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 30, ~~2019~~2020

~~[ ]~~☐ 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~~0-22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

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

3551 7^th Street, Moline, Illinois61265

(Address of principal executive offices, including zip code)

~~(309) 736‑3580~~(309) 736-3580

(Registrant's telephone number, including area code)

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


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

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

Yes ~~[ 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~~12b-2 of the Exchange Act.


Large accelerated filer ~~[ ]~~☐	Accelerated filer ~~[ X ]~~☒		Non-accelerated filer ~~[ ]~~☐
Smaller reporting company ~~[ ]~~☐		Emerging growth company ~~[ ]~~☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule ~~12b‑2~~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 1, ~~2019,~~2020, the Registrant had outstanding ~~15,779,717~~15,791,536 shares of common stock, $1.00 par value per share.

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of June 30, ~~2019~~2020 and December 31, ~~2018~~2019

June 30,

December 31,

2019

2018

(dollars in thousands)
Assets

Cash and due from banks

$
87,919

$
85,523
Federal funds sold

10,215

26,398
Interest-bearing deposits at financial institutions

195,282

133,198

Securities held to maturity, at amortized cost

388,713

401,913
Securities available for sale, at fair value

255,090

261,056
Total securities

643,803

662,969




Loans receivable held for sale

4,180

1,295
Loans/leases receivable held for investment

3,906,339

3,731,459
Gross loans/leases receivable

3,910,519

3,732,754
Less allowance for estimated losses on loans/leases

(41,104)

(39,847)
Net loans/leases receivable

3,869,415

3,692,907




Bank-owned life insurance

68,735

67,783
Premises and equipment, net

78,887

75,582
Restricted investment securities

22,195

25,689
Other real estate owned, net

8,637

9,378
Goodwill

77,748

77,832
Intangibles

16,089

17,450
Other assets

115,927

75,001
Total assets

$
5,194,852

$
4,949,710




Liabilities and Stockholders' Equity




Liabilities:




Deposits:




Noninterest-bearing

$
795,951

$
791,102
Interest-bearing

3,526,559

3,185,929
Total deposits

4,322,510

3,977,031




Short-term borrowings

19,191

28,774
Federal Home Loan Bank advances

105,733

266,492
Other borrowings

—

67,250
Subordinated notes

68,274

4,782
Junior subordinated debentures

37,755

37,670
Other liabilities

137,089

94,573
Total liabilities

4,690,552

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
Additional paid-in capital

272,744

270,761
Retained earnings

216,741

192,203
Accumulated other comprehensive income (loss):

Securities available for sale

2,412

(4,268)
Derivatives

(3,370)

(1,276)
Total stockholders' equity

504,300

473,138
Total liabilities and stockholders' equity

$
5,194,852

$
4,949,710


	June 30,		December 31,
	2020		2019

	(dollars in thousands)
Assets
Cash and due from banks	$	88,577	$	76,254
Federal funds sold		2,125		9,800
Interest-bearing deposits at financial institutions		140,775		147,891

Securities held to maturity, at amortized cost		425,976		400,646
Securities available for sale, at fair value		322,907		210,695
Total securities		748,883		611,341

Loans receivable held for sale		8,327		3,673
Loans/leases receivable held for investment		4,131,932		3,686,532
Gross loans/leases receivable		4,140,259		3,690,205
Less allowance for estimated losses on loans/leases		(60,827)		(36,001)
Net loans/leases receivable		4,079,432		3,654,204

Bank-owned life insurance		59,645		58,834
Premises and equipment, net		72,915		73,859
Restricted investment securities		23,209		23,252
Other real estate owned, net		157		4,129
Goodwill		74,248		74,748
Intangibles		13,872		14,970
Derivatives		225,164		87,827
Assets held for sale		10,765		11,966
Other assets		64,994		59,975
Total assets	$	5,604,761	$	4,909,050

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,177,482	$	777,224
Interest-bearing		3,172,293		3,133,827
Total deposits		4,349,775		3,911,051

Short-term borrowings		124,818		13,423
Federal Home Loan Bank advances		145,000		159,300
Subordinated notes		68,516		68,394
Junior subordinated debentures		37,916		37,838
Derivatives		233,589		88,437
Liabilities held for sale		1,588		5,003
Other liabilities		87,539		90,253
Total liabilities		5,048,741		4,373,699


Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 June 2020 and December 2019 - 0 shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 June 2020 - 15,790,611 shares issued and outstanding December 2019 - 15,828,098 shares issued and outstanding		15,791		15,828
Additional paid-in capital		274,315		274,785
Retained earnings		267,081		245,836
Accumulated other comprehensive income (loss):
Securities available for sale		8,738		2,817
Derivatives		(9,905)		(3,915)
Total stockholders' equity		556,020		535,351
Total liabilities and stockholders' equity	$	5,604,761	$	4,909,050

