UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 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~~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 ~~August~~November 1, 2019, the Registrant had outstanding ~~15,779,717~~15,794,839 shares of common stock, $1.00 par value per share.

~~Table of Contents~~

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


			Page Number(s)
Part I	FINANCIAL INFORMATION

	Item 1	Consolidated Financial Statements (Unaudited)

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

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

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

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

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

		Consolidated Statements of Cash Flows For the ~~Six months~~Nine Months Ended ~~June~~September 30, 2019 and 2018	910

		Notes to Consolidated Financial Statements	1112

		Note 1. Summary of Significant Accounting Policies	1112
		Note 2. ~~Investment Securities~~Assets and Liabilities Held for Sale	1314
		Note 3. ~~Loans/Leases Receivable~~Investment Securities	1715
		Note 4. ~~Derivatives~~Loans/Leases Receivable	2719
		Note 5. ~~Borrowings~~Derivatives	2829
		Note 6. ~~Earnings Per Share~~Borrowings	29
		Note 7. ~~Fair Value~~Earnings Per Share	2930
		Note 8. ~~Business Segment Information~~Fair Value	3231
		Note 9. Business Segment Information	34
		Note 10. Regulatory Capital Requirements	3335

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

		Introduction	3537
		General	3537
		Executive Overview	3538
		Long-Term Financial Goals	3740
		Strategic Developments	3841
		GAAP to Non-GAAP Reconciliations	3942
		Net Interest Income - (Tax Equivalent Basis)	4143
		Critical Accounting Policies	4548
		Goodwill	4548
		Allowance for Loan and Lease Losses	4649

~~Table of Contents~~


		Results of Operations	4649
		Interest Income	4649
		Interest Expense	46
		Provision for Loan/Lease Losses	4649
		Noninterest Income	4750
		Noninterest Expense	5053
		Income Taxes	5255
		Financial Condition	5356
		Investment Securities	5357
		Loans/Leases	5458
		Allowance for Estimated Losses on Loans/Leases	5659
		Nonperforming Assets	5761
		Deposits	5862
		Borrowings	5862
		Stockholders' Equity	6064
		Liquidity and Capital Resources	6064
		Special Note Concerning Forward-Looking Statements	6266

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	6467

	Item 4	Controls and Procedures	6669

Part II	OTHER INFORMATION		6770

	Item 1	Legal Proceedings	6770

	Item 1A	Risk Factors	6770

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	6770

	Item 3	Defaults upon Senior Securities	6770

	Item 4	Mine Safety Disclosures	6770

	Item 5	Other Information	6770

	Item 6	Exhibits	6871

Signatures			6972

Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.

~~Table of Contents~~

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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


	June 30,		December 31,		September 30,		December 31,
	2019		2018		2019		2018
	(dollars in thousands)				(dollars in thousands)
Assets
Cash and due from banks	$	87,919	$	85,523	$	91,671	$	85,523
Federal funds sold		10,215		26,398		9,300		26,398
Interest-bearing deposits at financial institutions		195,282		133,198		187,963		133,198

Securities held to maturity, at amortized cost		388,713		401,913		343,477		401,913
Securities available for sale, at fair value		255,090		261,056		211,932		261,056
Total securities		643,803		662,969		555,409		662,969

Loans receivable held for sale		4,180		1,295		8,890		1,295
Loans/leases receivable held for investment		3,906,339		3,731,459		3,601,380		3,731,459
Gross loans/leases receivable		3,910,519		3,732,754		3,610,270		3,732,754
Less allowance for estimated losses on loans/leases		(41,104)		(39,847)		(36,116)		(39,847)
Net loans/leases receivable		3,869,415		3,692,907		3,574,154		3,692,907

Bank-owned life insurance		68,735		67,783		58,367		67,783
Premises and equipment, net		78,887		75,582		74,486		75,582
Restricted investment securities		22,195		25,689		24,562		25,689
Other real estate owned, net		8,637		9,378		4,248		9,378
Goodwill		77,748		77,832		77,748		77,832
Intangibles		16,089		17,450		15,529		17,450
Assets held for sale						465,547		—
Other assets		115,927		75,001		153,398		75,001
Total assets	$	5,194,852	$	4,949,710	$	5,292,382	$	4,949,710

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	795,951	$	791,102	$	782,232	$	791,102
Interest-bearing		3,526,559		3,185,929		3,020,009		3,185,929
Total deposits		4,322,510		3,977,031		3,802,241		3,977,031

Short-term borrowings		19,191		28,774		18,526		28,774
Federal Home Loan Bank advances		105,733		266,492		195,800		266,492
Other borrowings		—		67,250		—		67,250
Subordinated notes		68,274		4,782		68,334		4,782
Junior subordinated debentures		37,755		37,670		37,797		37,670
Liabilities held for sale						470,530		—
Other liabilities		137,089		94,573		179,411		94,573
Total liabilities		4,690,552		4,476,572		4,772,639		4,476,572


Stockholders' Equity:
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
Preferred stock, $1 par value; shares authorized 250,000 September 2019 and December 2018 - no shares issued or outstanding						—		—
Common stock, $1 par value; shares authorized 20,000,000 September 2019 - 15,790,462 shares issued and outstanding December 2018 - 15,718,208 shares issued and outstanding						15,790		15,718
Additional paid-in capital		272,744		270,761		273,475		270,761
Retained earnings		216,741		192,203		230,892		192,203
Accumulated other comprehensive income (loss):
Securities available for sale		2,412		(4,268)		3,832		(4,268)
Derivatives		(3,370)		(1,276)		(4,246)		(1,276)
Total stockholders' equity		504,300		473,138		519,743		473,138
Total liabilities and stockholders' equity	$	5,194,852	$	4,949,710	$	5,292,382	$	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~~September 30, 2019 and 2018


	2019		2018		2019		2018
	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	47,515	$	35,408	$	50,406	$	44,034
Securities:
Taxable		1,678		1,594		1,682		1,522
Nontaxable		3,474		3,295		3,443		3,517
Interest-bearing deposits at financial institutions		1,168		228		951		324
Restricted investment securities		290		212		293		329
Federal funds sold		56		62		42		105
Total interest and dividend income		54,181		40,799		56,817		49,831

Interest expense:
Deposits		13,825		6,528		13,394		8,723
Short-term borrowings		81		63		97		78
Federal Home Loan Bank advances		601		1,019		1,023		1,422
Other borrowings		92		596		—		705
Subordinated notes		993		—		1,003		70
Junior subordinated debentures		576		508		581		519
Total interest expense		16,168		8,714		16,098		11,517
Net interest income		38,013		32,085		40,719		38,314
Provision for loan/lease losses		1,941		2,301		2,012		6,206
Net interest income after provision for loan/lease losses		36,072		29,784		38,707		32,108

Noninterest income:
Trust department fees		2,361		2,058		2,340		2,196
Investment advisory and management fees		1,888		1,058		1,782		1,059
Deposit service fees		1,658		1,610		1,813		1,656
Gains on sales of residential real estate loans, net		489		102		890		337
Gains on sales of government guaranteed portions of loans, net		39		—		519		46
Swap fee income		7,891		1,649		9,797		1,110
Securities losses, net		(52)		—		(3)		—
Earnings on bank-owned life insurance		412		399		489		474
Debit card fees		914		844		886		846
Correspondent banking fees		172		213		189		195
Other		1,293		979		1,204		890
Total noninterest income		17,065		8,912		19,906		8,809

Noninterest expense:
Salaries and employee benefits		22,749		15,804		24,215		17,433
Occupancy and equipment expense		3,533		3,133		3,860		3,318
Professional and data processing fees		3,031		2,771		4,030		2,396
Acquisition costs		—		414		—		1,292
Post-acquisition compensation, transition and integration costs		708		165		884		494
FDIC insurance, other insurance and regulatory fees		926		840		542		933
Loan/lease expense		312		260		221		369
Net cost of (income from) and gains/losses on operations of other real estate		1,182		(70)		2,078		(50)
Advertising and marketing		1,037		753		1,056		984
Bank service charges		508		466		502		462
Losses on debt extinguishment, net						148		—
Correspondent banking expense		206		204		209		205
Intangibles amortization		615		305		560		542
Other		1,753		1,325		1,640		2,122
Total noninterest expense		36,560		26,370		39,945		30,500
Net income before income taxes		16,577		12,326		18,668		10,417
Federal and state income tax expense		3,073		1,881		3,573		1,608
Net income	$	13,504	$	10,445	$	15,095	$	8,809

Basic earnings per common share	$	0.86	$	0.75	$	0.96	$	0.56
Diluted earnings per common share	$	0.85	$	0.73	$	0.94	$	0.55

Weighted average common shares outstanding		15,714,588		13,919,565		15,739,430		15,625,123
Weighted average common and common equivalent shares outstanding		15,938,377		14,232,423		15,976,742		15,922,324

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

See Notes to Consolidated Financial Statements (Unaudited)

See Notes to Consolidated Financial Statements (Unaudited)

~~Table of Contents~~

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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


	2019		2018		2019		2018
	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	93,082	$	69,622	$	143,488	$	113,655
Securities:
Taxable		3,344		3,150		5,026		4,671
Nontaxable		7,018		6,584		10,461		10,101
Interest-bearing deposits at financial institutions		2,091		425		3,042		749
Restricted investment securities		598		446		891		776
Federal funds sold		150		118		191		223
Total interest and dividend income		106,283		80,345		163,099		130,175

Interest expense:
Deposits		26,304		11,410		39,697		20,132
Short-term borrowings		152		95		275		186
Federal Home Loan Bank advances		1,662		2,215		2,685		3,637
Other borrowings		539		1,182		512		1,875
Subordinated notes		1,557		—		2,561		70
Junior subordinated debentures		1,148		955		1,729		1,474
Total interest expense		31,362		15,857		47,459		27,374
Net interest income		74,921		64,488		115,640		102,801
Provision for loan/lease losses		4,075		4,841		6,087		11,046
Net interest income after provision for loan/lease losses		70,846		59,647		109,553		91,755

Noninterest income:
Trust department fees		4,854		4,295		7,194		6,491
Investment advisory and management fees		3,624		2,010		5,406		3,069
Deposit service fees		3,212		3,142		5,025		4,797
Gains on sales of residential real estate loans, net		858		203		1,748		539
Gains on sales of government guaranteed portions of loans, net		70		358		589		405
Swap fee income		11,089		2,608		20,886		3,718
Securities losses, net		(52)		—		(56)		—
Earnings on bank-owned life insurance		952		817		1,441		1,292
Debit card fees		1,706		1,610		2,591		2,456
Correspondent banking fees		388		477		578		673
Other		2,357		1,934		3,562		2,822
Total noninterest income		29,058		17,454		48,964		26,262

Noninterest expenses:
Salaries and employee benefits		43,628		31,782		67,843		49,215
Occupancy and equipment expense		7,227		6,198		11,087		9,517
Professional and data processing fees		5,781		5,479		9,811		8,016
Acquisition costs		—		506		—		1,799
Post-acquisition compensation, transition and integration costs		842		165		1,727		659
FDIC insurance, other insurance and regulatory fees		1,890		1,597		2,432		2,529
Loan/lease expense		526		551		748		920
Net cost of (income from) and gains/losses on operations of other real estate		1,480		62		3,557		11
Advertising and marketing		1,822		1,446		2,878		2,430
Bank service charges		991		907		1,494		1,368
Losses on debt extinguishment, net						148		—
Correspondent banking expense		410		409		619		614
CDI amortization		1,147		609		1,706		1,151
Other		3,251		2,523		4,891		4,504
Total noninterest expenses		68,995		52,234		108,941		82,733
Income before income taxes		30,909		24,867
Net income before income taxes						49,576		35,284
Federal and state income tax expense		4,487		3,872		8,059		5,480
Net income	$	26,422	$	20,995	$	41,517	$	29,804


Basic earnings per common share	$	1.68	$	1.51	$	2.64	$	2.06
Diluted earnings per common share	$	1.66	$	1.48	$	2.60	$	2.02

Weighted average common shares outstanding		15,703,967		13,904,113		15,715,788		14,477,783
Weighted average common and common equivalent shares outstanding		15,930,659		14,219,003		15,946,020		14,786,777

Cash dividends declared per common share	$	0.12	$	0.12	$	0.18	$	0.18

See Notes to Consolidated Financial Statements (Unaudited)

~~Table of Contents~~

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

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


	Three Months Ended June 30,				Three Months Ended September 30,
	2019		2018		2019		2018
	(dollars in thousands)				(dollars in thousands)

Net income	$	13,504	$	10,445	$	15,095	$	8,809

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		4,669		(1,512)		1,827		(1,652)
Less reclassification adjustment for losses included in net income before tax		(52)		—		(3)		—
		4,721		(1,512)		1,830		(1,652)
Unrealized losses on derivatives:
Unrealized gains (losses) on derivatives:
Unrealized holding losses arising during the period before tax		(1,780)		(323)		(1,159)		577
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(134)		178
Less reclassification adjustment for caplet amortization before tax						—		(187)
						(1,159)		764
Unrealized gains (losses) on assets held for sale:
Unrealized holding gains (losses) arising during the period before tax on securities held for sale						48		—
Unrealized holding losses arising during the period before tax on derivatives held for sale						(31)		—
Less reclassification adjustment for caplet amortization before tax						(80)		—
		(1,646)		(501)		97		—

Other comprehensive income (loss), before tax		3,075		(2,013)		768		(888)
Tax expense (benefit)		833		(679)		224		(276)
Other comprehensive income (loss), net of tax		2,242		(1,334)		544		(612)

Comprehensive income	$	15,746	$	9,111	$	15,639	$	8,197


	Six Months Ended June 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(dollars in thousands)				(dollars in thousands)

Net income	$	26,422	$	20,995	$	41,517	$	29,804

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		8,813		(6,879)		10,639		(8,531)
Less reclassification adjustment for losses included in net income before tax		(52)		—		(56)		—
Less reclassification adjustment for adoption of ASU 2016-01		—		855		—		855
		8,865		(6,024)		10,695		(7,676)
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(2,942)		(172)		(4,101)		404
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(291)		97		(291)		(90)
		(2,651)		(269)		(3,810)		494
Unrealized gains (losses) on assets held for sale:
Unrealized holding gains (losses) arising during the period before tax on securities held for sale						48		—
Unrealized holding losses arising during the period before tax on derivatives held for sale						(31)		—
Less reclassification adjustment for ineffectiveness and caplet amortization before tax						(80)		—
						97		—

Other comprehensive income (loss), before tax		6,214		(6,293)		6,982		(7,182)
Tax expense (benefit)		1,628		(1,757)		1,852		(2,034)
Other comprehensive income (loss), net of tax		4,586		(4,536)		5,130		(5,148)

Comprehensive income	$	31,008	$	16,459	$	46,647	$	24,656

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


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

Balance December 31, 2018	$	15,718	$	270,761	$	192,203	$	(5,544)	$	473,138	$	15,718	$	270,761	$	192,203	$	(5,544)	$	473,138
Net income		—		—		12,918		—		12,918		—		—		12,918		—		12,918
Other comprehensive income, net of tax		—		—		—		2,344		2,344		—		—		—		2,344		2,344
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)		—		—		(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		4		124		—		—		128
Issuance of 25,238 shares of common stock as a result of
stock options exercised		25		263		—		—		288		25		263		—		—		288
Stock-based compensation expense		—		722		—		—		722		—		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)		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)		(5)		(147)		—		—		(152)
Balance, March 31, 2019	$	15,755	$	271,673	$	204,179	$	(3,200)	$	488,407	$	15,755	$	271,673	$	204,179	$	(3,200)	$	488,407
Net income		—		—		13,504		—		13,504		—		—		13,504		—		13,504
Other comprehensive loss, net of tax		—		—		—		2,242		2,242		—		—		—		2,242		2,242
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)		—		—		(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		11		323		—		—		334
Issuance of 2,414 shares of common stock as a result of
stock options exercised		3		41		—		—		44		3		41		—		—		44
Stock-based compensation expense		—		719		—		—		719		—		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)		—		—		—		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)		(1)		(7)		—		—		(8)
Balance, June 30, 2019	$	15,773	$	272,744	$	216,741	$	(958)	$	504,300	$	15,773	$	272,744	$	216,741	$	(958)	$	504,300

Net income												—		—		15,095		—		15,095
Other comprehensive income, net of tax												—		—		—		544		544
Common cash dividends declared, $0.06 per share												—		—		(944)		—		(944)
Issuance of 5,674 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan												6		187		—		—		193
Issuance of 12,438 shares of common stock as a result of
stock options exercised												12		144		—		—		156
Stock-based compensation expense												—		428		—		—		428
Exchange of 589 shares of common stock in connection
with payroll taxes for restricted stock and in connection
with stock options exercised												(1)		(28)		—		—		(29)
Balance September 30, 2019											$	15,790	$	273,475	$	230,892	$	(414)	$	519,743

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

QCR HOLDINGS, INC. AND SUBSIDIARIES

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

Three and Nine months ended September 30, 2019 and 2018


							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
Net income		—		—		8,809		—		8,809
Other comprehensive loss, net of tax		—		—		—		(612)		(612)
Common cash dividends declared, $0.06 per share		—		—		(938)		—		(938)
Issuance of 1,699,414 shares of common stock as a result
of merger with Springfield Bancshares, net of issuance
costs of $106,237		1,699		78,832		—		—		80,531
Issuance of 3,205 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		4		120		—		—		124
Issuance of 1,754 shares of common stock as a result of stock
options exercised		2		32		—		—		34
Stock-based compensation expense		—		319		—		—		319
Restricted stock awards - 5,300 shares of common stock		5		(5)		—		—		—
Exchange of 9,853 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		(10)		(458)		—		—		(468)
Balance, September 30, 2018	$	15,674	$	269,373	$	179,826	$	(7,486)	$	457,387

See Notes to Consolidated Financial Statements (Unaudited)

~~Table of Contents~~

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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


	2019			2018		2019		2018
	(dollars in thousands)					(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	26,422		$	20,995	$	41,517	$	29,804
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,518			2,075		3,889		3,257
Provision for loan/lease losses		4,075			4,841		6,087		11,046
Stock-based compensation expense		1,441			787		1,869		1,106
Deferred compensation expense accrued		1,323			1,004		2,087		1,453
Losses on other real estate owned, net		1,214			118		3,205		49
Amortization of premiums on securities, net		854			829		1,339		1,201
Securities losses, net		52			—		56		—
Loans originated for sale		(45,926)			(21,899)		(104,824)		(39,923)
Proceeds on sales of loans		43,969			22,072		97,916		38,954
Gains on sales of residential real estate loans		(858)			(203)		(1,748)		(539)
Gains on sales of government guaranteed portions of loans		(70)			(358)		(589)		(405)
Loss on debt extinguishment, net							148		—
Gains on sales of premises and equipment		(67)			—		(67)		—
Amortization of intangibles		1,147			609		1,706		1,151
Accretion of acquisition fair value adjustments, net		(2,145)			(1,244)		(3,413)		(2,951)
Increase in cash value of bank-owned life insurance		(952)			(817)		(1,441)		(1,292)
Decrease (increase) in other assets		942			(5,132)
Increase (decrease) in other liabilities		(4,615)			5,688
Increase in other assets							(1,953)		(8,293)
Increase in other liabilities							336		2,254
Net cash provided by operating activities	$	29,324		$	29,365	$	46,120	$	36,872

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold		16,183			19,331
Net decrease (increase) in federal funds sold							17,098		(2,873)
Net decrease (increase) in interest-bearing deposits at financial institutions		(62,084)			14,964		(57,180)		22,099
Proceeds from sales of other real estate owned		539			736		840		1,288
Activity in securities portfolio:
Purchases		(10,709)			(54,951)		(28,119)		(66,420)
Calls, maturities and redemptions		5,958			12,619		9,074		22,915
Paydowns		27,088			27,187		36,649		36,279
Sales		4,661			—		33,128		1,938
Activity in restricted investment securities:
Purchases		(3,868)			(4,215)		(5,682)		(5,352)
Redemptions		7,362			109		5,006		109
Net increase in loans/leases originated and held for investment		(176,394)			(150,993)		(237,286)		(208,738)
Purchase of premises and equipment		(6,032)			(2,666)		(8,755)		(7,112)
Proceeds from sales of premises and equipment		146	��		—		146		—
Net cash used in investing activities	$	(197,150)		$	(137,879)
Net cash paid for acquisition							—		(3,747)
Net cash (used in) investing activities						$	(235,081)	$	(209,614)

