287

—

—

—

—

—

3

$
3,010,990

$
3,010,990

$
815,703

—

$
—

$
—

$
—

TOTAL

8

$
4,309,980

$
4,309,980

$
1,149,420

8

$
1,037,049

$
1,037,049

$
—


	For the three months ended June 30, 2019							For the three months ended June 30, 2018
		Pre-		Post-					Pre-		Post-
		Modification		Modification					Modification		Modification
	Number of	Recorded		Recorded		Specific		Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans / Leases	Investment		Investment		Allowance		Loans / Leases	Investment		Investment		Allowance
	(dollars in thousands)
CONCESSION - Significant Payment Delay
C&I	1	$	52	$	52	$	—	—	$	—	$	—	$	—
	1	$	52	$	52	$	—	—	$	—	$	—	$	—

CONCESSION - Foregiveness of Principal
C&I	1	$	587	$	537	$	—	—	$	—	$	—	$	—
	1	$	587	$	537	$	—	—	$	—	$	—	$	—

TOTAL	2	$	639	$	589	$	—	—	$	—	$	—	$	—


	For the nine months ended September 30, 2018							For the nine months ended September 30, 2017							For the six months ended June 30, 2019							For the six months ended June 30, 2018
		Pre-		Post-					Pre-		Post-					Pre-		Post-					Pre-		Post-
		Modification		Modification					Modification		Modification					Modification		Modification					Modification		Modification
	Number of	Recorded		Recorded		Specific		Number of	Recorded		Recorded		Specific		Number of	Recorded		Recorded		Specific		Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans/Leases	Investment		Investment		Allowance		Loans/Leases	Investment		Investment		Allowance		Loans/Leases	Investment		Investment		Allowance		Loans/Leases	Investment		Investment		Allowance
															(dollars in thousands)

CONCESSION - Significant Payment Delay
C&I	1	$	273,717	$	273,717	$	273,717	7	$	801,650	$	801,650	$	—	2	$	71	$	71	$	—	—	$	—	$	—	$	—
Other Non Owner-Occupied CRE	2		980,899		980,899		60,000	—		—		—		—
Real Estate	1		46,320		46,320		—	—		—		—		—
Direct Financing Leases	4		91,898		91,898		—	27		1,889,000		1,889,000		—
	8	$	1,392,834	$	1,392,834	$	333,717	34	$	2,690,650	$	2,690,650	$	—

CONCESSION - Extension of Maturity
Other Non Owner-Occupied CRE	2	$	2,975,703	$	2,975,703	$	815,703	—	$	—	$	—	$	—
Residential Real Estate	1		35,287		35,287		—	—		—		—		—	—		—		—		—	1		46		46		—
Direct Financing Leases	—		—		—		—	2		104,382		104,382		—	3		103		103		5	2		48		48		—
	3	$	3,010,990	$	3,010,990	$	815,703	2	$	104,382	$	104,382	$	—	5	$	174	$	174	$	5	3	$	94	$	94	$	—

CONCESSION - Forgiveness of Principal
C&I															1	$	587	$	537	$	—	—	$	—	$	—	$	—
															1	$	587	$	537	$	—	—	$	—	$	—	$	—

TOTAL	11	$	4,403,824	$	4,403,824	$	1,149,420	36	$	2,795,032	$	2,795,032	$	—	6	$	761	$	711	$	5	3	$	94	$	94	$	—

Of the loans restructured during the ~~nine~~six months ended ~~September~~June 30, ~~2018, four~~2019, two with a post-modification recorded ~~balance~~balances of ~~$1,300,424~~$65 thousand were on nonaccrual. Of the loans restructured during the ~~nine moths~~six months ended ~~September~~June 30, ~~2017, three~~2018, one with a post-modification recorded balance of ~~$1,384,680 were~~$46 thousand was on nonaccrual. For the three and nine months ended September 30, 2018, two of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These TDRs related to customers whose loans were restructured in the third quarter of 2018 with pre-modification balances totaling $774 thousand.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, four~~2019, three of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. Two of these TDRs were related to one customer whose leases were restructured in the first quarter of 2019 with pre-modification balances totaling $66 thousand. The other TDR related to a customer whose loan was restructured in the third quarter of 2018 with an original pre-modification balance of $2.9 million and a current pre-modification balance of $1.5 million and a partial charge off of $879 thousand in the second quarter of 2019.

For the three and six months ended June 30, 2018, seven of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. Three of these TDRs were related to one customer whose loans were restructured in the second quarter of 2017 with pre-modification balances totaling ~~$112~~$78 thousand and the other ~~two~~ TDRs related to ~~another customer~~other customers whose loans were restructured in the ~~fourth quarter~~second and third quarters of ~~2016~~2017 with pre-modification balances totaling ~~$195~~$378 thousand.

Not included in the table above, the Company had 8three TDRs that were restructured and charged off ~~in 2018,~~for the six months ended June 30, 2019, totaling ~~$577,377.~~$161 thousand. The Company had 2eight TDRs that were restructured and charged off ~~in 2017,~~for the six months ended June 30, 2018, totaling ~~$65,623.~~$577 thousand.

3026

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 54 – DERIVATIVES

The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates. The Company entered into two interest rate caps on June 5, 2014 to hedge against the risk of rising interest rates on short-term liabilities. The short-term liabilities consist of $30.0 million of 1-month FHLB advances, and the benchmark rate hedged is 1-month LIBOR. The interest rate caps are designated as a cash flow hedge in accordance with ASC 815. An initial premium of $2.1 million was paid upfront for the ~~two~~ caps. As noted below, one of the caps matured during the quarter ended June 30, 2019. The details of the interest rate caps are as follows:



			Balance Sheet			1-Month LIBOR			Fair Value as of						Balance Sheet			1-Month LIBOR		Fair Value as of
Hedged Instrument	Effective Date	Maturity Date	Location		Notional Amount	Strike Rate			September 30, 2018		December 31, 2017		Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		June 30, 2019		December 31, 2018
(dollars in thousands)												(dollars in thousands)

1-month FHLB Advance	6/3/2014	6/5/2019	Other Assets	$	15,000,000	1.00	%	$	164,214	$	190,085		6/3/2014	6/5/2019	Other Assets	$	15,000	N/A		$	-	$	117
1-month FHLB Advance	6/5/2014	6/5/2021	Other Assets		15,000,000	1.50	%		539,253		316,615		6/5/2014	6/5/2021	Other Assets		15,000	1.49	%		98		342
				$	30,000,000			$	703,467	$	506,700					$	30,000			$	98	$	459

On June 21, 2018, the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities. The floating rate trust preferred securities are tied to 3-month LIBOR, and the interest rate swaps utilize 3-month LIBOR, so the hedge is effective. The interest rate swaps are designated as a cash flow hedge in accordance with ASC 815. The details of the interest rate swaps are as follows:


			Balance Sheet							Fair Value as of					Balance Sheet							Fair Value as of
Hedged Instrument	Effective Date	Maturity Date	Location		Notional Amount	Receive Rate		Pay Rate		September 30, 2018			Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		June 30, 2019		December 31, 2018
(dollars in thousands)												(dollars in thousands)

QCR Holdings Statutory Trust II	9/30/2018	9/30/2028	Other Liabilities	$	10,000,000	5.19	%	5.85	%	$	54,280		9/30/2018	9/30/2028	Other Liabilities	$	10,000	5.17	%	5.85	%	$	(965)	$	(298)
QCR Holdings Statutory Trust III	9/30/2018	9/30/2028	Other Liabilities		8,000,000	5.19	%	5.85	%		43,424		9/30/2018	9/30/2028	Other Liabilities		8,000	5.17	%	5.85	%		(772)		(239)
QCR Holdings Statutory Trust V	7/7/2018	7/7/2028	Other Liabilities		10,000,000	3.90	%	4.54	%		52,884		7/7/2018	7/7/2028	Other Liabilities		10,000	4.15	%	4.54	%		(940)		(288)
Community National Statutory Trust II	9/20/2018	9/20/2028	Other Liabilities		3,000,000	4.49	%	5.17	%		15,703		9/20/2018	9/20/2028	Other Liabilities		3,000	4.56	%	5.17	%		(288)		(89)
Community National Statutory Trust III	9/15//2018	9/15/2028	Other Liabilities		3,500,000	4.09	%	4.75	%		17,956		9/15//2018	9/15/2028	Other Liabilities		3,500	4.16	%	4.75	%		(336)		(104)
Guaranty Bankshares Statutory Trust I	9/15/2018	9/15/2028	Other Liabilities		4,500,000	4.09	%	4.75	%		23,086		9/15/2018	9/15/2028	Other Liabilities		4,500	4.16	%	4.75	%		(431)		(133)
				$	39,000,000	4.58	%	5.24	%	$	207,333					$	39,000	4.65	%	5.24	%	$	(3,732)	$	(1,151)

Changes in fair values of derivatives designated as cash flow hedges are recorded in OCI to the extent the hedge is effective, and reclassified to earnings as the hedged transaction (interest payments on debt) impact earnings.

The caps and swaps are valued by the transaction counterparty on a monthly basis and corroborated by a third party annually.

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. 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.


		June 30, 2019				December 31, 2018
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	596,451	$	65,824	$	445,022	$	22,196
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	596,451	$	65,824	$	445,022	$	22,196

Swap fee income totaled $11.1 million and $2.6 million for the six months ended June 30, 2019 and 2018, respectively. Swap fee income totaled $10.8 million for the year ended December 31, 2018.

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NOTE 5 –BORROWINGS

On February 12, 2019, the Company completed an underwritten public offering of $65.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on February 15, 2029. Net proceeds, after deducting the underwriting discount and estimated expenses, were $63.4 million. The subordinated notes, which qualify as Tier 2 capital for the Company, are at a fixed rate of 5.375% per year until but excluding February 15, 2024. On this date, the interest rate will change to an annual floating rate equal to three-month LIBOR plus 282 basis points until the maturity date. The interest on the subordinated notes are payable semi-annually, commencing on August 15, 2019 during the five year fixed term and thereafter quarterly, commencing on February 15, 2024. The subordinated notes have an optional redemption at par in whole or in part on any interest payment date on or after February 15, 2024. 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. Unamortized debt issuance costs related to the subordinated notes totaled $1.5 million at June 30, 2019.

Immediately following the issuance, the Company repaid term notes totaling $21.3 million and the outstanding balance of $9.0 million on its revolving line of credit. The Company intends to use the remaining net proceeds from this offering for general corporate purposes, including the pursuit of opportunistic acquisitions of similar or complementary financial service organizations, repaying indebtedness, financing investments and capital expenditures, repurchasing shares of the Company’s common stock, investing in the subsidiary banks as regulatory capital or other strategic opportunities that may arise in the future.

In the second quarter of 2019, the Company renewed its revolving line of credit. At renewal, the line amount was increased from $10.0 million to $20.0 million. The interest on the revolving line of credit is calculated at the effective LIBOR rate plus 2.25% per annum (4.57% at June 30, 2019). Prior to the renewal, the interest on the revolving line of credit was calculated at the effective LIBOR rate plus 2.50% per annum. The collateral on the revolving line of credit is the original stock certificates and stock powers of all bank subsidiaries. The outstanding balance on the revolving line of credit was $0 and $9.0 million at June 30, 2019 and December 31, 2018, respectively.

The Company prepaid two wholesale structured repurchase agreements in the second quarter of 2019 using excess funds generated by strong deposit growth. The first wholesale structured repurchase agreement totaled $5.0 million and had original maturity date of March 13, 2020 with a rate of 2.58%. The second wholesale structured repurchase agreement totaled $20.0 million and had an original maturity of June 13, 2020 with a rate of 2.46%. The loss on the prepayment of the two wholesale structured repurchase agreements totaled $50 thousand. In addition, wholesale structured repurchase agreements totaling $10.0 million matured in the second quarter of 2019. The wholesale structured repurchase agreements were utilized as an alternative funding source to FHLB advances and customer deposits. Wholesale structured repurchase agreements were collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.

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NOTE 6 - EARNINGS PER SHARE

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


										Three months ended			Six months ended
										June 30,			June 30,
		Three months ended			Nine months ended					2019		2018		2019		2018
		September 30,			September 30,				(dollars in thousands, except share data)
		2018		2017		2018		2017
Net income	$	8,808,835	$	7,853,935	$	29,804,181	$	25,804,917	$	13,504	$	10,445	$	26,422	$	20,995


Basic EPS	$	0.56	$	0.60	$	2.06	$	1.96	$	0.86	$	0.75	$	1.68	$	1.51
Diluted EPS	$	0.55	$	0.58	$	2.02	$	1.91	$	0.85	$	0.73	$	1.66	$	1.48

Weighted average common shares outstanding		15,625,123		13,151,350		14,477,783		13,151,672		15,714,588		13,919,565		15,703,967		13,904,113
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan		297,201		356,605		308,994		357,894
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan										223,789		312,858		226,692		314,890
Weighted average common and common equivalent shares outstanding		15,922,324		13,507,955		14,786,777		13,509,566		15,938,377		14,232,423		15,930,659		14,219,003

The increase in weighted average common shares outstanding when comparing the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 to ~~September~~June 30, ~~2017~~2018 was primarily due to the common stock issuance as a result of the merger with Springfield Banshares as discussed in Note 2 of the ~~Consolidated Financial Statements, and in connection with~~Company’s Annual Report on Form 10-K for the ~~acquisition of Guaranty Bank.~~year ended December 31, 2018.

NOTE 7 – FAIR VALUE

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

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

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

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

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Assets and liabilities measured at fair value on a recurring basis comprise the following at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant						Quoted Prices		Significant
			in Active		Other		Significant				in Active		Other		Significant
			Markets for		Observable		Unobservable				Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs				Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2018:
									(dollars in thousands)
June 30, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	36,491,749	$	—	$	36,491,749	$	—	$	35,762	$	—	$	35,762	$	—
Residential mortgage-backed and related securities		155,732,596		—		155,732,596		—		159,228		—		159,228		—
Municipal securities		58,904,207		—		58,904,207		—		53,189		—		53,189		—
Other securities		4,194,890		—		4,194,890		—		6,911		—		6,911		—
Interest rate caps		703,467		—		703,467		—		98		—		98		—
Interest rate swaps - assets		7,045,220		—		7,045,220		—		65,824		—		65,824		—
Total assets measured at fair value	$	263,072,129	$	—	$	263,072,129	$	—	$	321,012	$	—	$	321,012	$	—

Interest rate swaps - liabilities	$	6,837,887	$	—	$	6,837,887	$	—	$	69,556	$	—	$	69,556	$	—
Total liabilities measured at fair value	$	6,837,887	$	—	$	6,837,887	$	—	$	69,556	$	—	$	69,556	$	—


December 31, 2017:
December 31, 2018:
Securities AFS:
U.S. govt. sponsored agency securities	$	38,096,534	$	—	$	38,096,534	$	—	$	36,411	$	—	$	36,411	$	—
Residential mortgage-backed and related securities		163,301,304		—		163,301,304		—		159,249		—		159,249		—
Municipal securities		66,625,496		—		66,625,496		—		58,546		—		58,546		—
Other securities		4,884,573		1,028		4,883,545		—		6,850		—		6,850		—
Interest rate caps		506,700		—		506,700		—		459		—		459		—
Interest rate swaps - assets		4,397,238		—		4,397,238		—		22,196		—		22,196		—
Total assets measured at fair value	$	277,811,845	$	1,028	$	277,810,817	$	—	$	283,711	$	—	$	283,711	$	—

Interest rate swaps - liabilities	$	4,397,238	$	—	$	4,397,238	$	—	$	23,347	$	—	$	23,347	$	—
Total liabilities measured at fair value	$	4,397,238	$	—	$	4,397,238	$	—	$	23,347	$	—	$	23,347	$	—

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 or ~~2017.~~2018.

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

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

Interest rate swaps are executed for select commercial customers. The interest rate swaps are further described in Note 14 to the Consolidated Financial ~~Statements included in the Company's Annual Report on Form 10‑K for the year ended December 31, 2017.~~Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

Interest rate swaps are also used for the purpose of hedging interest rate risk on junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued~~

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).

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Assets measured at fair value on a non-recurring basis comprise the following at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant						Quoted Prices		Significant
			in Active		Other		Significant				in Active		Other		Significant
			Markets for		Observable		Unobservable				Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs				Identical Assets		Inputs		Inputs
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
September 30, 2018:
									(dollars in thousands)
June 30, 2019:
Impaired loans/leases	$	13,400,072	$	—	$	—	$	13,400,072	$	7,539	$	—	$	—	$	7,539
OREO		13,180,082		—		—		13,180,082		9,328		—		—		9,328
	$	26,580,154	$	—	$	—	$	26,580,154	$	16,867	$	—	$	—	$	16,867

December 31, 2017:
December 31, 2018:
Impaired loans/leases	$	8,972,337	$	—	$	—	$	8,972,337	$	9,657	$	—	$	—	$	9,657
OREO		14,642,973		—		—		14,642,973		10,128		—		—		10,128
	$	23,615,310	$	—	$	—	$	23,615,310	$	19,785	$	—	$	—	$	19,785

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

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

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
	Quantitative Information about Level Fair Value Measurements											June 30,		December 31,
	Fair Value		Fair Value									2019		2018		Valuation Technique	Unobservable Input	Range
	September 30,		December 31,									(dollars in thousands)
	2018		2017		Valuation Technique	Unobservable Input	Range
Impaired loans/leases	$	13,400,072	$	8,972,337	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%	$	7,539	$	9,657	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		13,180,082		14,642,973	Appraisal of collateral	Appraisal adjustments	0.00	%	to	(35.00)	%		9,328		10,128	Appraisal of collateral	Appraisal adjustments	0.00	%	to	(35.00)	%

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

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

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


										Fair Value	As of June 30, 2019				As of December 31, 2018
										Hierarchy	Carrying		Estimated		Carrying		Estimated
	Fair Value	As of September 30, 2018				As of December 31, 2017				Level	Value		Fair Value		Value		Fair Value
	Hierarchy	Carrying		Estimated		Carrying		Estimated			(dollars in thousands)
	Level	Value		Fair Value		Value		Fair Value
Cash and due from banks	Level 1	$	73,406,657	$	73,406,657	$	75,721,663	$	75,721,663	Level 1	$	87,919	$	87,919	$	85,523	$	85,523
Federal funds sold	Level 2		33,070,000		33,070,000		30,197,000		30,197,000	Level 2		10,215		10,215		26,398		26,398
Interest-bearing deposits at financial institutions	Level 2		96,590,367		96,590,367		55,765,012		55,765,012	Level 2		195,282		195,282		133,198		133,198
Investment securities:
HTM	Level 2		395,421,195		392,621,219		379,474,205		379,749,804	Level 2		388,713		406,212		401,913		400,770
AFS	See Previous Table		255,323,442		255,323,442		272,907,907		272,907,907	See Previous Table		255,090		255,090		261,056		261,056
Loans/leases receivable, net	Level 3		12,407,474		13,400,072		8,307,719		8,972,337	Level 3		6,981		7,539		8,942		9,657
Loans/leases receivable, net	Level 2		3,597,901,436		3,527,043,000		2,921,821,953		2,892,963,000	Level 2		3,862,434		3,842,781		3,683,965		3,639,329
Interest rate caps	Level 2		703,467		703,467		506,700		506,700	Level 2		98		98		459		459
Interest rate swaps - assets	Level 2		7,045,220		7,045,220		4,397,238		4,397,238	Level 2		65,824		65,824		22,196		22,196
Deposits:
Nonmaturity deposits	Level 2		2,917,002,466		2,917,002,466		2,670,583,178		2,670,583,178	Level 2		3,275,004		3,275,004		3,002,327		3,002,327
Time deposits	Level 2		871,274,455		863,227,000		596,071,878		591,772,000	Level 2		1,047,506		1,033,017		974,704		968,906
Short-term borrowings	Level 2		12,929,499		12,929,499		13,993,122		13,993,122	Level 2		19,191		19,191		28,774		28,774
FHLB advances	Level 2		359,128,925		358,357,000		192,000,000		192,115,000	Level 2		105,733		105,768		266,492		265,926
Other borrowings	Level 2		73,950,426		74,600,000		66,000,000		66,520,000	Level 2		—		—		67,250		67,770
Subordinated notes										Level 2		68,274		68,478		4,782		4,933
Junior subordinated debentures	Level 2		37,626,070		29,946,263		37,486,487		29,253,624	Level 2		37,755		30,465		37,670		29,992
Interest rate swaps - liabilities	Level 2		6,837,887		6,837,887		4,397,238		4,397,238	Level 2		69,556		69,556		23,347		23,347

NOTE 8 – BUSINESS SEGMENT INFORMATION

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

The Company's primary segment, Commercial Banking, is geographically divided by markets into the secondary segments comprised of the five subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, ~~RB&T~~SFC Bank and ~~SFC Bank.~~RB&T. Each of these secondary segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

The Company's Wealth Management segment represents the trust and asset management and investment management and advisory services offered at the Company's five subsidiary banks and the Bates Companies in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts, custodial services, and investments managed. No assets of the subsidiary banks have been allocated to the Wealth Management segment.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Selected financial information on the Company's business segments is presented as follows as of and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.