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended June 30, ~~2019~~2020 and ~~2018~~

2019

2018

(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$
47,515

$
35,408

Securities:

Taxable

1,678

1,594

Nontaxable

3,474

3,295

Interest-bearing deposits at financial institutions

1,168

228

Restricted investment securities

290

212

Federal funds sold

56

62

Total interest and dividend income

54,181

40,799

Interest expense:

Deposits

13,825

6,528

Short-term borrowings

81

63

Federal Home Loan Bank advances

601

1,019

Other borrowings

92

596

Subordinated notes

993

—

Junior subordinated debentures

576

508

Total interest expense

16,168

8,714

Net interest income

38,013

32,085

Provision for loan/lease losses

1,941

2,301

Net interest income after provision for loan/lease losses

36,072

29,784

Noninterest income:

Trust department fees

2,361

2,058

Investment advisory and management fees

1,888

1,058

Deposit service fees

1,658

1,610

Gains on sales of residential real estate loans, net

489

102

Gains on sales of government guaranteed portions of loans, net

39

—

Swap fee income

7,891

1,649

Securities losses, net

(52)

—

Earnings on bank-owned life insurance

412

399

Debit card fees

914

844

Correspondent banking fees

172

213

Other

1,293

979

Total noninterest income

17,065

8,912

Noninterest expense:

Salaries and employee benefits

22,749

15,804

Occupancy and equipment expense

3,533

3,133

Professional and data processing fees

3,031

2,771

Acquisition costs

—

414

Post-acquisition compensation, transition and integration costs

708

165

FDIC insurance, other insurance and regulatory fees

926

840

Loan/lease expense

312

260

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

1,182

(70)

Advertising and marketing

1,037

753

Bank service charges

508

466

Correspondent banking expense

206

204

Intangibles amortization

615

305

Other

1,753

1,325

Total noninterest expense

36,560

26,370

Net income before income taxes

16,577

12,326

Federal and state income tax expense

3,073

1,881

Net income

$
13,504

$
10,445

Basic earnings per common share

$
0.86

$
0.75

Diluted earnings per common share

$
0.85

$
0.73

Weighted average common shares outstanding

15,714,588

13,919,565

Weighted average common and common equivalent shares outstanding

15,938,377

14,232,423

Cash dividends declared per common share

$
0.06

$
0.06

See Notes to Consolidated Financial Statements (Unaudited)

2019

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~


	2020		2019

	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	42,614	$	47,515
Securities:
Taxable		2,048		1,678
Nontaxable		3,565		3,474
Interest-bearing deposits at financial institutions		134		1,168
Restricted investment securities		288		290
Federal funds sold		1		56
Total interest and dividend income		48,650		54,181

Interest expense:
Deposits		5,766		13,825
Short-term borrowings		22		81
Federal Home Loan Bank advances		347		601
Other borrowings		—		92
Subordinated notes		994		993
Junior subordinated debentures		573		576
Total interest expense		7,702		16,168
Net interest income		40,948		38,013
Provision for loan/lease losses		19,915		1,941
Net interest income after provision for loan/lease losses		21,033		36,072

Noninterest income:
Trust department fees		2,227		2,361
Investment advisory and management fees		1,399		1,888
Deposit service fees		1,286		1,658
Gains on sales of residential real estate loans, net		1,196		489
Gains on sales of government guaranteed portions of loans, net		—		39
Swap fee income		19,927		7,891
Securities gains (losses), net		65		(52)
Earnings on bank-owned life insurance		612		412
Debit card fees		775		914
Correspondent banking fees		198		172
Other		941		1,293
Total noninterest income		28,626		17,065

Noninterest expense:
Salaries and employee benefits		21,304		22,749
Occupancy and equipment expense		3,748		3,533
Professional and data processing fees		3,646		3,031
Post-acquisition compensation, transition and integration costs		70		708
Disposition costs		(83)		—
FDIC insurance, other insurance and regulatory fees		908		926
Loan/lease expense		339		312
Net cost of (income from) and gains/losses on operations of other real estate		(332)		1,182
Advertising and marketing		552		1,037
Bank service charges		501		508
Losses on liability extinguishment		429		—
Correspondent banking expense		212		206
Intangibles amortization		548		615
Other		1,280		1,753
Total noninterest expense		33,122		36,560
Net income before income taxes		16,537		16,577
Federal and state income tax expense		2,798		3,073
Net income	$	13,739	$	13,504

Basic earnings per common share	$	0.87	$	0.86
Diluted earnings per common share	$	0.86	$	0.85