CASH FLOWS FROM FINANCING ACTIVITIES:
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		345,614			31,652		276,960		82,309
Net increase (decrease) in short-term borrowings		(9,583)			3,592
Net decrease in short-term borrowings							(9,091)		(2,207)
Activity in Federal Home Loan Bank advances:
Term advances		5,000			—		25,000		—
Calls and maturities		(35,000)			(10,000)		(35,000)		(27,000)
Net change in short-term and overnight advances		(130,865)			72,100		(15,965)		120,330
Prepayments							(30,228)		—
Activity in other borrowings:
Proceeds from other borrowings		—			9,000		—		9,000
Calls, maturities and scheduled principal payments		(11,937)			(3,875)		(11,937)		(10,613)
Prepayments		(46,313)			—		(46,313)		—
Paydown of revolving line of credit		(9,000)			—		(9,000)		—
Proceeds from subordinated notes		63,393			—		63,393		—
Payment of cash dividends on common stock		(1,881)			(1,526)		(2,822)		(2,362)
Net proceeds from common stock offering							—		—
Proceeds from issuance of common stock, net		794			918		1,143		970
Net cash provided by financing activities	$	170,222		$	101,861	$	206,140	$	170,427
Net increase (decrease) in cash and due from banks		2,396			(6,653)

Cash and due from banks, beginning		85,523			75,722
Cash and due from banks, ending	$	87,919		$	69,069

~~(Continued)~~

910

~~Table of Contents~~

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

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


						2019		2018
						(dollars in thousands)

Net increase (decrease) in cash and due from banks							17,179		(2,315)

Cash and due from banks, beginning							85,523		75,722
Cash and due from banks, ending						$	102,702	$	73,407

Reconciliation of cash and due from banks:
Cash and due from banks							91,671		73,407
Cash included in assets held for sale							11,031		—
Cash and due from banks at end of period						$	102,702	$	73,407

	2019		2018
Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest	$	29,346	$	12,304		$	45,826	$	23,102
Income/franchise taxes		(1,032)		1,010			(769)		(1,100)

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)			5,130		(5,148)
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised		(160)		(194)			(189)		(662)
Transfers of loans to other real estate owned		1,012		46			1,049		46
Increase in the fair value of back-to-back interest rate swap assets and liabilities		43,628		1,775
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities							80,760		(2,441)
Dividends payable		942		836			944		938
Transfer of equity securities from securities available for sale to other assets at fair value		—		2,614			—		2,614

Supplemental disclosure of cash flow information for acquisitions:
Fair value of assets acquired:
Cash and due from banks						$	—	$	4,587
Interest-bearing deposits at financial institutions							—		62,925
Securities							—		4,845
Loans receivable, net							—		477,337
Bank-owned life insurance							—		7,092
Premises and equipment, net							—		6,092
Restricted investment securities							—		3,654
Intangibles							—		8,209
Other assets							—		988
Total assets acquired						$	—	$	575,729

Fair value of liabilities assumed:
Deposits						$	—	$	439,580
Short-term borrowings							—		1,144
FHLB advances							—		73,610
Other borrowings							—		9,544
Other liabilities							—		8,408
Total liabilities assumed							—		532,286
Net assets acquired						$	—	$	43,443
Consideration paid:
Cash paid *						$	—	$	8,334
Common stock							—		80,637
Total consideration paid							—		88,971
Goodwill						$	—	$	45,528

* Net cash paid at closing totaled $3,747 for acquisition of SFC Bank in 2018.

See Notes to Consolidated Financial Statements (Unaudited)					See Notes to Consolidated Financial Statements (Unaudited)

~~See Notes to Consolidated Financial Statements (Unaudited)~~

1011

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Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~June~~September 30, 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, 2018, included in the Company's Annual Report on Form 10‑K filed with the SEC on March 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 ~~June~~September 30, 2019 are not necessarily indicative of the results expected for the year ending December 31, 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~~IB&T: Illinois Bank & Trust
ASU: Accounting Standards Update	~~NIM: Net interest margin~~m2: m2 Lease Funds, LLC
Bates Companies: Bates Financial Advisors, Inc., Bates	~~NPA: Nonperforming asset~~NIM: Net interest margin
Financial Services, Inc., Bates Securities, Inc. and	~~NPL:~~NPA: Nonperforming ~~loan~~asset
Bates Financial Group, Inc.	NPL: Nonperforming loan
BOLI: Bank-owned life insurance	OREO: Other real estate owned
~~BOLI: Bank-owned life insurance~~	~~OTTI: Other-than-temporary impairment~~
Caps: Interest rate cap derivatives	~~PCI: Purchased credit impaired~~OTTI: Other-than-temporary impairment
CDI: Core deposit intangible	~~Provision: Provision for loan/lease losses~~PCI: Purchased credit impaired
Community National: Community National Bancorporation	~~QCBT: Quad City Bank & Trust Company~~Provision: Provision for loan/lease losses
CRBT: Cedar Rapids Bank & Trust Company	~~RB&T: Rockford~~QCBT: Quad City Bank & Trust Company
CRE: Commercial real estate	RB&T: Rockford Bank & Trust Company
CSB: Community State Bank	ROAA: Return on Average Assets
~~CSB: Community State Bank~~C&I: Commercial and industrial	SBA: U.S. Small Business Administration
~~C&I: Commercial and industrial~~EPS: Earnings per share	SEC: Securities and Exchange Commission
~~EPS: Earnings per share~~	~~SFC Bank: Springfield First Community Bank~~
Exchange Act: Securities Exchange Act of 1934, as	SFC Bank: Springfield ~~Bancshares: Springfield Bancshares, Inc.~~First Community Bank
amended	~~TA: Tangible assets~~Springfield Bancshares: Springfield Bancshares, Inc.
FASB: Financial Accounting Standards Board	~~TCE:~~TA: Tangible ~~common equity~~assets
FDIC: Federal Deposit Insurance Corporation	~~TDRs: Troubled debt restructurings~~TCE: Tangible common equity
FHLB: Federal Home Loan Bank	~~TEY: Tax equivalent yield~~TDRs: Troubled debt restructurings
FRB: Federal Reserve Bank of Chicago	TEY: Tax equivalent yield
GAAP: Generally Accepted Accounting Principles	The Company: QCR Holdings, Inc.
~~GAAP: Generally Accepted Accounting Principles~~	USDA: U.S. Department of Agriculture

1112

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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, SFC Bank and 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 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 Springfield, Missouri, occurred on July 1, 2018. The financial results for the periods since acquisition/merger are included in this report. See Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for additional information about the acquisition and merger.

On August 13, 2019, the Company entered into a definitive agreement to sell certain assets and liabilities of RB&T, a wholly-owned subsidiary headquartered in Rockford, Illinois, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc. Under the terms of the agreement, IB&T will acquire certain assets and assume certain liabilities for a cash payment. The transaction is subject to approval by federal and state bank regulators and to customary closing conditions. The transaction is expected to close in the fourth quarter of 2019. The assets and liabilities that will be sold are classified as held for sale on the Consolidated Balance Sheet and corresponding footnotes. See Note 2 to the Company’s Consolidated Financial Statements for additional information about the sale.

Recent accounting developments: 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 standard was adopted on January 1, 2019 and did not have a significant impact on the Company’s Consolidated Financial Statements.

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.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis. ASU 2017-04 requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the 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 annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect this guidance to 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.

1213

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 2 – ASSETS AND LIABILITIES HELD FOR SALE

On August 13, 2019, the Company and RB&T entered into a Purchase and Assumption Agreement (the Agreement) to sell certain assets and liabilities of RB&T, a wholly-owned subsidiary headquartered in Rockford, Illinois, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc. Under the terms of the Agreement, IB&T will acquire certain assets and assume certain liabilities of RB&T for a cash payment. The actual cash payment amount will be determined substantially by the following formula: (i) the “Purchase Price Premium”, plus (ii) the aggregate net book value of the acquired assets, minus (iii) the aggregate book value of the assumed liabilities. The Purchase Price Premium is equal to: (a) 8% of RB&T’s tangible assets, multiplied by (b) 0.345. Based on RB&T’s balance sheet as of September 30, 2019, the Purchase Price Premium would be $14.2 million and the total payment by IB&T to the Company would be $59.7 million. The transaction is subject to approval by federal and state bank regulators and to customary closing conditions. The transaction is expected to close in the fourth quarter of 2019.

Assets and liabilities of RB&T classified as held for sale are summarized as follows as of September 30, 2019:


	As of
	September 30, 2019
	(dollars in thousands)

ASSETS
Cash and cash equivalents	$	13,446
Securities		66,009
Loans, net		362,011
Other assets		24,081
Assets held for sale	$	465,547

LIABILIITES
Deposits	$	451,546
Borrowings		16,157
Other liabilities		2,827
Liabilities held for sale	$	470,530

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 3 – INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of ~~June~~September 30, 2019 and December 31, 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
	(dollars in thousands)								(dollars in thousands)
June 30, 2019:
September 30, 2019:
Securities HTM:
Municipal securities	$	387,663	$	17,967	$	(468)	$	405,162	$	342,427	$	20,122	$	(119)	$	362,430
Other securities		1,050		—		—		1,050		1,050		—		(6)		1,044
	$	388,713	$	17,967	$	(468)	$	406,212	$	343,477	$	20,122	$	(125)	$	363,474

Securities AFS:
U.S. govt. sponsored agency securities	$	35,430	$	431	$	(99)	$	35,762	$	20,861	$	470	$	(63)	$	21,268
Residential mortgage-backed and related securities		157,760		2,053		(585)		159,228		121,118		2,962		(200)		123,880
Municipal securities		51,948		1,259		(18)		53,189		47,259		1,653		(10)		48,902
Other securities		6,754		157		—		6,911		17,711		172		(1)		17,882
	$	251,892	$	3,900	$	(702)	$	255,090	$	206,949	$	5,257	$	(274)	$	211,932


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2018:
Securities HTM:
Municipal securities	$	400,863	$	5,661	$	(6,803)	$	399,721
Other securities		1,050		—		(1)		1,049
	$	401,913	$	5,661	$	(6,804)	$	400,770

Securities AFS:
U.S. govt. sponsored agency securities	$	37,150	$	39	$	(778)	$	36,411
Residential mortgage-backed and related securities		163,698		182		(4,631)		159,249
Municipal securities		59,069		180		(703)		58,546
Other securities		6,754		100		(4)		6,850
	$	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.

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Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of ~~June~~September 30, 2019 and December 31, 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
	(dollars in thousands)												(dollars in thousands)
June 30, 2019:
September 30, 2019:
Securities HTM:
Municipal securities	$	513	$	(3)	$	21,731	$	(465)	$	22,244	$	(468)	$	1,037	$	(1)	$	7,839	$	(118)	$	8,876	$	(119)
Other securities		—		—		—		—		—		—		1,044		(6)		—		—		1,044		(6)
	$	513	$	(3)	$	21,731	$	(465)	$	22,244	$	(468)	$	2,081	$	(7)	$	7,839	$	(118)	$	9,920	$	(125)

Securities AFS:
U.S. govt. sponsored agency securities	$	—	$	—	$	6,652	$	(99)	$	6,652	$	(99)	$	1,618	$	(1)	$	2,318	$	(62)	$	3,936	$	(63)
Residential mortgage-backed and related securities		—		—		47,176		(585)		47,176		(585)		1,194		(1)		20,376		(199)		21,570		(200)
Municipal securities		—		—		2,914		(18)		2,914		(18)		1,686		(3)		723		(7)		2,409		(10)
Other securities		248		—		—		—		248		—		248		(1)		—		—		248		(1)
	$	248	$	—	$	56,742	$	(702)	$	56,990	$	(702)	$	4,746	$	(6)	$	23,417	$	(268)	$	28,163	$	(274)


	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
December 31, 2018:
Securities HTM:
Municipal securities	$	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	$	1,565	$	(34)	$	29,605	$	(744)	$	31,170	$	(778)
Residential mortgage-backed and related securities		12,810		(148)		133,535		(4,483)		146,345		(4,631)
Municipal securities		28,356		(394)		15,932		(309)		44,288		(703)
Other securities		4,249		(4)		—		—		4,249		(4)
	$	46,980	$	(580)	$	179,072	$	(5,536)	$	226,052	$	(6,116)

At ~~June~~September 30, 2019, the investment portfolio included ~~587~~510 securities. Of this number, 6931 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~0.2%~~0.1% of the total amortized cost of the portfolio. Of these 6931 securities, 6721 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 ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

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All sales of securities for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and September 30, 2018 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		Three Months Ended				Nine Months Ended
	June 30, 2019		September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(dollars in thousands)			(dollars in thousands)

Proceeds from sales of securities	$	4,661	$	23,364	$	1,938	$	28,025	$	1,938
Gross gains from sales of securities		—		143		—		150		—
Gross losses from sales of securities		(52)		(146)		—		(206)		—

The amortized cost and fair value of securities as of ~~June~~September 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)				(dollars in thousands)
Securities HTM:
Due in one year or less	$	2,781	$	2,794	$	2,946	$	2,954
Due after one year through five years		32,323		32,929		31,055		31,689
Due after five years		353,609		370,489		309,476		328,831
	$	388,713	$	406,212	$	343,477	$	363,474
Securities AFS:
Due in one year or less	$	1,624	$	1,633	$	1,084	$	1,088
Due after one year through five years		27,466		27,638		17,157		17,384
Due after five years		65,042		66,591		67,590		69,580
		94,132		95,862		85,831		88,052
Residential mortgage-backed and related securities		157,760		159,228		121,118		123,880
	$	251,892	$	255,090	$	206,949	$	211,932

Portions of the U.S. government sponsored agency securities, municipal securities and 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)				(dollars in thousands)
Securities HTM:
Municipal securities	$	188,313	$	193,173	$	176,339	$	181,785

Securities AFS:
U.S. govt. sponsored agency securities		4,999		5,003
Municipal securities		44,184		45,185		40,262		41,646
Other securities		6,505		6,662		6,504		6,677
	$	55,688	$	56,850	$	46,766	$	48,323

As of September 30, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 91 issuers with fair values totaling $76.1 million and revenue bonds issued by 148 issuers, primarily consisting

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As of June 30, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 101 issuers with fair values totaling $81.0 million and revenue bonds issued by 159 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$377.3~~$335.2 million. The Company held investments in general obligation bonds in 2423 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 1917 states, including seven states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2018, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 110 issuers with fair values totaling $86.4 million and revenue bonds issued by 160 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $371.9 million. The Company held investments in general obligation bonds in 26 states, including sixstates 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.

Both general obligation and revenue bonds are diversified across many issuers. As of ~~June~~September 30, 2019 and December 31, 2018 the Company held revenue bonds of one single issuer, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the 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 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~~four held for investment charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of ~~June~~September 30, 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 ~~June~~September 30, 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.

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NOTE 34 – LOANS/LEASES RECEIVABLE

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



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

C&I loans *	$	1,548,657	$	1,429,410	$	1,469,978	$	1,429,410
CRE loans
Owner-occupied CRE		494,638		500,654		441,122		500,654
Commercial construction, land development, and other land		312,578		236,787		369,123		236,787
Other non owner-occupied CRE		1,030,257		1,028,670		877,677		1,028,670
		1,837,473		1,766,111		1,687,922		1,766,111

Direct financing leases **		101,180		117,969		92,307		117,969
Residential real estate loans ***		293,479		290,759		245,667		290,759
Installment and other consumer loans		120,947		119,381		106,540		119,381
		3,901,736		3,723,630		3,602,414		3,723,630
Plus deferred loan/lease origination costs, net of fees		8,783		9,124		7,856		9,124
		3,910,519		3,732,754		3,610,270		3,732,754
Less allowance		(41,104)		(39,847)		(36,116)		(39,847)
	$	3,869,415	$	3,692,907	$	3,574,154	$	3,692,907
** Direct financing leases:
Net minimum lease payments to be received	$	111,764	$	130,371	$	101,869	$	130,371
Estimated unguaranteed residual values of leased assets		690		828		547		828
Unearned lease/residual income		(11,274)		(13,230)		(10,109)		(13,230)
		101,180		117,969		92,307		117,969
Plus deferred lease origination costs, net of fees		2,760		3,642		2,153		3,642
		103,940		121,611		94,460		121,611
Less allowance		(1,459)		(1,792)		(1,302)		(1,792)
	$	102,481	$	119,819	$	93,158	$	119,819

* Includes equipment financing agreements outstanding at m2, totaling ~~$122.6~~$131.0 million and $103.4 million as of ~~June~~September 30, 2019 and December 31, 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 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 ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

*** Includes residential real estate loans held for sale totaling ~~$4.2~~$8.9 million and $1.3 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

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Changes in accretable yield for acquired loans were as follows:


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

Balance at the beginning of the period	$	(319)	$	(8,830)	$	(9,149)	$	(667)	$	(9,656)	$	(10,323)	$	(151)	$	(8,489)	$	(8,640)	$	(667)	$	(10,127)	$	(10,794)
Reclassification of nonaccretable discount to accretable		(159)		—		(159)		(159)		—		(159)		—		—		—		(159)		—		(159)
Accretion recognized		327		812		1,139		675		1,638		2,313		94		1,344		1,438		769		2,982		3,751
Balance at the end of the period	$	(151)	$	(8,018)	$	(8,169)	$	(151)	$	(8,018)	$	(8,169)	$	(57)	$	(7,145)	$	(7,202)	$	(57)	$	(7,145)	$	(7,202)


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

Balance at the beginning of the period	$	(157)	$	(5,659)	$	(5,816)	$	(191)	$	(6,280)	$	(6,471)	$	(142)	$	(5,051)	$	(5,193)	$	(191)	$	(6,280)	$	(6,471)
Discount added at acquisition														(293)		(7,800)		(8,093)		(293)		(7,800)		(8,093)
Reclassification of nonaccretable discount to accretable														(892)		—		(892)		(892)		—		(892)
Accretion recognized		15		608		623		49		1,229		1,278		269		1,579		1,848		318		2,808		3,126
Balance at the end of the period	$	(142)	$	(5,051)	$	(5,193)	$	(142)	$	(5,051)	$	(5,193)	$	(1,058)	$	(11,272)	$	(12,330)	$	(1,058)	$	(11,272)	$	(12,330)

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


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

C&I	$	1,540,661		$	4,136		$	307		$	—		$	3,553		$	1,548,657		$	1,466,347		$	2,067		$	246		$	—		$	1,318		$	1,469,978
CRE
Owner-Occupied CRE		493,877			571			—			—			190			494,638			440,668			276			—			—			178			441,122
Commercial Construction, Land Development, and Other Land		312,288			96			—			—			194			312,578			368,422			701			—			—			—			369,123
Other Non Owner-Occupied CRE		1,024,769			67			11			—			5,410			1,030,257			872,591			1,491			—			—			3,595			877,677
Direct Financing Leases		98,581			971			80			—			1,548			101,180			89,776			816			318			—			1,397			92,307
Residential Real Estate		291,605			190			160			54			1,470			293,479			243,785			58			704			—			1,120			245,667
Installment and Other Consumer		120,082			78			—			4			783			120,947			105,580			337			—			—			623			106,540
	$	3,881,863		$	6,109		$	558		$	58		$	13,148		$	3,901,736		$	3,587,169		$	5,746		$	1,268		$	—		$	8,231		$	3,602,414

As a percentage of total loan/lease portfolio		99.49	%		0.16	%		0.01	%		0.00	%		0.34	%		100.00	%		99.58	%		0.16	%		0.04	%		—	%		0.22	%		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	%

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


	As of June 30, 2019										As of September 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)										(dollars in thousands)

C&I	$	—	$	3,553	$	1,112	$	4,665	32.13	%	$	—	$	1,318	$	565	$	1,883	20.94	%
CRE
Owner-Occupied CRE		—		190		104		294	2.02	%		—		178		—		178	1.98	%
Commercial Construction, Land Development, and Other Land		—		194		—		194	1.34	%		—		—		—		—	-	%
Other Non Owner-Occupied CRE		—		5,410		—		5,410	37.26	%		—		3,595		—		3,595	39.97	%
Direct Financing Leases		—		1,548		97		1,645	11.33	%		—		1,397		198		1,595	17.73	%
Residential Real Estate		54		1,470		—		1,524	10.50	%		—		1,120		—		1,120	12.45	%
Installment and Other Consumer		4		783		—		787	5.42	%		—		623		—		623	6.93	%
	$	58	$	13,148	$	1,313	$	14,519	100.00	%	$	—	$	8,231	$	763	$	8,994	100.00	%

* Nonaccrual loans/leases included ~~$2.8 million~~$932 thousand of TDRs, including ~~$28~~$26 thousand in C&I loans, ~~$2.2 million~~$513 thousand in CRE loans, ~~$314~~$304 thousand in direct financing leases, ~~$286~~$32 thousand in residential real estate loans, and $2$57 thousand in installment loans.