	Commercial Banking										Wealth				Intercompany		Consolidated		Commercial Banking										Wealth				Intercompany		Consolidated
	QCBT		CRBT		CSB		RB&T		SFC Bank		Management		All other		Eliminations		Total		QCBT		CRBT		CSB		SFC Bank		RB&T		Management		All other		Eliminations		Total
Three Months Ended September 30, 2018
																			(dollars in thousands)
Three Months Ended June 30, 2019
Total revenue	$	17,321,929	$	16,799,795	$	8,888,955	$	5,244,856	$	7,360,191	$	3,255,241	$	12,475,438	$	(12,707,109)	$	58,639,296	$	20,374	$	23,575	$	9,730	$	7,757	$	5,659	$	4,249	$	17,772	$	(17,870)	$	71,246
Net interest income		12,218,192		10,832,532		7,101,066		3,414,760		5,700,566		—		(958,624)		4,991		38,313,483		12,632		10,785		7,294		5,425		3,373		—		(1,496)		—		38,013
Provision		409,086		452,742		20,000		4,849,000		475,000		—		—		—		6,205,828		973		300		151		485		32		—		—		—		1,941
Net income (loss)		4,827,397		4,868,765		2,533,392		(2,519,016)		2,197,448		768,095		8,600,144		(12,467,390)		8,808,835		4,505		6,928		2,207		2,079		786		583		13,583		(17,167)		13,504
Goodwill		3,222,688		14,979,984		9,888,225		—		45,527,529		—		—		—		73,618,426		3,223		14,980		9,888		45,975		—		—		3,682		—		77,748
Core deposit intangible		—		3,313,000		4,852,300		—		7,971,614		—		—		—		16,136,914
Intangibles																				—		2,935		4,328		7,268		—		—		1,558		—		16,089
Total assets		1,579,327,112		1,354,294,043		734,535,978		484,059,163		623,519,770		—		554,345,558		(537,349,129)		4,792,732,495		1,637,115		1,527,521		806,704		671,644		523,262		—		641,639		(613,033)		5,194,852

Three Months Ended September 30, 2017
Three Months Ended June 30, 2018
Total revenue	$	11,771,842	$	10,892,025	$	7,678,006	$	4,534,768	$	—	$	2,689,853	$	10,028,660	$	(7,052,986)	$	40,542,168	$	16,683	$	16,504	$	8,406	$	—	$	5,120	$	3,116	$	13,024	$	(13,142)	$	49,711
Net interest income		11,664,970		7,903,483		6,379,111		3,245,346		—		—		(636,562)		—		28,556,348		12,290		10,481		6,735		—		3,402		—		(823)		—		32,085
Provision		1,140,436		200,000		574,000		172,000		—		—		—		—		2,086,436		1,254		628		221		—		198		—		—		—		2,301
Net income		3,929,158		3,130,319		1,669,209		726,926		—		539,091		7,853,935		(9,994,703)		7,853,935
Net income (loss)																				4,511		4,705		2,158		—		814		797		10,405		(12,945)		10,445
Goodwill		3,222,688		—		9,888,225		—		—		—		—		—		13,110,913		3,223		14,980		9,888		—		—		—		—		—		28,091
Core deposit intangible		—		1,122,263		5,566,350		—		—		—		—		—		6,688,613
Intangibles																				—		3,440		5,030		—		—		—		—		—		8,470
Total assets		1,456,251,244		1,007,062,151		631,963,143		445,098,530		—		—		395,697,820		(385,609,794)		3,550,463,094		1,563,643		1,345,431		712,139		—		484,123		—		463,207		(461,660)		4,106,883

Nine Months Ended September 30, 2018
Six Months Ended June 30, 2019
Total revenue	$	49,812,373	$	49,301,104	$	25,458,573	$	15,362,717	$	7,360,191	$	9,560,319	$	38,031,924	$	(38,449,680)	$	156,437,521	$	38,918	$	42,819	$	19,000	$	15,045	$	11,255	$	8,478	$	32,354	$	(32,528)	$	135,341
Net interest income		36,628,528		32,149,435		20,579,523		10,281,763		5,700,566		—		(2,543,909)		4,991		102,800,897		24,771		21,193		14,260		10,651		6,801		—		(2,755)		—		74,921
Provision for loan/lease losses		2,783,988		1,682,312		816,602		5,288,500		475,000		—		—		—		11,046,402		1,993		725		301		985		71		—		—		—		4,075
Net income (loss)		13,796,167		14,190,335		6,560,327		(964,098)		2,197,448		2,335,871		29,520,347		(37,832,216)		29,804,181		8,690		12,028		4,363		3,732		1,304		1,741		26,181		(31,617)		26,422
Goodwill		3,222,688		14,979,984		9,888,225		—		45,527,529		—		—		—		73,618,426		3,223		14,980		9,888		45,975		—		—		3,682		—		77,748
Core deposit intangible		—		3,313,000		4,852,300		—		7,971,614		—		—		—		16,136,914
Intangibles																				—		2,935		4,328		7,268		—		—		1,558		—		16,089
Total assets		1,579,327,112		1,354,294,043		734,535,978		484,059,163		623,519,770		—		554,345,558		(537,349,129)		4,792,732,495		1,637,115		1,527,521		806,704		671,644		523,262		—		641,639		(613,033)		5,194,852

Nine Months Ended September 30, 2017
Six Months Ended June 30, 2018
Total revenue	$	39,517,823	$	31,428,339	$	23,981,019	$	12,723,998	$	—	$	7,952,495	$	30,086,617	$	(27,283,484)	$	118,406,807	$	32,491	$	32,501	$	16,570	$	—	$	10,118	$	6,305	$	25,556	$	(25,742)	$	97,799
Net interest income		34,381,270		22,107,955		20,326,439		9,308,932		—		—		(1,852,668)		—		84,271,928		24,410		21,317		13,479		—		6,867		—		(1,585)		—		64,488
Provision for loan/lease losses		2,624,538		750,000		2,209,000		631,000		—		—		—		—		6,214,538		2,375		1,230		797		—		439		—		—		—		4,841
Net income		11,657,941		8,893,461		5,484,383		2,406,337		—		1,554,618		25,804,917		(29,996,740)		25,804,917
Net income (loss)																				8,969		9,321		4,027		—		1,555		1,568		20,920		(25,365)		20,995
Goodwill		3,222,688		—		9,888,225		—		—		—		—		—		13,110,913		3,223		14,980		9,888		—		—		—		—		—		28,091
Core deposit intangible		—		1,122,263		5,566,350		—		—		—		—		—		6,688,613
Intangibles																				—		3,440		5,030		—		—		—		—		—		8,470
Total assets		1,456,251,244		1,007,062,151		631,963,143		445,098,530		—		—		395,697,820		(385,609,794)		3,550,463,094		1,563,643		1,345,431		712,139		—		484,123		—		463,207		(461,660)		4,106,883

NOTE 9 – REGULATORY CAPITAL REQUIREMENTS

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and 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 ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks' actual capital amounts and ratios as of ~~September~~June 30, ~~2018~~2019 and December 31, 2017 are presented in the following table (dollars in thousands). As of September 30, 2018 and December 31, 2017, each of the subsidiary banks met the requirements to be “well capitalized”.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – 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

As of September 30, 2018:

Company:

Total risk-based capital

$
449,655

10.87
%
$
330,798

>

8.00
%
$
408,329

>

9.875
%
$
413,497

>

10.00
%
Tier 1 risk-based capital

406,578

9.83
%

248,098

>

6.00

325,629

>

7.875

330,798

>

8.00

Tier 1 leverage

406,578

8.87
%

183,278

>

4.00

183,278

>

4.000

229,098

>

5.00

Common equity Tier 1

368,952

8.92
%

186,074

>

4.50

263,605

>

6.375

268,773

>

6.50

Quad City Bank & Trust:







Total risk-based capital

$
160,806

11.72
%
$
109,744

>

8.00
%
$
135,466

>

9.875
%
$
137,180

>

10.00
%
Tier 1 risk-based capital

147,532

10.75
%

82,308

>

6.00

108,029

>

7.875

109,744

>

8.00

Tier 1 leverage

147,532

9.32
%

63,297

>

4.00

63,297

>

4.000

79,121

>

5.00

Common equity Tier 1

147,532

10.75
%

61,731

>

4.50

87,452

>

6.375

89,167

>

6.50

Cedar Rapids Bank & Trust:







Total risk-based capital

$
145,066

11.79
%
$
98,462

>

8.00
%
$
121,540

>

9.875
%
$
123,078

>

10.00
%
Tier 1 risk-based capital

131,839

10.71
%

73,847

>

6.00

96,924

>

7.875

98,462

>

8.00

Tier 1 leverage

131,839

9.83
%

53,659

>

4.00

53,659

>

4.000

67,074

>

5.00

Common equity Tier 1

131,839

10.71
%

55,385

>

4.50

78,462

>

6.375

80,001

>

6.50

Community State Bank:







Total risk-based capital

$
72,601

11.43
%
$
50,801

>

8.00
%
$
62,708

>

9.875
%
$
63,501

>

10.00
%
Tier 1 risk-based capital

67,149

10.57
%

38,101

>

6.00

50,007

>

7.875

50,801

>

8.00

Tier 1 leverage

67,149

9.62
%

27,918

>

4.00

27,918

>

4.000

34,898

>

5.00

Common equity Tier 1

67,149

10.57
%

28,576

>

4.50

40,482

>

6.375

41,276

>

6.50

Rockford Bank & Trust:







Total risk-based capital

$
45,314

10.19
%
$
35,583

>

8.00
%
$
43,923

>

9.875
%
$
44,479

>

10.00
%
Tier 1 risk-based capital

39,692

8.92
%

26,688

>

6.00

35,027

>

7.875

35,583

>

8.00

Tier 1 leverage

39,692

8.20
%

19,365

>

4.00

19,365

>

4.000

24,207

>

5.00

Common equity Tier 1

39,692

8.92
%

20,016

>

4.50

28,356

>

6.375

28,912

>

6.50

Springfield First Community Bank:







Total risk-based capital

$
54,108

11.64
%
$
37,196

>

8.00
%
$
45,914

>

9.875
%
$
46,495

>

10.00
%
Tier 1 risk-based capital

48,870

10.51
%

27,897

>

6.00

36,615

>

7.875

37,196

>

8.00

Tier 1 leverage

48,870

9.31
%

20,988

>

4.00

20,988

>

4.000

26,235

>

5.00

Common equity Tier 1

48,870

10.51
%

20,923

>

4.50

29,640

>

6.375

30,222

>

6.50

For Capital

To Be Well

Adequacy Purposes

Capitalized Under

For Capital

With Capital

Prompt Corrective

Actual

Adequacy Purposes

Conservation Buffer*

Action Provisions


Amount

Ratio

Amount



Ratio

Amount



Ratio

Amount



Ratio

As of December 31, 2017:

Company:

Total risk-based capital

$
383,282

11.15
%
$
275,090

>

8.00
%
$
318,073

>

9.25
%
$
343,862

>

10.00
%
Tier 1 risk-based capital

348,530

10.14
%

206,317

>

6.00

249,300

>

7.25

275,090

>

8.00

Tier 1 leverage

348,530

8.98
%

155,256

>

4.00

155,256

>

4.00

194,070

>

5.00

Common equity Tier 1

313,012

9.10
%

154,738

>

4.50

197,721

>

5.75

223,510

>

6.50

Quad City Bank & Trust:























Total risk-based capital

$
160,112

12.35
%
$
103,711

>

8.00
%
$
119,916

>

9.25
%
$
129,639

>

10.00
%
Tier 1 risk-based capital

147,472

11.38
%

77,783

>

6.00

93,988

>

7.25

103,711

>

8.00

Tier 1 leverage

147,472

9.52
%

61,985

>

4.00

61,985

>

4.00

77,481

>

5.00

Common equity Tier 1

147,472

11.38
%

58,337

>

4.50

74,542

>

5.75

84,265

>

6.50

Cedar Rapids Bank & Trust:























Total risk-based capital

$
138,492

11.88
%
$
93,272

>

8.00
%
$
107,846

>

9.25
%
$
116,590

>

10.00
%
Tier 1 risk-based capital

126,601

10.86
%

69,954

>

6.00

84,528

>

7.25

93,272

>

8.00

Tier 1 leverage

126,601

11.68
%

43,348

>

4.00

43,348

>

4.00

54,185

>

5.00

Common equity Tier 1

126,601

10.86
%

52,465

>

4.50

67,039

>

5.75

75,783

>

6.50

Community State Bank:























Total risk-based capital

$
66,271

11.71
%
$
45,293

>

8.00
%
$
52,370

>

9.25
%
$
56,616

>

10.00
%
Tier 1 risk-based capital

61,941

10.94
%

33,970

>

6.00

41,047

>

7.25

45,293

>

8.00

Tier 1 leverage

61,941

9.77
%

25,354

>

4.00

25,354

>

4.00

31,693

>

5.00

Common equity Tier 1

61,941

10.94
%

25,477

>

4.50

32,554

>

5.75

36,801

>

6.50

Rockford Bank & Trust:























Total risk-based capital

$
45,684

11.28
%
$
32,413

>

8.00
%
$
37,477

>

9.25
%
$
40,516

>

10.00
%
Tier 1 risk-based capital

40,615

10.02
%

24,310

>

6.00

29,374

>

7.25

32,413

>

8.00

Tier 1 leverage

40,615

8.94
%

18,177

>

4.00

18,177

>

4.00

22,721

>

5.00

Common equity Tier 1

40,615

10.02
%

18,232

>

4.50

23,297

>

5.75

26,335

>

6.50

* The minimums under Basel III increase by .625% (the capital conservation buffer) annually until 2019. The fully phased-in minimums are 10.5% (Total risk-based capital), 8.5% (Tier 1 risk-based capital), and 7.0% (Common equity Tier 1).

~~NOTE 10 – REVENUE RECOGNITION~~

As of January 1, 2018, the Company adopted ASU 2014‑09 using the modified retrospective approach. The adoption of the guidance had no material impact on the measurement or recognition of revenue as approximately 89% of the Company's revenue (based on 2017 audited financial results) is outside the scope of this guidance; however, additional

3733

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

~~disclosures have been added in accordance with the ASU. See Note 1 for additional information on this new accounting standard.~~

~~Descriptions of our revenue-generating contracts with customers that are within the scope of ASU 2014‑09, which~~December 31, 2018 are presented in ~~our income statements as components~~the following table (dollars in thousands). As of ~~non-interest income are as follows:~~

~~Trust department~~June 30, 2019 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~~December 31, 2018, each of the ~~customer's deposited funds and is generally terminable at will by either party. The contract permits~~subsidiary banks met the ~~customer~~requirements to ~~access~~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
As of June 30, 2019:
Company:
Total risk-based capital	$	551,046	12.04	%	$	366,017	>	8.00	%	$	480,397	>	10.50	%	$	457,521	>	10.00	%
Tier 1 risk-based capital		446,490	9.76	%		274,513	>	6.00			388,893	>	8.50			366,017	>	8.00
Tier 1 leverage		446,490	8.96	%		199,304	>	4.00			199,304	>	4.00			249,130	>	5.00
Common equity Tier 1		408,735	8.93	%		205,884	>	4.50			320,265	>	7.00			297,389	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	171,919	11.53	%	$	119,322	>	8.00	%	$	156,610	>	10.50	%	$	149,152	>	10.00	%
Tier 1 risk-based capital		158,453	10.62	%		89,491	>	6.00			126,779	>	8.50			119,322	>	8.00
Tier 1 leverage		158,453	9.39	%		67,519	>	4.00			67,519	>	4.00			84,398	>	5.00
Common equity Tier 1		158,453	10.62	%		67,119	>	4.50			104,407	>	7.00			96,949	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	159,747	11.56	%	$	110,543	>	8.00	%	$	145,088	>	10.50	%	$	138,179	>	10.00	%
Tier 1 risk-based capital		146,594	10.61	%		82,908	>	6.00			117,452	>	8.50			110,543	>	8.00
Tier 1 leverage		146,594	10.16	%		57,716	>	4.00			57,716	>	4.00			72,145	>	5.00
Common equity Tier 1		146,594	10.61	%		62,181	>	4.50			96,725	>	7.00			89,816	>	6.50
Community State Bank:
Total risk-based capital	$	85,269	12.33	%	$	55,307	>	8.00	%	$	72,591	>	10.50	%	$	69,134	>	10.00	%
Tier 1 risk-based capital		78,770	11.39	%		41,481	>	6.00			58,764	>	8.50			55,307	>	8.00
Tier 1 leverage		78,770	10.03	%		31,420	>	4.00			31,420	>	4.00			39,275	>	5.00
Common equity Tier 1		78,770	11.39	%		31,110	>	4.50			48,394	>	7.00			44,937	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	65,725	12.91	%	$	40,724	>	8.00	%	$	53,451	>	10.50	%	$	50,906	>	10.00	%
Tier 1 risk-based capital		58,978	11.59	%		30,543	>	6.00			43,270	>	8.50			40,724	>	8.00
Tier 1 leverage		58,978	10.58	%		22,306	>	4.00			22,306	>	4.00			27,883	>	5.00
Common equity Tier 1		58,978	11.59	%		22,907	>	4.50			35,634	>	7.00			33,089	>	6.50
Rockford Bank & Trust:
Total risk-based capital	$	52,293	10.68	%	$	39,163	>	8.00	%	$	51,401	>	10.50	%	$	48,954	>	10.00	%
Tier 1 risk-based capital		46,232	9.44	%		29,372	>	6.00			41,611	>	8.50			39,163	>	8.00
Tier 1 leverage		46,232	9.04	%		20,466	>	4.00			20,466	>	4.00			25,582	>	5.00
Common equity Tier 1		46,232	9.44	%		22,029	>	4.50			34,268	>	7.00			31,820	>	6.50


										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of December 31, 2018:
Company:
Total risk-based capital	$	460,416	10.69	%	$	344,551	>	8.00	%	$	425,305	>	9.875	%	$	430,689	>	10.00	%
Tier 1 risk-based capital		420,569	9.77	%		258,413	>	6.00			339,168	>	7.875			344,551	>	8.00
Tier 1 leverage		420,569	8.87	%		189,858	>	4.00			189,858	>	4.000			237,322	>	5.00
Common equity Tier 1		382,899	8.89	%		193,810	>	4.50			274,564	>	6.375			279,948	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	162,009	11.38	%	$	113,900	>	8.00	%	$	140,596	>	9.875	%	$	142,376	>	10.00	%
Tier 1 risk-based capital		148,529	10.43	%		85,425	>	6.00			112,121	>	7.875			113,900	>	8.00
Tier 1 leverage		148,529	9.04	%		65,744	>	4.00			65,744	>	4.000			82,180	>	5.00
Common equity Tier 1		148,529	10.43	%		64,069	>	4.50			90,764	>	6.375			92,544	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	146,292	11.55	%	$	101,310	>	8.00	%	$	125,054	>	9.875	%	$	126,637	>	10.00	%
Tier 1 risk-based capital		133,982	10.58	%		75,982	>	6.00			99,727	>	7.875			101,310	>	8.00
Tier 1 leverage		133,982	9.98	%		53,682	>	4.00			53,682	>	4.000			67,103	>	5.00
Common equity Tier 1		133,982	10.58	%		56,987	>	4.50			80,731	>	6.375			82,314	>	6.50
Community State Bank:
Total risk-based capital	$	75,233	11.24	%	$	53,567	>	8.00	%	$	66,122	>	9.875	%	$	66,959	>	10.00	%
Tier 1 risk-based capital		69,101	10.32	%		40,175	>	6.00			52,730	>	7.875			53,567	>	8.00
Tier 1 leverage		69,101	9.19	%		30,070	>	4.00			30,070	>	4.000			37,588	>	5.00
Common equity Tier 1		69,101	10.32	%		30,131	>	4.50			42,686	>	6.375			43,523	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	57,051	12.24	%	$	37,278	>	8.00	%	$	46,016	>	9.875	%	$	46,598	>	10.00	%
Tier 1 risk-based capital		51,279	11.00	%		27,959	>	6.00			36,696	>	7.875			37,278	>	8.00
Tier 1 leverage	��	51,279	9.39	%		21,849	>	4.00			21,849	>	4.000			27,312	>	5.00
Common equity Tier 1		51,279	11.00	%		20,969	>	4.50			29,706	>	6.375			30,289	>	6.50
Rockford Bank & Trust:
Total risk-based capital	$	50,648	10.89	%	$	37,208	>	8.00	%	$	45,929	>	9.875	%	$	46,511	>	10.00	%
Tier 1 risk-based capital		44,821	9.64	%		27,906	>	6.00			36,627	>	7.875			37,208	>	8.00
Tier 1 leverage		44,821	8.93	%		20,081	>	4.00			20,081	>	4.000			25,101	>	5.00
Common equity Tier 1		44,821	9.64	%		20,930	>	4.50			29,650	>	6.375			30,232	>	6.50

* June 30, 2019 minimums reflect the ~~funds on deposit and request additional services related to~~fully phased-in ratios (including 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.capital conservation buffer).