Weighted average common shares outstanding		15,747,056		15,714,588
Weighted average common and common equivalent shares outstanding		15,895,336		15,938,377

Cash dividends declared per common share	$	0.06	$	0.06

~~CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)~~

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

2019

2018


(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$
93,082

$
69,622

Securities:

Taxable

3,344

3,150

Nontaxable

7,018

6,584

Interest-bearing deposits at financial institutions

2,091

425

Restricted investment securities

598

446

Federal funds sold

150

118

Total interest and dividend income

106,283

80,345

Interest expense:

Deposits

26,304

11,410

Short-term borrowings

152

95

Federal Home Loan Bank advances

1,662

2,215

Other borrowings

539

1,182

Subordinated notes

1,557

—

Junior subordinated debentures

1,148

955

Total interest expense

31,362

15,857

Net interest income

74,921

64,488

Provision for loan/lease losses

4,075

4,841

Net interest income after provision for loan/lease losses

70,846

59,647

Noninterest income:

Trust department fees

4,854

4,295

Investment advisory and management fees

3,624

2,010

Deposit service fees

3,212

3,142

Gains on sales of residential real estate loans, net

858

203

Gains on sales of government guaranteed portions of loans, net

70

358

Swap fee income

11,089

2,608

Securities losses, net

(52)

—

Earnings on bank-owned life insurance

952

817

Debit card fees

1,706

1,610

Correspondent banking fees

388

477

Other

2,357

1,934

Total noninterest income

29,058

17,454

Noninterest expenses:

Salaries and employee benefits

43,628

31,782

Occupancy and equipment expense

7,227

6,198

Professional and data processing fees

5,781

5,479

Acquisition costs

—

506

Post-acquisition compensation, transition and integration costs

842

165

FDIC insurance, other insurance and regulatory fees

1,890

1,597

Loan/lease expense

526

551

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

1,480

62

Advertising and marketing

1,822

1,446

Bank service charges

991

907

Correspondent banking expense

410

409

CDI amortization

1,147

609

Other

3,251

2,523

Total noninterest expenses

68,995

52,234

Income before income taxes

30,909

24,867

Federal and state income tax expense

4,487

3,872

Net income

$
26,422

$
20,995

Basic earnings per common share

$
1.68

$
1.51

Diluted earnings per common share

$
1.66

$
1.48

Weighted average common shares outstanding

15,703,967

13,904,113

Weighted average common and common equivalent shares outstanding

15,930,659

14,219,003

Cash dividends declared per common share

$
0.12

$
0.12

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

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)~~

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

Three Months Ended June 30,



2019

2018

(dollars in thousands)

Net income

$
13,504

$
10,445

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:

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

4,669

(1,512)

Less reclassification adjustment for losses included in net income before tax

(52)

—

4,721

(1,512)

Unrealized losses on derivatives:

Unrealized holding losses arising during the period before tax

(1,780)

(323)

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

(134)

178

(1,646)

(501)

Other comprehensive income (loss), before tax

3,075

(2,013)

Tax expense (benefit)

833

(679)

Other comprehensive income (loss), net of tax

2,242

(1,334)

Comprehensive income

$
15,746

$
9,111

Six Months Ended June 30,

2019

2018

(dollars in thousands)

Net income

$
26,422

$
20,995

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:

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

8,813

(6,879)

Less reclassification adjustment for losses included in net income before tax

(52)

—

Less reclassification adjustment for adoption of ASU 2016-01

—

855

8,865

(6,024)

Unrealized losses on derivatives:

Unrealized holding losses arising during the period before tax

(2,942)

(172)

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

(291)

97

(2,651)

(269)

Other comprehensive income (loss), before tax

6,214

(6,293)

Tax expense (benefit)

1,628

(1,757)

Other comprehensive income (loss), net of tax

4,586

(4,536)

Comprehensive income

$
31,008

$
16,459

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Six Months Ended June 30, 2020 and 2019


	2020		2019

	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	85,774	$	93,082
Securities:
Taxable		3,775		3,344
Nontaxable		7,024		7,018
Interest-bearing deposits at financial institutions		495		2,091
Restricted investment securities		546		598
Federal funds sold		18		150
Total interest and dividend income		97,632		106,283

Interest expense:
Deposits		14,972		26,304
Short-term borrowings		86		152
Federal Home Loan Bank advances		796		1,662
Other borrowings		—		539
Subordinated notes		1,988		1,557
Junior subordinated debentures		1,144		1,148
Total interest expense		18,986		31,362
Net interest income		78,646		74,921
Provision for loan/lease losses		28,282		4,075
Net interest income after provision for loan/lease losses		50,364		70,846