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

C&I	$	389	$	4,088	$	454	$	4,931	26.58	%
CRE
Owner-Occupied CRE		107		216		—		323	1.74	%
Commercial Construction, Land Development, and Other Land		—		319		—		319	1.72	%
Other Non Owner-Occupied CRE		—		5,522		2,984		8,506	45.86	%
Direct Financing Leases		—		1,761		111		1,872	10.09	%
Residential Real Estate		89		1,743		100		1,932	10.41	%
Installment and Other Consumer		47		611		9		667	3.60	%
	$	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 $2.3 million of TDRs, including $265 thousand in C&I loans, $1.4 million in CRE loans, $321 thousand in direct financing leases, $344 thousand in residential real estate loans, and $3 thousand in installment loans.

1921

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 ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively, are presented as follows:


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

Balance, beginning	$	17,260	$	18,303	$	1,606	$	2,538	$	1,457	$	41,164	$	18,248	$	17,363	$	1,459	��	$	2,582	$	1,452	$	41,104
Provisions (credits) charged to expense		1,116		414		331		86		(6)		1,941
Reclassification of allowance related to held for sale assets														(2,814)		(2,392)		—			(628)		(288)		(6,122)
Provisions (credits) charged to expense *														998		220		80			241		45		1,584
Loans/leases charged off		(193)		(1,369)		(497)		(73)		(20)		(2,152)		(349)		—		(351)			(37)		(4)		(741)
Recoveries on loans/leases previously charged off		65		15		19		31		21		151		68		100		114			—		9		291
Balance, ending	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104	$	16,151	$	15,291	$	1,302		$	2,158	$	1,214	$	36,116


	Three Months Ended June 30, 2018												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)												(dollars in thousands)

Balance, beginning	$	15,065	$	14,938	$	2,730	$	2,375	$	1,424	$	36,532	$	15,234	$	15,819	$	2,724	$	2,433	$	1,335	$	37,545
Provisions (credits) charged to expense		777		872		688		57		(93)		2,301		3,699		2,254		125		132		(4)		6,206
Loans/leases charged off		(729)		—		(794)		—		(1)		(1,524)		(87)		(387)		(428)		(58)		(31)		(991)
Recoveries on loans/leases previously charged off		121		9		100		1		5		236		71		30		211		—		5		317
Balance, ending	$	15,234	$	15,819	$	2,724	$	2,433	$	1,335	$	37,545	$	18,917	$	17,716	$	2,632	$	2,507	$	1,305	$	43,077


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

Balance, beginning	$	16,420	$	17,719	$	1,792	$	2,557	$	1,359	$	39,847	$	16,420	$	17,719	$	1,792	$	2,557	$	1,359	$	39,847
Provisions charged to expense		2,123		948		776		68		160		4,075
Reclassification of allowance related to held for sale assets														(2,814)		(2,392)		—		(628)		(288)		(6,122)
Provisions charged to expense *														3,120		1,168		856		309		206		5,659
Loans/leases charged off		(527)		(1,369)		(1,149)		(73)		(94)		(3,212)		(876)		(1,369)		(1,501)		(109)		(99)		(3,953)
Recoveries on loans/leases previously charged off		232		65		40		30		27		394		300		164		155		31		36		685
Balance, ending	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104	$	16,151	$	15,291	$	1,302	$	2,158	$	1,214	$	36,116


	Six Months Ended June 30, 2018												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)												(dollars in thousands)

Balance, beginning	$	14,323	$	13,963	$	2,382	$	2,466	$	1,222	$	34,356	$	14,323	$	13,963	$	2,382	$	2,466	$	1,221	$	34,355
Provisions charged to expense		1,585		1,837		1,293		18		108		4,841		5,284		4,091		1,418		150		104		11,046
Loans/leases charged off		(824)		—		(1,079)		(52)		(6)		(1,961)		(911)		(388)		(1,506)		(110)		(36)		(2,951)
Recoveries on loans/leases previously charged off		150		19		128		1		11		309		221		50		338		1		16		626
Balance, ending	$	15,234	$	15,819	$	2,724	$	2,433	$	1,335	$	37,545	$	18,917	$	17,716	$	2,632	$	2,507	$	1,305	$	43,077

*Excludes provision related to loans included in assets held for sale of $428 thousand for the three and nine months ended September 30, 2019.

2022

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~~September 30, 2019 and December 31, 2018 is presented as follows:


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

Allowance for impaired loans/leases	$	1,085		$	445		$	93		$	192		$	152		$	1,967		$	160		$	374		$	59		$	27		$	84		$	704
Allowance for nonimpaired loans/leases		17,163			16,918			1,366			2,390			1,300			39,137			15,991			14,917			1,243			2,131			1,130			35,412
	$	18,248		$	17,363		$	1,459		$	2,582		$	1,452		$	41,104		$	16,151		$	15,291		$	1,302		$	2,158		$	1,214		$	36,116

Impaired loans/leases	$	4,520		$	7,736		$	1,860		$	1,628		$	1,052		$	16,796		$	1,764		$	4,148		$	1,581		$	1,062		$	623		$	9,178
Nonimpaired loans/leases		1,544,137			1,829,737			99,320			291,851			119,895			3,884,940			1,468,214			1,683,774			90,726			244,605			105,917			3,593,236
	$	1,548,657		$	1,837,473		$	101,180		$	293,479		$	120,947		$	3,901,736		$	1,469,978		$	1,687,922		$	92,307		$	245,667		$	106,540		$	3,602,414

Allowance as a percentage of impaired loans/leases		24.00	%		5.75	%		5.00	%		11.79	%		14.45	%		11.71	%		9.07	%		9.02	%		3.73	%		2.54	%		13.48	%		7.67	%
Allowance as a percentage of nonimpaired loans/leases		1.11	%		0.92	%		1.38	%		0.82	%		1.08	%		1.01	%		1.09	%		0.89	%		1.37	%		0.87	%		1.07	%		0.99	%
Total allowance as a percentage of total loans/leases		1.18	%		0.94	%		1.44	%		0.88	%		1.20	%		1.05	%		1.10	%		0.91	%		1.41	%		0.88	%		1.14	%		1.00	%


	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.

2123

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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 ~~six~~nine months ended ~~June~~September 30, 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)												(dollars in thousands)

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	2,048	$	2,088	$	—	$	1,680	$	52	$	52	$	1,545	$	1,585	$	—	$	1,026	$	18	$	18
CRE
Owner-Occupied CRE		216		232		—		187		11		11		40		56		—		21		—		—
Commercial Construction, Land Development, and Other Land		546		902		—		628		13		13		—		—		—		—		—		—
Other Non Owner-Occupied CRE		3,417		4,296		—		4,183		92		92		733		733		—		751		22		22
Direct Financing Leases		1,600		1,600		—		1,901		16		16		1,440		1,440		—		1,246		19		19
Residential Real Estate		810		1,001		—		765		1		1		648		764		—		522		—		—
Installment and Other Consumer		875		875		—		797		7		7		539		539		—		510		—		—
	$	9,512	$	10,994	$	—	$	10,141	$	192	$	192	$	4,945	$	5,117	$	—	$	4,076	$	59	$	59

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	2,472	$	2,478	$	1,085	$	1,917	$	18	$	18	$	219	$	219	$	160	$	102	$	—	$	—
CRE
Owner-Occupied CRE		124		124		21		129		—		—		121		121		18		127		—		—
Commercial Construction, Land Development, and Other Land		142		142		31		145		—		—		—		—		—		—		—		—
Other Non Owner-Occupied CRE		3,291		3,291		393		1,588		—		—		3,254		3,254		356		1,995		—		—
Direct Financing Leases		260		260		93		196		1		1		141		141		59		108		2		2
Residential Real Estate		818		818		192		829		3		3		414		414		27		381		—		—
Installment and Other Consumer		177		177		152		136		—		—		84		84		84		57		—		—
	$	7,284	$	7,290	$	1,967	$	4,940	$	22	$	22	$	4,233	$	4,233	$	704	$	2,770	$	2	$	2

Total Impaired Loans/Leases:
C&I	$	4,520	$	4,566	$	1,085	$	3,597	$	70	$	70	$	1,764	$	1,804	$	160	$	1,128	$	18	$	18
CRE
Owner-Occupied CRE		340		356		21		316		11		11		161		177		18		148		—		—
Commercial Construction, Land Development, and Other Land		688		1,044		31		773		13		13		—		—		—		—		—		—
Other Non Owner-Occupied CRE		6,708		7,587		393		5,771		92		92		3,987		3,987		356		2,746		22		22
Direct Financing Leases		1,860		1,860		93		2,097		17		17		1,581		1,581		59		1,354		21		21
Residential Real Estate		1,628		1,819		192		1,594		4		4		1,062		1,178		27		903		—		—
Installment and Other Consumer		1,052		1,052		152		933		7		7		623		623		84		567		—		—
	$	16,796	$	18,284	$	1,967	$	15,081	$	214	$	214	$	9,178	$	9,350	$	704	$	6,846	$	61	$	61

2224

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 ~~June~~September 30, 2019 and 2018, respectively are presented as follows:


	Three Months Ended June 30, 2019						Three Months Ended June 30, 2018						Three Months Ended September 30, 2019						Three Months Ended September 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)												(dollars in thousands)

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	1,683	$	29	$	29	$	1,401	$	59	$	59	$	1,433	$	6	$	6	$	2,795	$	17	$	17
CRE
Owner-Occupied CRE		194		7		7		289		6		6		42		—		—		289		—		—
Commercial Construction, Land Development, and Other Land		603		6		6		—		—		—		—		—		—		—		—		—
Other Non Owner-Occupied CRE		3,985		22		22		1,105		—		—		739		7		7		1,009		9		9
Direct Financing Leases		1,795		7		7		2,199		3		3		1,359		6		6		1,780		3		3
Residential Real Estate		801		—		—		929		—		—		540		—		—		666		—		—
Installment and Other Consumer		816		3		3		101		—		—		543		—		—		115		—		—
	$	9,877	$	74	$	74	$	6,024	$	68	$	68	$	4,656	$	19	$	19	$	6,654	$	29	$	29

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	2,046	$	9	$	9	$	353	$	2	$	2	$	141	$	—	$	—	$	3,401	$	2	$	2
CRE
Owner-Occupied CRE		127		—		—		145		—		—		123		—		—		141		—		—
Commercial Construction, Land Development, and Other Land		143		—		—		5,492		—		—		—		—		—		5,484		—		—
Other Non Owner-Occupied CRE		1,980		—		—		—		—		—		3,254		—		—		3,848		8		8
Direct Financing Leases		227		—		—		566		—		—		120		—		—		558		—		—
Residential Real Estate		822		1		1		512		3		3		390		—		—		461		3		3
Installment and Other Consumer		150		—		—		117		—		—		84		—		—		113		—		—
	$	5,495	$	10	$	10	$	7,185	$	5	$	5	$	4,112	$	—	$	—	$	14,006	$	13	$	13

Total Impaired Loans/Leases:
C&I	$	3,729	$	38	$	38	$	1,754	$	61	$	61	$	1,574	$	6	$	6	$	6,196	$	19	$	19
CRE
Owner-Occupied CRE		321		7		7		434		6		6		165		—		—		430		—		—
Commercial Construction, Land Development, and Other Land		746		6		6		5,492		—		—		—		—		—		5,484		—		—
Other Non Owner-Occupied CRE		5,965		22		22		1,105		—		—		3,993		7		7		4,857		17		17
Direct Financing Leases		2,022		7		7		2,765		3		3		1,479		6		6		2,338		3		3
Residential Real Estate		1,623		1		1		1,441		3		3		930		—		—		1,127		3		3
Installment and Other Consumer		966		3		3		218		—		—		627		—		—		228		—		—
	$	15,372	$	84	$	84	$	13,209	$	73	$	73	$	8,768	$	19	$	19	$	20,660	$	42	$	42

2325

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, 2018 are presented as follows:


			Unpaid
	Recorded		Principal		Related
Classes of Loans/Leases	Investment		Balance		Allowance
	(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	1,846	$	4,540	$	—
CRE
Owner-Occupied CRE		106		106		—
Commercial Construction, Land Development, and Other Land		507		507		—
Other Non Owner-Occupied CRE		1,804		1,804		—
Direct Financing Leases		1,929		1,929		—
Residential Real Estate		984		1,058		—
Installment and Other Consumer		762		762		—
	$	7,938	$	10,706	$	—

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	2,653	$	2,653	$	973
CRE
Owner-Occupied CRE		304		660		39
Commercial Construction, Land Development, and Other Land		149		149		33
Other Non Owner-Occupied CRE		7,577		7,577		2,052
Direct Financing Leases		320		320		194
Residential Real Estate		1,126		1,126		257
Installment and Other Consumer		136		136		111
	$	12,265	$	12,621	$	3,659

Total Impaired Loans/Leases:
C&I	$	4,499	$	7,193	$	973
CRE
Owner-Occupied CRE		410		766		39
Commercial Construction, Land Development, and Other Land		656		656		33
Other Non Owner-Occupied CRE		9,381		9,381		2,052
Direct Financing Leases		2,249		2,249		194
Residential Real Estate		2,110		2,184		257
Installment and Other Consumer		898		898		111
	$	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.

2426

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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 ~~June~~September 30, 2019 and December 31, 2018:


	As of June 30, 2019												As of September 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)												(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,398,762	$	487,200	$	308,269	$	1,008,427	$	3,202,658	98.14	%	$	1,306,314	$	435,761	$	368,659	$	861,561	$	2,972,295	98.19	%
Special Mention (Rating 6)		9,811		4,236		64		5,802		19,913	0.61	%		14,043		2,888		40		6,224		23,195	0.77	%
Substandard (Rating 7)		17,460		3,202		4,245		16,028		40,935	1.25	%		18,597		2,473		424		9,892		31,386	1.04	%
Doubtful (Rating 8)		—		—		—		—		—	—	%		—		—		—		—		—	—	%
	$	1,426,033	$	494,638	$	312,578	$	1,030,257	$	3,263,506	100.00	%	$	1,338,954	$	441,122	$	369,123	$	877,677	$	3,026,876	100.00	%


	As of June 30, 2019												As of September 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)												(dollars in thousands)

Performing	$	121,836	$	99,536	$	291,955	$	120,160	$	633,487	99.26	%	$	130,291	$	90,712	$	244,547	$	105,917	$	571,467	99.29	%
Nonperforming		788		1,644		1,524		787		4,743	0.74	%		733		1,595		1,120		623		4,071	0.71	%
	$	122,624	$	101,180	$	293,479	$	120,947	$	638,230	100.00	%	$	131,024	$	92,307	$	245,667	$	106,540	$	575,538	100.00	%


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

Pass (Ratings 1 through 5)	$	1,294,418	$	487,949	$	230,473	$	1,008,626	$	3,021,466	97.72	%
Special Mention (Rating 6)		23,302		9,599		3,848		5,309		42,058	1.36	%
Substandard (Rating 7)		8,286		3,106		2,466		14,735		28,593	0.92	%
Doubtful (Rating 8)		—		—		—		—		—	—	%
	$	1,326,006	$	500,654	$	236,787	$	1,028,670	$	3,092,117	100.00	%


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

Performing	$	102,713	$	116,097	$	288,827	$	118,714	$	626,351	99.18	%
Nonperforming		691		1,872		1,932		667		5,162	0.82	%
	$	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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

As of ~~June~~September 30, 2019 and December 31, 2018, TDRs totaled ~~$4.1~~$1.7 million and $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 ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.


	For the three months ended June 30, 2019							For the three months ended June 30, 2018							For the three months ended September 30, 2019							For the three months ended September 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)														(dollars in thousands)
CONCESSION - Significant Payment Delay
C&I	1	$	52	$	52	$	—	—	$	—	$	—	$	—	—	$	—	$	—	$	—	1	$	274	$	274	$	274
Other Non Owner-Occupied CRE															—		—		—		—	2		981		981		60
Direct Financing Leases															3		116		116		—	2		44		44		—
	1	$	52	$	52	$	—	—	$	—	$	—	$	—	3	$	116	$	116	$	—	5	$	1,299	$	1,299	$	334

CONCESSION - Foregiveness of Principal
C&I	1	$	587	$	537	$	—	—	$	—	$	—	$	—
CONCESSION - Extension of Maturity
Installment and Other Consumer															1		56		56		56	—		—		—		—
	1	$	587	$	537	$	—	—	$	—	$	—	$	—	1	$	56	$	56	$	56	—	$	—	$	—	$	—

TOTAL	2	$	639	$	589	$	—	—	$	—	$	—	$	—	4	$	172	$	172	$	56	5	$	1,299	$	1,299	$	334


	For the six months ended June 30, 2019							For the six months ended June 30, 2018							For the nine months ended September 30, 2019							For the nine months ended September 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)														(dollars in thousands)
CONCESSION - Significant Payment Delay
C&I	2	$	71	$	71	$	—	—	$	—	$	—	$	—	1	$	19	$	19	$	—	1	$	274	$	274	$	274
Other Non Owner-Occupied CRE															—		—		—		—	2		981		981		60
Residential Real Estate	—		—		—		—	1		46		46		—	—		—		—		—	1		46		46		—
Direct Financing Leases	3		103		103		5	2		48		48		—	6		219		219		20	4		92		92		—
	5	$	174	$	174	$	5	3	$	94	$	94	$	—	7	$	238	$	238	$	20	8	$	1,393	$	1,393	$	334

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

CONCESSION - Extension of Maturity
Other Non Owner-Occupied CRE															—	$	—	$	—	$	—	2	$	2,976	$	2,976	$	816
Installment and Other Consumer															1		56		56		56
Direct Financing Leases															—		—		—		—	1		35		35		—
															1	$	56	$	56	$	56	3	$	3,011	$	3,011	$	816

TOTAL	6	$	761	$	711	$	5	3	$	94	$	94	$	—	9	$	881	$	831	$	76	11	$	4,404	$	4,404	$	1,150

Of the loans restructured during the ~~six~~nine months ended ~~June~~September 30, 2019, ~~two~~three with post-modification recorded balances of ~~$65~~$121 thousand were on nonaccrual. Of the loans restructured during the ~~six~~nine months ended ~~June~~September 30, 2018, ~~one~~four with a post-modification recorded balance of ~~$46 thousand~~$1.3 million was on nonaccrual.

For the ~~three and six~~nine months ended ~~June~~September 30, 2019, ~~three~~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. ~~Two of these~~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~~nine months ended ~~June~~September 30, 2018, ~~seven~~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. ~~Three of these~~These TDRs were related to ~~one customer whose loans were restructured in the second quarter of 2017 with pre-modification balances totaling $78 thousand and the other TDRs related to other~~ customers whose loans were restructured in the ~~second and~~ third ~~quarters~~quarter of ~~2017~~2018 with pre-modification balances totaling ~~$378~~$774 thousand.

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

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Not included in the table above, the Company had three TDRs that were restructured and charged off for the nine months ended September 30, 2019, totaling $108 thousand. The Company had nine TDRs that were restructured and charged off for the nine months ended September 30, 2018, totaling $577 thousand.

NOTE 45 – 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 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

Hedged Instrument

Effective Date

Maturity Date

Location

Notional Amount

Strike Rate

June 30, 2019

December 31, 2018

(dollars in thousands)

1-month FHLB Advance

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

1.49
%

98

342

$
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~~three-month LIBOR, and the interest rate swaps utilize ~~3-month~~three-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		June 30, 2019		December 31, 2018			Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2019		December 31, 2018
(dollars in thousands)	(dollars in thousands)														(dollars in thousands)

QCR Holdings Statutory Trust II		9/30/2018	9/30/2028	Other Liabilities	$	10,000	5.17	%	5.85	%	$	(965)	$	(298)		9/30/2018	9/30/2028	Other Liabilities	$	10,000	4.95	%	5.85	%	$	(1,265)	$	(298)
QCR Holdings Statutory Trust III		9/30/2018	9/30/2028	Other Liabilities		8,000	5.17	%	5.85	%		(772)		(239)		9/30/2018	9/30/2028	Other Liabilities		8,000	4.95	%	5.85	%		(1,012)		(239)
QCR Holdings Statutory Trust V		7/7/2018	7/7/2028	Other Liabilities		10,000	4.15	%	4.54	%		(940)		(288)		7/7/2018	7/7/2028	Other Liabilities		10,000	3.85	%	4.54	%		(1,229)		(288)
Community National Statutory Trust II		9/20/2018	9/20/2028	Other Liabilities		3,000	4.56	%	5.17	%		(288)		(89)		9/20/2018	9/20/2028	Other Liabilities		3,000	4.33	%	5.17	%		(378)		(89)
Community National Statutory Trust III		9/15//2018	9/15/2028	Other Liabilities		3,500	4.16	%	4.75	%		(336)		(104)		9/15//2018	9/15/2028	Other Liabilities		3,500	3.87	%	4.75	%		(441)		(104)
Guaranty Bankshares Statutory Trust I		9/15/2018	9/15/2028	Other Liabilities		4,500	4.16	%	4.75	%		(431)		(133)		9/15/2018	9/15/2028	Other Liabilities		4,500	3.87	%	4.75	%		(566)		(133)
					$	39,000	4.65	%	5.24	%	$	(3,732)	$	(1,151)					$	39,000	4.40	%	5.24	%	$	(4,891)	$	(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				September 30, 2019				December 31, 2018
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
	(dollars in thousands)								(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	596,451	$	65,824	$	445,022	$	22,196	$	694,928	$	102,956	$	445,022	$	22,196
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	596,451	$	65,824	$	445,022	$	22,196	$	694,928	$	102,956	$	445,022	$	22,196

Swap fee income totaled ~~$11.1~~$20.9 million and ~~$2.6~~$3.7 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. Swap fee income totaled ~~$10.8~~$10.6 million for the year ended December 31, 2018.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

NOTE 56 –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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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~~September 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%~~(4.34% at ~~June~~September 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 100% of the ~~original~~outstanding capital stock ~~certificates and stock powers~~ of ~~all~~the Company’s bank subsidiaries. The outstanding balance on the revolving line of credit was $0 and $9.0 million at ~~June~~September 30, 2019 and December 31, 2018, respectively.