~~Correspondent banking fees:~~ 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.

~~NOTE 11 –SUBSEQUENT EVENTS - ACQUISITIONS~~

~~BATES COMPANIES~~

On October 1, 2018 the Company announced the successful completion of the previously announced acquisition of the Bates Companies, headquartered in Rockford, Illinois. The acquisition and subsequent merger of the Bates Companies into RB&T will enhance the wealth management services of RB&T by adding approximately $700 million of assets under management.

In the acquisition, the Company acquired 100% of the Bates Companies' outstanding common stock for an aggregate consideration of $3.0 million cash and up to $3.0 million of the Company's common stock. Of the total cash consideration, $1.5 million in cash was paid at closing. This was funded through operating cash. The additional $1.5 million was recorded as a promissory note and will be repaid in five equal, annual installments of $300,000 each on the first through fifth anniversaries of the closing date. Interest will be paid at a rate of 2.18% per annum, based on the applicable federal rate as of the closing date. Additionally, in a private placement exempt from registration with the SEC, the Company will issue $1.0 million of Company stock in November 2018. Assuming all future performance based contingent consideration is realized, total stock consideration can reach $3.0 million, which would result in the Company issuing approximately 70,504 common shares based on the 10-day volume weighted average of the closing stock price of the Company ending five days prior to closing.

~~During the first nine months of 2018, the Company incurred $401 thousand of expenses related to the acquisition, comprised primarily of legal and accounting costs.~~

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three and ~~nine~~six months ending ~~September~~June 30, ~~2018.~~2019. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. The page locations and specific sections and notes that are referred to in this discussion are presented in the table of contents.

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

GENERAL

QCR Holdings, Inc. is a financial holding company and the parent company of QCBT, CRBT, CSB, ~~RB&T~~SFC Bank and ~~SFC Bank.~~

RB&T. QCBT, CRBT and CSB are Iowa-chartered commercial banks, ~~RB&T is an Illinois-chartered commercial bank and~~ SFC Bank is a Missouri-chartered commercial bank, and RB&T is an Illinois-chartered commercial bank. ~~With the exception of SFC Bank, all~~All are members of the Federal Reserve system with depository accounts insured to the maximum amount permitted by law by the FDIC. ~~SFC Bank’s application to become a member of the Federal Reserve system is in process with the Federal Reserve.~~

QCBT commenced operations in 1994 and provides full-service commercial and consumer banking, and trust and asset management services to the Quad City area and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. QCBT also provides leasing services through its wholly-owned subsidiary, m2, located in Brookfield, Wisconsin. In addition, QCBT owns 100% of Quad City Investment Advisors, LLC, which is an investment management and advisory company.

CRBT commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its five offices located in Cedar Rapids and Marion, Iowa. Cedar Falls and Waterloo, Iowa and adjacent communities are served through three additional CRBT offices ~~(two in Waterloo and one~~(one in Cedar ~~Falls)~~Falls and two in Waterloo).

CSB was acquired by the Company in 2016 and provides full-service commercial and consumer banking services to the Des Moines, Iowa area and adjacent communities through its 10 offices, including its main office located on North Ankeny Boulevard in Ankeny, Iowa.

SFC Bank became a subsidiary of the Company in 2018, as further described in Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. SFC Bank provides full-service commercial and consumer banking services to the Springfield, Missouri area through its main office located on Glenstone Avenue in Springfield, Missouri.

RB&T commenced operations in January 2005 and provides full-service commercial and consumer banking, and trust and asset management services to Rockford, Illinois and adjacent communities through its main office located on Guilford Road ~~at Alpine Road~~ in Rockford and its branch facility in downtown Rockford.

SFC Bank was merged into the Company in 2018, as further described in Note 2 to the Consolidated Financial Statements. SFC Bank provides full-service commercial and consumer banking to the Springfield, Missouri area through its branch office located on Glenstone Avenue in Springfield, Missouri.

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EXECUTIVE OVERVIEW

The Company reported net income of ~~$8.8~~$13.5 million and diluted EPS of ~~$0.55~~$0.85 for the quarter ended ~~September~~June 30, ~~2018.~~2019. By comparison, for the quarter ended March 31, 2019, the Company reported net income of $12.9 million and diluted EPS of $0.81. For the quarter ended June 30, 2018, the Company reported net income of $10.4 million, and diluted EPS of $0.73. For the ~~quarter~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company reported net income of ~~$7.9~~$26.4 million, and diluted EPS of ~~$0.58. For~~$1.66.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

By comparison, for the ~~nine~~six months ended ~~September~~June 30, 2018, the Company reported net income of ~~$29.8~~$21.0 million, and diluted EPS of ~~$2.02. By comparison, for the nine months ended September 30, 2017, the Company reported net income of $25.8 million, and diluted EPS of $1.91.~~$1.48.

The ~~third~~second quarter of ~~2018~~2019 was highlighted by several significant items:

~~Net~~Record net income of ~~$8.8~~$13.5 million, or ~~$0.55~~$0.85 per diluted share;

~~Core~~Record adjusted net income (non-GAAP) of ~~$10.4~~$14.1 million, or ~~$0.65~~$0.88 per diluted share;

Annualized loan and lease growth of ~~7.9%~~11.7% for the quarter and ~~10.5%~~9.5% year-to-date;

~~Provision~~Annualized deposit growth of 12.2% for ~~loan~~the quarter and ~~lease losses~~17.4% year-to-date;

Record noninterest income of ~~$6.2~~$17.1 million for the ~~quarter;~~quarter and $29.1 million year-to-date;

NIM and NIM (TEY) (non-GAAP) stabilized at 3.25% and 3.40%, respectively; and

Nonperforming ~~loans increased $15.3 million; and~~

~~Completion of merger with Springfield Bancshares, Inc. on July 1, 2018.~~assets down $3.2 million, or 12.2%, from the prior quarter.

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


											For the three months ended						For the six months ended
											June 30, 2019		March 31, 2019		June 30, 2018		June 30, 2019		June 30, 2018
	For the three months ended						For the nine months ended				(dollars in thousands)
	September 30, 2018		December 31, 2017		September 30, 2017		September 30, 2018		September 30, 2017
Net income	$	8,808,835	$	9,901,590	$	7,853,935	$	29,804,181	$	25,804,917	$	13,504	$	12,918	$	10,445	$	26,422	$	20,995

Diluted earnings per common share	$	0.55	$	0.70	$	0.58	$	2.02	$	1.91	$	0.85	$	0.81	$	0.73	$	1.66	$	1.48

Weighted average common and common equivalent shares outstanding		15,922,324		14,193,191		13,507,955		14,786,777		13,509,566		15,938,377		15,922,940		14,232,423		15,930,659		14,219,003

The increase in weighted average common shares outstanding ~~from September 30, 2017 to September~~since June 30, 2018 was primarily due to the common stock issued as a result of the merger with Springfield Bancshares ~~and~~as further described in Note 2 to the ~~acquisition of Guaranty Bank.~~Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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


											For the three months ended						For the six months ended
											June 30, 2019		March 31, 2019		June 30, 2018		June 30, 2019		June 30, 2018
	For the three months ended						For the nine months ended				(dollars in thousands)
	September 30, 2018		June 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Net interest income	$	38,313,483	$	32,084,496	$	28,556,348	$	102,800,897	$	84,271,928	$	38,013	$	36,908	$	32,085	$	74,921	$	64,488
Provision expense		6,205,828		2,300,735		2,086,436		11,046,402		6,214,538		1,941		2,134		2,301		4,075		4,841
Noninterest income		8,808,825		8,912,266		6,701,303		26,262,540		20,767,575		17,065		11,993		8,912		29,058		17,454
Noninterest expense		30,499,610		26,369,823		23,395,747		82,732,930		66,073,493		36,560		32,435		26,370		68,995		52,234
Federal and state income tax expense		1,608,035		1,880,819		1,921,533		5,479,924		6,946,555		3,073		1,414		1,881		4,487		3,872
Net income	$	8,808,835	$	10,445,385	$	7,853,935	$	29,804,181	$	25,804,917	$	13,504	$	12,918	$	10,445	$	26,422	$	20,995

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

Net interest income in the ~~third~~second quarter of ~~2018~~2019 was up ~~19%~~3% compared to the first quarter of 2019. The increase was primarily due to an $85.5 million increase in average interest earning assets, as reported net interest margin remained stable between quarters. Net interest income increased 18% compared to the second quarter of ~~2018. Net interest income increased 34% compared to the third quarter of 2017~~2018 and ~~22%~~16% when comparing the first ~~nine~~six months of ~~2018~~2019 to the same period in the prior year. ~~This increase was~~These increases were primarily due to strong loan ~~and lease~~ growth and the ~~acquisitions~~addition of SFC ~~Bank and Guaranty~~ Bank.

Provision expense in the ~~third~~second quarter of ~~2018 increased 170%~~2019 decreased 9% compared to the first quarter of 2019. Provision expense decreased 16% compared to the second quarter of 2018 and ~~increased 197% from~~16% when comparing the first six months of 2019 to the same period ~~of 2017. Provision expense increased 78%~~ in the ~~first nine months of 2018 from the same period of 2017.~~prior year. The ~~increase was~~decreases were primarily ~~attributable~~due to two unrelated borrowers as well as to strong loan growth and accounting for acquired loans (as acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance).continued asset quality improvements. See the Provision for Loan Lease Losses section of this report for additional details.

Noninterest income in the ~~third~~second quarter of ~~2018 decreased 1%~~2019 increased 42% compared to the first quarter of 2019 primarily due to higher swap fee income. Noninterest income increased 91% compared to the second quarter of 2018 ~~primarily due to lower swap fee income. Noninterest income in the third quarter of 2018 increased 31% from the third quarter of 2017~~ and ~~26%~~66% when comparing the first ~~nine~~six months of ~~2018~~2019 to the same period in the prior year. ~~This increase was~~These increases were primarily attributable to higher swap fee income as well as solid growth in wealth management fee income and the ~~acquisitions~~addition of ~~Guaranty~~SFC Bank and ~~SFC Bank.~~the Bates Companies.

Noninterest expense increased ~~16% from~~13% in the second quarter of ~~2018.~~2019 compared to the first quarter of 2019. In the second quarter of 2019, there was $708 thousand of post-acquisition compensation, transition and integration cost as compared to $134 thousand in the first quarter of 2019. Net cost and gains/losses on operations of other real estate was $1.2 million in the second quarter of 2019 primarily due to a write down of an OREO property of $1 million, as compared to $298 thousand in the first quarter of 2019. Additionally, the Company incurred approximately $2.5 million in additional bonus and commission expense during the second quarter due to strong year-to-date results and higher than expected fee income. Noninterest expense increased ~~30% from~~39% compared to the ~~third~~second quarter of ~~2017~~2018 and ~~25%~~32% when comparing the first ~~nine~~six months of ~~2018~~2019 to the same period in the prior year primarily due to the ~~acquisitions~~addition of ~~Guaranty Bank and~~ SFC Bank.

Federal and state income tax expense in the ~~third~~second quarter of ~~2018 decreased 15%~~2019 increased 117% compared to the first quarter of 2019. Federal and state income tax expense increased 63% compared to the second quarter of ~~2018. Federal~~2018 and ~~state income tax expense in the third quarter of 2018 decreased~~ 16% ~~compared to the third quarter of 2017 and decreased 21%~~ when comparing the first ~~nine~~six months of ~~2018~~2019 to the same period in the prior ~~year primarily due to a lower federal tax rate.~~year. See the “Income Taxes” section of this ~~Report~~report for additional ~~details.~~details on these decreases.

LONG-TERM FINANCIAL GOALS

As previously stated, the Company has established certain financial goals by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these goals, there is no assurance that they will be met. Moreover, the Company's ability to achieve these goals will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, ~~2017.~~2018. The Company's long-term financial goals are as follows:

~~Strong~~Generate strong organic loan and lease growth in order to maintain a gross loans and leases to total assets ratio in the range of 73 – 78%;

Improve profitability (measured by NIM and ROAA);

~~Improve~~Support strong asset quality by ~~reducing~~maintaining NPAs to total assets to below 0.75% and ~~maintain~~maintaining charge-offs as a percentage of average loans/leases of under 0.25% annually;

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Grow core deposits to maintain reliance on wholesale funding at less than 15% of total assets;

~~Grow noninterest bearing deposits to more than 30% of total assets;~~

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Continue to focus on generating gains on sales of government guaranteed portions of loans and swap fee income ~~to more than $4~~between $8 million and $12 million annually; and

Grow wealth management net income by 10% annually.

The following table shows the evaluation of the Company's long-term financial goals:


			For the Quarter Ending											For the Quarter Ending
Goal	Key Metric	Target**	September 30, 2018			June 30, 2018			September 30, 2017			Key Metric	Target **	June 30, 2019			March 31, 2019			June 30, 2018
Balance sheet efficiency	Gross loans and leases to total assets	73% - 78%		76	%		76	%		75	%	Gross loans and leases to total assets	73% - 78%		75	%		75	%		76	%
	NIM TEY (non-GAAP)*	> 3.65%		3.60	%		3.52	%		3.71	%	NIM TEY (non-GAAP)*	> 3.35%		3.40	%		3.40	%		3.52	%
Profitability	ROAA	> 1.10%		0.75	%		1.03	%		0.90	%	ROAA	> 1.10%		1.06	%		1.04	%		1.03	%
	Core ROAA (non-GAAP)*	> 1.10%		0.89	%		1.08	%		0.97	%	Adjusted ROAA (non-GAAP)*	> 1.10%		1.11	%		1.05	%		1.08	%
Asset quality	NPAs to total assets	< 0.75%		0.87	%		0.65	%		0.95	%	NPAs to total assets	< 0.75%		0.45	%		0.52	%		0.65	%
	Net charge-offs to average loans and leases***	< 0.25% annually		0.09	%		0.11	%		0.11	%	Net charge-offs to average loans and leases***	< 0.25% annually		0.15	%		0.09	%		0.11	%
Reliance on wholesale funding	Wholesale funding to total assets****	< 15%		16	%		13	%		12	%	Wholesale funding to total assets****	< 15%		10	%		12	%		13	%
Funding mix	Noninterest bearing deposits as a percentage of total assets	> 30%		17	%		18	%		20	%
Consistent, high quality noninterest income revenue streams	Gains on sales of government guaranteed portions of loans and swap fee income***	> $4 million annually	$	5.5	million	$	5.9	million	$	2.4	million	Gains on sales of government guaranteed portions of loans and swap fee income***	$8-12 million annually	$	22.3	million	$	12.9	million	$	5.9	million
	Grow wealth management net income***	> 10% annually		50	%		54	%		24	%	Grow wealth management net income***	> 10% annually		11	%		50	%		54	%

* See “GAAP to Non-GAAP” reconciliations section.

** Targets will be re-evaluated and adjusted as appropriate.

*** Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period that are then annualized for comparison.

**** Wholesale funding to total assets is calculated by dividing total borrowings and brokered deposits by total assets.

STRATEGIC DEVELOPMENTS

The Company took the following actions during the ~~third~~second quarter of ~~2018~~2019 to support its corporate strategy and the long-term financial goals shown ~~above.~~above:

The Company grew loans and leases in the ~~third~~second quarter of ~~2018~~2019 by ~~7.9%~~11.7% on an annualized basis ~~excluding acquired loans of SFC Bank.~~and 9.5% year-to-date. Strong loan and lease growth for the remainder of the year will help keep the Company's ~~loan~~loans and leases to ~~asset~~assets ratio within the targeted range of 73‑78%.

The Company has participated, and intends to continue to participate, in a prudent manner, as an acquirer in the consolidation taking place in our markets to continue to grow EPS, further boost ROAA and improve the Company's efficiency ratio. ~~The Company announced in July 2018 the completion of the merger of Springfield Bancshares.~~ On October 1, 2018 the Company announced the successful completion of the previously announced acquisition of the Bates Companies, headquartered in Rockford, Illinois. The acquisition and subsequent merger of the Bates Companies into RB&T will enhance the wealth management services of RB&T by adding approximately $700 million of assets under management. ~~See Notes 2 and 11 to the Consolidated Financial Statements for additional details about these strategic transactions.~~

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The Company has continued to focus on lowering the NPAs to total assets ratio. This ratio ~~increased~~decreased by 22seven basis points to ~~0.87%,~~0.45% compared to the ~~second~~first quarter ~~2018. This increase was primarily due to two large credits in the Rockford, Illinois market.~~2019. The Company remains committed to improving asset quality ratios in ~~2018~~2019 and beyond.