Noninterest income:
Trust department fees		4,539		4,854
Investment advisory and management fees		3,126		3,624
Deposit service fees		2,763		3,212
Gains on sales of residential real estate loans, net		1,848		858
Gains on sales of government guaranteed portions of loans, net		—		70
Swap fee income		26,731		11,089
Securities gains (losses), net		65		(52)
Earnings on bank-owned life insurance		941		952
Debit card fees		1,533		1,706
Correspondent banking fees		413		388
Other		1,863		2,357
Total noninterest income		43,822		29,058

Noninterest expenses:
Salaries and employee benefits		39,823		43,628
Occupancy and equipment expense		7,780		7,227
Professional and data processing fees		7,015		5,781
Post-acquisition compensation, transition and integration costs		221		842
Disposition costs		434		—
FDIC insurance, other insurance and regulatory fees		1,591		1,890
Loan/lease expense		567		526
Net cost of (income from) and gains/losses on operations of other real estate		(319)		1,480
Advertising and marketing		1,234		1,822
Bank service charges		1,005		991
Losses on liability extinguishment		576		—
Correspondent banking expense		428		410
Intangibles amortization		1,097		1,147
Goodwill impairment		500		—
Other		2,585		3,251
Total noninterest expenses		64,537		68,995
Net income before income taxes		29,649		30,909
Federal and state income tax expense		4,682		4,487
Net income	$	24,967	$	26,422

Basic earnings per common share	$	1.58	$	1.68
Diluted earnings per common share	$	1.56	$	1.66

Weighted average common shares outstanding		15,771,926		15,703,967
Weighted average common and common equivalent shares outstanding		15,956,958		15,930,659

Cash dividends declared per common share	$	0.12	$	0.12

See Notes to Consolidated Financial Statements (Unaudited

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CHANGES IN STOCKHOLDERS' EQUITY~~COMPREHENSIVE INCOME (UNAUDITED)

Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive


Stock

Capital

Earnings

(Loss)

Total

(dollars in thousands)

Balance December 31, 2018

$
15,718

$
270,761

$
192,203

$
(5,544)

$
473,138
Net income

—

—

12,918

—

12,918
Other comprehensive income, net of tax

—

—

—

2,344

2,344
Common cash dividends declared, $0.06 per share

—

—

(942)

—

(942)
Issuance of 4,446 shares of common stock as a result of

  stock purchased under the Employee Stock Purchase Plan

4

124

—

—

128
Issuance of 25,238 shares of common stock as a result of

  stock options exercised

25

263

—

—

288
Stock-based compensation expense

—

722

—

—

722
Restricted stock awards and restricted stock units - 12,719

  shares of common stock, net of restricted stock units

  withheld for payment of taxes

13

(50)

—

—

(37)
Exchange of 5,169 shares of common stock in connection

   with payroll taxes for restricted stock vested and in

   connection with stock options exercised

(5)

(147)

—

—

(152)
Balance, March 31, 2019

$
15,755

$
271,673

$
204,179

$
(3,200)

$
488,407
Net income

—

—

13,504

—

13,504
Other comprehensive loss, net of tax

—

—

—

2,242

2,242
Common cash dividends declared, $0.06 per share

—

—

(942)

—

(942)
Issuance of 11,346 shares of common stock as a result of

  stock purchased under the Employee Stock Purchase Plan

11

323

—

—

334
Issuance of 2,414 shares of common stock as a result of

  stock options exercised

3

41

—

—

44
Stock-based compensation expense

—

719

—

—

719
Restricted stock awards and restricted stock units- 4,769

  shares of common stock, net of restricted stock units

  withheld for payment of taxes

5

(5)

—

—

—
Exchange of 1,032 shares of common stock in connection

   with payroll taxes for restricted stock vested and in

   connection with stock options exercised

(1)

(7)

—

—

(8)
Balance, June 30, 2019

$
15,773

$
272,744

$
216,741

$
(958)

$
504,300


	Three Months Ended June 30,
	2020		2019

	(dollars in thousands)

Net income	$	13,739	$	13,504

Other comprehensive income (loss):

Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period before tax		5,336		4,669
Less reclassification adjustment for gains (losses) included in net income before tax		65		(52)
		5,271		4,721
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(654)		(1,780)
Less reclassification adjustment for caplet amortization before tax		(124)		(134)
		(530)		(1,646)

Other comprehensive income, before tax		4,741		3,075
Tax expense		1,119		833
Other comprehensive income, net of tax		3,622		2,242

Comprehensive income	$	17,361	$	15,746

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


	Six Months Ended June 30,
	2020		2019

	(dollars in thousands)

Net income	$	24,967	$	26,422

Other comprehensive income (loss):

Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period before tax		7,817		8,813
Less reclassification adjustment for gains (losses) included in net income before tax		65		(52)
		7,752		8,865
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(7,815)		(2,942)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(234)		(291)
		(7,581)		(2,651)