The Company prepaid $30.2 million of FHLB term advances in the third quarter of 2019 using excess funds generated by strong deposit growth. The term advances had original maturities from February 2020 to October 2021 with rates ranging from 1.50% to 2.97%.

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.

NOTE 7 - EARNINGS PER SHARE

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


		Three months ended			Nine months ended
		September 30,			September 30,
		2019		2018		2019		2018
	(dollars in thousands, except share data)

Net income	$	15,095	$	8,809	$	41,517	$	29,804


Basic EPS	$	0.96	$	0.56	$	2.64	$	2.06
Diluted EPS	$	0.94	$	0.55	$	2.60	$	2.02

Weighted average common shares outstanding		15,739,430		15,625,123		15,715,788		14,477,783
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan		237,312		297,201		230,232		308,994
Weighted average common and common equivalent shares outstanding		15,976,742		15,922,324		15,946,020		14,786,777

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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,

2019


2018


2019


2018

(dollars in thousands, except share data)

Net income

$
13,504

$
10,445

$
26,422

$
20,995









Basic EPS

$
0.86

$
0.75

$
1.68

$
1.51

Diluted EPS

$
0.85

$
0.73

$
1.66

$
1.48

Weighted average common shares outstanding

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

223,789

312,858

226,692

314,890

Weighted average common and common equivalent shares outstanding

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 six months ended June 30, 2019 to June 30, 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

~~NOTE 7~~8 – 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.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

Assets and liabilities measured at fair value on a recurring basis comprise the following at ~~June~~September 30, 2019 and December 31, 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)
	(dollars in thousands)								(dollars in thousands)
June 30, 2019:
September 30, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	35,762	$	—	$	35,762	$	—	$	21,268	$	—	$	21,268	$	—
Residential mortgage-backed and related securities		159,228		—		159,228		—		123,880		—		123,880		—
Municipal securities		53,189		—		53,189		—		48,902		—		48,902		—
Other securities		6,911		—		6,911		—		17,882		—		17,882		—
Interest rate caps		98		—		98		—
Interest rate swaps - assets		65,824		—		65,824		—		102,956		—		102,956		—
Total assets measured at fair value	$	321,012	$	—	$	321,012	$	—	$	314,888	$	—	$	314,888	$	—

Interest rate swaps - liabilities	$	69,556	$	—	$	69,556	$	—	$	107,847	$	—	$	107,847	$	—
Total liabilities measured at fair value	$	69,556	$	—	$	69,556	$	—	$	107,847	$	—	$	107,847	$	—


December 31, 2018:
Securities AFS:
U.S. govt. sponsored agency securities	$	36,411	$	—	$	36,411	$	—	$	36,411	$	—	$	36,411	$	—
Residential mortgage-backed and related securities		159,249		—		159,249		—		159,249		—		159,249		—
Municipal securities		58,546		—		58,546		—		58,546		—		58,546		—
Other securities		6,850		—		6,850		—		6,850		—		6,850		—
Interest rate caps		459		—		459		—
Interest rate swaps - assets		22,196		—		22,196		—		22,196		—		22,196		—
Total assets measured at fair value	$	283,711	$	—	$	283,711	$	—	$	283,252	$	—	$	283,252	$	—

Interest rate swaps - liabilities	$	23,347	$	—	$	23,347	$	—	$	23,347	$	—	$	23,347	$	—
Total liabilities measured at fair value	$	23,347	$	—	$	23,347	$	—	$	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 ~~six~~nine months ended ~~June~~September 30, 2019 or 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~~

Table 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).Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Interest rate swaps are executed for select commercial customers. The interest rate swaps are further described in Note 45 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).

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

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

Assets measured at fair value on a non-recurring basis comprise the following at ~~June~~September 30, 2019 and December 31, 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
	(dollars in thousands)								(dollars in thousands)
June 30, 2019:
September 30, 2019:
Impaired loans/leases	$	7,539	$	—	$	—	$	7,539	$	3,839	$	—	$	—	$	3,839
OREO		9,328		—		—		9,328		4,588		—		—		4,588
	$	16,867	$	—	$	—	$	16,867	$	8,427	$	—	$	—	$	8,427

December 31, 2018:
Impaired loans/leases	$	9,657	$	—	$	—	$	9,657	$	9,657	$	—	$	—	$	9,657
OREO		10,128		—		—		10,128		10,128		—		—		10,128
	$	19,785	$	—	$	—	$	19,785	$	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.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:


	Quantitative Information about Level Fair Value Measurements												Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value										Fair Value		Fair Value
	June 30,		December 31,										September 30,		December 31,
	2019		2018		Valuation Technique	Unobservable Input	Range						2019		2018		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)												(dollars in thousands)

Impaired loans/leases	$	7,539	$	9,657	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%	��	$	3,839	$	9,657	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		9,328		10,128	Appraisal of collateral	Appraisal adjustments	0.00	%	to	(35.00)	%			4,588		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 ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

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				Fair Value	As of September 30, 2019				As of December 31, 2018
	Hierarchy	Carrying		Estimated		Carrying		Estimated		Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value		Level	Value		Fair Value		Value		Fair Value
		(dollars in thousands)									(dollars in thousands)

Cash and due from banks	Level 1	$	87,919	$	87,919	$	85,523	$	85,523	Level 1	$	91,671	$	91,671	$	85,523	$	85,523
Federal funds sold	Level 2		10,215		10,215		26,398		26,398	Level 2		9,300		9,300		26,398		26,398
Interest-bearing deposits at financial institutions	Level 2		195,282		195,282		133,198		133,198	Level 2		187,963		187,963		133,198		133,198
Investment securities:
HTM	Level 2		388,713		406,212		401,913		400,770	Level 2		343,477		363,474		401,913		400,770
AFS	See Previous Table		255,090		255,090		261,056		261,056	*		211,932		211,932		261,056		261,056
Loans/leases receivable, net	Level 3		6,981		7,539		8,942		9,657	Level 3		3,555		3,839		8,942		9,657
Loans/leases receivable, net	Level 2		3,862,434		3,842,781		3,683,965		3,639,329	Level 2		3,570,599		3,495,905		3,683,965		3,639,329
Interest rate caps	Level 2		98		98		459		459	Level 2		—		—		459		459
Interest rate swaps - assets	Level 2		65,824		65,824		22,196		22,196	Level 2		102,956		102,956		22,196		22,196
Assets held for sale:
Cash and cash equivalents										Level 2		13,446		13,446		—		—
Securities										Level 2		66,009		68,389		—		—
Loans, net										Level 2		362,011		354,438		—		—

Deposits:
Nonmaturity deposits	Level 2		3,275,004		3,275,004		3,002,327		3,002,327	Level 2		3,050,033		3,050,033		3,002,327		3,002,327
Time deposits	Level 2		1,047,506		1,033,017		974,704		968,906	Level 2		752,208		748,305		974,704		968,906
Short-term borrowings	Level 2		19,191		19,191		28,774		28,774	Level 2		18,526		18,526		28,774		28,774
FHLB advances	Level 2		105,733		105,768		266,492		265,926	Level 2		195,800		195,697		266,492		265,926
Other borrowings	Level 2		—		—		67,250		67,770	Level 2		—		—		67,250		67,770
Subordinated notes	Level 2		68,274		68,478		4,782		4,933	Level 2		68,334		68,521		4,782		4,933
Junior subordinated debentures	Level 2		37,755		30,465		37,670		29,992	Level 2		37,797		30,494		37,670		29,992
Interest rate swaps - liabilities	Level 2		69,556		69,556		23,347		23,347	Level 2		107,847		107,847		23,347		23,347
Liabilities hed for sale:
Deposits										Level 2		451,546		447,869		—		—
Borrowings										Level 2		16,157		16,149		—		—

*See previous table in Note 8.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 89 – 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~~four held for investment subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, and SFC ~~Bank and RB&T.~~Bank. 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~~four 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~~thresholds as well as the corporate operations of the parent company. This segment also includes the results of segments classified as held for sale.

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


	Commercial Banking								Wealth				Intercompany		Consolidated
	QCBT		CRBT		CSB		SFC Bank		Management		All other		Eliminations		Total
	(dollars in thousands)
Three Months Ended September 30, 2019
Total revenue	$	21,230	$	25,707	$	11,596	$	8,351	$	4,122	$	27,753	$	(22,036)	$	76,723
Net interest income		13,357		11,478		8,894		5,056		—		1,934		—		40,719
Provision		948		150		150		276		—		488		—		2,012
Net income (loss)		4,870		7,900		3,482		2,116		926		15,081		(19,280)		15,095
Goodwill		3,223		14,980		9,888		45,975		—		3,682		—		77,748
Intangibles		—		2,810		4,154		7,034		—		1,531		—		15,529
Total assets		1,642,950		1,592,896		801,596		693,898		—		1,180,872		(619,830)		5,292,382

Three Months Ended September 30, 2018
Total revenue	$	17,322	$	16,800	$	8,889	$	7,360	$	3,255	$	17,721	$	(12,707)	$	58,640
Net interest income		12,218		10,833		7,101		5,701		—		2,456		5		38,314
Provision		409		453		20		475		—		4,849		—		6,206
Net income (loss) from continuing operations		4,827		4,869		2,533		2,198		768		6,081		(12,467)		8,809
Goodwill		3,223		14,979		9,888		45,528		—		—		—		73,618
Intangibles		—		3,313		4,852		7,972		—		—		—		16,137
Total assets		1,579,327		1,354,293		734,536		623,520		—		1,038,405		(537,349)		4,792,732

Nine Months Ended September 30, 2019
Total revenue	$	60,148	$	68,526	$	30,596	$	23,396	$	12,599	$	71,361	$	(54,563)	$	212,063
Net interest income		38,129		32,671		23,154		15,707		—		5,979		—		115,640
Provision for loan/lease losses		2,941		875		451		1,261		—		559		—		6,087
Net income (loss)		13,560		19,928		7,845		5,848		2,667		42,566		(50,897)		41,517
Goodwill		3,223		14,980		9,888		45,975		—		3,682		—		77,748
Intangibles		—		2,810		4,154		7,034		—		1,531		—		15,529
Total assets		1,642,950		1,592,896		801,596		693,898		—		1,180,872		(619,830)		5,292,382

Nine Months Ended September 30, 2018
Total revenue	$	49,812	$	49,301	$	25,459	$	7,360	$	9,560	$	53,395	$	(38,450)	$	156,437
Net interest income		36,629		32,149		20,579		5,701		—		7,738		5		102,801
Provision for loan/lease losses		2,784		1,682		817		475		—		5,288		—		11,046
Net income (loss) from continuing operations		13,796		14,191		6,560		2,197		2,336		28,556		(37,832)		29,804
Goodwill		3,223		14,979		9,888		45,528		—		—		—		73,618
Intangibles		—		3,313		4,852		7,972		—		—		—		16,137
Total assets		1,579,327		1,354,293		734,536		623,520		—		1,038,405		(537,349)		4,792,732

3234

Table of Contents

Part I

Item 1

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 six months ended June 30, 2019 and 2018.~~

Commercial Banking

Wealth

Intercompany

Consolidated

QCBT

CRBT

CSB

SFC Bank

RB&T

Management

All other

Eliminations

Total

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





Total revenue
$
20,374

$
23,575

$
9,730

$
7,757

$
5,659

$
4,249

$
17,772

$
(17,870)

$
71,246
Net interest income

12,632

10,785

7,294

5,425

3,373

—

(1,496)

—

38,013
Provision

973

300

151

485

32

—

—

—

1,941
Net income  (loss)

4,505

6,928

2,207

2,079

786

583

13,583

(17,167)

13,504
Goodwill

3,223

14,980

9,888

45,975

—

—

3,682

—

77,748
Intangibles

—

2,935

4,328

7,268

—

—

1,558

—

16,089
Total assets

1,637,115

1,527,521

806,704

671,644

523,262

—

641,639

(613,033)

5,194,852

















Three Months Ended June 30, 2018

















Total revenue
$
16,683

$
16,504

$
8,406

$
—

$
5,120

$
3,116

$
13,024

$
(13,142)

$
49,711
Net interest income

12,290

10,481

6,735

—

3,402

—

(823)

—

32,085
Provision

1,254

628

221

—

198

—

—

—

2,301
Net income (loss)

4,511

4,705

2,158

—

814

797

10,405

(12,945)

10,445
Goodwill

3,223

14,980

9,888

—

—

—

—

—

28,091
Intangibles

—

3,440

5,030

—

—

—

—

—

8,470
Total assets

1,563,643

1,345,431

712,139

—

484,123

—

463,207

(461,660)

4,106,883

Six Months Ended June 30, 2019

















Total revenue
$
38,918

$
42,819

$
19,000

$
15,045

$
11,255

$
8,478

$
32,354

$
(32,528)

$
135,341
Net interest income

24,771

21,193

14,260

10,651

6,801

—

(2,755)

—

74,921
Provision for loan/lease losses

1,993

725

301

985

71

—

—

—

4,075
Net income (loss)

8,690

12,028

4,363

3,732

1,304

1,741

26,181

(31,617)

26,422
Goodwill

3,223

14,980

9,888

45,975

—

—

3,682

—

77,748
Intangibles

—

2,935

4,328

7,268

—

—

1,558

—

16,089
Total assets

1,637,115

1,527,521

806,704

671,644

523,262

—

641,639

(613,033)

5,194,852

















Six Months Ended June 30, 2018

















Total revenue
$
32,491

$
32,501

$
16,570

$
—

$
10,118

$
6,305

$
25,556

$
(25,742)

$
97,799
Net interest income

24,410

21,317

13,479

—

6,867

—

(1,585)

—

64,488
Provision for loan/lease losses

2,375

1,230

797

—

439

—

—

—

4,841
Net income (loss)

8,969

9,321

4,027

—

1,555

1,568

20,920

(25,365)

20,995
Goodwill

3,223

14,980

9,888

—

—

—

—

—

28,091
Intangibles

—

3,440

5,030

—

—

—

—

—

8,470
Total assets

1,563,643

1,345,431

712,139

—

484,123

—

463,207

(461,660)

4,106,883

NOTE 910 – 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 ~~June~~September 30, 2019 and December 31, 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 ~~June~~September 30, 2019 and December 31, 2018 are presented in the following table (dollars in thousands). As of September 30, 2019 and December 31, 2018, each of the subsidiary banks met the requirements to be “well capitalized”.


										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer*					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of September 30, 2019:
Company:
Total risk-based capital	$	567,977	12.22	%	$	371,904	>	8.00	%	$	488,124	>	10.50	%	$	464,880	>	10.00	%
Tier 1 risk-based capital		461,899	9.94			278,928	>	6.00			395,148	>	8.50			371,904	>	8.00
Tier 1 leverage		461,899	9.02			204,868	>	4.00			204,868	>	4.00			256,085	>	5.00
Common equity Tier 1		424,102	9.12			209,196	>	4.50			325,416	>	7.00			302,172	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	177,834	11.72	%	$	121,345	>	8.00	%	$	159,265	>	10.50	%	$	151,681	>	10.00	%
Tier 1 risk-based capital		163,998	10.81			91,009	>	6.00			128,929	>	8.50			121,345	>	8.00
Tier 1 leverage		163,998	9.85			66,604	>	4.00			66,604	>	4.00			83,255	>	5.00
Common equity Tier 1		163,998	10.81			68,257	>	4.50			106,177	>	7.00			98,593	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	168,158	11.64	%	$	115,524	>	8.00	%	$	151,625	>	10.50	%	$	144,405	>	10.00	%
Tier 1 risk-based capital		154,769	10.72			86,643	>	6.00			122,744	>	8.50			115,524	>	8.00
Tier 1 leverage		154,769	9.99			61,993	>	4.00			61,993	>	4.00			77,491	>	5.00
Common equity Tier 1		154,769	10.72			64,982	>	4.50			101,083	>	7.00			93,863	>	6.50
Community State Bank:
Total risk-based capital	$	89,088	12.92	%	$	55,147	>	8.00	%	$	72,380	>	10.50	%	$	68,933	>	10.00	%
Tier 1 risk-based capital		82,399	11.95			41,360	>	6.00			58,593	>	8.50			55,147	>	8.00
Tier 1 leverage		82,399	10.35			31,846	>	4.00			31,846	>	4.00			39,808	>	5.00
Common equity Tier 1		82,399	11.95			31,020	>	4.50			48,253	>	7.00			44,807	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	68,371	13.16	%	$	41,561	>	8.00	%	$	54,549	>	10.50	%	$	51,951	>	10.00	%
Tier 1 risk-based capital		61,328	11.80			31,171	>	6.00			44,159	>	8.50			41,561	>	8.00
Tier 1 leverage		61,328	9.67			25,375	>	4.00			25,375	>	4.00			31,719	>	5.00
Common equity Tier 1		61,328	11.80			23,378	>	4.50			36,366	>	7.00			33,768	>	6.50

* September 30, 2019 minimums reflect the fully phased-in ratios (including the capital conservation buffer).

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

December 31, 2018 are presented in the following table (dollars in thousands). As of June 30, 2019 and December 31, 2018, each of the subsidiary banks met the requirements to be “well capitalized”.

For Capital

To Be Well

Adequacy Purposes

Capitalized Under

For Capital

With Capital

Prompt Corrective

Actual

Adequacy Purposes

Conservation Buffer*

Action Provisions


Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

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														For Capital					To Be Well
										Adequacy Purposes					Capitalized Under														Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective									For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions					Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio		Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of December 31, 2018:
Company:
Total risk-based capital	$	460,416	10.69	%	$	344,551	>	8.00	%	$	425,305	>	9.875	%	$	430,689	>	10.00	%	$	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			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			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			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	%	$	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			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			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			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	%	$	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			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			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			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	%	$	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			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			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			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	%	$	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			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			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			51,279	11.00			20,969	>	4.50			29,706	>	6.375			30,289	>	6.50
Rockford Bank & Trust:
Rockford Bank & Trust
Total risk-based capital	$	50,648	10.89	%	$	37,208	>	8.00	%	$	45,929	>	9.875	%	$	46,511	>	10.00	%	$	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			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			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			44,821	9.64			20,930	>	4.50			29,650	>	6.375			30,232	>	6.50

* ~~June 30, 2019 minimums reflect the fully phased-in ratios (including the capital conservation buffer).~~

3436

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three and ~~six~~nine months ending ~~June~~September 30, 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, SFC Bank and RB&T. QCBT, CRBT and CSB are Iowa-chartered commercial banks, SFC Bank is a Missouri-chartered commercial bank, and RB&T is an Illinois-chartered commercial bank. All are members of the Federal Reserve system with depository accounts insured to the maximum amount permitted ~~by law~~ by the FDIC.

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 (one in Cedar 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 in Rockford and its branch facility in downtown Rockford.On August 13, 2019, the Company entered into a definitive agreement to sell certain assets and liabilities of RB&T, a wholly-owned subsidiary headquartered in Rockford, Illinois, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc. Under the terms of the agreement, IB&T will acquire certain assets and assume certain liabilities for a cash payment. The transaction is subject to approval by federal and state bank regulators and to customary closing conditions. The transaction is expected to close in the fourth quarter of 2019. The assets and liabilities that will be sold are classified as held for sale on the Consolidated Balance Sheet and corresponding footnotes. See Note 2 to the Company’s Consolidated Financial Statements for additional information about the sale.