Management has continued to focus on reducing the Company's reliance on wholesale funding. Wholesale funding ~~however, wholesale funding increased 3%~~as a percentage of total assets decreased to 10% in the ~~third~~second quarter of ~~2018.~~2019 due to the strong core deposit growth which outpaced the Company’s loan growth. Management continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the ~~three~~four states currently served – Iowa, Illinois,Wisconsin and ~~Wisconsin - and to expand into the Missouri market.~~Missouri. The Company acts as the correspondent bank for ~~191~~192 downstream banks with average total noninterest bearing deposits of ~~$197.5~~$168.9 million and average total interest bearing deposits of ~~$221.1~~$310.1 million during the first ~~nine~~six months of 2019. By comparison, the Company acted as the correspondent bank for 192 downstream banks with average total noninterest bearing deposits of $215.3 million and average total interest bearing deposits of $208.3 million during the first six months of 2018. 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.

SBA and USDA lending is a specialty lending area on which the Company has focused. Once these loans are originated, the government-guaranteed portion of the loan can be sold to the secondary market for premiums.

As a result of the relatively low interest rate environment including a flat yield curve, the Company has focused on executing interest rate swaps on select commercial 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 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~~borrowers and the Company. Swap fee income totaled $11.1 million for the six months ended June 30, 2019 as compared to $2.6 million for the six months ended June 30, 2018.

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of ~~September~~June 30, ~~2018,~~2019, the Company had ~~$2.71~~$2.95 billion of total financial assets in trust (and related) accounts and ~~$1.08~~$1.75 billion of total financial assets in brokerage (and related) accounts. Continued growth in assets under management ~~will help~~are expected to drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management continues to focus on growing wealth management fee income, expanding market share will continue to be a primary strategy, both through organic growth as well as through the acquisition of managed assets.On October 1, 2018 the Company announced the successful completion of the previously announced acquisition of the Bates Companies, headquartered in Rockford, Illinois. The acquisition and subsequent merger of the Bates Companies into RB&T will enhance the wealth management services of RB&T by adding approximately $700 million of assets under management.

GAAP TO NON-GAAP RECONCILIATIONS

The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, ~~“core~~“adjusted net income”, ~~“core net income attributable to QCR Holdings, Inc. common stockholders”, “core~~“adjusted EPS”, ~~“core~~“adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, and “efficiency ratio”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:

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

~~Core~~Adjusted net income, ~~core net income attributable to QCR Holdings, Inc. common stockholders, core~~adjusted EPS and ~~core~~adjusted ROAA (all non-GAAP measures) are reconciled to net income;

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

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

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

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

NIM (TEY) is a financial measure that the Company's management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures.

~~The efficiency ratio is a ratio that management utilizes to compare~~ In addition, the Company ~~to peers. It is~~calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate a ~~standard ratio in the banking industry and widely utilized by investors.~~great deal, making comparions difficult.

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

September 30,

June 30,

March 31,

December 31,

September 30,

RECONCILIATIONS

2018

2018

2018

2017

2017

(dollars in thousands, except per share data)

TCE/TA RATIO







Stockholders' equity (GAAP)

$
457,387

$
369,588

$
360,428

$
353,287

$
313,039

Less: Intangible assets

89,755

36,561

37,108

37,413

19,800

TCE (non-GAAP)

$
367,632

$
333,027

$
323,320

$
315,874

$
293,239

Total assets (GAAP)

$
4,792,732

$
4,106,883

$
4,026,314

$
3,982,665

$
3,550,463

Less: Intangible assets

89,755

36,561

37,108

37,413

198,000

TA (non-GAAP)

$
4,702,977

$
4,070,322

$
3,989,206

$
3,945,252

$
3,352,463

TCE/TA ratio (non-GAAP)

7.82
%

8.18
%

8.10
%

8.01
%

8.31
%

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

For the Quarter Ended

For the Nine Months Ended

September 30,

June 30,

December 31,


September 30,

September 30,


2018

2018

2017

2018

2017

(dollars in thousands,except per share data)

CORE NET INCOME

Net income (GAAP)

$
8,809

$
10,445

$
9,902

$
29,804

$
25,805

Less nonrecurring items (post-tax) (*):











Income:











Securities gains, net

$
—

$
—

$
(41)

$
—

$
(16)

Total nonrecurring income (non-GAAP)

$
—

$
—

$
(41)

$
—

$
(16)

Expense:











Acquisition costs

$
1,495

$
327

$
430

$
1,616

$
265

Post-acquisition compensation, transition and integration costs

111

130

2,462

520

340

Total nonrecurring expense (non-GAAP)

$
1,606

$
457

$
2,892

$
2,136

$
605

Adjustment of tax expense related to the Tax Act

$
—

$
—

$
2,919

$
—

$
—

Core net income (non-GAAP)

$
10,415

$
10,902

$
9,916

$
31,940

$
26,426

CORE EPS











Core net income (non-GAAP) (from above)

$
10,415

$
10,902

$
9,916

$
31,940

$
26,426

Weighted average common shares outstanding

15,625,123

13,919,565

13,845,497

14,477,783

13,151,752

Weighted average common and common equivalent shares outstanding

15,922,324

14,232,423

14,193,191

14,786,777

13,509,673

Core EPS (non-GAAP):









Basic

$
0.67

$
0.78

$
0.72

$
2.21

$
2.01

Diluted

$
0.65

$
0.77

$
0.70

$
2.16

$
1.96

CORE ROAA











Core net income (non-GAAP) (from above)

$
10,415

$
10,902

$
9,916

$
31,940

$
26,426

Average Assets

$
4,677,875

$
4,053,684

$
3,923,337

$
4,342,083

$
3,385,352

Core ROAA (annualized) (non-GAAP)

0.89
%

1.08
%

1.01
%

1.00
%

1.04
%

NIM (TEY)*





Net interest income (GAAP)

$
38,314

$
32,085

$
31,793

$
102,801

$
84,272

Plus: Taxequivalent adjustment

1,548

1,462

2,585

4,329

6,632

Net interest income - taxequivalent (non-GAAP)

$
39,862

$
33,547

$
34,378

$
107,130

$
90,904

Average earning assets

$
4,387,487

$
3,820,333

$
3,699,193

$
3,989,099

$
3,186,716

NIM (GAAP)

3.46
%

3.37
%

3.41
%

3.45
%

3.54
%

NIM (TEY) (non-GAAP)

3.60
%

3.52
%

3.69
%

3.59
%

3.81
%

EFFICIENCY RATIO











Noninterest expense (GAAP)

$
30,500

$
26,370

$
31,351

$
82,733

$
66,073

Net interest income (GAAP)

$
38,314

$
32,085

$
31,793

$
102,801

$
84,272

Noninterest income (GAAP)

8,809

8,912

9,714

26,262

20,768

Total income

$
47,123

$
40,997

$
41,507

$
129,063

$
105,040

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

64.72
%

64.32
%

75.53
%

64.10
%

62.90
%


	As of
GAAP TO NON-GAAP	June 30,			March 31,			June 30,
RECONCILIATIONS	2019			2019			2018
		(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	504,300		$	488,407		$	369,588
Less: Intangible assets		93,837			94,790			36,561
TCE (non-GAAP)	$	410,463		$	393,617		$	333,027

Total assets (GAAP)	$	5,194,852		$	5,066,662		$	4,106,883
Less: Intangible assets		93,837			94,790			36,561
TA (non-GAAP)	$	5,101,015		$	4,971,872		$	4,070,322

TCE/TA ratio (non-GAAP)		8.05	%		7.92	%		8.18	%


	For the Quarter Ended									For the Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2019			2019			2018			2019			2018
	(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	13,504		$	12,918		$	10,445		$	26,422		$	20,995
Less nonrecurring items (post-tax) (*):
Income:
Securities losses, net	$	(41)		$	—		$	—		$	(41)		$	—
Total nonrecurring income (non-GAAP)	$	(41)		$	—		$	—		$	(41)		$	—
Expense:
Acquisition costs	$	—		$	—		$	327		$	—		$	400
Post-acquisition compensation, transition and integration costs		559			106			130			665			130
Total nonrecurring expense (non-GAAP)	$	559		$	106		$	457		$	665		$	530


Adjusted net income (non-GAAP)	$	14,104		$	13,024		$	10,902		$	27,128		$	21,525

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	14,104		$	13,024		$	10,902		$	27,128		$	21,525

Weighted average common shares outstanding		15,714,588			15,693,345			13,919,565			15,703,967			13,904,113
Weighted average common and common equivalent shares outstanding		15,938,377			15,922,940			14,232,423			15,930,659			14,219,003

Adjusted EPS (non-GAAP):
Basic	$	0.90		$	0.83		$	0.78		$	1.73		$	1.55
Diluted	$	0.88		$	0.82		$	0.77		$	1.70		$	1.51

ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	14,104		$	13,024		$	10,902		$	27,128		$	21,525

Average Assets	$	5,077,900		$	4,968,502		$	4,053,684		$	5,023,201		$	4,024,188

Adjusted ROAA (annualized) (non-GAAP)		1.11	%		1.05	%		1.08	%		1.08	%		1.07	%

ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	38,013		$	36,908		$	32,085		$	74,921		$	64,488
Plus: Taxequivalent adjustment		1,808			1,794			1,462			3,509			2,815
Net interest income - taxequivalent (non-GAAP)	$	39,821		$	38,702		$	33,547		$	78,430		$	67,303
Less: Accquisition accounting net accretion		1,076			1,069			545			2,145			1,244
Adjusted net interest income		38,745			37,633			33,002			76,285			66,059

Average earning assets	$	4,698,021		$	4,612,553		$	3,820,333		$	4,655,287		$	3,789,905

NIM (GAAP)		3.25	%		3.25	%		3.37	%		3.25	%		3.43	%
NIM (TEY) (non-GAAP)		3.40	%		3.40	%		3.52	%		3.40	%		3.58	%
Adjusted NIM (TEY) (non-GAAP)		3.31	%		3.31	%		3.46	%		3.30	%		3.51	%

EFFICIENCY RATIO
Noninterest expense (GAAP)	$	36,560		$	32,435		$	26,370		$	68,995		$	52,234

Net interest income (GAAP)	$	38,013		$	36,908		$	32,085		$	74,921		$	64,488
Noninterest income (GAAP)		17,065			11,993			8,912			29,058			17,454
Total income	$	55,078		$	48,901		$	40,997		$	103,979		$	81,942

Efficiency ratio (noninterest expense/total income) (non-GAAP)		66.38	%		66.33	%		64.32	%		66.35	%		63.75	%

* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of ~~35% for periods prior to March 31, 2018 and~~ 21% ~~for periods including and after March 31, 2018.~~.

~~NET INTEREST INCOME - (TAX EQUIVALENT BASIS)~~

As part of the Tax Act, the Company's federal income tax rate was reduced from 35% down to 21% effective January 1, 2018. In order to compare periods before and after the effective date of the Tax Act, it's important to note the difference in the federal income tax rate and the impact on the Company's tax exempt earning assets (loans and securities) and the related tax equivalent yield reporting.

4540

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a tax equivalent basis, increased ~~29%~~19% to ~~$39.9~~$39.8 million for the quarter ended ~~September~~June 30, ~~2018,~~2019, compared to the same quarter of the prior year, and increased ~~18%~~17% to ~~$107.1~~$78.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to the same period of the prior year. Excluding the tax equivalent adjustments, net interest income increased ~~34%~~18% for the quarter ended ~~September~~June 30, ~~2018~~2019 compared to the same quarter of the prior year, and increased ~~22%~~16% for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to the same period of the prior year. Net interest income improved due to ~~several~~two main factors:

The merger of ~~SFC Bank~~Springfield Bancshares in the third quarter of ~~2018 and the acquisition of Guaranty Bank in the fourth quarter of 2017;~~

~~Organic loan and lease growth has been strong over the past 12 months pushing loans/leases up to 76% of total assets;~~2018; and

~~The Company's continued strategy to redeploy funds from~~Strong organic loan and deposit growth over the ~~lower yielding taxable securities portfolio into higher yielding loans and municipal bonds, especially with the Company's most recent acquisitions of CSB and Guaranty Bank.~~past 12 months.

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


	Tax Equivalent Basis						GAAP						Tax Equivalent Basis						GAAP
	For the Quarter Ended						For the Quarter Ended						For the Quarter Ended						For the Quarter Ended
	September 30,		June 30,		September 30,		September 30,		June 30,		September 30,		June 30,		March 31,		June 30,		June 30,		March 31,		June 30,
	2018		2018		2017		2018		2018		2017		2019		2019		2018		2019		2019		2018
Average Yield on Interest-Earning Assets	4.65	%	4.44	%	4.34	%	4.51	%	4.28	%	4.06	%	4.78	%	4.74	%	4.44	%	4.63	%	4.58	%	4.28	%
Average Cost of Interest-Bearing Liabilities	1.35	%	1.21	%	0.87	%	1.35	%	1.21	%	0.87	%	1.76	%	1.72	%	1.21	%	1.76	%	1.72	%	1.21	%
Net Interest Spread	3.30	%	3.23	%	3.47	%	3.16	%	3.07	%	3.19	%	3.02	%	3.02	%	3.23	%	2.87	%	2.86	%	3.07	%
NIM	3.60	%	3.52	%	3.71	%	3.46	%	3.37	%	3.43	%	3.40	%	3.40	%	3.52	%	3.25	%	3.25	%	3.37	%
NIM Excluding Acquisition Accounting Net Accretion	3.44	%	3.46	%	3.65	%	3.31	%	3.31	%	3.37	%	3.31	%	3.31	%	3.46	%	3.15	%	3.15	%	3.31	%


	Tax Equivalent Basis				GAAP				Tax Equivalent Basis				GAAP
	For the Nine Months Ended				For the Nine Months Ended				For the Six Months Ended				For the Six Months Ended
	September 30,		September 30,		September 30,		September 30,		June 30,		June 30,		June 30,		June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Average Yield on Interest-Earning Assets	4.51	%	4.37	%	4.36	%	4.10	%	4.76	%	4.42	%	4.60	%	4.28	%
Average Cost of Interest-Bearing Liabilities	1.21	%	0.78	%	1.21	%	0.78	%	1.74	%	1.13	%	1.74	%	1.13	%
Net Interest Spread	3.30	%	3.59	%	3.15	%	3.32	%	3.02	%	3.29	%	2.86	%	3.15	%
NIM	3.59	%	3.81	%	3.45	%	3.54	%	3.40	%	3.58	%	3.25	%	3.43	%
NIM Excluding Acquisition Accounting Net Accretion	3.44	%	3.56	%	3.29	%	3.28	%	3.30	%	3.51	%	3.15	%	3.37	%

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

For the Quarter Ended

For the Nine Months Ended

September 30,

June 30,

September 30,

September 30,

September 30,

2018


2018


2017

2018


2017

dollars in thousands

Acquisition Accounting Net Accretion in NIM

$
1,740

$
545

$
474

$
2,984

$
4,028


		For the Quarter Ended						For the Six Months Ended
		June 30,		March 31,		June 30,		June 30,		June 30,
		2019		2019		2018		2019		2018
		(dollars in thousands)

Acquisition Accounting Net Accretion in NIM	$	1,076	$	1,069	$	545	$	2,145	$	1,244

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

NIM on a tax equivalent basis ~~was up 8 basis points~~remained stable on a linked quarter ~~basis.~~basis at 3.40%. Excluding acquisition accounting net accretion, NIM ~~was down 2 basis points~~also remained stable on a linked quarter ~~basis. This modest~~basis at 3.31%. The stability in net interest margin ~~compression~~during the quarter was ~~primarily~~ due to a 4 basis point increase in the ~~following:~~yield on interest earning assets, offset by a 4 basis point increase in the total cost of funds (due to both mix and rate).

~~Increases in the cost of funds due to both mix and rate as the Company continues to grow larger commercial and public deposits which tend to have higher interest rate sensitivity;~~

With the flat yield curve and continued competition in our markets, loan pricing continues to be pressured but the pressure has eased moderately as evidenced by the third quarter results. The Company had success in widening spreads as core loan yields increased 10 basis points on a linked quarter basis; however, the pace and magnitude of the widening has been offset by the increasing cost of funds; and

~~The majority of the Company’s earning asset growth in the third quarter of 2018 occurred at the end of the quarter.~~

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.

4741

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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


	For the three months ended September 30,																For the three months ended June 30,
	2018								2017								2019								2018
				Interest		Average						Interest		Average						Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)																(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	23,199		$	105		1.80	%	$	19,966		$	52		1.03	%	$	9,690		$	56		2.32	%	$	18,561		$	61		1.32	%
Interest-bearing deposits at financial institutions		61,815			323		2.07	%		42,178			141		1.33	%		182,651			1,168		2.56	%		54,879			228		1.67	%
Investment securities (1)		667,142			5,973		3.55	%		593,451			5,808		3.88	%		644,999			6,062		3.77	%		648,276			5,752		3.56	%
Restricted investment securities		22,683			330		5.77	%		17,793			173		3.86	%		21,007			290		5.54	%		21,100			212		4.03	%
Gross loans/leases receivable (1) (2) (3)		3,612,648			44,648		4.90	%		2,629,626			29,978		4.52	%		3,839,674			48,413		5.06	%		3,077,517			36,008		4.69	%
Total interest earning assets		4,387,487			51,379		4.65	%		3,303,014			36,152		4.34	%		4,698,021			55,989		4.78	%		3,820,333			42,261		4.44	%

Noninterest-earning assets:
Cash and due from banks		78,103								64,272								82,394								68,266
Premises and equipment		72,489								61,585								78,008								63,665
Less allowance		(38,083)								(34,086)								(41,224)								(36,960)
Other		177,879								108,363								260,701								138,380
Total assets	$	4,677,875							$	3,503,148							$	5,077,900							$	4,053,684

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	2,214,480			5,432		0.97	%	$	1,613,162			2,230		0.55	%	$	2,461,768			8,271		1.35	%	$	1,919,406			4,089		0.85	%
Time deposits		825,020			3,290		1.58	%		530,120			1,326		0.99	%		1,013,391			5,554		2.20	%		665,643			2,439		1.47	%
Short-term borrowings		21,407			78		1.45	%		16,138			33		0.81	%		16,145			81		2.01	%		19,024			63		1.33	%
FHLB advances		209,111			1,273		2.42	%		146,556			608		1.65	%		76,154			601		3.17	%		174,826			1,019		2.34	%
Other borrowings		74,503			925		4.93	%		72,617			726		3.97	%		10,550			92		3.50	%		67,044			596		3.57	%
Subordinated notes																		68,239			993		5.84	%		—			—		—	%
Junior subordinated debentures		37,600			519		5.48	%		33,563			362		4.28	%		37,731			576		6.12	%		37,558			508		5.43	%
Total interest-bearing liabilities		3,382,121			11,517		1.35	%		2,412,156			5,285		0.87	%		3,683,978			16,168		1.76	%		2,883,501			8,714		1.21	%

Noninterest-bearing demand deposits		800,577								738,824								796,232								757,954
Other noninterest-bearing liabilities		59,112								42,572								99,427								47,198
Total liabilities		4,241,810								3,193,552								4,579,637								3,688,653

Stockholders' equity		436,065								309,596								498,263								365,031
Total liabilities and stockholders' equity	$	4,677,875							$	3,503,148							$	5,077,900							$	4,053,684
Net interest income				$	39,862							$	30,867							$	39,821							$	33,547
Net interest spread							3.30	%							3.47	%							3.02	%							3.23	%
Net interest margin							3.60	%							3.71	%							3.25	%							3.37	%
Net interest margin (TEY)(Non-GAAP)																							3.40	%							3.52	%
Adjusted net interest margin (TEY)(Non-GAAP)																							3.31	%							3.46	%
Ratio of average interest-earning assets to average interest-bearing liabilities		129.73	%							136.93	%							127.53	%							132.49	%

(1)

Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a ~~35%~~21% tax ~~rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.~~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.