Other comprehensive income (loss), before tax		171		6,214
Tax expense		240		1,628
Other comprehensive income (loss), net of tax		(69)		4,586

Comprehensive income	$	24,898	$	31,008

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019

2019

2018

(dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES





Net income

$
26,422

$
20,995

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





Depreciation

2,518

2,075

Provision for loan/lease losses

4,075

4,841

Stock-based compensation expense

1,441

787

Deferred compensation expense accrued

1,323

1,004

Losses on other real estate owned, net

1,214

118

Amortization of premiums on securities, net

854

829

Securities losses, net

52

—

Loans originated for sale

(45,926)

(21,899)

Proceeds on sales of loans

43,969

22,072

Gains on sales of residential real estate loans

(858)

(203)

Gains on sales of government guaranteed portions of loans

(70)

(358)

Gains on sales of premises and equipment

(67)

—

Amortization of intangibles

1,147

609

Accretion of acquisition fair value adjustments, net

(2,145)

(1,244)

Increase in cash value of bank-owned life insurance

(952)

(817)

Decrease (increase) in other assets

942

(5,132)

Increase (decrease) in other liabilities

(4,615)

5,688

Net cash provided by operating activities

$
29,324

$
29,365





CASH FLOWS FROM INVESTING ACTIVITIES





Net decrease in federal funds sold

16,183

19,331

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

(62,084)

14,964

Proceeds from sales of other real estate owned

539

736

Activity in securities portfolio:

Purchases

(10,709)

(54,951)

Calls, maturities and redemptions

5,958

12,619

Paydowns

27,088

27,187

Sales

4,661

—

Activity in restricted investment securities:



Purchases

(3,868)

(4,215)

Redemptions

7,362

109

Net increase in loans/leases originated and held for investment

(176,394)

(150,993)

Purchase of premises and equipment

(6,032)

(2,666)

Proceeds from sales of premises and equipment

146
��

—

Net cash used in investing activities

$
(197,150)

$
(137,879)





CASH FLOWS FROM FINANCING ACTIVITIES:





Net increase in deposit accounts

345,614

31,652

Net increase (decrease) in short-term borrowings

(9,583)

3,592

Activity in Federal Home Loan Bank advances:



Term advances

5,000

—

Calls and maturities

(35,000)

(10,000)

Net change in short-term and overnight advances

(130,865)

72,100

Activity in other borrowings:



Proceeds from other borrowings

—

9,000

Calls, maturities and scheduled principal payments

(11,937)

(3,875)

Prepayments

(46,313)

—

  Paydown of revolving line of credit

(9,000)

—

Proceeds from subordinated notes

63,393

—

Payment of cash dividends on common stock

(1,881)

(1,526)

Proceeds from issuance of common stock, net

794

918

Net cash provided by financing activities

$
170,222

$
101,861

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


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

	(dollars in thousands)

Balance December 31, 2019	$	15,828	$	274,785	$	245,836	$	(1,098)	$	535,351
Net income		—		—		11,228		—		11,228
Other comprehensive loss, net of tax		—		—		—		(3,691)		(3,691)
Common cash dividends declared, $0.06 per share		—		—		(942)		—		(942)
Repurchase and cancellation of 100,932 shares of common stock
as a result of a share repurchase program		(101)		(1,844)		(1,835)		—		(3,780)
Issuance of 5,553 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		6		208		—		—		214
Issuance of 31,729 shares of common stock as a result of
stock options exercised		32		274		—		—		306
Stock-based compensation expense		—		641		—		—		641
Restricted stock awards and restricted stock units- 10,300 shares
of common stock , net of restricted stock units
withheld for payment for taxes		10		(8)		—		—		2
Exchange of 1,012 shares of common stock in connection
with payroll taxes for restricted stock and in connection
with stock options exercised		(1)		(189)		—		—		(190)
Balance, March 31, 2020	$	15,774	$	273,867	$	254,287	$	(4,789)	$	539,139
Net income		—		—		13,739		—		13,739
Other comprehensive income, net of tax		—		—		—		3,622		3,622
Common cash dividends declared, $0.06 per share		—		—		(945)		—		(945)
Issuance of 16,413 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan		16		462		—		—		478
Issuance of 975 shares of common stock as a result of
stock options exercised		1		9		—		—		10
Stock-based compensation expense		—		423		—		—		423
Exchange of 513 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised		—		(446)		—		—		(446)
Balance, June 30, 2020	$	15,791	$	274,315	$	267,081	$	(1,167)	$	556,020

~~(Continued)~~


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

	(dollars in thousands)

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

~~Table of Contents~~

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued~~

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

2019

2018

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





Interest

$
29,346

$
12,304

Income/franchise taxes

(1,032)