~~EXECUTIVE OVERVIEW~~

The Company reported net income of $13.5 million and diluted EPS of $0.85 for the quarter ended June 30, 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 six months ended June 30, 2019, the Company reported net income of $26.4 million, and diluted EPS of $1.66.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

EXECUTIVE OVERVIEW

The Company reported net income of $15.1 million and diluted EPS of $0.94 for the quarter ended September 30, 2019. By comparison, for the ~~six months~~quarter ended June 30, 2019, the Company reported net income of $13.5 million and diluted EPS of $0.85. For the quarter ended September 30, 2018, the Company reported net income of ~~$21.0~~$8.8 million, and diluted EPS of ~~$1.48.~~$0.55.

For the nine months ended September 30, 2019, the Company reported net income of $41.5 million, and diluted EPS of $2.60. By comparison, for the nine months ended September 30, 2018, the Company reported net income of $29.8 million, and diluted EPS of $2.02.

The ~~second~~third quarter of 2019 was also highlighted by ~~several significant items:~~ther following results and events:

~~Record~~Adjusted net income (non-GAAP) of ~~$13.5~~$15.9 million, or ~~$0.85~~$1.00 per diluted share;

Expanded NIM and NIM(TEY)(non-GAAP) each by 12 basis points, to 3.37% and 3.52%, respectively;

Record ~~adjusted net~~noninterest income ~~(non-GAAP)~~ of ~~$14.1~~$19.9 million ~~or $0.88 per diluted share;~~for the quarter and $49.0 million year-to-date;

Entered a definitive agreement to sell certain assets and liabilities of RB&T;

Excluding RB&T’s held for sale assets and liabilities:

Annualized loan and lease growth of ~~11.7%~~9.1% for the quarter and ~~9.5%~~9.4% year-to-date;

~~Annualized deposit growth of 12.2% for the~~Deposits were down 1.7% on a linked quarter basis and ~~17.4%~~up 9.6% annualized year-to-date;

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

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

Nonperforming assets were down ~~$3.2~~$2.5 million, or ~~12.2%~~15.6%, 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				For the three months ended						For the nine months ended
	June 30, 2019		March 31, 2019		June 30, 2018		June 30, 2019		June 30, 2018		September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(dollars in thousands)										(dollars in thousands)

Net income	$	13,504	$	12,918	$	10,445	$	26,422	$	20,995	$	15,095	$	13,504	$	8,809	$	41,517	$	29,804

Diluted earnings per common share	$	0.85	$	0.81	$	0.73	$	1.66	$	1.48	$	0.94	$	0.85	$	0.55	$	2.60	$	2.02

Weighted average common and common equivalent shares outstanding		15,938,377		15,922,940		14,232,423		15,930,659		14,219,003		15,976,742		15,938,377		15,922,324		15,946,020		14,786,777

~~The increase in weighted average common shares outstanding since June 30, 2018 was primarily due to the common stock issued as a result of the merger with Springfield Bancshares~~ ~~as further described in Note 2 to the 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

(dollars in thousands)

Net interest income

$
38,013

$
36,908

$
32,085

$
74,921

$
64,488

Provision expense

1,941

2,134

2,301

4,075

4,841

Noninterest income

17,065

11,993

8,912

29,058

17,454

Noninterest expense

36,560

32,435

26,370

68,995

52,234

Federal and state income tax expense

3,073

1,414

1,881

4,487

3,872

Net income

$
13,504

$
12,918

$
10,445

$
26,422

$
20,995

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	For the three months ended						For the nine months ended
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(dollars in thousands)

Net interest income	$	40,719	$	38,013	$	38,314	$	115,640	$	102,801
Provision expense		2,012		1,941		6,206		6,087		11,046
Noninterest income		19,906		17,065		8,809		48,964		26,262
Noninterest expense		39,945		36,560		30,500		108,941		82,733
Federal and state income tax expense		3,573		3,073		1,608		8,059		5,480
Net income	$	15,095	$	13,504	$	8,809	$	41,517	$	29,804

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

Net interest income in the ~~second~~third quarter of 2019 was up 3%7% compared to the ~~first~~second quarter of 2019. The increase was primarily due to ~~an $85.5~~a $93.2 million increase in average interest earning assets ascombined with a 12 basis point increase in reported net interest ~~margin remained stable between quarters.~~margin. Net interest income increased ~~18%~~6% compared to the ~~second~~third quarter of 2018 and ~~16%~~12% when comparing the first ~~six~~nine months of 2019 to the same period in the prior year. These increases were primarily due to strong loan growth and the addition of SFC Bank.

Provision expense in the ~~second~~third quarter of 2019 ~~decreased 9%~~increased 4% compared to the ~~first~~second quarter of 2019. Provision expense decreased ~~16%~~68% compared to the ~~second~~third quarter of 2018 and ~~16%~~45% when comparing the first ~~six~~nine months of 2019 to the same period in the prior year. The increase in the third quarter was primarily due to $493 thousand of provision related to a nonperforming loan included in assets held for sale. The decreases in provision when comparing to the prior periods of 2018 were primarily due to continued asset quality improvements. See the Provision for Loan Lease Losses section of this report for additional details.

Noninterest income in the ~~second~~third quarter of 2019 increased ~~42%~~17% compared to the ~~first~~second quarter of 2019 primarily due to higher swap fee income. Noninterest income increased ~~91%~~126% compared to the ~~second~~third quarter of 2018 and ~~66%~~86% when comparing the first ~~six~~nine months of 2019 to the same period in the prior year. These increases were primarily attributable to higher swap fee income as well as solid growth in wealth management fee income and the addition of SFC Bank and the Bates Companies.

Noninterest expense increased ~~13%~~9% in the ~~second~~third quarter of 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~~$2.1 million in the third quarter of 2019 as compared to $1.1 million in the second quarter of 2019 primarily due to a write down of anone OREO property of $1$2 million ~~as compared to $298 thousand~~ in the ~~first quarter of 2019.~~third quarter. Additionally, the Company incurred approximately ~~$2.5~~$1.5 million in additional bonus and commission expense during the ~~second~~third quarter due to strong year-to-date results and higher than expected fee income. Professional and data processing fees increased $999 thousand comparing the third quarter of 2019 to the second quarter of 2019. This increased expense was primarily due to recent mergers/acquisitions. Noninterest expense increased ~~39%~~31% compared to the ~~second~~third quarter of 2018 and 32% when comparing the first ~~six~~nine months of 2019 to the same period in the prior year primarily due to the addition of SFC Bank.

Federal and state income tax expense in the ~~second~~third quarter of 2019 increased ~~117%~~16% compared to the ~~first~~second quarter of 2019. Federal and state income tax expense increased ~~63%~~122% compared to the ~~second~~third quarter of 2018 and ~~16%~~47% when comparing the first ~~six~~nine months of 2019 to the same period in the prior year. See the “Income Taxes” section of this report for additional details on these ~~decreases.~~increases.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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, 2018. The Company's long-term financial goals are as follows:

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);

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

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

Continue to focus on generating gains on sales of government guaranteed portions of loans and swap fee income 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 **	June 30, 2019			March 31, 2019			June 30, 2018			Key Metric	Target **	September 30, 2019				June 30, 2019			September 30, 2018
Balance sheet efficiency	Gross loans and leases to total assets	73% - 78%		75	%		75	%		76	%	Gross loans and leases to total assets	73% - 78%			75	%		75	%		76	%
	NIM TEY (non-GAAP)*	> 3.35%		3.40	%		3.40	%		3.52	%	NIM TEY (non-GAAP)*	> 3.35%			3.52	%		3.40	%		3.60	%
Profitability	ROAA	> 1.10%		1.06	%		1.04	%		1.03	%	ROAA	> 1.10%			1.16	%		1.06	%		0.75	%
	Adjusted ROAA (non-GAAP)*	> 1.10%		1.11	%		1.05	%		1.08	%	Adjusted ROAA (non-GAAP)*	> 1.10%			1.22	%		1.11	%		0.89	%
Asset quality	NPAs to total assets	< 0.75%		0.45	%		0.52	%		0.65	%	NPAs to total assets	< 0.75%			0.27	%		0.45	%		0.87	%
	Net charge-offs to average loans and leases***	< 0.25% annually		0.15	%		0.09	%		0.11	%	Net charge-offs to average loans and leases***	< 0.25% annually			0.11	%		0.15	%		0.09	%
Reliance on wholesale funding	Wholesale funding to total assets****	< 15%		10	%		12	%		13	%	Wholesale funding to total assets****	< 15%			11	%		10	%		16	%
Consistent, high quality noninterest income revenue streams	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	Gains on sales of government guaranteed portions of loans and swap fee income***	$8-12 million annually		$	28.6	million	$	22.3	million	$	5.5	million
	Grow wealth management net income***	> 10% annually		11	%		50	%		54	%	Grow wealth management net income***	> 10% annually			20	%		18	%		39	%

* 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

STRATEGIC DEVELOPMENTS

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

~~The~~Excluding the impact of loans classified as held for sale, the Company grew loans and leases in the ~~second~~third quarter of 2019 by ~~11.7%~~9.1% on an annualized basis and ~~9.5%~~10.3% year-to-date. Strong loan and lease growth for the remainder of the year ~~will help~~is anticipated to keep the Company's loans and leases to assets ratio within the targeted range of 73‑78%.

~~The Company has participated, and intends to continue to participate, in a prudent manner,~~Excluding RB&T’s loans/leases, which are classified as ~~an acquirer in~~held for sale, the ~~consolidation taking place in our markets to continue to grow EPS, further boost ROAA and improve the Company's efficiency ratio.~~

~~The~~ Company has continued to focus on lowering the NPAs to total assets ratio. This ratio decreased by ~~seven~~ 18basis points to ~~0.45%~~0.27% compared to the ~~first~~second quarter 2019. The Company remains committed to ~~improving~~maintaining strong asset quality ratios in 2019 and beyond.

Management has continued to focus on reducing the Company's reliance on wholesale funding. Wholesale funding as a percentage of total assets ~~decreased to 10%~~remained stable in the ~~second~~third quarter of 2019 ~~due to the strong core deposit growth which outpaced the Company’s loan growth.~~at 11%. Management continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~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 four states currently served – Iowa, Illinois,Wisconsin and Missouri. The Company acts as the correspondent bank for ~~192~~195 downstream banks with average total noninterest bearing deposits of ~~$168.9~~$170.5 million and average total interest bearing deposits of ~~$310.1~~$330.5 million during the first ~~six~~nine months of 2019. By comparison, the Company acted as the correspondent bank for ~~192~~191 downstream banks with average total noninterest bearing deposits of ~~$215.3~~$197.5 million and average total interest bearing deposits of ~~$208.3~~$221.1 million during the first ~~six~~nine 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.

As a result of the relatively low interest rate environment including a flat to inverted yield curve, the Company has focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as appropriate for the borrowers and the Company. Swap fee income totaled ~~$11.1~~$20.9 million for the ~~six~~nine months ended ~~June~~September 30, 2019 as compared to ~~$2.6~~$3.7 million for the ~~six~~nine months ended ~~June~~September 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 ~~June~~September 30, 2019, the Company had ~~$2.95~~$2.97 billion of total financial assets in trust (and related) accounts and ~~$1.75~~$1.51 billion of total financial assets in brokerage (and related) accounts. Continued growth in assets under management 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

GAAP TO NON-GAAP RECONCILIATIONS

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

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

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

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

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

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

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

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

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


	As of
GAAP TO NON-GAAP	September 30,			June 30,			September 30,
RECONCILIATIONS	2019			2019			2018
		(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	519,743		$	504,300		$	457,387
Less: Intangible assets		93,277			93,837			89,755
TCE (non-GAAP)	$	426,466		$	410,463		$	367,632

Total assets (GAAP)	$	5,292,382		$	5,194,852		$	4,792,732
Less: Intangible assets		93,277			93,837			89,755
TA (non-GAAP)	$	5,199,105		$	5,101,015		$	4,702,977

TCE/TA ratio (non-GAAP)		8.20	%		8.05	%		7.82	%

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~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.~~

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						For the Quarter Ended									For the Nine Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,			September 30,			June 30,			September 30,			September 30,			September 30,
	2019			2019			2018			2019			2018			2019			2019			2018			2019			2018
	(dollars in thousands, except per share data)															(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	13,504		$	12,918		$	10,445		$	26,422		$	20,995		$	15,095		$	13,504		$	8,809		$	41,517		$	29,804
Less nonrecurring items (post-tax) (*):
Income:
Securities losses, net	$	(41)		$	—		$	—		$	(41)		$	—		$	(2)		$	(41)		$	—		$	(43)		$	—
Total nonrecurring income (non-GAAP)	$	(41)		$	—		$	—		$	(41)		$	—		$	(2)		$	(41)		$	—		$	(43)		$	—
Expense:
Losses on debt extinguishment																$	117		$	—		$	—		$	117		$	—
Acquisition costs	$	—		$	—		$	327		$	—		$	400		$	—		$	—		$	1,216		$	—		$	1,616
Post-acquisition compensation, transition and integration costs		559			106			130			665			130			698			559			390			1,363			520
Total nonrecurring expense (non-GAAP)	$	559		$	106		$	457		$	665		$	530		$	815		$	559		$	1,606		$	1,480		$	2,136


Adjusted net income (non-GAAP)	$	14,104		$	13,024		$	10,902		$	27,128		$	21,525		$	15,913		$	14,104		$	10,415		$	43,041		$	31,940

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	14,104		$	13,024		$	10,902		$	27,128		$	21,525		$	15,913		$	14,104		$	10,415		$	43,041		$	31,940

Weighted average common shares outstanding		15,714,588			15,693,345			13,919,565			15,703,967			13,904,113			15,739,430			15,714,588			15,625,123			15,715,788			14,477,783
Weighted average common and common equivalent shares outstanding		15,938,377			15,922,940			14,232,423			15,930,659			14,219,003			15,976,742			15,938,377			15,922,324			15,946,020			14,786,777

Adjusted EPS (non-GAAP):
Basic	$	0.90		$	0.83		$	0.78		$	1.73		$	1.55		$	1.01		$	0.90		$	0.67		$	2.74		$	2.21
Diluted	$	0.88		$	0.82		$	0.77		$	1.70		$	1.51		$	1.00		$	0.88		$	0.65		$	2.70		$	2.16

ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	14,104		$	13,024		$	10,902		$	27,128		$	21,525		$	15,913		$	14,104		$	10,415		$	43,041		$	31,940

Average Assets	$	5,077,900		$	4,968,502		$	4,053,684		$	5,023,201		$	4,024,188		$	5,217,763		$	5,077,900		$	4,677,875		$	5,088,055		$	4,242,083

Adjusted ROAA (annualized) (non-GAAP)		1.11	%		1.05	%		1.08	%		1.08	%		1.07	%		1.22	%		1.11	%		0.89	%		1.13	%		1.00	%

ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	38,013		$	36,908		$	32,085		$	74,921		$	64,488		$	40,719		$	38,013		$	38,314		$	115,640		$	102,801
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
Plus: Tax equivalent adjustment																	1,763			1,808			1,548			4,944			4,329
Net interest income - tax equivalent (non-GAAP)																$	42,482		$	39,821		$	39,862		$	120,584		$	107,130
Less: Accquisition accounting net accretion		1,076			1,069			545			2,145			1,244			1,268			1,076			1,677			3,413			2,921
Adjusted net interest income		38,745			37,633			33,002			76,285			66,059			41,214			38,745			38,185			117,171			104,209

Average earning assets	$	4,698,021		$	4,612,553		$	3,820,333		$	4,655,287		$	3,789,905		$	4,791,274		$	4,698,021		$	4,387,487		$	4,700,617		$	3,989,099

NIM (GAAP)		3.25	%		3.25	%		3.37	%		3.25	%		3.43	%		3.37	%		3.25	%		3.46	%		3.29	%		3.45	%
NIM (TEY) (non-GAAP)		3.40	%		3.40	%		3.52	%		3.40	%		3.58	%		3.52	%		3.40	%		3.60	%		3.43	%		3.59	%
Adjusted NIM (TEY) (non-GAAP)		3.31	%		3.31	%		3.46	%		3.30	%		3.51	%		3.41	%		3.31	%		3.45	%		3.33	%		3.49	%

EFFICIENCY RATIO
Noninterest expense (GAAP)	$	36,560		$	32,435		$	26,370		$	68,995		$	52,234		$	39,945		$	36,560		$	30,500		$	108,941		$	82,733

Net interest income (GAAP)	$	38,013		$	36,908		$	32,085		$	74,921		$	64,488		$	40,719		$	38,013		$	38,314		$	115,640		$	102,801
Noninterest income (GAAP)		17,065			11,993			8,912			29,058			17,454			19,906			17,065			8,809			48,964			26,262
Total income	$	55,078		$	48,901		$	40,997		$	103,979		$	81,942		$	60,625		$	55,078		$	47,123		$	164,604		$	129,063

Efficiency ratio (noninterest expense/total income) (non-GAAP)		66.38	%		66.33	%		64.32	%		66.35	%		63.75	%		65.89	%		66.38	%		64.72	%		66.18	%		64.10	%

* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21%.

~~Table of Contents~~

~~Part I~~

~~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 ~~19%~~7% to ~~$39.8~~$42.5 million for the quarter ended ~~June~~September 30, 2019 compared to the same quarter of the prior year, and increased ~~17%~~13% to ~~$78.4~~$120.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to the same period of the prior year. Excluding the tax equivalent adjustments, net interest income increased ~~18%~~6% for the quarter ended ~~June~~September 30, 2019 compared to the same quarter of the prior year, and increased ~~16%~~12% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to the same period of the prior year. Net interest income improved due to two main factors:

The ~~merger~~addition of ~~Springfield Bancshares~~SFC Bank in the third quarter of 2018; and

Strong organic loan and deposit growth over the past 12 months.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	Tax Equivalent Basis						GAAP						Tax Equivalent Basis						GAAP
	For the Quarter Ended						For the Quarter Ended						For the Quarter Ended						For the Quarter Ended
	June 30,		March 31,		June 30,		June 30,		March 31,		June 30,		September 30,		June 30,		September 30,		September 30,		June 30,		September 30,
	2019		2019		2018		2019		2019		2018		2019		2019		2018		2019		2019		2018
Average Yield on Interest-Earning Assets	4.78	%	4.74	%	4.44	%	4.63	%	4.58	%	4.28	%	4.85	%	4.78	%	4.65	%	4.70	%	4.63	%	4.51	%
Average Cost of Interest-Bearing Liabilities	1.76	%	1.72	%	1.21	%	1.76	%	1.72	%	1.21	%	1.71	%	1.76	%	1.35	%	1.71	%	1.76	%	1.35	%
Net Interest Spread	3.02	%	3.02	%	3.23	%	2.87	%	2.86	%	3.07	%	3.14	%	3.02	%	3.30	%	2.99	%	2.87	%	3.16	%
NIM	3.40	%	3.40	%	3.52	%	3.25	%	3.25	%	3.37	%	3.52	%	3.40	%	3.60	%	3.37	%	3.25	%	3.46	%
NIM Excluding Acquisition Accounting Net Accretion	3.31	%	3.31	%	3.46	%	3.15	%	3.15	%	3.31	%	3.41	%	3.31	%	3.44	%	3.27	%	3.15	%	3.31	%


	Tax Equivalent Basis				GAAP				Tax Equivalent Basis				GAAP
	For the Six Months Ended				For the Six Months Ended				For the Nine Months Ended				For the Nine Months Ended
	June 30,		June 30,		June 30,		June 30,		September 30,		September 30,		September 30,		September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Average Yield on Interest-Earning Assets	4.76	%	4.42	%	4.60	%	4.28	%	4.78	%	4.51	%	4.64	%	4.36	%
Average Cost of Interest-Bearing Liabilities	1.74	%	1.13	%	1.74	%	1.13	%	1.73	%	1.21	%	1.73	%	1.21	%
Net Interest Spread	3.02	%	3.29	%	2.86	%	3.15	%	3.05	%	3.30	%	2.91	%	3.15	%
NIM	3.40	%	3.58	%	3.25	%	3.43	%	3.43	%	3.59	%	3.29	%	3.45	%
NIM Excluding Acquisition Accounting Net Accretion	3.30	%	3.51	%	3.15	%	3.37	%	3.33	%	3.49	%	3.19	%	3.29	%

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 table above ~~table~~ reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:

For the Quarter Ended

For the Six Months Ended

June 30,

March 31,

June 30,

June 30,

June 30,


2019


2019


2018

2019

2018


(dollars in thousands)

Acquisition Accounting Net Accretion in NIM
$
1,076

$
1,069

$
545

$
2,145

$
1,244


		For the Quarter Ended						For the Nine Months Ended
		September 30,		June 30,		September 30,		September 30,		September 30,
		2019		2019		2018		2019		2018
		(dollars in thousands)

Acquisition Accounting Net Accretion in NIM	$	1,268	$	1,076	$	1,677	$	3,413	$	2,921

NIM on a tax equivalent basis ~~remained stable~~ was up 12 basis pointson a linked quarter ~~basis at 3.40%.~~basis. Excluding acquisition accounting net accretion, NIM ~~also remained stable~~was up 10 basis points on a linked quarter ~~basis at 3.31%.~~basis. The ~~stability~~increase in net interest margin during the quarter was due to a 4seven basis point increase in the yield on interest earning assets ~~offset by~~and a 4five basis point ~~increase~~decrease in the total cost of funds (due to both mix and rate).