4842

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the ~~three months ended September~~Three Months Ended June 30, ~~2018~~2019



	Inc./(Dec.)		Components				Inc./(Dec.)		Components
	from		of Change (1)				from		of Change (1)
	Prior Period		Rate		Volume		Prior Period (1)		Rate		Volume
	2018 vs. 2017						2019 vs. 2018
	(dollars in thousands)						(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	53	$	44	$	9	$	(5)	$	141	$	(146)
Interest-bearing deposits at financial institutions		182		100		82		940		177		763
Investment securities (2)		165		(2,261)		2,426		310		501		(191)
Restricted investment securities		157		101		56		78		85		(7)
Gross loans/leases receivable (2) (3) (4)		14,670		2,694		11,976
Gross loans/leases receivable (2) (3)								12,405		2,961		9,444
Total change in interest income		15,227		678		14,549		13,728		3,865		9,863

INTEREST EXPENSE
Interest-bearing deposits		3,202		2,162		1,040		4,182		2,807		1,375
Time deposits		1,964		1,014		950		3,115		1,517		1,598
Short-term borrowings		45		32		13		18		73		(55)
Federal Home Loan Bank advances		665		347		318		(418)		1,617		(2,035)
Other borrowings		199		180		19		(504)		(11)		(493)
Subordinated notes								993		—		993
Junior subordinated debentures		157		110		47		68		66		2
Total change in interest expense		6,232		3,845		2,387		7,454		6,069		1,385

Total change in net interest income	$	8,995	$	(3,167)	$	12,162	$	6,274	$	(2,204)	$	8,478

(1)

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

(2)

(3)

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

~~(4)~~

~~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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	For the nine months ended September 30,																For the six months ended June 30,
	2018								2017								2019								2018
				Interest		Average						Interest		Average						Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)																(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	20,488		$	223		1.46	%	$	16,600		$	105		0.85	%	$	12,713		$	150		2.38	%	$	19,132		$	118		1.24	%
Interest-bearing deposits at financial institutions		55,408			749		1.81	%		73,655			560		1.02	%		169,057			2,091		2.49	%		52,205			425		1.64	%
Investment securities (1)		654,818			17,391		3.55	%		575,884			16,350		3.80	%		652,727			12,158		3.76	%		648,656			11,418		3.55	%
Restricted investment securities		21,871			776		4.74	%		14,963			435		3.89	%		21,146			598		5.70	%		21,465			446		4.19	%
Gross loans/leases receivable (1) (2) (3)		3,236,514			115,365		4.77	%		2,505,614			86,821		4.63	%		3,799,645			94,795		5.03	%		3,048,447			70,753		4.68	%
Total interest earning assets		3,989,099			134,504		4.51	%		3,186,716			104,271		4.37	%		4,655,287			109,792		4.76	%		3,789,905			83,160		4.42	%

Noninterest-earning assets:
Cash and due from banks		71,198								64,363								80,513								67,745
Premises and equipment, net		66,516								61,296								77,266								63,530
Less allowance for estimated losses on loans/leases		(36,726)								(32,648)								(40,843)								(36,048)
Other		151,996								105,625								250,979								139,057
Total assets	$	4,242,083							$	3,385,352							$	5,023,201							$	4,024,189

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,987,371			12,541		0.84	%	$	1,528,971			5,205		0.46	%	$	2,374,939			15,445		1.31	%	$	1,873,817			7,109		0.77	%
Time deposits		702,441			7,591		1.44	%		522,986			3,575		0.91	%		1,012,925			10,859		2.16	%		641,152			4,301		1.35	%
Short-term borrowings		19,234			173		1.20	%		19,754			76		0.51	%		15,261			152		2.01	%		18,148			95		1.06	%
Federal Home Loan Bank advances		206,875			3,219		2.08	%		112,550			1,365		1.62	%		111,755			1,662		3.00	%		205,758			2,215		2.17	%
Other borrowings		68,742			2,376		4.62	%		73,126			2,104		3.85	%		27,126			539		4.01	%		65,862			1,182		3.62	%
Subordinated notes																		53,438			1,557		5.88	%		—			—		—
Junior subordinated debentures		37,557			1,474		5.25	%		33,530			1,042		4.15	%		37,709			1,148		6.14	%		37,534			955		5.13	%
Total interest-bearing liabilities		3,022,220			27,374		1.21	%		2,290,917			13,367		0.78	%		3,633,151			31,362		1.74	%		2,842,271			15,857		1.13	%

Noninterest-bearing demand deposits		784,401								751,318								803,266								776,314
Other noninterest-bearing liabilities		49,588								42,660								96,441								44,826
Total liabilities		3,856,209								3,084,895								4,532,858								3,663,411

Stockholders' equity		385,874								300,457								490,343								360,778
Total liabilities and stockholders' equity	$	4,242,083							$	3,385,352							$	5,023,201							$	4,024,189
Net interest income				$	107,130							$	90,904							$	78,430							$	67,303
Net interest spread							3.30	%							3.59	%							3.02	%							3.29	%
Net interest margin							3.59	%							3.81	%							3.25	%							3.43	%
Net interest margin (TEY)(Non-GAAP)																							3.40	%							3.58	%
Adjusted net interest margin (TEY)(Non-GAAP)																							3.30	%							3.51	%
Ratio of average interest earning assets to average interest-bearing liabilities		131.99	%							139.10	%							128.13	%							133.34	%

(1)

(2)

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

(3)

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

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Analysis of Changes of Interest Income/Interest Expense	Analysis of Changes of Interest Income/Interest Expense							Analysis of Changes of Interest Income/Interest Expense
For the nine months ended September 30, 2018
For the six months ended June 30, 2019								For the six months ended June 30, 2019

		Inc./(Dec.)		Components					Inc./(Dec.)		Components
		from		of Change (1)					from		of Change (1)
		Prior Period		Rate		Volume			Prior Period (1)		Rate		Volume
		2018 vs. 2017							2019 vs. 2018
		(dollars in thousands)							(dollars in thousands)
INTEREST INCOME
Federal funds sold		$	118	$	89	$	29		$	32	$	140	$	(108)
Interest-bearing deposits at other financial institutions			189		424		(235)			1,666		314		1,352
Investment securities (2)			1,041		(1,585)		2,626			740		668		72
Restricted investment securities			341		110		231			152		171		(19)
Gross loans/leases receivable (2) (3) (4)			28,544		2,556		25,988			24,042		5,606		18,436
Total change in interest income			30,233		1,594		28,639			26,632		6,899		19,733
INTEREST EXPENSE
Interest-bearing demand deposits			7,336		5,430		1,906			8,336		6,065		2,271
Time deposits			4,016		2,525		1,491			6,558		3,330		3,228
Short-term borrowings			97		101		(4)			57		100		(43)
Federal Home Loan Bank advances			1,854		468		1,386			(553)		1,606		(2,159)
Other borrowings			272		470		(198)			(643)		334		(977)
Subordinated notes										1,557		—		1,557
Junior subordinated debentures			432		297		135			193		—		193
Total change in interest expense			14,007		9,291		4,716			15,505		11,435		4,070
Total change in net interest income		$	16,226	$	(7,697)	$	23,923		$	11,127	$	(4,536)	$	15,663

(1)

(2)

(3)

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

~~(4)~~

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

CRITICAL ACCOUNTING POLICIES

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

~~ALLOWANCE FOR LOAN AND LEASE LOSSES~~

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

GOODWILL

The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. A more detailed discussion of this critical accounting policy tocan be ~~that related to~~found in the ~~allowance~~Company's Annual Report on Form 10‑K for ~~loan and lease losses.~~the year ended December 31, 2018.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

ALLOWANCE FOR LOAN AND LEASE LOSSES

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. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in NPLs, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers' sensitivity to interest rate movements.

~~Qualitative factors include management's view regarding the general economic environment~~A more detailed discussion of this critical accounting policy can be found in the Company's ~~markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and~~

~~Table of Contents~~

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~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

~~complexity of individual credits in relation to loan/lease structures, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology.~~

~~Management may report a materially different amount~~Annual Report on Form 10‑K for the provision in the statement of income to change the allowance if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein, as well as the section entitled “Financial Condition” of this Management's Discussion and Analysis that discusses the allowance.

Although management believes the level of the allowance as of September 30, 2018 was adequate to absorb losses in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.year ended December 31, 2018.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income ~~on a tax equivalent basis~~ increased ~~42%~~33%, comparing the ~~third~~second quarter of ~~2018~~2019 to the same period of ~~2017,~~2018, and increased ~~29%~~32% comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of ~~2017.~~2018. This increase was primarily the result of the ~~acquisitions~~addition of SFC ~~Bank and Guaranty~~ Bank, strong organic loan growth and ~~improved pricing~~loans repricing with the rising rate environment. Although the latter has been less than the Company would like due to competitive pressures and the flat yield curve, the Company is focused on growing loans at higher rates with widening spreads to more than offset the effect of the rising cost of funds.

Overall, the Company's average earning assets increased ~~33%~~23%, comparing the ~~third~~second quarter of ~~2018~~2019 to the ~~third~~second quarter of ~~2017.~~2018. During the same time period, average gross loans and leases increased ~~37%~~25%, while average investment securities ~~increased 12% with a portion allocable to private placement tax-exempt municipal securities.~~decreased 1%. Average earning assets increased ~~25%~~23%, comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of ~~2017.~~2018. Average gross loans and leases increased ~~29%~~25% and average investment securities increased ~~14%~~1%, comparing the first ~~nine months~~half of ~~2018~~2019 to the same period ~~to 2017.~~of 2018. These increases were ~~also~~ the result of the ~~acquisition~~addition of SFC Bank and ~~Guaranty Bank and~~ strong organic loan growth.

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

INTEREST EXPENSE

Interest expense for the ~~third~~second quarter of 2019 increased 86% from the second quarter of 2018 ~~increased 118% from the third quarter of 2017~~ and increased ~~105%~~98%, comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of ~~2017.~~2018. The ~~acquisitions~~addition of ~~Guaranty Bank and~~ SFC Bank primarily contributed to this increase as the Company added over ~~$650~~$439 million in ~~deposits and $78 million in FHLB advances. Additionally, as the~~deposits. The Company has grown organically at a significant pace over the past several years and the loan growth has been funded in ~~larger~~large part by bigger depositor relationships with higher rate sensitivity, many of which have pricing tied to a certain index. As a result, the cost of these funds is higher than the rest of the Company’s core deposit portfolio, and the cost rises at a higher rate (beta) as market interest rates ~~rise (which has been the case over the past several quarters).~~rise. The beta on the balance of the Company’s core deposit portfolio has performed well and is much lower than the beta on relationships with pricing tied to a certain index. Additionally, the ~~loan growth has outpaced deposit growth, short-term borrowings have increased to temporarily fill in the funding gap and the~~ cost of ~~these~~funds on the Company’s short-term wholesale funds has increased with the rising rate environment.

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

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

PROVISION FOR LOAN/LEASE LOSSES

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

The Company's provision totaled ~~$6.2~~$1.9 million for the ~~third~~second quarter of ~~2018,~~2019, which was ~~an increase~~a decrease of ~~$4.1 million or 197%~~16% from the same quarter of the prior year. Provision for the first ~~nine~~six months of ~~the year~~2019 totaled ~~$11.0~~$4.1 million, which was ~~up $4.8 million or 78%,~~down 16% compared to the first ~~nine~~six months of ~~2017. The increaseswere~~2018. These decreases were primarily attributable to ~~additional provision~~improved asset quality.

Table of ~~$4.7 million related to two unrelated borrowers as well as to loan growth and accounting for loans acquired through acquisitions.~~Contents

Part I

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

In accordance with GAAP for business combination accounting, acquired loans are recorded at fair value; therefore, no allowance is associated with such loans at acquisition. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance through provision. This provision, when coupled with net charge-offs of ~~$2.3~~$2.8 million for the first ~~nine~~six months of ~~2018,~~2019, increased the Company's allowance to ~~$43.1~~$41.1 million at ~~September~~June 30, ~~2018.~~2019. As of ~~September~~June 30, ~~2018,~~2019, the Company's allowance to total loans/leases was ~~1.18%~~1.05%, which was down from 1.07% at December 31, 2018 and down from 1.21% at June 30, ~~2018 and down from 1.31% at September 30, 2017.~~2018. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($~~14.4~~9.3 million and ~~$5.6~~$6.6 million at ~~September~~June 30, 2019 and June 30, 2018, ~~and September 30, 2017,~~ respectively). When factoring this remaining discount into the Company's allowance to total loans and leases calculation, the Company's allowance as a percentage of total loans and leases increased from 1.18% to 1.57% as of September 30, 2018 and increased from 1.31% to 1.52% as of September 30, 2017.

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

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three and six months ended June 30, 2019 and 2018.


									Three Months Ended
									June 30,		June 30,
	Three Months Ended								2019		2018		$ Change		% Change
	September 30,		September 30,						(dollars in thousands)
	2018		2017		$ Change		% Change
Trust department fees	$	2,195,828	$	1,721,401	$	474,427	27.6	%	$	2,361	$	2,058	$	303	14.7	%
Investment advisory and management fees		1,059,413		968,452		90,961	9.4			1,888		1,058		830	78.4
Deposit service fees		1,655,529		1,522,461		133,068	8.7			1,658		1,610		48	3.0
Gains on sales of residential real estate loans, net		336,679		98,409		238,270	242.1			489		102		387	379.4
Gains on sales of government guaranteed portions of loans, net		46,417		91,974		(45,557)	(49.5)			39		—		39	100.0
Swap fee income		1,110,182		194,256		915,926	471.5			7,891		1,649		6,242	378.5
Securities gains (losses), net		—		(63,588)		63,588	(100.0)
Securities losses, net										(52)		—		(52)	(100.0)
Earnings on bank-owned life insurance		474,426		428,002		46,424	10.8			412		399		13	3.3
Debit card fees		845,740		754,803		90,937	12.0			914		844		70	8.3
Correspondent banking fees		195,450		239,060		(43,610)	(18.2)			172		213		(41)	(19.2)
Other		889,161		746,073		143,088	19.2			1,293		979		314	32.1
Total noninterest income	$	8,808,825	$	6,701,303	$	2,107,522	31.4	%	$	17,065	$	8,912	$	8,153	91.5	%


	Six Months Ended
	June 30,		June 30,
	2019		2018		$ Change		% Change
	(dollars in thousands)

Trust department fees	$	4,854	$	4,295	$	559	13.0	%
Investment advisory and management fees		3,624		2,010		1,614	80.3
Deposit service fees		3,212		3,142		70	2.2
Gains on sales of residential real estate loans, net		858		203		655	322.7
Gains on sales of government guaranteed portions of loans, net		70		358		(288)	(80.4)
Swap fee income		11,089		2,608		8,481	325.2
Securities losses, net		(52)		—		(52)	(100.0)
Earnings on bank-owned life insurance		952		817		135	16.5
Debit card fees		1,706		1,610		96	6.0
Correspondent banking fees		388		477		(89)	(18.7)
Other		2,357		1,934		423	21.9
Total noninterest income	$	29,058	$	17,454	$	11,604	66.5	%

In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased $198.3 million in the first six months of 2019 with 186 new client relationships. With strong growth in assets under management, trust department fees increased 15%, comparing the second quarter of 2019 to the same period of the prior year. Trust

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Nine Months Ended

September 30,

September 30,


2018

2017

$ Change

% Change

Trust department fees

$
6,490,896

$
5,153,609

$
1,337,287

25.9
%

Investment advisory and management fees

3,069,423

2,798,886

270,537

9.7

Deposit service fees

4,797,385

4,297,210

500,175

11.6

Gains on sales of residential real estate loans, net

539,266

307,360

231,906

75.5

Gains on sales of government guaranteed portions of loans, net

404,851

1,129,668

(724,817)

(64.2)

Swap fee income

3,717,761

635,353

3,082,408

485.1

Securities gains (losses), net

—

(25,124)

25,124

(100.0)

Earnings on bank-owned life insurance

1,291,686

1,357,049

(65,363)

(4.8)

Debit card fees

2,456,134

2,201,125

255,009

11.6

Correspondent banking fees

672,807

684,306

(11,499)

(1.7)

Other

2,822,331

2,228,133

594,198

26.7

Total noninterest income

$
26,262,540

$
20,767,575

$
5,494,965

26.5
%

In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income and, due to favorable market conditions in 2018 coupled with strong growth in assets under management, trust department fees increased ~~28%~~13%, ~~comparing the third quarter of 2018 to the same period of the prior year. Trust department fees increased 26%~~ when comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts.

Investment advisory and management fees increased 9%78%, comparing the ~~third~~second quarter of ~~2018~~2019 to the same period of the prior year, and they increased ~~10%~~80% when comparing the first ~~nine months~~half of ~~2018~~2019 to the first ~~nine months~~half of ~~2017.~~2018. In October 2018, the Company acquired the Bates Companies which increased assets under management by approximately $704 million as of closing. Management has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company's Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Similar to trust department fees, ~~these~~investment advisory and management fees are largely determined based on the value of the investments managed. On October 1, 2018 the Company announced the successful completion of the previously announced acquisition of the Bates Companies, headquartered in Rockford, Illinois. The acquisition and subsequent merger of the Bates Companies into RB&T will enhance the wealth management services of RB&T by adding approximately $700 million of assets under management.

Deposit service fees expanded 9%3% comparing the ~~third~~second quarter of ~~2018~~2019 to the same period of the prior year, and expanded ~~12%~~2% when comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. ~~This increase was primarily the result of the growth in deposits due to the acquisitions of Guaranty Bank and SFC Bank. Additionally, the~~The Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, increased ~~242%~~379% when comparing the ~~third~~second quarter of ~~2018~~2019 to the same period of the prior year and increased ~~76%~~323% when comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. ~~Overall, with~~The increase was due to the ~~continued low interest rate environment,~~addition of SFC Bank which recognized gains on sales of residential real estate of $351 thousand in the second quarter of 2019 and $635 thousand in the first half of 2019. Overall, refinancing activity has slowed, as many of the Company's existing and prospective customers have already executed a refinancing. Therefore, this area has generally become a smaller contributor to overall noninterest income.

The Company's gains on the sale of government-guaranteed portions of loans for the ~~third~~second quarter of 2019 increased 100% compared to the second quarter of 2018 ~~decreased 50% compared to the third quarter of 2017~~ and decreased ~~64%~~80% when comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. ~~As one of its core strategies, the~~The Company continues to leverage its expertise by taking advantage of programs offered by the

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

SBA and the USDA. ~~In the past several years, the Company's portfolio of government-guaranteed loans has grown as a direct result of the Company's strong expertise in SBA and USDA lending.~~ In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company's portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. Lastly, a strategy for improved pricing is packaging loans together for sale. From time to time, the Company may execute on this strategy, which may delay the gains on sales of some loans to achieve better pricing. Recently, competitors have been offering SBA loan candidates traditional financing without the guarantee and the Company is not willing to relax its structure for those lending opportunities.

As a result of the ~~continued relatively low~~ interest rate environment, ~~including a flat yield curve,~~ the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project 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 fee dependent upon the pricing. Management ~~believes that these swaps help position the Company more favorably for rising rate environments. Management~~ will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the ~~borrower~~borrowers and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income totaled ~~$1.1~~$7.9 million for the ~~third~~second quarter of ~~2018,~~2019, compared to ~~$194 thousand~~$1.6 million for the ~~third~~second quarter of ~~2017.~~2018. Swap fee income totaled ~~$3.7~~$11.1 million for the first ~~nine months~~half of ~~2018~~2019, compared to ~~$635 thousand~~$2.6 million in the first ~~nine~~half of 2018. The increase in swap fee income for the first three and six months of ~~2017.~~2019, as compared to all prior periods, was due to both the volume and the size of the transactions executed. Future levels of swap fee income are ~~also~~somewhat dependent upon prevailing interest rates.