1,010



Supplemental schedule of noncash investing activities:



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

4,586

(4,536)

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

(160)

(194)

Transfers of loans to other real estate owned

1,012

46

Increase in the fair value of back-to-back interest rate swap assets and liabilities

43,628

1,775

Dividends payable

942

836

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

—

2,614

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30, 2020 and 2019


	2020		2019

	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	24,967	$	26,422
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,690		2,518
Provision for loan/lease losses		28,282		4,075
Stock-based compensation expense		1,064		1,441
Deferred compensation expense accrued		1,705		1,323
Losses (gains) on other real estate owned, net		(369)		1,214
Amortization of premiums on securities, net		557		854
Caplet amortization		234		—
Securities (gains) losses, net		(65)		52
Loans originated for sale		(98,837)		(45,926)
Proceeds on sales of loans		96,031		43,969
Gains on sales of residential real estate loans		(1,848)		(858)
Gains on sales of government guaranteed portions of loans		—		(70)
Loss on liability extinguishment, net		576		—
Gains on sales of premises and equipment		(8)		(67)
Amortization of intangibles		1,097		1,147
Accretion of acquisition fair value adjustments, net		(1,361)		(2,145)
Increase in cash value of bank-owned life insurance		(941)		(952)
Goodwill impairment		500		—
Decrease (increase) in other assets		(2,255)		942
Decrease in other liabilities		(12,729)		(4,615)
Net cash provided by operating activities	$	39,290	$	29,324

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold		7,675		16,183
Net decrease (increase) in interest-bearing deposits at financial institutions		7,116		(62,084)
Proceeds from sales of other real estate owned		4,341		539
Activity in securities portfolio:
Purchases		(166,743)		(10,709)
Calls, maturities and redemptions		11,946		5,958
Paydowns		22,541		27,088
Sales		4,592		4,661
Activity in restricted investment securities:
Purchases		(4,274)		(3,868)
Redemptions		4,317		7,362
Net increase in loans/leases originated and held for investment		(447,385)		(176,394)
Purchase of premises and equipment		(1,828)		(6,032)
Proceeds from sales of premises and equipment		88		146
Net cash (used in) investing activities	$	(557,614)	$	(197,150)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		408,849		345,614
Net increase (decrease) in short-term borrowings		111,395		(9,583)
Activity in Federal Home Loan Bank advances:
Term advances		85,000		5,000
Calls and maturities		(40,000)		(35,000)
Net change in short-term and overnight advances		(59,300)		(130,865)
Activity in other borrowings:
Calls, maturities and scheduled principal payments		—		(11,937)
Prepayments		—		(46,313)
Paydown of revolving line of credit		—		(9,000)
Prepayments on brokered and public time deposits		29,359		—
Proceeds from subordinated notes		—		63,393
Payment of cash dividends on common stock		(1,884)		(1,881)
Proceeds from issuance of common stock, net		1,008		794
Repurchase and cancellation of shares		(3,780)		—
Net cash provided by financing activities	$	530,647	$	170,222

Net increase in cash and due from banks		12,323		2,396

Cash and due from banks, beginning		76,254		85,523
Cash and due from banks, ending	$	88,577	$	87,919

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Six Months Ended June 30, 2020 and 2019



Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest	$	19,377	$	29,346
Income/franchise taxes		(1,099)		(1,032)

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net		(69)		4,586
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised		(636)		(160)
Transfers of loans to other real estate owned		—		1,012
Due to broker for purchases of securities		4,338		—
Due from broker for sales of securities		1,735		—
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities		140,048		43,628
Dividends payable		945		942

See Notes to Consolidated Financial Statements (Unaudited)

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, ~~2019~~2020

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The interim unaudited ~~consolidated financial statements~~Consolidated Financial Statements contained herein should be read in conjunction with the audited ~~consolidated financial statements~~Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, ~~2018,~~2019, included in the Company's Annual Report on Form ~~10‑K~~10-K filed with the SEC on March ~~15, 2019.~~13, 2020. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited ~~consolidated financial statements,~~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~~10-Q and Rule ~~10‑01~~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 30, ~~2019~~2020 are not necessarily indicative of the results expected for the year ending December 31, ~~2019,~~2020, or for any other period.