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

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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 June 30,																For the Three Months Ended September 30,
	2019								2018								2019 (4)								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	$	9,690		$	56		2.32	%	$	18,561		$	61		1.32	%	$	7,234		$	42		2.30	%	$	23,199		$	105		1.80	%
Interest-bearing deposits at financial institutions		182,651			1,168		2.56	%		54,879			228		1.67	%		172,386			951		2.19	%		61,815			323		2.07	%
Investment securities (1)		644,999			6,062		3.77	%		648,276			5,752		3.56	%		626,471			6,080		3.85	%		667,142			5,973		3.55	%
Restricted investment securities		21,007			290		5.54	%		21,100			212		4.03	%		22,719			293		5.12	%		22,683			330		5.77	%
Gross loans/leases receivable (1) (2) (3)		3,839,674			48,413		5.06	%		3,077,517			36,008		4.69	%		3,962,464			51,214		5.13	%		3,612,648			44,648		4.90	%
Total interest earning assets		4,698,021			55,989		4.78	%		3,820,333			42,261		4.44	%		4,791,274			58,580		4.85	%		4,387,487			51,379		4.65	%

Noninterest-earning assets:
Cash and due from banks		82,394								68,266								85,262								78,103
Premises and equipment		78,008								63,665								79,646								72,489
Less allowance		(41,224)								(36,960)								(41,673)								(38,083)
Other		260,701								138,380								303,254								177,879
Total assets	$	5,077,900							$	4,053,684							$	5,217,763							$	4,677,875

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	2,461,768			8,271		1.35	%	$	1,919,406			4,089		0.85	%	$	2,505,383			7,907		1.25	%	$	2,214,480			5,432		0.97	%
Time deposits		1,013,391			5,554		2.20	%		665,643			2,439		1.47	%		975,736			5,486		2.23	%		825,020			3,290		1.58	%
Short-term borrowings		16,145			81		2.01	%		19,024			63		1.33	%		17,333			98		2.24	%		21,407			78		1.45	%
FHLB advances		76,154			601		3.17	%		174,826			1,019		2.34	%		123,107			1,023		3.30	%		209,111			1,422		2.70	%
Other borrowings		10,550			92		3.50	%		67,044			596		3.57	%		—			—		—	%		74,503			776		4.13	%
Subordinated notes		68,239			993		5.84	%		—			—		—	%		68,299			1,003		5.83	%		—			—		—	%
Junior subordinated debentures		37,731			576		6.12	%		37,558			508		5.43	%		37,774			581		6.10	%		37,600			519		5.48	%
Total interest-bearing liabilities		3,683,978			16,168		1.76	%		2,883,501			8,714		1.21	%		3,727,632			16,098		1.71	%		3,382,121			11,517		1.35	%

Noninterest-bearing demand deposits		796,232								757,954								821,876								800,577
Other noninterest-bearing liabilities		99,427								47,198								152,060								59,112
Total liabilities		4,579,637								3,688,653								4,701,568								4,241,810

Stockholders' equity		498,263								365,031								516,195								436,065
Total liabilities and stockholders' equity	$	5,077,900							$	4,053,684							$	5,217,763							$	4,677,875
Net interest income				$	39,821							$	33,547							$	42,482							$	39,862
Net interest spread							3.02	%							3.23	%							3.14	%							3.30	%
Net interest margin							3.25	%							3.37	%							3.37	%							3.46	%
Net interest margin (TEY)(Non-GAAP)							3.40	%							3.52	%							3.52	%							3.60	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.31	%							3.46	%							3.41	%							3.45	%
Ratio of average interest-earning assets to average interest-bearing liabilities		127.53	%							132.49	%							128.53	%							129.73	%

(1)

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

(2)

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

(3)

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

(4)

Interest earning assets and interest bearing liabilities classified as held for sale as of September 30, 2019 are included in the calculations above.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended ~~June~~September 30, 2019



	Inc./(Dec.)		Components				Inc./(Dec.)		Components
	from		of Change (1)				from		of Change (1)
	Prior Period (1)		Rate		Volume		Prior Period (1)		Rate		Volume
	2019 vs. 2018						2019 vs. 2018
	(dollars in thousands)						(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	(5)	$	141	$	(146)	$	(63)	$	149	$	(212)
Interest-bearing deposits at financial institutions		940		177		763		628		19		609
Investment securities (2)		310		501		(191)		107		1,737		(1,630)
Restricted investment securities		78		85		(7)		(37)		(40)		3
Gross loans/leases receivable (2) (3)		12,405		2,961		9,444		6,566		2,108		4,458
Total change in interest income		13,728		3,865		9,863		7,201		3,973		3,228

INTEREST EXPENSE
Interest-bearing deposits		4,182		2,807		1,375		2,475		1,697		778
Time deposits		3,115		1,517		1,598		2,196		1,519		677
Short-term borrowings		18		73		(55)		20		103		(83)
Federal Home Loan Bank advances		(418)		1,617		(2,035)		(399)		1,486		(1,885)
Other borrowings		(504)		(11)		(493)		(776)		(388)		(388)
Subordinated notes		993		—		993		1,003		—		1,003
Junior subordinated debentures		68		66		2		62		59		3
Total change in interest expense		7,454		6,069		1,385		4,581		4,476		105

Total change in net interest income	$	6,274	$	(2,204)	$	8,478	$	2,620	$	(503)	$	3,123

(1)

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

(2)

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

(3)

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

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	For the six months ended June 30,																For the Nine Months Ended September 30,
	2019								2018								2019 (4)								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	$	12,713		$	150		2.38	%	$	19,132		$	118		1.24	%	$	10,887		$	191		2.35	%	$	20,488		$	223		1.46	%
Interest-bearing deposits at financial institutions		169,057			2,091		2.49	%		52,205			425		1.64	%		170,167			3,042		2.39	%		55,408			749		1.81	%
Investment securities (1)		652,727			12,158		3.76	%		648,656			11,418		3.55	%		643,975			18,237		3.79	%		654,818			17,391		3.55	%
Restricted investment securities		21,146			598		5.70	%		21,465			446		4.19	%		21,670			891		5.50	%		21,871			776		4.74	%
Gross loans/leases receivable (1) (2) (3)		3,799,645			94,795		5.03	%		3,048,447			70,753		4.68	%		3,853,918			145,682		5.05	%		3,236,514			115,365		4.77	%
Total interest earning assets		4,655,287			109,792		4.76	%		3,789,905			83,160		4.42	%		4,700,617			168,043		4.78	%		3,989,099			134,504		4.51	%

Noninterest-earning assets:
Cash and due from banks		80,513								67,745								82,096								71,198
Premises and equipment, net		77,266								63,530								78,059								66,516
Less allowance for estimated losses on loans/leases		(40,843)								(36,048)								(41,119)								(36,726)
Other		250,979								139,057								268,403								151,996
Total assets	$	5,023,201							$	4,024,189							$	5,088,055							$	4,242,083

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	2,374,939			15,445		1.31	%	$	1,873,817			7,109		0.77	%	$	2,418,420			23,351		1.29	%	$	1,987,371			12,541		0.84	%
Time deposits		1,012,925			10,859		2.16	%		641,152			4,301		1.35	%		1,000,529			16,346		2.18	%		702,441			7,591		1.44	%
Short-term borrowings		15,261			152		2.01	%		18,148			95		1.06	%		15,952			275		2.30	%		19,234			186		1.29	%
Federal Home Loan Bank advances		111,755			1,662		3.00	%		205,758			2,215		2.17	%		115,539			2,685		3.11	%		206,875			3,267		2.11	%
Other borrowings		27,126			539		4.01	%		65,862			1,182		3.62	%		18,084			512		3.79	%		68,742			2,315		4.50	%
Subordinated notes		53,438			1,557		5.88	%		—			—		—			58,392			2,561		5.86	%		—			—		—
Junior subordinated debentures		37,709			1,148		6.14	%		37,534			955		5.13	%		37,730			1,729		6.13	%		37,556			1,474		5.25	%
Total interest-bearing liabilities		3,633,151			31,362		1.74	%		2,842,271			15,857		1.13	%		3,664,646			47,459		1.73	%		3,022,219			27,374		1.21	%

Noninterest-bearing demand deposits		803,266								776,314								809,469								784,401
Other noninterest-bearing liabilities		96,441								44,826								114,980								49,589
Total liabilities		4,532,858								3,663,411								4,589,095								3,856,209

Stockholders' equity		490,343								360,778								498,960								385,874
Total liabilities and stockholders' equity	$	5,023,201							$	4,024,189							$	5,088,055							$	4,242,083
Net interest income				$	78,430							$	67,303							$	120,584							$	107,130
Net interest spread							3.02	%							3.29	%							3.05	%							3.30	%
Net interest margin							3.25	%							3.43	%							3.29	%							3.45	%
Net interest margin (TEY)(Non-GAAP)							3.40	%							3.58	%							3.43	%							3.59	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.30	%							3.51	%							3.33	%							3.49	%
Ratio of average interest earning assets to average interest-bearing liabilities		128.13	%							133.34	%							128.27	%							131.99	%

(1)

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

(2)

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

(3)

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

(4)

Interest earning assets and interest bearing liabilities classified as held for sale as of September 30, 2019 are included in the calculations above.

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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 six months ended June 30, 2019
For the nine months ended September 30, 2019								For the nine months ended September 30, 2019

		Inc./(Dec.)		Components					Inc./(Dec.)		Components
		from		of Change (1)					from		of Change (1)
		Prior Period (1)		Rate		Volume			Prior Period (1)		Rate		Volume
		2019 vs. 2018							2019 vs. 2018
		(dollars in thousands)							(dollars in thousands)
INTEREST INCOME
Federal funds sold		$	32	$	140	$	(108)		$	(32)	$	140	$	(172)
Interest-bearing deposits at other financial institutions			1,666		314		1,352			2,293		309		1,984
Investment securities (2)			740		668		72			846		1,293		(447)
Restricted investment securities			152		171		(19)			115		127		(12)
Gross loans/leases receivable (2) (3) (4)			24,042		5,606		18,436
Gross loans/leases receivable (2) (3)										30,317		7,299		23,018
Total change in interest income			26,632		6,899		19,733			33,539		9,168		24,371

INTEREST EXPENSE
Interest-bearing demand deposits			8,336		6,065		2,271			10,810		7,671		3,139
Time deposits			6,558		3,330		3,228			8,755		4,786		3,969
Short-term borrowings			57		100		(43)			89		142		(53)
Federal Home Loan Bank advances			(553)		1,606		(2,159)			(582)		1,691		(2,273)
Other borrowings			(643)		334		(977)			(1,803)		(320)		(1,483)
Subordinated notes			1,557		—		1,557			2,561		—		2,561
Junior subordinated debentures			193		—		193			255		—		255
Total change in interest expense			15,505		11,435		4,070			20,085		13,970		6,115
Total change in net interest income		$	11,127	$	(4,536)	$	15,663		$	13,454	$	(4,802)	$	18,256

(1)

(2)

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

(3)

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

CRITICAL ACCOUNTING POLICIES

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

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

GOODWILL

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

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income increased ~~33%~~14%, comparing the ~~second~~third quarter of 2019 to the same period of 2018, and increased ~~32%~~25% comparing the first ~~half~~nine months of 2019 to the same period of 2018. This increase was primarily the result of the addition of SFC Bank, strong organic loan ~~growth~~ and ~~loans repricing with the rising rate environment.~~deposit growth.

Overall, the Company's average earning assets increased ~~23%~~9%, comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of 2018. During the same time period, average gross loans and leases increased ~~25%~~10%, while average investment securities decreased 1%6%. Average earning assets increased ~~23%~~18%, comparing the first ~~half~~nine months of 2019 to the same period of 2018. Average gross loans and leases increased ~~25%~~19% and average investment securities ~~increased 1%~~decreased 2%, comparing the first ~~half~~nine months of 2019 to the same period of 2018. ~~These~~The increases in average earning assets and average gross loans and leases were the result of the addition of SFC 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 ~~second~~third quarter of 2019 increased ~~86%~~40% from the ~~second~~third quarter of 2018 and increased ~~98%~~73%, comparing the first ~~half~~nine months of 2019 to the same period of 2018. The addition of SFC Bank primarily contributed to this increase as the Company added over $439 million in deposits. The Company has grown organically at a significant pace over the past several years and the loan growth has been funded in large part by ~~bigger~~larger 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. 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 cost of funds on the Company’s short-term wholesale funds has increased with the rising rate environment. During the third quarter, market interest rates fell as the Federal Reserve cut the Federal Funds rate 50 basis points. As a direct result, the Company’s interest expense declined modestly on a linked-quarter basis.

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 $1.9 million for the second quarter of 2019, which was a decrease of 16% from the same quarter of the prior year. Provision for the first six months of 2019 totaled $4.1 million, which was down 16% compared to the first six months of 2018. These decreases were primarily attributable to improved asset quality.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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The Company's provision totaled $2.0 million for the third quarter of 2019, which was a decrease of 68% from the same quarter of the prior year. Provision for the first nine months of 2019 totaled $6.1 million, which was down 45% compared to the first nine months of 2018. These decreases were primarily attributable to improved asset quality.

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 ~~$2.8~~$3.3 million for the first ~~six~~nine months of 2019, increased the Company's allowance to ~~$41.1~~$36.1 million at ~~June~~September 30, 2019. As of ~~June~~September 30, 2019, the Company's allowance to total loans/leases was ~~1.05%~~1.00%, which was down from 1.07% at December 31, 2018 and ~~down from 1.21%~~1.18% at ~~June~~September 30, 2018. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($~~9.3~~7.7 million and ~~$6.6~~$14.4 million at ~~June~~September 30, 2019 and ~~June~~September 30, 2018, respectively).

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~~nine months ended ~~June~~September 30, 2019 and 2018.


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

Trust department fees	$	2,361	$	2,058	$	303	14.7	%	$	2,340	$	2,196	$	144	6.6	%
Investment advisory and management fees		1,888		1,058		830	78.4			1,782		1,059		723	68.3
Deposit service fees		1,658		1,610		48	3.0			1,813		1,656		157	9.5
Gains on sales of residential real estate loans, net		489		102		387	379.4			890		337		553	164.1
Gains on sales of government guaranteed portions of loans, net		39		—		39	100.0			519		46		473	1,028.3
Swap fee income		7,891		1,649		6,242	378.5			9,797		1,110		8,687	782.6
Securities losses, net		(52)		—		(52)	(100.0)			(3)		—		(3)	(100.0)
Earnings on bank-owned life insurance		412		399		13	3.3			489		474		15	3.2
Debit card fees		914		844		70	8.3			886		846		40	4.7
Correspondent banking fees		172		213		(41)	(19.2)			189		195		(6)	(3.1)
Other		1,293		979		314	32.1			1,204		890		314	35.3
Total noninterest income	$	17,065	$	8,912	$	8,153	91.5	%	$	19,906	$	8,809	$	11,097	126.0	%


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

Trust department fees	$	4,854	$	4,295	$	559	13.0	%	$	7,194	$	6,491	$	703	10.8	%
Investment advisory and management fees		3,624		2,010		1,614	80.3			5,406		3,069		2,337	76.1
Deposit service fees		3,212		3,142		70	2.2			5,025		4,797		228	4.8
Gains on sales of residential real estate loans, net		858		203		655	322.7			1,748		539		1,209	224.3
Gains on sales of government guaranteed portions of loans, net		70		358		(288)	(80.4)			589		405		184	45.4
Swap fee income		11,089		2,608		8,481	325.2			20,886		3,718		17,168	461.8
Securities losses, net		(52)		—		(52)	(100.0)			(56)		—		(56)	(100.0)
Earnings on bank-owned life insurance		952		817		135	16.5			1,441		1,292		149	11.5
Debit card fees		1,706		1,610		96	6.0			2,591		2,456		135	5.5
Correspondent banking fees		388		477		(89)	(18.7)			578		673		(95)	(14.1)
Other		2,357		1,934		423	21.9			3,562		2,822		740	26.2
Total noninterest income	$	29,058	$	17,454	$	11,604	66.5	%	$	48,964	$	26,262	$	22,702	86.4	%

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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~~$286.2 million in the first ~~six~~nine months of 2019 with ~~186~~238 new client relationships. With strong growth in assets under management, trust department fees increased ~~15%~~7%, comparing the ~~second~~third quarter of 2019 to the same period of the prior year. Trust

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department fees increased ~~13%~~11%, when comparing the first ~~half~~nine months of 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 ~~78%~~68%, comparing the ~~second~~third quarter of 2019 to the same period of the prior year, and they increased ~~80%~~76% when comparing the first ~~half~~nine months of 2019 to the first ~~half~~nine months of 2018. In October 2018, the Company acquired the Bates Companies which increased assets under management by approximately $704 ~~million as of closing.~~million. 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, investment advisory and management fees are largely determined based on the value of the investments managed.

Deposit service fees expanded 3%10% comparing the ~~second~~third quarter of 2019 to the same period of the prior year, and expanded 2%5% when comparing the first ~~half~~nine months of 2019 to the same period of the prior year. 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 ~~379%~~164% when comparing the ~~second~~third quarter of 2019 to the same period of the prior year and increased ~~323%~~224% when comparing the first ~~half~~nine months of 2019 to the same period of the prior year. The increase was due to the addition of SFC Bank which recognized gains on sales of residential real estate of ~~$351~~$597 thousand in the ~~second~~third quarter of 2019 and ~~$635 thousand~~$1.2 million in the first ~~half~~nine months 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 ~~second~~third quarter of 2019 increased ~~100%~~1028% compared to the ~~second~~third quarter of 2018 and ~~decreased 80%~~increased 45% when comparing the first ~~half~~nine months of 2019 to the same period of the prior year. ~~Given the nature of~~As reflected by these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. The Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. 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. Recently, competitors have been offering SBA loan candidates traditional financing without ~~the~~a guarantee and the Company is not willing to relax its structure for those lending opportunities.

As a result of the relatively low interest rate environment and its continued focus across all subsidiary banks, the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrowers and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income totaled ~~$7.9~~$9.8 million for the ~~second~~third quarter of 2019, compared to ~~$1.6~~$1.1 million for the ~~second~~third quarter of 2018. Swap fee income totaled ~~$11.1~~$20.9 million for the first ~~half~~nine months of 2019, compared to ~~$2.6~~$3.7 million in the first ~~half~~nine months of 2018. The increase in swap fee income for the first three and ~~six~~nine months of 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 somewhat dependent upon prevailing interest rates.

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Securities losses totaled ~~$52~~$3 thousand and $56 thousand for the three and ~~six~~nine months ended ~~June~~September 30, ~~2019.~~2019, respectively. By comparison, there were no securities losses for the three and ~~six~~nine months ended ~~June~~September 30, 2018.

Earnings on BOLI increased 3% comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of 2018, and increased ~~17%~~12% comparing the first ~~half~~nine months of 2019 to the first ~~half~~nine months of 2018. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity market and can lead to volatility in 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 8%5% comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of the prior year, and increased 6% comparing the first ~~half~~nine months of 2019 to the first ~~half~~nine months of 2018. This increase was primarily related to 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.

Correspondent banking fees decreased ~~19%~~3% comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of the prior year ~~as well as~~and decreased 14% for the first ~~half~~nine months of 2019 as compared to the first ~~half~~nine months of 2018. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the ccorrespondent banking fees. 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 ~~192~~195 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income increased ~~32%~~35% comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of the prior year, and increased ~~22%~~26% comparing the first ~~half~~nine months of 2019 to the first ~~half~~nine months of 2018. This increase was primarily due to ~~loan related~~ fee income, equity investment income and gain on disposal of leased assets.