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Securities losses totaled $52 thousand for the three and six months ended June 30, 2019. By comparison, there were no securities losses for the three and six months ended June 30, 2018.

Earnings on BOLI increased ~~11%~~3% comparing the ~~third~~second quarter of ~~2018~~2019 to the second quarter of 2018, and ~~decreased 5%~~increased 17% comparing the first ~~nine months~~half of ~~2018~~2019 to the first ~~nine months~~half of ~~2017.~~2018. There were no purchases of BOLI within the last 12 months. Notably, a ~~small~~ portion of the Company's BOLI is variable rate whereby ~~the~~ returns are determined by the performance of the equity ~~market. Equity~~ market ~~performance accounted for the majority of the decrease~~and can lead to volatility in ~~earnings on BOLI.~~earnings. 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 ~~12%~~8% comparing the ~~third~~second quarter of ~~2018~~2019 to the ~~third~~second quarter of the prior year, and ~~12%~~increased 6% comparing the first ~~nine months~~half of ~~2018~~2019 to the first ~~nine months~~half of ~~2017.~~2018. This increase was primarily related to ~~the acquisition of Guaranty Bank in the fourth quarter of 2017.~~recent acquisitions. 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 retail deposit product with a higher interest rate that incentivizes debit card ~~activity, which has been taken advantage of by the Company's customers.~~activity.

Correspondent banking fees decreased ~~18%~~19% comparing the ~~third~~second quarter of ~~2018~~2019 to the ~~third~~second quarter of the prior year, ~~and decreased 2% comparing~~as well as the first ~~nine months~~half of ~~2018~~2019 to the first ~~nine months~~half of ~~2017.~~2018. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately ~~191~~192 banks in Iowa, Illinois and Wisconsin.

Other noninterest income increased ~~19%~~32% comparing the ~~third~~second quarter of ~~2018~~2019 to the ~~third~~second quarter of the prior year, and increased ~~27%~~22% comparing the first ~~nine months~~half of ~~2018~~2019 to the first ~~nine months~~half of ~~2017. These increases were~~2018. This increase was primarily ~~driven by fluctuations in net gains recognized~~due to loan related fee income, equity investment income and gain on ~~the~~ disposal of leased assets.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.


									Three Months Ended
									June 30,		June 30,
	Three Months Ended								2019		2018		$ Change		% Change
	September 30,		September 30,						(dollars in thousands)
	2018		2017		$ Change		% Change
Salaries and employee benefits	$	17,432,632	$	13,423,943	$	4,008,689	29.9	%	$	22,749	$	15,804	$	6,945	43.9	%
Occupancy and equipment expense		3,318,470		2,516,274		802,196	31.9			3,533		3,133		400	12.8
Professional and data processing fees		2,537,027		2,950,839		(413,812)	(14.0)			3,031		2,771		260	9.4
Acquisition costs		1,292,043		407,997		884,046	216.7			—		414		(414)	(100.0)
Post-acquisition compensation, transition and integration costs		493,063		522,740		(29,677)	(5.7)			708		165		543	329.1
FDIC insurance, other insurance and regulatory fees		932,746		690,894		241,852	35.0			926		840		86	10.2
Loan/lease expense		369,379		257,540		111,839	43.4			312		260		52	20.0
Net cost of (income from) operations of other real estate		(50,362)		(160,640)		110,278	(68.6)
Net cost of (income from) and gains/losses on operations of other real estate										1,182		(70)		1,252	(1,788.6)
Advertising and marketing		983,762		669,923		313,839	46.8			1,037		753		284	37.7
Bank service charges		461,656		460,153		1,503	0.3			508		466		42	9.0
Correspondent banking expense		205,121		204,189		932	0.5			206		204		2	1.0
CDI amortization expense		541,665		230,867		310,798	134.6
Intangibles amortization										615		305		310	101.6
Other		1,982,408		1,221,028		761,380	62.4			1,753		1,325		428	32.3
Total noninterest expense	$	30,499,610	$	23,395,747	$	7,103,863	30.4	%	$	36,560	$	26,370	$	10,190	38.6	%


									Six Months Ended
									June 30,		June 30,
	Nine Months Ended								2019		2018		$ Change		% Change
	September 30,		September 30,						(dollars in thousands)
	2018		2017		$ Change		% Change
Salaries and employee benefits	$	49,214,623	$	39,662,218	$	9,552,405	24.1	%	$	43,628	$	31,782	$	11,846	37.3	%
Occupancy and equipment expense		9,516,939		7,716,829		1,800,110	23.3			7,227		6,198		1,029	16.6
Professional and data processing fees		8,015,966		7,374,930		641,036	8.7			5,781		5,479		302	5.5
Acquisition costs		1,798,184		407,997		1,390,187	340.7			—		506		(506)	(100.0)
Post-acquisition compensation, transition and integration costs		658,377		522,740		135,637	25.9			842		165		677	410.3
FDIC insurance, other insurance and regulatory fees		2,529,415		1,957,413		572,002	29.2			1,890		1,597		293	18.3
Loan/lease expense		920,215		811,362		108,853	13.4			526		551		(25)	(4.5)
Net cost of (income from) operations of other real estate		11,190		(118,453)		129,643	(109.4)
Net cost of (income from) and gains/losses on operations of other real estate										1,480		62		1,418	2,287.1
Advertising and marketing		2,430,085		1,846,942		583,143	31.6			1,822		1,446		376	26.0
Bank service charges		1,368,318		1,331,499		36,819	2.8			991		907		84	9.3
Correspondent banking expense		614,212		604,233		9,979	1.7			410		409		1	0.2
CDI amortization		1,150,767		692,600		458,167	66.2
Intangibles amortization										1,147		609		538	88.3
Other		4,504,639		3,263,183		1,241,456	38.0			3,251		2,523		728	28.9
Total noninterest expense	$	82,732,930	$	66,073,493	$	16,659,437	25.2	%	$	68,995	$	52,234	$	16,761	32.1	%

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges ~~relating~~ to ~~acquisitions~~post-acquisition transition and integration costs related to the core system conversion of SFC Bank are expected to impact expense throughout ~~2018.~~2019.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the ~~third~~second quarter of ~~2017~~2019 to the ~~third~~second quarter of 2018 by ~~30%~~44%. This line item also increased ~~24%~~37% when comparing the first ~~nine months~~half of ~~2018~~2019 to the first ~~nine months~~half of ~~2017.~~2018. This increase was primarily related to bonuses and commissions on elevated swap fee income, the addition of SFC ~~Bank and Guaranty~~ Bank employees, new hires and merit increases. ToOver the past year, the Company has added several producers to bolster growth prospects. Further, to help support recent and expected growth, the Company ~~is adding~~has added to operational infrastructure and investing in additional staffing both at the corporate level and at some of the bank charters. Some of these hires are opportunistic, as the Company takes advantage of talent availability in the marketplace as a result of ongoing industry consolidation.

Occupancy and equipment expense increased 32%, comparing the third quarter of 2018 to the same period of the prior year and increased 23% comparing the first nine months of 2018 to the same period of the prior year. The increased expense was primarily due to the addition of Guaranty Bank and SFC Bank.

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Occupancy and equipment expense increased 13% comparing the second quarter of 2019 to the same period of the prior year, and increased 17% comparing the first half of 2019 to the same period of the prior year. The increased expense was due to higher information technology service contract costs, increases in repairs and maintenance costs and the additions of SFC Bank and the Bates Companies.

Professional and data processing fees ~~decreased 14%,~~increased 9% comparing the ~~third~~first quarter of ~~2018~~2019 to the same period in ~~2017,~~2018, and increased 9%6% comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. This increased expense was ~~partially~~mostly due to ~~the addition of SFC Bank. Additionally, legal~~recent mergers/acquisitions. Legal expense ~~was also~~continues to be elevated due to a legal matter at RB&T where two employees have been charged with wrongdoing in connection with an SBA loan application. The Company anticipates these legal expenses will continue ~~to increase~~ until the court proceedings are completed, which the Company expects to occur in ~~mid 2019.~~early 2020. Neither RB&T nor the Company have been charged in the case. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing one-time costs and driving recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.

There were no acquisition costs in the first six months of 2019. Acquisition costs totaled ~~$1.3 million~~$414 thousand and $506 thousand for the ~~third~~second quarter of 2018 and ~~$1.8 million for the~~ first ~~nine months~~half of ~~2018. Acquisition costs for the third quarter and the first nine months of 2017 totaled $408 thousand.~~2018, respectively. These costs were comprised primarily of legal, accounting and investment banking costs related to ~~the acquisitions described in Notes 2 and 11 to the Consolidated Financial Statements.~~mergers/acquisitions.

Post-acquisition costs totaled ~~$493~~$708 thousand for the ~~third~~second quarter of ~~2018 and $658~~2019 as compared to $165 thousand for the same period of the prior year. Post-acquisition costs totaled $842 thousand for the first ~~nine months~~half of ~~2018.~~2019 as compared to $165 thousand for the same period of the prior year. These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to mergers/acquisitions.

FDIC insurance, other insurance and regulatory fee expense increased ~~35%~~10%, comparing the ~~third~~second quarter of 2019 to the second quarter of 2018, ~~to the third quarter of 2017~~ and increased ~~29%~~18% comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. The increase in expense was due to the ~~acquisitions~~addition of ~~Guaranty~~SFC Bank and ~~SFC Bank.~~organic asset growth.

Loan/lease expense increased ~~43%~~20% when comparing the ~~third~~second quarter of ~~2018~~2019 to the same quarter of ~~2017~~2018, and ~~increased 13%~~decreased 5% comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of ~~the~~ prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost ~~of/income from~~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~~cost of (income from) and gains/losses on operations of other real estate totaled ~~$50~~$1.2 million for the second quarter of 2019, compared to $70 thousand for the ~~third~~second quarter of ~~2018, compared to $161 thousand for the third quarter of 2017.~~2018. Net cost of (income from) and gains/losses on operations of other real estate totaled ~~$11 thousand~~$1.5 million for the first ~~nine months~~half of ~~2018~~2019 compared to ~~net income from operations of $118~~$62 thousand for the same period of the prior year. In the second quarter of 2019, the Company wrote down an OREO property by $1 million.

Advertising and marketing expense increased ~~47%,~~38% comparing the ~~third~~second quarter of 2019 to the second quarter of 2018, ~~to the third quarter of 2017~~ and increased ~~32%~~26% comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. The increase in expense was primarily due to the ~~additions~~addition of ~~Guaranty Bank and~~ SFC Bank.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, ~~remained flat~~increased 9% from the ~~third quarter of 2017 to the third~~second quarter of 2018 ~~and increased 3%,~~to the second quarter of 2019, as well as comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. As ~~transactions~~transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

Correspondent banking expense ~~was~~increased 1% when comparing the second quarter of 2019 to the second quarter of 2018 and remained flat when comparing the ~~third quarter~~first half of ~~2018 to the third quarter of 2017 and increased 2% when comparing the first nine months of 2018~~2019 to the same period of the prior year. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

CDI amortization expense increased 135% when comparing the third quarter of 2018 to the third quarter of 2017 and increased 66% when comparing the first nine months of 2018 to the same period of the prior year. The increase was due to the acquisitions of Guaranty Bank and SFC Bank.

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Intangibles amortization expense increased 102% when comparing the second quarter of 2019 to the second quarter of 2018, and increased 88% when comparing the first half of 2019 to the same period of the prior year. The increase was due to the addition of SFC Bank and the Bates Companies.

Other noninterest expense was up ~~62%~~32% when comparing the ~~third~~second quarter of 2019 to the second quarter of 2018, ~~to the third quarter of 2017~~ and increased ~~38%~~29% when comparing the first ~~nine months~~half of ~~2018~~2019 to the same period of the prior year. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management. A portion of this increase is related to ~~lease termination fees at Guaranty Realty as well as~~ the ~~additions~~addition of ~~Guaranty Bank and~~ SFC Bank.

INCOME TAXES

In the ~~third~~second quarter of ~~2018,~~2019, the Company incurred income tax expense of ~~$1.6~~$3.1 million. During the first ~~nine months~~half of the year, the Company incurred income tax expense of ~~$5.5~~$4.5 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.


																	For the Three Months Ended June 30,								For the Six Months Ended June 30,
																	2019				2018				2019				2018
	For the Three Months Ended September 30,								For the Nine Months Ended September 30,										% of				% of				% of				% of
	2018				2017				2018				2017						Pretax				Pretax				Pretax				Pretax
			% of				% of				% of				% of		Amount		Income		Amount		Income		Amount		Income		Amount		Income
			Pretax				Pretax				Pretax				Pretax		(dollars in thousands)
	Amount		Income		Amount		Income		Amount		Income		Amount		Income
Computed "expected" tax expense	$	2,187,543	21.0	%	$	3,421,414	35.0	%	$	7,409,662	21.0	%	$	11,463,015	35.0	%	$	3,481	21.0	%	$	2,589	21.0	%	$	6,491	21.0	%	$	5,222	21.0	%
Tax exempt income, net		(1,046,728)	(10.0)			(1,479,786)	(15.1)			(2,945,918)	(8.3)			(4,219,116)	(12.9)			(1,068)	(6.5)			(956)	(7.8)			(2,175)	(7.1)			(1,899)	(7.6)
Bank-owned life insurance		(89,489)	(0.9)			(149,802)	(1.5)			(261,114)	(0.7)			(474,968)	(1.4)			(87)	(0.5)			(84)	(0.7)			(200)	(0.6)			(172)	(0.7)
State income taxes, net of federal benefit, current year		392,789	3.8			389,200	4.0			1,501,913	4.3			1,191,935	3.6			772	4.7			558	4.5			1,421	4.6			1,109	4.5
Tax credits																		(38)	(0.2)			—	—			(77)	(0.3)			—	—
True-up adjustment to year-end provision																		—	—			—	—			(715)	(2.3)			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(8,802)	(0.1)			(190,554)	(1.9)			(341,807)	(1.0)			(813,421)	(2.5)			(54)	(0.3)			(201)	(1.6)			(154)	(0.5)			(333)	(1.3)
Other		172,722	1.6			(68,939)	(0.8)			117,188	0.2			(200,890)	(0.6)			67	0.3			(25)	(0.1)			(104)	(0.3)			(55)	(0.3)
Federal and state income tax expense	$	1,608,035	15.4	%	$	1,921,533	19.7	%	$	5,479,924	15.5	%	$	6,946,555	21.2	%	$	3,073	18.5	%	$	1,881	15.3	%	$	4,487	14.5	%	$	3,872	15.6	%

The effective tax rate for the quarter ended ~~September~~June 30, ~~2018~~2019 was ~~15.4%~~18.5%, which was a ~~4.3% decrease~~3.2% increase from the effective tax rate of ~~19.7%~~15.3% for the quarter ended ~~September~~June 30, ~~2017.~~2018. The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 was ~~15.5%~~14.5%, which was a decrease over the effective tax rate of ~~21.2%~~15.6% for the ~~nine~~six months ended ~~September~~June 30, ~~2017. The Tax Act, enacted on December 22, 2017~~2018. During the first quarter of 2019 and ~~effective January 1, 2018, reduced~~in conjunction with the ~~federal corporate~~Company’s year-end tax preparation process, the Company identified a one-time true-up adjustment of $715 thousand. Excluding this, the Company’s effective tax rate ~~from 35% to 21%.~~was approximately 16.8% for the six months ended June 30, 2019.

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FINANCIAL CONDITION

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


	As of																As of
	September 30, 2018				June 30, 2018				December 31, 2017				September 30, 2017				June 30, 2019				March 31, 2019				December 31, 2018				June 30, 2018
	(dollars in thousands)																(dollars in thousands)
	Amount		%		Amount		%		Amount		%		Amount		%
Cash and due from banks	$	73,407	1	%	$	69,069	2	%	$	75,722	2	%	$	56,275	2	%
Federal funds sold and interest-bearing deposits		129,660	3	%		51,667	1	%		85,962	2	%		61,789	2	%
																	Amount		%		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits																	$	293,416	6	%	$	292,559	6	%	$	245,119	5	%	$	120,736	3	%
Securities		650,745	14	%		657,997	16	%		652,382	16	%		583,936	16	%		643,803	12	%		655,749	13	%		662,969	13	%		657,997	16	%
Net loans/leases		3,610,309	75	%		3,077,247	75	%		2,930,130	74	%		2,641,772	74	%		3,869,415	75	%		3,758,268	74	%		3,692,907	75	%		3,077,247	75	%
Other assets		328,611	7	%		250,903	6	%		238,469	6	%		206,691	6	%		388,218	7	%		360,086	7	%		348,715	7	%		250,903	6	%
Total assets	$	4,792,732	100	%	$	4,106,883	100	%	$	3,982,665	100	%	$	3,550,463	100	%	$	5,194,852	100	%	$	5,066,662	100	%	$	4,949,710	100	%	$	4,106,883	100	%

Total deposits	$	3,788,277	79	%	$	3,298,276	81	%	$	3,266,655	82	%	$	2,894,268	82	%	$	4,322,510	83	%	$	4,194,220	83	%	$	3,977,031	80	%	$	3,298,276	81	%
Total borrowings		483,635	10	%		380,392	9	%		309,480	8	%		296,145	8	%		230,953	4	%		282,994	5	%		404,968	8	%		380,392	9	%
Other liabilities		63,433	1	%		58,627	1	%		53,243	1	%		47,011	1	%		137,089	3	%		101,041	2	%		94,573	2	%		58,627	1	%
Total stockholders' equity		457,387	10	%		369,588	9	%		353,287	9	%		313,039	9	%		504,300	10	%		488,407	10	%		473,138	10	%		369,588	9	%
Total liabilities and stockholders' equity	$	4,792,732	100	%	$	4,106,883	100	%	$	3,982,665	100	%	$	3,550,463	100	%	$	5,194,852	100	%	$	5,066,662	100	%	$	4,949,710	100	%	$	4,106,883	100	%

During the ~~third~~second quarter of ~~2018,~~2019, the Company's total assets increased ~~$685.8~~$128 million, or ~~17%~~3%, to a total of ~~$4.8~~$5.2 billion. ~~This included $575.7 million in assets acquired and new goodwill of $45.5 million as part of the SFC Bank acquisition (further described in Note 2 to the Consolidated Financial Statements).~~ The Company ~~organically~~ grew its net loan/lease portfolio ~~$61.3~~$111 million, which was primarily funded by an increase in ~~short-term wholesale funding.~~core deposits. Deposits grew ~~$50.3~~

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$128 million in the ~~third~~second quarter of ~~2018, excluding the $439.6 million of deposits acquired. Borrowings increased $18.9~~2019, while borrowings decreased $52 million in the ~~third~~second quarter of ~~2018, excluding the $84.3 million of borrowings acquired.~~2019.