The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form ~~10‑Q.~~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,~~Bancshares, 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~~LRP: Loan Relief Program
ASU: Accounting Standards Update	~~NIM: Net interest margin~~m2: m2 Lease Funds, LLC
Bates Companies: Bates Financial Advisors, Inc., Bates	~~NPA: Nonperforming asset~~MSELF: Main Street Expanded Loan Facility
Financial Services, Inc., Bates Securities, Inc. and	MSNLF: Main Street New Loan Facility
Bates Financial Group, Inc.	NIM: Net interest margin
BOLI: Bank-owned life insurance	NPA: Nonperforming asset
Caps: Interest rate cap derivatives	NPL: Nonperforming loan
~~Bates Financial Group, Inc.~~CARES Act: Coronavirus Aid, Relief and Economy	OREO: Other real estate owned
~~BOLI: Bank-owned life insurance~~Security Act	OTTI: Other-than-temporary impairment
~~Caps: Interest rate cap derivatives~~CDI: Core deposit intangible	PCI: Purchased credit impaired
~~CDI: Core deposit intangible~~CECL: Current Expected Credit Losses	PPP: Paycheck Protection Program
Community National: Community National Bancorporation	Provision: Provision for loan/lease losses
~~Community National: Community National Bancorporation~~COVID-19: Coronavirus Disease 2019	QCBT: Quad City Bank & Trust Company
CRBT: Cedar Rapids Bank & Trust Company	RB&T: Rockford Bank & Trust Company
CRE: Commercial real estate	ROAA: Return on Average Assets
CSB: Community State Bank	SBA: U.S. Small Business Administration
C&I: Commercial and industrial	SEC: Securities and Exchange Commission
EPS: Earnings per share	SFC Bank: Springfield First Community Bank
Exchange Act: Securities Exchange Act of 1934, as	Springfield Bancshares: Springfield Bancshares, Inc.
amended	TA: Tangible assets
FASB: Financial Accounting Standards Board	TCE: Tangible common equity
FDIC: Federal Deposit Insurance Corporation	TDRs: Troubled debt restructurings
FHLB: Federal Home Loan Bank	TEY: Tax equivalent yield
FRB: Federal Reserve Bank of Chicago	The Company: QCR Holdings, Inc.
GAAP: Generally Accepted Accounting Principles	USDA: U.S. Department of Agriculture

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The ~~consolidated financial statements~~Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of ~~five~~4 commercial banks: QCBT, CRBT, CSB and SFC ~~Bank and RB&T.~~Bank. 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~~On November 30, 2019, the Company sold substantially all of the ~~Bates Companies, headquartered in Rockford, Illinois, occurred on October 1, 2018. The merger with Springfield Bancshares,~~assets and transferred substantially all of the ~~holding company~~deposits and certain other liabilities of ~~SFC Bank, headquartered in Springfield, Missouri, occurred on July 1, 2018.~~the Company’s wholly-owned subsidiary, RB&T. The financial results ~~for the periods since acquisition/merger~~of RB&T prior to its sale 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~~2019 for additional information about the ~~acquisition and merger.~~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,~~ 2016-13, Financial Instruments – Credit Losses. Under the standard, assets measured at amortized ~~costs~~cost (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~~asset’s life. For public companies, ASU ~~2016‑13~~2016-13 is effective for fiscal years beginning after December 15, 2019, including ~~interim~~items periods within those fiscal years. ~~Companies may choose~~On March 27, 2020, the CARES Act, a stimulus package designed in response to ~~early adopt for fiscal years~~the economic disruption created by COVID-19, was signed into law. The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13. Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate will be required to comply with ASU 2016-13, beginning ~~after~~on the date of the enactment, March 27, 2020 until the earlier of the two following dates: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December ~~15, 2018, including interim periods within those fiscal years.~~ 31, 2020.The Company has elected to defer its implementation of ASU 2016-13 as allowed by the CARES Act. The Company has developed a CECL allowance model which calculates allowances over the life of the loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions. Those assumptions are based upon the existing probability of default and loss given default framework. The Company will utilize economic and other forecasts over a four quarter reasonable and supportable forecast period and then fully revert back to average historical losses. The Company’s credit administration team will periodically refine the model as needed and is running parallel calculations. The Company anticipates increases in the allowance for credit losses on longer dated portfolios and decreases in the shorter dated portfolios. The Company estimates an increase in the allowance for estimated losses on loans/leases in the range of $4 million to $6 million upon adoption of CECL at both January 1, 2020 and June 30, 2020. The Company continues to work on the process of ~~analyzing~~finalizing the ~~impact~~review of ~~adoption~~the most recent model run and on finalizing the assumptions, including qualitative adjustments and economic forecasts, which has resulted in adjustments to previous estimates.