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NONINTEREST EXPENSE

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


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

Salaries and employee benefits	$	22,749	$	15,804	$	6,945	43.9	%	$	24,215	$	17,433	$	6,782	38.9	%
Occupancy and equipment expense		3,533		3,133		400	12.8			3,860		3,318		542	16.3
Professional and data processing fees		3,031		2,771		260	9.4			4,030		2,396		1,634	68.2
Acquisition costs		—		414		(414)	(100.0)			—		1,292		(1,292)	(100.0)
Post-acquisition compensation, transition and integration costs		708		165		543	329.1			884		494		390	78.9
FDIC insurance, other insurance and regulatory fees		926		840		86	10.2			542		933		(391)	(41.9)
Loan/lease expense		312		260		52	20.0			221		369		(148)	(40.1)
Net cost of (income from) and gains/losses on operations of other real estate		1,182		(70)		1,252	(1,788.6)			2,078		(50)		2,128	(4,256.0)
Advertising and marketing		1,037		753		284	37.7			1,056		984		72	7.3
Bank service charges		508		466		42	9.0			502		462		40	8.7
Loss on debt extinguishment, net										148		—		148	100.0
Correspondent banking expense		206		204		2	1.0			209		205		4	2.0
Intangibles amortization		615		305		310	101.6			560		542		18	3.3
Other		1,753		1,325		428	32.3			1,640		2,122		(482)	(22.7)
Total noninterest expense	$	36,560	$	26,370	$	10,190	38.6	%	$	39,945	$	30,500	$	9,445	31.0	%


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

Salaries and employee benefits	$	43,628	$	31,782	$	11,846	37.3	%	$	67,843	$	49,215	$	18,628	37.9	%
Occupancy and equipment expense		7,227		6,198		1,029	16.6			11,087		9,517		1,570	16.5
Professional and data processing fees		5,781		5,479		302	5.5			9,811		8,016		1,795	22.4
Acquisition costs		—		506		(506)	(100.0)			—		1,799		(1,799)	(100.0)
Post-acquisition compensation, transition and integration costs		842		165		677	410.3			1,727		659		1,068	162.1
FDIC insurance, other insurance and regulatory fees		1,890		1,597		293	18.3			2,432		2,529		(97)	(3.8)
Loan/lease expense		526		551		(25)	(4.5)			748		920		(172)	(18.7)
Net cost of (income from) and gains/losses on operations of other real estate		1,480		62		1,418	2,287.1			3,557		11		3,546	32,236.4
Advertising and marketing		1,822		1,446		376	26.0			2,878		2,430		448	18.4
Bank service charges		991		907		84	9.3			1,494		1,368		126	9.2
Losses on debt extinguishment, net										148		—		148	100.0
Correspondent banking expense		410		409		1	0.2			619		614		5	0.8
Intangibles amortization		1,147		609		538	88.3			1,706		1,151		555	48.2
Other		3,251		2,523		728	28.9			4,891		4,504		387	8.6
Total noninterest expense	$	68,995	$	52,234	$	16,761	32.1	%	$	108,941	$	82,733	$	26,208	31.7	%

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

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the ~~second~~third quarter of 2019 to the ~~second~~third quarter of 2018 by ~~44%~~39%. This line item also increased ~~37%~~38% when comparing the first ~~half~~nine months of 2019 to the first ~~half~~nine months of 2018. This increase was primarily related to bonuses and commissions on elevated swap fee income, the addition of SFC Bank employees, new hires and merit increases. Over the past year, the Company has added several producers to bolster growth prospects. Further, to help support recent and expected growth, the Company 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.to:

Bonuses and commissions on elevated swap fee income;

Improved financial results and the related incentives;

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The addition of SFC Bank employees, new hires and merit increases;

The addition of several producers to bolster growth prospects; and

The addition 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 ~~13%~~16% comparing the ~~second~~third quarter of 2019 to the same period of the prior year, and increased 17% comparing the first ~~half~~nine months 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 increased 9%68% comparing the ~~first~~third quarter of 2019 to the same period in 2018, and increased 6%22% comparing the first ~~half~~nine months of 2019 to the same period of the prior year. This increased expense was mostly due to recent mergers/acquisitions. ~~Legal~~Additionally, legal expense ~~continues to be~~was also elevated in the third quarter 2019 due to athe continued 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 until the court proceedings are completed, which the Company expects to occur in 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~~nine months of 2019. Acquisition costs totaled ~~$414 thousand~~$1.2 million and ~~$506 thousand~~$1.8 million for the ~~second~~third quarter of 2018 and first ~~half~~nine months of 2018, respectively. These costs were comprised primarily of legal, accounting and investment banking costs related to mergers/acquisitions.

Post-acquisition costs totaled ~~$708~~$884 thousand for the ~~second~~third quarter of 2019 as compared to ~~$165~~$494 thousand for the same period of the prior year. Post-acquisition costs totaled ~~$842~~$1.7 thousand for the first ~~half~~nine months of 2019 as compared to ~~$165~~$659 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 10%~~decreased 42%, comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of 2018, and ~~increased 18%~~decreased 4% comparing the first ~~half~~nine months of 2019 to the same period of the prior year. The ~~increase~~decrease in expense was due to the ~~addition~~award of ~~SFC Bank and organic asset growth.~~assessment credits by the FDIC in September 2019.

Loan/lease expense ~~increased 20%~~decreased 40% when comparing the ~~second~~third quarter of 2019 to the same quarter of 2018, and decreased 5%19% comparing the first ~~half~~nine months of 2019 to the same period of prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net cost of (income from) and gains/losses on operations of other real estate totaled ~~$1.2~~$2.1 million for the ~~second~~third quarter of 2019, compared to ~~$70~~$50 thousand of net income for the ~~second~~third quarter of 2018. Net cost of (income from) and gains/losses on operations of other real estate totaled ~~$1.5~~$3.6 million for the first ~~half~~nine months of 2019 compared to ~~$62~~$11 thousand for the same period of the prior year. In the ~~second~~third quarter of 2019, the Company wrote down an OREO property by $1$2.0 million. Writedowns on OREO totaled $3.0 million for the nine months ended September 30, 2019.

Advertising and marketing expense increased ~~38%~~7% comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of 2018, and ~~increased 26%~~increased18% comparing the first ~~half~~nine months of 2019 to the same period of the prior year. The increase in expense was primarily due to the addition of SFC Bank.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 9% from the ~~second~~third quarter of 2018 to the ~~second~~third quarter of 2019, as well as comparing

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the first ~~half~~nine months of 2019 to the same period of the prior year. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

Losses on debt extinguishment, net were $148 thousand for the three and nine months ended September 30, 2019. These losses relate to the prepayment of certain FHLB advances. There were no losses on debt extinguishment for the three and nine months ended September 30, 2018.

Correspondent banking expense increased 2% when comparing the third quarter of 2019 to the third quarter of 2018 and increased 1% when comparing the ~~second quarter of 2019 to the second quarter of 2018 and remained flat when comparing the~~ first ~~half~~nine months of 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.

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Intangibles amortization expense increased ~~102%~~3% when comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of 2018, and increased ~~88%~~48% when comparing the first ~~half~~nine months 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 32%~~down 23% when comparing the ~~second~~third quarter of 2019 to the ~~second~~third quarter of 2018, and increased ~~29%~~9% when comparing the first ~~half~~nine months of 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 the addition of SFC Bank.

INCOME TAXES

In the ~~second~~third quarter of 2019, the Company incurred income tax expense of ~~$3.1~~$3.6 million. During the first ~~half~~nine months of the year, the Company incurred income tax expense of ~~$4.5~~$8.1 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 ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.


	For the Three Months Ended June 30,								For the Six Months Ended June 30,								For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2019				2018				2019				2018				2019				2018				2019				2018
			% of				% of				% of				% of				% of				% of				% of				% of
			Pretax				Pretax				Pretax				Pretax				Pretax				Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income		Amount		Income
	(dollars in thousands)																(dollars in thousands)

Computed "expected" tax expense	$	3,481	21.0	%	$	2,589	21.0	%	$	6,491	21.0	%	$	5,222	21.0	%	$	3,920	21.0	%	$	2,188	21.0	%	$	10,411	21.0	%	$	7,410	21.0	%
Tax exempt income, net		(1,068)	(6.5)			(956)	(7.8)			(2,175)	(7.1)			(1,899)	(7.6)			(1,169)	(6.3)			(1,047)	(10.0)			(3,344)	(6.7)			(2,946)	(8.3)
Bank-owned life insurance		(87)	(0.5)			(84)	(0.7)			(200)	(0.6)			(172)	(0.7)			(103)	(0.6)			(89)	(0.9)			(303)	(0.6)			(261)	(0.7)
State income taxes, net of federal benefit, current year		772	4.7			558	4.5			1,421	4.6			1,109	4.5			964	5.2			393	3.8			2,384	4.8			1,502	4.3
Tax credits		(38)	(0.2)			—	—			(77)	(0.3)			—	—			(39)	(0.2)			—	—			(116)	(0.2)			—	—
True-up adjustment to year-end provision		—	—			—	—			(715)	(2.3)			—	—			—	—			—	—			(715)	(1.4)			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(54)	(0.3)			(201)	(1.6)			(154)	(0.5)			(333)	(1.3)			(54)	(0.3)			(9)	(0.1)			(208)	(0.4)			(342)	(1.0)
Other		67	0.3			(25)	(0.1)			(104)	(0.3)			(55)	(0.3)			54	0.3			172	1.6			(50)	(0.2)			117	0.2
Federal and state income tax expense	$	3,073	18.5	%	$	1,881	15.3	%	$	4,487	14.5	%	$	3,872	15.6	%	$	3,573	19.1	%	$	1,608	15.4	%	$	8,059	16.3	%	$	5,480	15.5	%

The effective tax rate for the quarter ended ~~June~~September 30, 2019 was ~~18.5%~~19.1%, which was ~~a 3.2%~~an increase from the effective tax rate of ~~15.3%~~15.4% for the quarter ended ~~June~~September 30, 2018. The Company’s effective tax rate increased year over year as the Company’s growth in taxable income significantly outpaced the modest growth in tax exempt income. The effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2019 was ~~14.5%~~16.3%, which was ~~a decrease~~an increase over the effective tax rate of ~~15.6%~~15.5% for the ~~six~~nine months ended ~~June~~September 30, 2018. During the first quarter of 2019 and in conjunction with the 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 was approximately ~~16.8%~~14.9% for the ~~six~~nine months ended ~~June~~September 30, 2019.

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FINANCIAL CONDITION

Following is a table that represents the major categories of the Company’s balance sheet. On August 13, 2019 the Company and RB&T entered into a definitive agreement with IB&T, a wholly owned subsidiary of Heartland Financial USA, Inc., pursuant to which IB&T will acquire certain assets and assume certain liabilities of RB&T for a cash payment. The transaction is expected to close in the fourth quarter of 2019. As a result, certain assets and liabilities of RB&T are classified as held for sale as of September 30, 2019, which impacts balance sheet comparisons to prior periods.


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

	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	293,416	6	%	$	292,559	6	%	$	245,119	5	%	$	120,736	3	%	$	288,934	5	%	$	293,416	6	%	$	245,119	5	%	$	203,067	4	%
Securities		643,803	12	%		655,749	13	%		662,969	13	%		657,997	16	%		555,409	10	%		643,803	12	%		662,969	13	%		650,745	14	%
Net loans/leases		3,869,415	75	%		3,758,268	74	%		3,692,907	75	%		3,077,247	75	%		3,574,154	68	%		3,869,415	75	%		3,692,907	75	%		3,610,309	75	%
Other assets		388,218	7	%		360,086	7	%		348,715	7	%		250,903	6	%		408,338	8	%		388,218	7	%		348,715	7	%		328,611	7	%
Assets held for sale																		465,547	9	%		—	-	%		—	-	%		—	-	%
Total assets	$	5,194,852	100	%	$	5,066,662	100	%	$	4,949,710	100	%	$	4,106,883	100	%	$	5,292,382	100	%	$	5,194,852	100	%	$	4,949,710	100	%	$	4,792,732	100	%

Total deposits	$	4,322,510	83	%	$	4,194,220	83	%	$	3,977,031	80	%	$	3,298,276	81	%	$	3,802,241	72	%	$	4,322,510	83	%	$	3,977,031	81	%	$	3,788,277	79	%
Total borrowings		230,953	4	%		282,994	5	%		404,968	8	%		380,392	9	%		320,457	6	%		230,953	4	%		404,968	8	%		483,635	10	%
Other liabilities		137,089	3	%		101,041	2	%		94,573	2	%		58,627	1	%		179,411	3	%		137,089	3	%		94,573	2	%		63,433	1	%
Liabilities held for sale																		470,530	9	%		—	-	%		—	-	%		—	-	%
Total stockholders' equity		504,300	10	%		488,407	10	%		473,138	10	%		369,588	9	%		519,743	10	%		504,300	10	%		473,138	9	%		457,387	10	%
Total liabilities and stockholders' equity	$	5,194,852	100	%	$	5,066,662	100	%	$	4,949,710	100	%	$	4,106,883	100	%	$	5,292,382	100	%	$	5,194,852	100	%	$	4,949,710	100	%	$	4,792,732	100	%

Assets and liabilities held for sale are summarized as follows as of September 30, 2019:

The assets and liabilities of RB&T were reclassified to assets/liabilities held for sale on such date and are summarized as follo
	As of
	September 30, 2019
	(dollars in thousands)

ASSETS
Cash and cash equivalents	$	13,446
Securities		66,009
Loans, net		362,011
Other assets		24,081
Assets held for sale	$	465,547

LIABILIITES
Deposits	$	451,546
Borrowings		16,157
Other liabilities		2,827
Liabilities held for sale	$	470,530

During the ~~second~~third quarter of 2019, the Company's total assets increased ~~$128~~$97.5 million, or 3%2%, to a total of ~~$5.2~~$5.3 billion. The ~~Company grew its~~Company’s net loan/lease portfolio ~~$111~~decreased $295.3 million, which was ~~primarily funded by an increase in core deposits.~~entirely the result of classifying RB&T’s assets as held for sale. Deposits ~~grew $128~~decreased $520.3 million in the ~~second~~third quarter of 2019, ~~while borrowings decreased $52~~mainly as a result of classifying RB&T’s liabilities as held for sale, which included deposits of $451.5 million as of September 30, 2019. The remaining net decline in deposits of $69.0 million was driven primarily by a decline in higher cost public funds and brokered CDs, as the Company intentionally did not renew certain deposits as they matured. Borrowings increased $89.5 million in the ~~second~~third quarter of ~~2019.~~2019 which consisted primarily of short-term FHLB advances to offset the decline in deposits.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INVESTMENT SECURITIES

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

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

Following is a breakdown of the Company's securities portfolio by type, the percentage of unrealized gains (losses) to carrying value 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, 2019					June 30, 2019					December 31, 2018					September 30, 2018
	Amount			%		Amount			%		Amount			%		Amount			%		Amount			%		Amount			%		Amount			%		Amount			%
	(dollars in thousands)																				(dollars in thousands)

U.S. govt. sponsored agency securities	$	35,762		6	%	$	35,843		5	%	$	36,411		5	%	$	35,667		5	%	$	21,268		4	%	$	35,762		6	%	$	36,411		5	%	$	36,492		5	%
Municipal securities		440,852		68	%		450,376		69	%		459,409		70	%		458,510		70	%		391,329		71	%		440,852		68	%		459,409		70	%		453,275		70	%
Residential mortgage-backed and related securities		159,228		25	%		161,692		25	%		159,249		24	%		158,534		24	%		123,880		22	%		159,228		25	%		159,249		24	%		155,733		24	%
Other securities		7,961		1	%		7,838		1	%		7,900		1	%		5,286		1	%		18,932		3	%		7,961		1	%		7,900		1	%		5,245		1	%
	$	643,803		100	%	$	655,749		100	%	$	662,969		100	%	$	657,997		100	%	$	555,409		100	%	$	643,803		100	%	$	662,969		100	%	$	650,745		100	%

Securities as a % of Total Assets		12.39	%				12.94	%				13.39	%				16.02	%				11.51	%				12.39	%				13.39	%				13.58	%
Net Unrealized Gains (Losses) as a % of Amortized Cost		3.23	%				1.46	%				(1.01)	%				(1.58)	%				4.54	%				3.23	%				(1.01)	%				(1.47)	%
Duration (in years)		6.4					6.6					6.8					7.0					6.5					6.4					6.8					7.0
Yield on investment securities (tax equivalent)		3.77	%				3.74	%				3.58	%				3.56	%
Quarterly Yield on Investment Securities (GAAP)		3.20	%				3.18	%				2.85	%				3.02	%
Quarterly Yield on investment securities (tax equivalent)																						3.85	%				3.77	%				3.58	%				3.55	%

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~~lengthened modestly with the TEY on the portfolio increasing 1927 basis points in the first ~~half~~nine months of ~~2019; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 35 basis points.~~2019.

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

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LOANS/LEASES

~~Total~~Excluding RB&T loans classified as held for sale, total loans/leases grew ~~11.7%~~9.1% on an annualized basis during the ~~second~~third quarter of 2019 and ~~9.5%~~9.4% 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, 2019				June 30, 2019				December 31, 2018				September 30, 2018
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)																(dollars in thousands)

C&I loans	$	1,548,657	40	%	$	1,479,247	39	%	$	1,429,410	38	%	$	1,273,000	42	%	$	1,469,978	41	%	$	1,548,657	40	%	$	1,429,410	38	%	$	1,380,543	39	%
CRE loans		1,837,473	46	%		1,790,845	47	%		1,766,111	48	%		1,349,319	43	%		1,687,922	46	%		1,837,473	46	%		1,766,111	48	%		1,727,326	47	%
Direct financing leases		101,180	3	%		108,543	3	%		117,969	3	%		133,196	4	%		92,307	3	%		101,180	3	%		117,969	3	%		126,752	3	%
Residential real estate loans		293,479	8	%		288,502	8	%		290,759	8	%		257,434	8	%		245,667	7	%		293,479	8	%		290,759	8	%		309,288	8	%
Installment and other consumer loans		120,947	3	%		123,087	3	%		119,381	3	%		92,952	3	%		106,540	3	%		120,947	3	%		119,381	3	%		100,191	3	%
Total loans/leases	$	3,901,736	100	%	$	3,790,224	100	%	$	3,723,630	100	%	$	3,105,901	100	%	$	3,602,414	100	%	$	3,901,736	100	%	$	3,723,630	100	%	$	3,644,100	100	%
Plus deferred loan/lease origination costs, net of fees		8,783				9,208				9,124				8,891				7,856				8,783				9,124				9,286
Less allowance		(41,104)				(41,164)				(39,847)				(37,545)				(36,116)				(41,104)				(39,847)				(43,077)
Net loans/leases	$	3,869,415			$	3,758,268			$	3,692,907			$	3,077,247			$	3,574,154			$	3,869,415			$	3,692,907			$	3,610,309

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 ~~June~~September 30, 2019 and December 31, 2018, respectively, approximately ~~27%~~26% 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 $69~~decreased $78.7 million during the current ~~quarter.~~

~~A syndicated loan is a commercial loan provided by a group~~quarter, however, excluding the impact of ~~lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. The nationally syndicated~~RB&T loans ~~invested in by~~reclassified to held for sale, C&I loans grew $47.4 million during the Company consist of fully-funded, highly-liquid term loans for which there is a liquid secondary market. As of June 30, 2019 and December 31, 2018, the amount of nationally syndicated loans totaled $45.7 million and $40.8 million, respectively.current quarter.

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				2019				2019				2018				2018
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)																(dollars in thousands)

Lessors of Nonresidential Buildings	$	612,526	33	%	$	613,024	34	%	$	612,327	34	%	$	439,067	33	%	$	544,337	32	%	$	612,526	33	%	$	612,327	34	%	$	605,517	35	%
Lessors of Residential Buildings		394,235	21	%		355,850	20	%		346,270	19	%		230,187	17	%		403,766	24	%		394,235	21	%		346,270	19	%		321,357	19	%
Hotels		82,180	5	%		81,107	5	%		81,345	5	%		73,335	5	%		61,199	4	%		82,180	5	%		81,345	5	%		87,850	5	%
Nonresidential Property Managers		58,207	3	%		65,736	4	%		69,885	4	%		55,979	4	%		53,581	3	%		58,207	3	%		69,885	4	%		56,600	3	%
Land Subdivision		45,847	3	%		46,042	3	%		48,378	3	%		39,883	3	%		46,144	3	%		45,847	3	%		48,378	3	%		50,252	3	%
New Housing For-Sale Builders		43,520	2	%		47,276	3	%		47,598	3	%		38,392	3	%		45,419	3	%		43,520	2	%		47,598	3	%		37,911	2	%
Other Activities Related to Real Estate																		36,212	2	%		32,652	2	%		25,345	2	%		27,802	2	%
Other *		600,958	33	%		581,810	31	%		560,308	32	%		472,476	35	%		497,264	29	%		568,306	31	%		534,963	30	%		540,037	31	%
Total CRE Loans	$	1,837,473	100	%	$	1,790,845	100	%	$	1,766,111	100	%	$	1,349,319	100	%	$	1,687,922	100	%	$	1,837,473	100	%	$	1,766,111	100	%	$	1,727,326	100	%

* “Other” consists of all other industries. None of these had concentrations greater than ~~$36.8~~$33.8 million, or approximately 2.0% of total CRE loans in the most recent period presented.