INVESTMENT SECURITIES

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

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


																					As of
	As of																				June 30, 2019					March 31, 2019					December 31, 2018					June 30, 2018
	September 30, 2018					June 30, 2018					December 31, 2017					September 30, 2017					Amount			%		Amount			%		Amount			%		Amount			%
	Amount			%		Amount			%		Amount			%		Amount			%		(dollars in thousands)
	(dollars in thousands)
U.S. govt. sponsored agency securities	$	36,492		5	%	$	35,667		5	%	$	38,097		6	%	$	39,340		7	%	$	35,762		6	%	$	35,843		5	%	$	36,411		5	%	$	35,667		5	%
Municipal securities		453,275		70	%		458,510		70	%		445,049		68	%		379,694		65	%		440,852		68	%		450,376		69	%		459,409		70	%		458,510		70	%
Residential mortgage-backed and related securities		155,733		24	%		158,534		24	%		163,301		25	%		158,969		27	%		159,228		25	%		161,692		25	%		159,249		24	%		158,534		24	%
Other securities		5,245		1	%		5,286		1	%		5,935		1	%		5,933		1	%		7,961		1	%		7,838		1	%		7,900		1	%		5,286		1	%
	$	650,745		100	%	$	657,997		100	%	$	652,382		100	%	$	583,936		100	%	$	643,803		100	%	$	655,749		100	%	$	662,969		100	%	$	657,997		100	%

Securities as a % of Total Assets		13.58	%				16.02	%				16.38	%				16.45	%				12.39	%				12.94	%				13.39	%				16.02	%
Net Unrealized Losses as a % of Amortized Cost		(1.47)	%				(1.58)	%				(0.13)	%				(0.16)	%
Net Unrealized Gains (Losses) as a % of Amortized Cost																						3.23	%				1.46	%				(1.01)	%				(1.58)	%
Duration (in years)		7.0					7.0					7.0					6.4					6.4					6.6					6.8					7.0
Quarterly Yield on Investment Securities (TEY)		3.55	%				3.56	%				3.82	%				3.88	%
Yield on investment securities (tax equivalent)																						3.77	%				3.74	%				3.58	%				3.56	%
Quarterly Yield on Investment Securities (GAAP)		3.02	%				3.02	%				2.77	%				2.85	%				3.20	%				3.18	%				2.85	%				3.02	%

Management monitors the level of unrealized gains/losses including performing quarterly reviews of individual securities for evidence of OTTI. Management identified no OTTI in any of the periods presented.

The duration of the securities portfolio shortened modestly with the TEY on the portfolio ~~decreasing 28 bps~~increasing 19 basis points in the first ~~nine months~~half of ~~2018;~~2019; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 2535 basis points.

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

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

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

LOANS/LEASES

Total loans/leases grew ~~7.9%~~11.7% on an annualized basis during the ~~third~~second quarter of ~~2018.~~2019 and 9.5% year-to-date. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following table.


																	As of
	As of																June 30, 2019				March 31, 2019				December 31, 2018				June 30, 2018
	September 30, 2018				June 30, 2018				December 31, 2017				September 30, 2017				Amount		%		Amount		%		Amount		%		Amount		%
	Amount		%		Amount		%		Amount		%		Amount		%		(dollars in thousands)
	(dollars in thousands)
C&I loans	$	1,380,543	39	%	$	1,273,000	42	%	$	1,134,516	38	%	$	1,034,531	39	%	$	1,548,657	40	%	$	1,479,247	39	%	$	1,429,410	38	%	$	1,273,000	42	%
CRE loans		1,727,326	47	%		1,349,319	43	%		1,303,492	44	%		1,157,856	43	%		1,837,473	46	%		1,790,845	47	%		1,766,111	48	%		1,349,319	43	%
Direct financing leases		126,752	3	%		133,196	4	%		141,448	5	%		147,063	6	%		101,180	3	%		108,543	3	%		117,969	3	%		133,196	4	%
Residential real estate loans		309,287	8	%		257,434	8	%		258,646	9	%		239,958	9	%		293,479	8	%		288,502	8	%		290,759	8	%		257,434	8	%
Installment and other consumer loans		100,191	3	%		92,952	3	%		118,611	4	%		89,605	3	%		120,947	3	%		123,087	3	%		119,381	3	%		92,952	3	%
Total loans/leases	$	3,644,099	100	%	$	3,105,901	100	%	$	2,956,713	100	%	$	2,669,013	100	%	$	3,901,736	100	%	$	3,790,224	100	%	$	3,723,630	100	%	$	3,105,901	100	%
Plus deferred loan/lease origination costs, net of fees		9,287				8,891				7,773				7,741				8,783				9,208				9,124				8,891
Less allowance		(43,077)				(37,545)				(34,356)				(34,982)				(41,104)				(41,164)				(39,847)				(37,545)
Net loans/leases	$	3,610,309			$	3,077,247			$	2,930,130			$	2,641,772			$	3,869,415			$	3,758,268			$	3,692,907			$	3,077,247

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. Owner-occupied loans are generally considered to have less risk. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, approximately ~~26%~~27% and 28% of the CRE loan portfolio was owner-occupied.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more C&I loans. C&I loans grew ~~$107.5~~$69 million during the current quarter.

A syndicated loan is a commercial loan provided by a group of lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. The nationally syndicated loans invested in by the Company consist of ~~fully funded, highly liquid~~fully-funded, highly-liquid term loans for which there is a liquid secondary market. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the amount of nationally syndicated loans totaled ~~$48.4~~$45.7 million and ~~$51.2~~$40.8 million, respectively.

Following is a listing of significant industries within the Company's CRE loan portfolio:


																	As of June 30,				As of March 31,				As of December 31,				As of June 30,
	As of September 30,				As of June 30,				As of December 31,				As of September 30,				2019				2019				2018				2018
	2018				2018				2017				2017				Amount		%		Amount		%		Amount		%		Amount		%
	Amount		%		Amount		%		Amount		%		Amount		%		(dollars in thousands)
	(dollars in thousands)
Lessors of Nonresidential Buildings	$	605,517	35	%	$	439,067	33	%	$	388,648	30	%	$	345,387	30	%	$	612,526	33	%	$	613,024	34	%	$	612,327	34	%	$	439,067	33	%
Lessors of Residential Buildings		321,357	19	%		230,187	17	%		199,047	15	%		159,542	14	%		394,235	21	%		355,850	20	%		346,270	19	%		230,187	17	%
Hotels		87,850	5	%		73,335	5	%		70,447	5	%		42,121	4	%		82,180	5	%		81,107	5	%		81,345	5	%		73,335	5	%
Nonresidential Property Managers		56,600	3	%		55,979	4	%		51,621	4	%		53,231	5	%		58,207	3	%		65,736	4	%		69,885	4	%		55,979	4	%
Land Subdivision		50,252	3	%		39,883	3	%		44,192	3	%		41,795	3	%		45,847	3	%		46,042	3	%		48,378	3	%		39,883	3	%
Nursing Care Facilities		39,306	2	%		37,417	3	%		47,008	4	%		41,264	3	%
New Housing For-Sale Builders		37,911	2	%		38,392	3	%		61,480	5	%		56,390	5	%		43,520	2	%		47,276	3	%		47,598	3	%		38,392	3	%
Lessors of Other Real Estate Property		34,376	2	%		28,149	2	%		29,078	2	%		21,160	2	%
Other *		494,157	29	%		406,910	30	%		411,971	32	%		396,966	34	%		600,958	33	%		581,810	31	%		560,308	32	%		472,476	35	%
Total CRE Loans	$	1,727,326	100	%	$	1,349,319	100	%	$	1,303,492	100	%	$	1,157,856	100	%	$	1,837,473	100	%	$	1,790,845	100	%	$	1,766,111	100	%	$	1,349,319	100	%

* “Other” consists of all other industries. None of these had concentrations greater than ~~$34.0~~$36.8 million, or approximately 2%2.0% of total CRE loans in the most recent period presented.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

The Company's residential real estate loan portfolio includes the following:

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

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

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

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


	As of September 30,				As of June 30,				As of December 31,				As of September 30,				As of June 30,				As of March 31,				As of December 31,				As of June 30,
	2018				2018				2017				2017				2019				2019				2018				2018
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)																(dollars in thousands)

Trucks, Vans and Vocational Vehicles	$	37,942	16	%	$	35,814	15	%	$	19,927	9	%	$	18,146	8	%	$	46,650	20	%	$	43,489	19	%	$	40,588	18	%	$	35,814	15	%
Manufacturing - General																		17,879	8	%		16,952	7	%		16,760	7	%		16,794	7	%
Construction - General		17,201	7	%		18,494	8	%		18,705	9	%		18,807	9	%		16,026	7	%		16,295	7	%		17,236	8	%		18,494	8	%
Manufacturing - General		16,666	7	%		16,794	7	%		16,571	8	%		16,997	8	%
Food Processing Equipment		15,490	7	%		14,377	6	%		12,965	6	%		13,317	6	%		15,863	7	%		15,622	7	%		15,334	7	%		14,377	6	%
Marine - Travelifts		12,729	5	%		12,875	6	%		10,802	5	%		10,417	5	%		11,659	5	%		11,819	5	%		12,370	5	%		12,875	6	%
Trailers		10,016	4	%		10,137	4	%		8,983	4	%		9,272	4	%		9,303	4	%		9,603	4	%		9,842	4	%		10,137	4	%
Manufacturing - CNC																		6,832	3	%		6,702	3	%		6,616	3	%		6,344	3	%
Computer Hardware		9,656	4	%		10,141	4	%		11,340	5	%		11,483	5	%		6,282	3	%		8,350	4	%		9,166	4	%		10,141	4	%
Manufacturing - CNC		6,990	3	%		6,344	3	%		6,742	3	%		6,722	3	%
Crane																		5,756	3	%		5,749	3	%		5,726	3	%		5,089	2	%
Other *		106,156	47	%		108,321	47	%		109,201	51	%		109,798	52	%		94,426	40	%		93,775	41	%		95,008	41	%		103,232	45	%

Total m2 loans and leases	$	232,846	100	%	$	233,297	100	%	$	215,236	100	%	$	214,959	100	%	$	230,676	100	%	$	228,356	100	%	$	228,646	100	%	$	233,297	100	%

* “Other” consists of all other equipment types. None of these had concentrations greater than 3% of total m2 loan and lease portfolio in the most recent period presented.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's loan and lease portfolio.

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 are presented as follows:


									Three Months Ended				Six Months Ended
	Three Months Ended				Nine Months Ended				June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		(dollars in thousands)
	(dollars in thousands)				(dollars in thousands)
Balance, beginning	$	37,545	$	33,357	$	34,356	$	30,757	$	41,164	$	36,532	$	39,847	$	34,356
Provisions charged to expense		6,206		2,086		11,046		6,215		1,941		2,301		4,075		4,841
Loans/leases charged off		(991)		(650)		(2,951)		(2,394)		(2,152)		(1,524)		(3,212)		(1,961)
Recoveries on loans/leases previously charged off		317		189		626		404		151		236		394		309
Balance, ending	$	43,077	$	34,982	$	43,077	$	34,982	$	41,104	$	37,545	$	41,104	$	37,545

The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, ~~past~~historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, ~~governmental~~government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate allowance 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

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

and analyzed quarterly with specific detailed reviews completed on all ~~loans~~credits risk-rated ~~worse~~less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10‑K for the year ended December 31, ~~2017,~~2018, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the ~~loan review~~credit administration staff and reported to management and the board of directors.

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


	As of												As of
Internally Assigned Risk Rating *	September 30, 2018			June 30, 2018			December 31, 2017			September 30, 2017			June 30, 2019			March 31, 2019			December 31, 2018			June 30, 2018
													(dollars in thousands)
	(dollars in thousands)
Special Mention (Rating 6)	$	49,230		$	44,202		$	31,024		$	27,315		$	19,913		$	24,769		$	42,058		$	44,202
Substandard (Rating 7)		45,676			42,492			43,435			50,323			40,935			43,696			28,593			42,492
Doubtful (Rating 8)		3			—			271			—			—			—			—			—
	$	94,909		$	86,694		$	74,730		$	77,638		$	60,848		$	68,465		$	70,651		$	86,694

Criticized Loans **	$	94,909		$	86,694		$	74,730		$	77,638		$	60,848		$	68,465		$	70,651		$	86,694
Classified Loans ***	$	45,679		$	42,492		$	43,706		$	50,323		$	40,935		$	43,696		$	28,593		$	42,492

Criticized Loans as a % of Total Loans/Leases		2.60	%		2.79	%		2.52	%		2.90	%		1.56	%		1.80	%		1.89	%		2.79	%
Classified Loans as a % of Total Loans/Leases		1.25	%		1.37	%		1.47	%		1.88	%		1.05	%		1.16	%		0.77	%		1.37	%

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

** Criticized loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

*** Classified loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 7 or 8, regardless of performance.

The Company experienced ~~an 8% increase~~a 6% decrease in classified loans during the ~~third~~second quarter of ~~2018. Criticized~~2019. Classified loans increased ~~9% during the same period. The Company experienced an increase of 5% in classified loans~~43% during the first ~~nine~~six months of ~~2018.~~2019. The increase was due to one C&I loan relationship and one CRE loan relationship that were downgraded from a rating of special mention to substandard in the first quarter of 2019. Criticized loans ~~increased 27%~~

Table of Contents

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

decreased 11% during the ~~same period.~~second quarter of 2019 and 14% during the first six months of 2019. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.


	As of
	September 30, 2018		June 30, 2018		December 31, 2017		September 30, 2017		As of
									June 30, 2019		March 31, 2019		December 31, 2018		June 30, 2018
Allowance / Gross Loans/Leases	1.18	%	1.21	%	1.16	%	1.31	%	1.05	%	1.08	%	1.07	%	1.21	%
Allowance / NPLs	147.39	%	270.09	%	184.28	%	123.05	%	283.10	%	238.48	%	214.80	%	270.09	%

Although management believes that the allowance at ~~September~~June 30, ~~2018~~2019 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

See Note 43 to the Consolidated Financial Statements for additional information regarding the Company's allowance.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

NONPERFORMING ASSETS

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


	As of September 30,			As of June 30,			As of December 31,			As of September 30,			As of June 30,			As of March 31,			As of December 31,			As of June 30,
	2018			2018			2017			2017			2019			2019			2018			2018
	(dollars in thousands)												(dollars in thousands)

Nonaccrual loans/leases (1) (2)	$	23,576		$	12,554		$	11,441		$	20,443		$	13,148		$	13,406		$	14,260		$	12,554
Accruing loans/leases past due 90 days or more(3)		1,410			20			89			423			58			61			632			20
TDRs - accruing		4,240			1,327			7,113			7,563			1,313			3,794			3,659			1,327
Total NPLs		29,226			13,901			18,643			28,429			14,519			17,261			18,551			13,901
OREO		12,204			12,750			13,558			5,135			8,637			9,110			9,378			12,750
Other repossessed assets		150			150			80			120			—			—			8			150
Total NPAs	$	41,580		$	26,801		$	32,281		$	33,684		$	23,156		$	26,371		$	27,937		$	26,801
																							.
NPLs to total loans/leases		0.80	%		0.45	%		0.63	%		1.06	%		0.37	%		0.45	%		0.50	%		0.45	%
NPAs to total loans/leases plus repossessed property		1.13	%		0.86	%		1.08	%		1.26	%		0.59	%		0.69	%		0.75	%		0.86	%
NPAs to total assets		0.87	%		0.65	%		0.81	%		0.95	%		0.45	%		0.52	%		0.56	%		0.65	%

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of ~~$1.8~~$2.8 million at ~~September~~June 30, ~~2018, $2.6~~2019, $1.5 million at March 31, ~~2018,~~2019, $2.3 million at December 31, ~~2017,~~2018, and ~~$2.2~~$1.8 million at ~~September~~June 30, ~~2017.~~2018.

(3)

Includes TDRs of $0 at June 30, 2019, $0 at March 31, 2019, $496 thousand at December 31, 2018, and $0 at June 30, 2018.

NPAs at ~~September~~June 30, ~~2018~~2019 were ~~$41.6~~$23.2 million, ~~up $14.8~~down $3.2 million from March 31, 2019 and down $3.6 million from June 30, ~~2018 and up $7.9 million from September 30, 2017. The increase in the third quarter of 2018 was primarily due to three loans that were downgraded and moved to nonaccrual status.~~2018.

The ratio of NPAs to total assets was ~~0.87%~~0.45% at ~~September~~June 30, ~~2018, up~~2019, down from 0.52% at March 31, 2019 and down from 0.65% at June 30, ~~2018 and down from 0.95% at September 30, 2017. SFC Bank had no NPAs at the end of the third quarter.~~2018.

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

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

DEPOSITS

Deposits increased ~~$490.0~~$128.3 million during the ~~third~~second quarter of ~~2018,~~2019, primarily due to ~~the acquisition of SFC Bank.~~growth in correspondent bank deposits and growth in large customers’ balances. The table below presents the composition of the Company's deposit portfolio.


																	As of
	As of																June 30, 2019				March 31, 2019				December 31, 2018				June 30, 2018
	September 30, 2018				June 30, 2018				December 31, 2017				September 30, 2017				Amount		%		Amount		%		Amount		%		Amount		%
	Amount		%		Amount		%		Amount		%		Amount		%		(dollars in thousands)
	(dollars in thousands)
Noninterest bearing demand deposits	$	802,090	21	%	$	746,822	23	%	$	789,548	24	%	$	715,537	25	%	$	795,951	18	%	$	821,599	20	%	$	791,102	20	%	$	746,822	22	%
Interest bearing demand deposits		2,094,814	55	%		1,865,382	56	%		1,855,893	57	%		1,614,894	55	%		2,505,956	58	%		2,334,474	55	%		2,204,205	55	%		1,865,382	57	%
Time deposits		615,323	16	%		519,999	16	%		516,058	16	%		430,270	15	%		733,135	17	%		719,286	17	%		704,903	18	%		519,999	16	%
Brokered deposits		276,050	8	%		166,073	5	%		105,156	3	%		133,567	5	%		287,468	7	%		318,861	8	%		276,821	7	%		166,073	5	%
	$	3,788,277	100	%	$	3,298,276	100	%	$	3,266,655	100	%	$	2,894,268	100	%	$	4,322,510	100	%	$	4,194,220	100	%	$	3,977,031	100	%	$	3,298,276	100	%

Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity.

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In an effort to strengthen the relationship and maximize the liquidity potential of its correspondent banking clients, the Company introduced an interest-bearing money market deposit account to its correspondent banking clients and this generated strong deposit growth in 2017.

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 industy concentrations and large accounts are monitored by the internal asset liability management committees.

BORROWINGS

The ~~subsidiary banks offer short-term repurchase agreements to a few of their significant customers. Also, the~~ subsidiary banks purchase federal funds for short-term funding needs from the FRB or from their correspondent banks. The table below presents the composition of the Company's short-term borrowings.


									As of
	As of								June 30, 2019		March 31, 2019		December 31, 2018		June 30, 2018
	September 30, 2018		June 30, 2018		December 31, 2017		September 30, 2017		(dollars in thousands)
	(dollars in thousands)
Overnight repurchase agreements	$	4,259	$	2,186	$	7,003	$	3,671	$	2,181	$	3,056	$	2,084	$	2,186
Federal funds purchased		8,670		15,400		6,990		12,340		17,010		12,830		26,690		15,400
	$	12,929	$	17,586	$	13,993	$	16,011	$	19,191	$	15,886	$	28,774	$	17,586

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

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

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

As of


September 30, 2018

June 30, 2018

December 31, 2017

September 30, 2017

(dollars in thousands)

Term FHLB advances

$
63,399

$
46,600

$
56,600

$
58,600
Overnight FHLB advances

295,730

207,500

135,400

110,455

$
359,129

$
254,100

$
192,000

$
169,055

Term FHLB advances increased $16.8 million in the current quarter, as compared to the prior quarter. Overnight FHLB advances increased by $88.2 million in the third quarter of 2018 due to the acquisition of SFC Bank and strong loan and lease growth, which outpaced the Company's deposit growth.

~~The table below presents the composition of the Company's other borrowings.~~

As of


September 30, 2018

June 30, 2018

December 31, 2017

September 30, 2017

(dollars in thousands)

Wholesale structured repurchase agreements

$
35,000

$
35,000

$
35,000

$
45,000

Term notes

25,187

27,125

31,000

32,500

Subordinated debentures

4,763

—

—

—

Revolving line of credit

9,000

9,000

—

—

$
73,950

$
71,125

$
66,000

$
77,500

6458

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	As of
	June 30, 2019		March 31, 2019		December 31, 2018		June 30, 2018
	(dollars in thousands)

Term FHLB advances	$	46,433	$	66,380	$	76,327	$	46,600
Overnight FHLB advances		59,300		59,800		190,165		207,500
	$	105,733	$	126,180	$	266,492	$	254,100

Term FHLB advances decreased $19.9 million in the current quarter, as compared to the prior quarter due to maturities. Due to strong deposit growth, the Company did not replace these maturities. Overnight FHLB advances decreased slightly in the second quarter of 2019.

Other borrowings ~~include~~decreased $35.0 million in the current quarter. The Company prepaid two wholesale structured ~~repos which are~~repurchase agreements in the second quarter of 2019 using excess funds generated by strong deposit growth. The first wholesale structured repurchase agreement totaled $5.0 million and had original maturity date of March 13, 2020 with an interest rate of 2.58%. The second wholesale structured repurchase agreement totaled $20.0 million and had an original maturity of June 13, 2020 with an interest rate of 2.46%. In addition, wholesale structured repurchase agreements totaling $10.0 million matured in the second quarter of 2019 with an interest rate of 3.59%. The wholesale structured repurchase agreements were utilized as an alternative funding source to FHLB advances and customer deposits. ~~Structured repos are~~Wholesale structured repurchase agreements were collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.

~~As described~~The Company had subordinated notes totaling $68.3 million as of June 30, 2019, $68.2 million as of March 31, 2019 and $4.8 million as of December 31, 2018. There were no outstanding subordinated notes as of June 30, 2018. See Note 5 to the Company’s Consolidated Financial Statements for additional information regarding our subordinated notes, including the repayment of our term notes (totaling $21.3 million) and our revolving line of credit (totaling $9.0 million) during the first quarter of 2019.

The Company renewed its revolving credit note in the second quarter of 2019. See Note 115 to the Consolidated Financial Statements ~~included in the Company's Annual Report on Form 10‑K~~ for the year ended December 31, 2017, the Company has outstanding term notes and an available revolving line of credit. As of September 30, 2018, the term debt had been paid down to $25.2 million, as scheduled. The term notes and revolving line of credit have been used to fund acquisitions as described in Note 2 to the Consolidated Financial Statements. As of September 30, 2018, $1.0 million of the $10.0 million line of credit was available. Interest is calculated at the effective LIBOR rate plus 2.50% per annum (4.90% at September 30, 2018).additional details regarding this renewal.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	September 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
			Weighted				Weighted				Weighted				Weighted
			Average				Average				Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate
	(dollar amounts in thousands)								(dollars in thousands)
Year ending December 31:
2018	$	422,889	2.28	%	$	273,677	1.68	%
2019		185,976	2.14			31,950	2.32		$	315,799	2.34	%	$	510,736	2.35	%
2020		48,694	2.31			26,600	2.44			58,382	2.23			48,557	2.31
2021		10,000	1.98			—	—			15,050	2.31			15,050	2.31
2022		3,970	2.00			—	—			3,970	2.00			3,970	2.00
Total Wholesale Funding	$	671,529	2.24	%	$	332,227	1.80	%	$	393,201	2.32	%	$	578,313	2.35	%

During the first ~~nine~~six months of ~~2018,~~2019, wholesale funding decreased $185.1 million. FHLB overnight advances and term advances decreased $130.9 million and $29.9 million in the first half of 2019, respectively. Brokered deposits increased ~~$339.3 million. Year-to-date,~~$10.6 million in the ~~Company has repaid $147.2~~first half of 2019 as some of the banks rotated from overnight advances to short-term brokered deposits, as the latter was cheaper. Wholesale structured repurchase agreements decreased $35.0 million in the first half of 2019 with $25.0 million of ~~term borrowings at~~prepayments (with original maturities in 2020) and a $10.0 million maturity. ~~However, this was more than offset by growth in short-term borrowings used to temporarily fund strong earning asset growth.~~

STOCKHOLDERS' EQUITY

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


													As of
	As of												June 30, 2019			March 31, 2019			December 31, 2018			June 30, 2018
	September 30, 2018			June 30, 2018			December 31, 2017			September 30, 2017			(dollars in thousands)
	(dollars in thousands)
Common stock	$	15,674		$	13,974		$	13,918		$	13,202		$	15,773		$	15,755		$	15,718		$	13,974
Additional paid in capital		269,373			190,533			189,078			158,459			272,744			271,673			270,761			190,533
Retained earnings		179,826			171,955			151,962			142,450			216,741			204,179			192,203			171,955
AOCI (loss)		(7,486)			(6,874)			(1,671)			(1,072)			(958)			(3,200)			(5,544)			(6,874)
Total stockholders' equity	$	457,387		$	369,588		$	353,287		$	313,039		$	504,300		$	488,407		$	473,138		$	369,588

TCE* / TA		7.82	%		8.18	%		8.01	%		8.31	%
TCE / TA ratio (non-GAAP)														8.05	%		7.92	%		7.78	%		8.18	%

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

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged ~~$163.1~~$274.7 million during the ~~third~~second quarter of ~~2018~~2019 and ~~$164.0~~$159.7 million during the full year of ~~2017.~~2018. 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

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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 (both residential mortgage-backed securities and municipal securities).~~portfolio.

At ~~September~~June 30, 2019, the subsidiary banks had 34 lines of credit totaling $373.0 million, of which $1.7 million was secured and $371.3 million was unsecured. At June 30, 2019, the full $373.0 million was available.

At December 31, 2018, the subsidiary banks had 33 lines of credit totaling ~~$371.9~~$363.7 million, of which ~~$2.9~~$1.7 million was secured and ~~$369.0 million was unsecured. At September 30, 2018, the full $371.9 million was available.~~

~~At December 31, 2017, the subsidiary banks had 34 lines of credit totaling $375.0 million, of which $3.0 million was secured and $372.0~~$362.0 million was unsecured. At December 31, ~~2017,~~2018, $343.7 million of the ~~full $375.0~~$363.7 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 ~~$10.0~~$20.0 million secured revolving credit note with a variable interest rate and a maturity of ~~September~~June 30, ~~2019.~~2020. At ~~September~~June 30, ~~2018, $1.0 million of~~2019, the ~~$10.0~~full $20.0 million was available.

As of ~~September~~June 30, ~~2018,~~2019, the Company had ~~$418.6~~$479.0 million in average correspondent banking deposits spread over ~~191~~192 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 ~~$209.6~~$197.1 million during the first ~~nine~~six months of ~~2018,~~2019, compared to ~~$271.1~~$137.9 million for the same period of ~~2017.~~2018. The net ~~increase~~decrease in federal funds sold was ~~$2.9~~$16.2 million for the first ~~nine~~six months of ~~2018,~~2019, compared to a net decrease of ~~$1.7~~$19.3 million for the same period of ~~2017.~~2018. The net ~~decrease~~increase in interest-bearing deposits at financial institutions was ~~$22.1~~$62.1 million for the first ~~nine~~six months of ~~2018,~~2019, compared to ~~$22.7~~a net decrease of $15.0 million for the same period of ~~2017.~~2018. Proceeds from calls, maturities, and paydowns of securities were ~~$61.1~~$33.0 million for the first ~~nine~~six months of ~~2018,~~2019, compared to ~~$92.5~~$39.8 million for the same period of ~~2017.~~2018. Purchases of securities used cash of ~~$66.4~~$10.7 million for the first ~~nine~~six months of ~~2018,~~2019, compared to ~~$103.5~~$55.0 million for the same period of ~~2017.~~2018. Proceeds from sales of securities were $4.7 million for the first six months of 2019, compared to no proceeds from sales of securities for the first six months of 2018. The net increase in loans/leases used cash of ~~$208.7~~$176.4 million for the first ~~nine~~six months of ~~2018~~2019 compared to ~~$269.9~~$151.0 million for the same period of ~~2017.~~2018.

Financing activities provided cash of ~~$170.4~~$170.2 million for the first ~~nine~~six months of ~~2018,~~2019, compared to ~~$229.6~~$101.9 million for same period of ~~2017.~~2018. Net increases in deposits totaled ~~$82.3~~$345.6 million for the first ~~nine~~six months of ~~2018,~~2019, compared to ~~$225.1~~$31.7 million for the same period of ~~2017.~~2018. During the first ~~nine~~six months of ~~2018,~~2019, the Company's short-term borrowings decreased ~~$2.2~~$9.6 million, compared to ~~$24.0~~an increase of $3.6 million for the same period of ~~2017.~~2018. In the first ~~nine~~six months of 2019, the Company decreased short-term and overnight FHLB advances by $130.9 million. Maturities and principal payments on FHLB term advances totaled $35.0 million and on other borrowings totaled $11.9 million in the first six months of 2019. Prepayments on other borrowings totaled $46.3 million in the first six months of 2019. During the first six months of 2019, proceeds from subordinated notes were $63.4 million. In the first six months of 2018, the Company increased short-term and overnight FHLB advances by ~~$120.3~~$72.1 million and increased other borrowings by $9.0 million. Maturities and principal payments on ~~FHLB term advances totaled $27.0 million and on other~~ borrowings totaled ~~$10.6~~$13.9 million in the first ~~nine~~six months of 2018. ~~In the first nine months of 2017, the Company increased FHLB advances and~~

~~Table of Contents~~

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~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

borrowings by $44.6 million through a mixture of term advances, proceeds from other borrowings and net change in short-term and overnight advances, while borrowing maturities and principal payments on borrowings totaled $15.5 million.

Total cash provided by operating activities was ~~$36.9~~$29.3 million for the first ~~nine~~six months of ~~2018,~~2019, compared to ~~$27.2~~$29.4 million for the same period of ~~2017.~~2018.

Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred ~~securities.~~securities and, most recently, subordinated notes.

Table of Contents

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The following table presents the details of the trust preferred securities outstanding as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.


		Amount		Amount								Amount		Amount
		Outstanding		Outstanding								Outstanding		Outstanding
		September 30,		December 31,			Interest Rate as of		Interest Rate as of			June 30,		December 31,			Interest Rate as of		Interest Rate as of
Name	Date Issued	2018		2017		Interest Rate	September 30, 2018		December 31, 2017		Date Issued	2019		2018		Interest Rate	June 30, 2019		December 31, 2018
												(dollars in thousands)

QCR Holdings Statutory Trust II	February 2004	$	10,310,000	$	10,310,000	2.85% over 3-month LIBOR	5.25	%	4.54	%	February 2004	$	10,310	$	10,310	2.85% over 3-month LIBOR	5.17	%	5.65	%
QCR Holdings Statutory Trust III	February 2004		8,248,000		8,248,000	2.85% over 3-month LIBOR	5.25	%	4.54	%	February 2004		8,248		8,248	2.85% over 3-month LIBOR	5.17	%	5.65	%
QCR Holdings Statutory Trust V	February 2006		10,310,000		10,310,000	1.55% over 3-month LIBOR	3.89	%	2.91	%	February 2006		10,310		10,310	1.55% over 3-month LIBOR	4.15	%	3.99	%
Community National Statutory Trust II	September 2004		3,093,000		3,093,000	2.17% over 3-month LIBOR	4.51	%	3.80	%	September 2004		3,093		3,093	2.17% over 3-month LIBOR	4.56	%	4.96	%
Community National Statutory Trust III	March 2007		3,609,000		3,609,000	1.75% over 3-month LIBOR	4.08	%	3.32	%	March 2007		3,609		3,609	1.75% over 3-month LIBOR	4.16	%	4.54	%
Guaranty Bankshares Statutory Trust I	May 2005		4,640,000		4,640,000	1.75% over 3-month LIBOR	4.08	%	3.34	%	May 2005		4,640		4,640	1.75% over 3-month LIBOR	4.16	%	4.54	%
		$	40,210,000	$	40,210,000	Weighted Average Rate	4.60	%	3.82	%		$	40,210	$	40,210	Weighted Average Rate	4.65	%	4.94	%

As described in Note 54 to the Consolidated Financial Statements, on June 21, 2018 the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities. The floating rate trust preferred securities are tied to 3-month LIBOR, and the interest rate swaps utilize 3-month LIBOR, so the hedge is effective. The interest rate swaps are designated as a cash flow hedge in accordance with ASC 815. See Note 54 for the notional amount swapped and the related effective fixed rates. The Company assumed the trust preferred securities originally issued by Community National in connection with its acquisition in May 2013. The Company assumed the trust preferred securities originally issued by Guaranty in connection with its acquisition in October 2017. As a result of acquisition accounting, the liabilities were recorded at fair value upon acquisition with the resulting discount being accreted as interest expense on a level yield basis over the expected term. As of September 30, 2018, the remaining discount was $2.6 million.

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

~~Table of Contents~~

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued~~

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

The strength of the local, state, and national economy (including the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulation).

Changes in the interest rate environment.

The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.

The impact of cybersecurity risks.

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

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

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

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

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

The imposition of tariffs or other governmental policies impacting the value of the agricultural or other products of our borrowers.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, ~~2017.~~

2018.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300, ~~400,~~ and ~~500~~400 basis point upward shifts; and a 100 and 200 basis point downward ~~shift~~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 ~~shift.~~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. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve.

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 ~~shift~~shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis.

The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit ~~has been increased to~~is a 25% decline in net interest

~~Table of Contents~~

~~Part I~~

~~Item 3~~

~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued~~

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.

Table of Contents

Part I

Item 3

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


	NET INTEREST INCOME EXPOSURE in YEAR 1								NET INTEREST INCOME EXPOSURE in YEAR 1
			As of September 30,		As of December 31,		As of December 31,				As of June 30,		As of December 31,		As of December 31,
INTEREST RATE SCENARIO	POLICY LIMIT		2018		2017		2016		POLICY LIMIT		2019		2018		2017

100 basis point downward shift	(10.0)	%	0.7	%	0.3	%	(1.7)	%	(10.0)	%	0.7	%	0.7	%	0.3	%
200 basis point upward shift	(10.0)	%	(3.5)	%	(3.7)	%	(1.2)	%	(10.0)	%	(2.7)	%	(2.7)	%	(3.7)	%
300 basis point upward shock	(25.0)	%	(8.8)	%	(8.4)	%	(1.4)	%	(25.0)	%	(6.4)	%	(9.0)	%	(8.4)	%

The simulation is well 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 ~~September~~June 30, ~~2018~~2019 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

In 2014, the Company executed two interest rate cap transactions, each with a notional value of $15.0 million, for a total of $30.0 million. The interest rate caps purchased essentially set a ceiling to the interest rate paid on the $30.0 million of short-term FHLB advances that are being hedged, minimizing the interest rate risk associated with rising interest rates.

~~On June 21, 2018, the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities, for a total of $39.0 million.~~

~~The Company will continue to analyze and evaluate similar transactions as an alternative and cost effective way to mitigate interest rate risk.~~

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

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Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d‑15(e) promulgated under the Exchange Act of 1934) as of ~~September~~June 30, ~~2018.~~2019. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

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

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Table of Contents

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

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

Item 1A Risk Factors

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company's Annual Report on Form 10‑K for the year ended December 31, ~~2017.~~2018. Please refer to that section of the Company's Form 10‑K for disclosures regarding the risks and uncertainties related to the Company's business.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

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~~Table of Contents~~

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6 Exhibits


~~10.1~~	First Amendment to Employment Agreement between QCR Holdings, Inc. and Ronald Nagel, dated September 10, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s 8-K filed with the SEC on September 10, 2018).

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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017;~~2018; (ii) Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~September~~June 30, ~~2017;~~2018; (iii) Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~September~~June 30, ~~2017;~~2018; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~September~~June 30, ~~2017;~~2018; (v) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~September~~June 30, ~~2017;~~2018; and (vi) Notes to the Consolidated Financial Statements.

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SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)


Date	~~November 8, 2018~~August 6, 2019	/s/ ~~Douglas M. Hultquist~~Larry J. Helling
		~~Douglas M. Hultquist, President~~Larry J. Helling
		Chief Executive Officer


Date	~~November 8, 2018~~August 6, 2019	/s/ Todd A. Gipple
		Todd A. Gipple, ~~Executive Vice~~ President
		Chief Operating Officer
		Chief Financial Officer


Date	~~November 8, 2018~~August 6, 2019	/s/ Elizabeth A. Grabin
		Elizabeth A. Grabin, ~~First~~Senior Vice President
		~~Director of Financial Reporting~~Chief Accounting Officer
		(Principal Accounting ~~Officer~~Officer)

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	As of
	July 1, 2018
ASSETS
Cash and due from banks	$	4,586,326
Interest-bearing deposits at financial institutions		62,924,396
Securities		4,845,441
Loans/leases receivable, net		477,336,699
Bank-owned life insurance		7,091,883
Premises and equipment		6,091,978
Restricted investment securities		3,654,200
Core deposit intangible		8,208,728
Other assets		989,056
Total assets acquired	$	575,728,707

LIABILITIES
Deposits	$	439,579,328
Short-term borrowings		1,143,478
FHLB advances		73,610,427
Other borrowings		9,543,810
Other liabilities		8,408,464
Total liabilities assumed	$	532,285,507
Net assets acquired	$	43,443,200

CONSIDERATION PAID:
Cash	$	8,333,535
Common stock		80,637,194
Total consideration paid	$	88,970,729
Goodwill	$	45,527,529


	September 30, 2018
Balance at acquisition	$	8,208,728
Amortization expense		(237,114)
Balance at the end of the period	$	7,971,614


Gross carrying amount	$	8,208,728
Accumulated amortization		(237,114)
Net book value	$	7,971,614


Years ending December 31,	Amount
2018	$	237,114
2019		932,810
2020		915,051
2021		893,192
2022		867,227
Thereafter		4,126,220
	$	7,971,614



	Amount	Rate	Terms	Maturity Date	Collateral
FHLB advance	$ 40,000,000	2.10%	daily interest payments; principal due at maturity	7/2/2018	commercial and residential real estate loans
FHLB advance	4,991,962	2.01%	monthly interest payments; principal due at maturity	7/30/2018	commercial and residential real estate loans
FHLB advance	4,966,060	2.09%	monthly interest payments; principal due at maturity	10/1/2018	commercial and residential real estate loans
FHLB advance	4,848,879	2.09%	monthly interest payments; principal due at maturity	9/30/2019	commercial and residential real estate loans
FHLB advance	4,787,502	1.50%	monthly interest payments; principal due at maturity	2/10/2020	commercial and residential real estate loans
FHLB advance	4,756,169	1.93%	monthly interest payments; principal due at maturity	5/27/2020	commercial and residential real estate loans
FHLB advance	4,664,663	1.96%	monthly interest payments; principal due at maturity	1/27/2021	commercial and residential real estate loans
FHLB advance	4,595,192	2.00%	monthly interest payments; principal due at maturity	7/29/2021	commercial and residential real estate loans
Subordinated debenture	952,566	4.00%	monthly interest payments; principal due at maturity	4/30/2021	unsecured
Subordinated debenture	952,566	4.00%	monthly interest payments; principal due at maturity	4/30/2021	unsecured
Subordinated debenture	946,226	4.00%	monthly interest payments; principal due at maturity	9/15/2021	unsecured
Subordinated debenture	946,226	4.00%	monthly interest payments; principal due at maturity	9/15/2021	unsecured
Subordinated debenture	946,226	4.00%	monthly interest payments; principal due at maturity	9/15/2021	unsecured
Bank stock loan	4,800,000	5.25%	monthly interest payments; principal due at maturity	3/13/2020	4,000,000 issued and outstanding shares of common stock of SFC Bank
Fair value of FHLB and other borrowings assumed	$ 83,154,237