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 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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 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				2019				2019				2018				2018
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)																(dollars in thousands)

Trucks, Vans and Vocational Vehicles	$	46,650	20	%	$	43,489	19	%	$	40,588	18	%	$	35,814	15	%	$	43,489	19	%	$	46,650	20	%	$	40,588	18	%	$	37,942	16	%
Manufacturing - General		17,879	8	%		16,952	7	%		16,760	7	%		16,794	7	%		16,952	7	%		17,879	8	%		16,760	7	%		16,666	7	%
Construction - General		16,026	7	%		16,295	7	%		17,236	8	%		18,494	8	%		16,295	7	%		16,026	7	%		17,236	8	%		17,201	7	%
Food Processing Equipment		15,863	7	%		15,622	7	%		15,334	7	%		14,377	6	%		15,622	7	%		15,863	7	%		15,334	7	%		15,490	7	%
Marine - Travelifts		11,659	5	%		11,819	5	%		12,370	5	%		12,875	6	%		11,819	5	%		11,659	5	%		12,370	5	%		12,729	5	%
Trailers		9,303	4	%		9,603	4	%		9,842	4	%		10,137	4	%		9,603	4	%		9,303	4	%		9,842	4	%		10,016	4	%
Computer Hardware																		8,350	4	%		6,282	3	%		9,166	4	%		9,656	4	%
Manufacturing - CNC		6,832	3	%		6,702	3	%		6,616	3	%		6,344	3	%		6,432	3	%		6,832	3	%		6,616	3	%		6,990	3	%
Computer Hardware		6,282	3	%		8,350	4	%		9,166	4	%		10,141	4	%
Crane		5,756	3	%		5,749	3	%		5,726	3	%		5,089	2	%
Other *		94,426	40	%		93,775	41	%		95,008	41	%		103,232	45	%		101,499	44	%		100,182	43	%		100,734	44	%		106,156	47	%
Total m2 loans and leases	$	230,676	100	%	$	228,356	100	%	$	228,646	100	%	$	233,297	100	%	$	230,061	100	%	$	230,676	100	%	$	228,646	100	%	$	232,846	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 34 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 ~~six~~nine months ended ~~June~~September 30, 2019 and 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, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(dollars in thousands)								(dollars in thousands)

Balance, beginning	$	41,164	$	36,532	$	39,847	$	34,356	$	41,104	$	37,545	$	39,847	$	34,355
Reclassification of allowance related to held for sale loans										(6,122)		—		(6,122)		—
Provisions charged to expense		1,941		2,301		4,075		4,841		1,584		6,206		5,659		11,046
Loans/leases charged off		(2,152)		(1,524)		(3,212)		(1,961)		(741)		(991)		(3,953)		(2,951)
Recoveries on loans/leases previously charged off		151		236		394		309		291		317		685		626
Balance, ending	$	41,104	$	37,545	$	41,104	$	37,545	$	36,116	$	43,077	$	36,116	$	43,077

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, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate 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 and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10‑K for the year ended December 31, 2018, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


	As of												As of
Internally Assigned Risk Rating *	June 30, 2019			March 31, 2019			December 31, 2018			June 30, 2018			September 30, 2019			June 30, 2019			December 31, 2018			September 30, 2018
	(dollars in thousands)												(dollars in thousands)

Special Mention (Rating 6)	$	19,913		$	24,769		$	42,058		$	44,202		$	23,195		$	19,913		$	42,058		$	49,230
Substandard (Rating 7)		40,935			43,696			28,593			42,492			31,386			40,935			28,593			45,676
Doubtful (Rating 8)		—			—			—			—			—			—			—			3
	$	60,848		$	68,465		$	70,651		$	86,694		$	54,581		$	60,848		$	70,651		$	94,909

Criticized Loans **	$	60,848		$	68,465		$	70,651		$	86,694		$	54,581		$	60,848		$	70,651		$	94,909
Classified Loans ***	$	40,935		$	43,696		$	28,593		$	42,492		$	31,386		$	40,935		$	28,593		$	45,679

Criticized Loans as a % of Total Loans/Leases		1.56	%		1.80	%		1.89	%		2.79	%		1.51	%		1.56	%		1.89	%		2.60	%
Classified Loans as a % of Total Loans/Leases		1.05	%		1.16	%		0.77	%		1.37	%		0.87	%		1.05	%		0.77	%		1.25	%

* 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 a 6% decrease in~~Company’s classified and criticized loans ~~during~~are at some of the ~~second quarter of 2019. Classified loans increased 43% during~~lowest levels for the first six months of 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

Company’s history.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~decreased 11% during the 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								As of
	June 30, 2019		March 31, 2019		December 31, 2018		June 30, 2018		September 30, 2019		June 30, 2019		December 31, 2018		September 30, 2018
Allowance / Gross Loans/Leases	1.05	%	1.08	%	1.07	%	1.21	%	1.00	%	1.05	%	1.07	%	1.18	%
Allowance / NPLs	283.10	%	238.48	%	214.80	%	270.09	%	401.56	%	283.10	%	214.80	%	147.39	%

Although management believes that the allowance at ~~June~~September 30, 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 34 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 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			2019			2019			2018			2018
	(dollars in thousands)												(dollars in thousands)

Nonaccrual loans/leases (1) (2)	$	13,148		$	13,406		$	14,260		$	12,554		$	8,231		$	13,148		$	14,260		$	23,576
Accruing loans/leases past due 90 days or more (3)		58			61			632			20			—			58			632			1,410
TDRs - accruing		1,313			3,794			3,659			1,327			763			1,313			3,659			4,240
Total NPLs		14,519			17,261			18,551			13,901			8,994			14,519			18,551			29,226
OREO		8,637			9,110			9,378			12,750			4,248			8,637			9,378			12,204
Other repossessed assets		—			—			8			150			—			—			8			150
Total NPAs	$	23,156		$	26,371		$	27,937		$	26,801		$	13,242		$	23,156		$	27,937		$	41,580
											.
NPLs to total loans/leases		0.37	%		0.45	%		0.50	%		0.45	%		0.25	%		0.37	%		0.50	%		0.80	%
NPAs to total loans/leases plus repossessed property		0.59	%		0.69	%		0.75	%		0.86	%		0.37	%		0.59	%		0.75	%		1.13	%
NPAs to total assets		0.45	%		0.52	%		0.56	%		0.65	%		0.27	%		0.45	%		0.56	%		0.87	%

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of ~~$2.8 million~~$933 thousand at September 30, 2019, $902 thousand at June 30, 2019, ~~$1.5 million at March 31, 2019, $2.3~~$1.9 million at December 31, 2018, and ~~$1.8~~$1.6 million at ~~June~~September 30, 2018.

(3)

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

NPAs at ~~June~~September 30, 2019 were ~~$23.2~~$13.2 million, down ~~$3.2 million from March 31, 2019 and down $3.6~~$9.9 million from June 30, 2019 and down $28.3 million from September 30, 2018. Excluding RB&T’s NPAs, the Company’s NPAs were down $2.5 million on a linked-quarter basis. The improvement was primarily attributed to the $2.0 million writedown of an OREO property.

The ratio of NPAs to total assets was 0.27% at September 30, 2019, down from 0.45% at June 30, 2019 ~~down from 0.52% at March 31, 2019~~ and down from ~~0.65%~~0.87% at ~~June~~September 30, 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.

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

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

DEPOSITS

~~Deposits increased $128.3~~Excluding the impact of RB&T deposits reclassified to held for sale, deposits decreased $68.7 million during the ~~second~~third quarter of 2019, primarily due to ~~growth in correspondent bank deposits~~the maturity and ~~growth in large customers’ balances.~~intentional nonreplacement of higher cost public funds and brokered CDs. 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, 2019				June 30, 2019				December 31, 2018				September 30, 2018
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)																(dollars in thousands)

Noninterest bearing demand deposits	$	795,951	18	%	$	821,599	20	%	$	791,102	20	%	$	746,822	22	%	$	782,232	21	%	$	795,951	18	%	$	791,101	20	%	$	802,090	21	%
Interest bearing demand deposits		2,505,956	58	%		2,334,474	55	%		2,204,205	55	%		1,865,382	57	%		2,245,557	59	%		2,505,956	58	%		2,204,206	55	%		2,094,814	56	%
Time deposits		733,135	17	%		719,286	17	%		704,903	18	%		519,999	16	%		536,352	14	%		733,135	17	%		704,903	18	%		615,323	16	%
Brokered deposits		287,468	7	%		318,861	8	%		276,821	7	%		166,073	5	%		238,100	6	%		287,468	7	%		276,821	7	%		276,050	7	%
	$	4,322,510	100	%	$	4,194,220	100	%	$	3,977,031	100	%	$	3,298,276	100	%	$	3,802,241	100	%	$	4,322,510	100	%	$	3,977,031	100	%	$	3,788,277	100	%

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

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 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, 2019		June 30, 2019		December 31, 2018		September 30, 2018
	(dollars in thousands)								(dollars in thousands)

Overnight repurchase agreements	$	2,181	$	3,056	$	2,084	$	2,186	$	2,421	$	2,181	$	2,084	$	3,049
Federal funds purchased		17,010		12,830		26,690		15,400		16,105		17,010		26,690		8,670
	$	19,191	$	15,886	$	28,774	$	17,586	$	18,526	$	19,191	$	28,774	$	11,719

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. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of changing interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.

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

Term FHLB advances	$	46,433	$	66,380	$	76,327	$	46,600	$	60,000	$	46,433	$	76,327	$	63,399
Overnight FHLB advances		59,300		59,800		190,165		207,500		135,800		59,300		190,165		295,730
	$	105,733	$	126,180	$	266,492	$	254,100	$	195,800	$	105,733	$	266,492	$	359,129

~~Term~~ FHLB advances ~~decreased $19.9~~increased $90.1 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~~intentional runoff of ~~2019.~~

Other borrowings decreased $35.0 million in the current quarter. 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 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 customernon-core deposits. ~~Wholesale structured repurchase agreements were collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.~~

The Company had subordinated notes totaling $68.3 million as of ~~June~~September 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.~~2019. See Note 56 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.~~notes.

The Company renewed its revolving credit note in the second quarter of 2019. See Note 56 to the Consolidated Financial Statements for additional details regarding this renewal.

It is management's intention to reduce its reliance on wholesale funding, including FHLB advances, wholesale structured 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.

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


	September 30, 2019				December 31, 2018
			Weighted				Weighted
			Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate
	(dollars in thousands)
Year ending December 31:
2019	$	284,189	2.19	%	$	510,736	2.35	%
2020		81,895	2.05			48,557	2.31
2021		18,476	1.88			15,050	2.31
2022		29,340	1.80			3,970	2.00
2023		20,000	1.84			—	—
Total Wholesale Funding	$	433,900	2.10	%	$	578,313	2.35	%

During the first nine months of 2019, wholesale funding decreased $144.4 million. Excluding the impact of RB&T wholesale funding reclassified to held for sale, wholesale funding decreased $79.3 million during the first nine months of 2019.

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June 30, 2019

December 31, 2018

Weighted

Weighted

Average

Average

Maturity:

Amount Due

Interest Rate


Amount Due

Interest Rate

(dollars in thousands)
Year ending December 31:

2019

$
315,799

2.34
%

$
510,736

2.35
%
2020

58,382

2.23

48,557

2.31

2021

15,050

2.31

15,050

2.31

2022

3,970

2.00

3,970

2.00

Total Wholesale Funding

$
393,201

2.32
%

$
578,313

2.35
%

During the first six months of 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 $10.6 million in the 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 prepayments (with original maturities in 2020) and a $10.0 million maturity.

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, 2019			June 30, 2019			December 31, 2018			September 30, 2018
	(dollars in thousands)												(dollars in thousands)

Common stock	$	15,773		$	15,755		$	15,718		$	13,974		$	15,790		$	15,773		$	15,718		$	15,674
Additional paid in capital		272,744			271,673			270,761			190,533			273,475			272,744			270,761			269,373
Retained earnings		216,741			204,179			192,203			171,955			230,892			216,741			192,203			179,826
AOCI (loss)		(958)			(3,200)			(5,544)			(6,874)			(414)			(958)			(5,544)			(7,486)
Total stockholders' equity	$	504,300		$	488,407		$	473,138		$	369,588		$	519,743		$	504,300		$	473,138		$	457,387

TCE / TA ratio (non-GAAP)		8.05	%		7.92	%		7.78	%		8.18	%		8.20	%		8.05	%		7.78	%		7.82	%

* 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.

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 ~~$274.7~~$264.9 million during the ~~second~~third quarter of 2019 and ~~$159.7~~$263.2 million during the full year of ~~2018.~~2019. 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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~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~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.

At ~~June~~September 30, 2019, the subsidiary banks had 34 lines of credit totaling ~~$373.0~~$419.1 million, of which ~~$1.7~~$47.8 million was secured and $371.3 million was unsecured. At ~~June~~September 30, 2019, the full ~~$373.0~~$419.1 million was available.

At December 31, 2018, the subsidiary banks had 33 lines of credit totaling ~~$363.7~~$327.7 million, of which $1.7 million was secured and ~~$362.0~~$326.0 million was unsecured. At December 31, 2018, ~~$343.7~~$307.7 million of the ~~$363.7~~$327.7 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 $20.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2020. At ~~June~~September 30, 2019, the full $20.0 million was available.

As of ~~June~~September 30, 2019, the Company had ~~$479.0~~$501.0 million in average correspondent banking deposits spread over ~~192~~195 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Investing activities used cash of ~~$197.1~~$235.1 million during the first ~~six~~nine months of 2019, compared to ~~$137.9~~$209.6 million for the same period of 2018. The net decrease in federal funds sold was ~~$16.2~~$17.1 million for the first ~~six~~nine months of 2019, compared to a net ~~decrease~~increase of ~~$19.3~~$2.9 million for the same period of 2018. The net increase in interest-bearing deposits at financial institutions was ~~$62.1~~$57.2 million for the first ~~six~~nine months of 2019, compared to a net ~~decrease~~increase of ~~$15.0 million~~$22.1million for the same period of 2018. Proceeds from calls, maturities, and paydowns of securities were ~~$33.0~~$45.7 million for the first ~~six~~nine months of 2019, compared to ~~$39.8~~$59.2 million for the same period of 2018. Purchases of securities used cash of ~~$10.7~~$28.1 million for the first ~~six~~nine months of 2019, compared to ~~$55.0~~$66.4 million for the same period of 2018. Proceeds from sales of securities were ~~$4.7~~$33.1 million for the first ~~six~~nine months of 2019, compared to ~~no proceeds from sales of securities~~$1.9 million for the ~~first six months~~same period of 2018. The net increase in loans/leases used cash of ~~$176.4~~$237.3 million for the first ~~six~~nine months of 2019 compared to ~~$151.0~~$208.7 million for the same period of 2018.

Financing activities provided cash of ~~$170.2~~$206.1 million for the first ~~six~~nine months of 2019, compared to ~~$101.9~~$170.4 million for same period of 2018. Net increases in deposits totaled ~~$345.6~~$277.0 million for the first ~~six~~nine months of 2019, compared to ~~$31.7~~$82.3 million for the same period of 2018. During the first ~~six~~nine months of 2019, the Company's short-term borrowings decreased ~~$9.6~~$9.1 million, compared to ~~an increase of $3.6~~$2.2 million for the same period of 2018. In the first ~~six~~nine months of 2019, the Company decreased short-term and overnight FHLB advances by ~~$130.9~~$16.0 million. Maturities and principal payments on FHLB term advances totaled $35.0 million and on other borrowings totaled ~~$11.9~~$20.9 million in the first ~~six~~nine months of 2019. Prepayments on FHLB term advances totaled $33.2 million and on other borrowings totaled $46.3 million in the first ~~six~~nine months of 2019. During the first ~~six~~nine months of 2019, proceeds from subordinated notes were $63.4 million. In the first ~~six~~nine months of 2018, the Company increased short-term and overnight FHLB advances by ~~$72.1~~$120.3 million and increased other borrowings by $9.0 million. Maturities and principal payments on borrowings totaled ~~$13.9~~$10.6 million in the first ~~six~~nine months of 2018.

Total cash provided by operating activities was ~~$29.3~~$46.1 million for the first ~~six~~nine months of 2019, compared to ~~$29.4~~$36.9 million for the same period of 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 and, most recently, subordinated notes.

~~Table of Contents~~

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~~Item 2~~

~~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 ~~June~~September 30, 2019 and December 31, 2018.


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

QCR Holdings Statutory Trust II	February 2004	$	10,310	$	10,310	2.85% over 3-month LIBOR	5.17	%	5.65	%	February 2004	$	10,310	$	10,310	2.85% over 3-month LIBOR	4.95	%	5.65	%
QCR Holdings Statutory Trust III	February 2004		8,248		8,248	2.85% over 3-month LIBOR	5.17	%	5.65	%	February 2004		8,248		8,248	2.85% over 3-month LIBOR	4.95	%	5.65	%
QCR Holdings Statutory Trust V	February 2006		10,310		10,310	1.55% over 3-month LIBOR	4.15	%	3.99	%	February 2006		10,310		10,310	1.55% over 3-month LIBOR	3.85	%	3.99	%
Community National Statutory Trust II	September 2004		3,093		3,093	2.17% over 3-month LIBOR	4.56	%	4.96	%	September 2004		3,093		3,093	2.17% over 3-month LIBOR	4.33	%	4.96	%
Community National Statutory Trust III	March 2007		3,609		3,609	1.75% over 3-month LIBOR	4.16	%	4.54	%	March 2007		3,609		3,609	1.75% over 3-month LIBOR	3.87	%	4.54	%
Guaranty Bankshares Statutory Trust I	May 2005		4,640		4,640	1.75% over 3-month LIBOR	4.16	%	4.54	%	May 2005		4,640		4,640	1.75% over 3-month LIBOR	3.87	%	4.54	%
		$	40,210	$	40,210	Weighted Average Rate	4.65	%	4.94	%		$	40,210	$	40,210	Weighted Average Rate	4.40	%	4.94	%

As described in Note 45 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~~three-month LIBOR, and the interest rate swaps utilize ~~3-month~~three-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 45 for the notional amount swapped and the related effective fixed rates.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

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

The strength of the local, state, and national 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.

~~Table of Contents~~

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

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, 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, and 400 basis point upward shifts; and a 100 and 200 basis point downward shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.

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

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

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

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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 June 30,		As of December 31,		As of December 31,				As of September 30,		As of December 31,		As of December 31,
INTEREST RATE SCENARIO	POLICY LIMIT		2019		2018		2017		POLICY LIMIT		2019		2018		2017

100 basis point downward shift	(10.0)	%	0.7	%	0.7	%	0.3	%	(10.0)	%	0.4	%	0.7	%	0.3	%
200 basis point upward shift	(10.0)	%	(2.7)	%	(2.7)	%	(3.7)	%	(10.0)	%	(1.7)	%	(2.7)	%	(3.7)	%
300 basis point upward shock	(25.0)	%	(6.4)	%	(9.0)	%	(8.4)	%	(25.0)	%	(4.0)	%	(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 ~~June~~September 30, 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).

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 ~~June~~September 30, 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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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, 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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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6 Exhibits


2.1	Purchase and Assumptin Agreement by and among Illinois Bank & Trust, Rockford Bank and Trust Company and QCR Holdings, Inc. (solely for the purposes of the sections defined therein), dated August 13, 2019 (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed with the SEC on August 13, 2019.

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 ~~June~~September 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018; (iii) Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018; (v) Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 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	~~August 6,~~ November 8, 2019	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer


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


Date	~~August 6,~~November 8, 2019	/s/ ~~Elizabeth A. Grabin~~Nick W. Anderson
		~~Elizabeth A. Grabin, Senior Vice President~~Nick W. Anderson
		Chief Accounting Officer
		~~(Principal Accounting Officer)~~

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

1-month FHLB Advance	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	1.49	%		98		342
				$	30,000			$	98	$	459