Risks and Uncertainties: On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the ~~Company's Consolidated Financial Statements.~~

~~In January 2017,~~economies and financial markets of many countries, including 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 bygeographical area in which the ~~carrying amount exceeds~~Company operates. On March 27, 2020, the ~~reporting unit’s fair value,~~CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the ~~extent~~COVID-19 pandemic.The Company currently expects that the ~~loss recognized does not exceed~~COVID-19 pandemic and the ~~amount of goodwill allocated~~specific developments referred 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~~above will have a significant impact on its ~~Consolidated Financial Statements.~~

~~Reclassifications: Certain amounts~~business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the ~~prior year's consolidated financial statements have been reclassified,~~hotel, restaurant, entertainment and retail industries will continue to endure significant economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with ~~no effect on net income or stockholders' equity,~~economic conditions generally, are also expected to ~~conform~~impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the ~~current period presentation.~~

Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. As a result,

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

the Company anticipates that its financial condition, capital levels, asset quality and results of operations will be adversely affected, as described in further detail on this report.

Due to the economic impact that COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions led to the occurrence of a triggering event during the first quarter of 2020, therefore an interim impairment test over goodwill was performed as of March 31, 2020. When such an assessment is performed, should the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Based upon the results of the interim goodwill assessment during the first quarter of 2020, the Company concluded that an impairment did not exist on the bank reporting units as of the time of the assessment. There was no occurrence of a triggering event during the second quarter of 2020 therefore no impairment test over goodwill was needed.

NOTE ~~2 –~~2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are summarized as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair


Cost

Gains

(Losses)

Value

(dollars in thousands)
June 30, 2019:








Securities HTM:








Municipal securities

$
387,663

$
17,967

$
(468)

$
405,162
Other securities

1,050

—

—

1,050

$
388,713

$
17,967

$
(468)

$
406,212








Securities AFS:








U.S. govt. sponsored agency securities

$
35,430

$
431

$
(99)

$
35,762
Residential mortgage-backed and related securities

157,760

2,053

(585)

159,228
Municipal securities

51,948

1,259

(18)

53,189
Other securities

6,754

157

—

6,911

$
251,892

$
3,900

$
(702)

$
255,090


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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2018:
									(dollars in thousands)
June 30, 2020:
Securities HTM:
Municipal securities	$	400,863	$	5,661	$	(6,803)	$	399,721	$	424,926	$	21,323	$	(2,231)	$	444,018
Other securities		1,050		—		(1)		1,049		1,050		—		—		1,050
	$	401,913	$	5,661	$	(6,804)	$	400,770

									$	425,976	$	21,323	$	(2,231)	$	445,068

Securities AFS:
U.S. govt. sponsored agency securities	$	37,150	$	39	$	(778)	$	36,411	$	16,663	$	809	$	—	$	17,472
Residential mortgage-backed and related securities		163,698		182		(4,631)		159,249		138,044		7,659		(31)		145,672
Municipal securities		59,069		180		(703)		58,546		98,388		2,962		(84)		101,266
Asset-backed securities										39,712		414		(329)		39,797
Other securities		6,754		100		(4)		6,850		18,550		173		(23)		18,700
	$	266,671	$	501	$	(6,116)	$	261,056
									$	311,357	$	12,017	$	(467)	$	322,907


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

	(dollars in thousands)
December 31, 2019:
Securities HTM:
Municipal securities	$	399,596	$	26,042	$	(143)	$	425,495
Other securities		1,050		—		—		1,050
	$	400,646	$	26,042	$	(143)	$	426,545

Securities AFS:
U.S. govt. sponsored agency securities	$	19,872	$	283	$	(77)	$	20,078
Residential mortgage-backed and related securities		118,724		2,045		(182)		120,587
Municipal securities		46,659		1,602		(4)		48,257
Asset-backed securities		16,958		—		(71)		16,887
Other securities		4,749		138		(1)		4,886
	$	206,962	$	4,068	$	(335)	$	210,695

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.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, are summarized as follows:

Less than 12 Months

12 Months or More

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


Value

Losses

Value

Losses

Value

Losses

(dollars in thousands)
June 30, 2019:












Securities HTM:












Municipal securities

$
513

$
(3)

$
21,731

$
(465)

$
22,244

$
(468)
Other securities

—

—

—

—

—

—

$
513

$
(3)

$
21,731

$
(465)

$
22,244

$
(468)












Securities AFS:










U.S. govt. sponsored agency securities

$
—

$
—

$
6,652

$
(99)

$
6,652

$
(99)
Residential mortgage-backed and related securities

—

—

47,176

(585)

47,176

(585)
Municipal securities

—

—

2,914

(18)

2,914

(18)
Other securities

248

—

—

—

248

—

$
248

$
—

$
56,742

$
(702)

$
56,990

$
(702)


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

	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:
													(dollars in thousands)
June 30, 2020:
Securities HTM:
Municipal securities	$	114,201	$	(2,187)	$	69,412	$	(4,616)	$	183,613	$	(6,803)	$	47,822	$	(2,231)	$	—	$	—	$	47,822	$	(2,231)
Other securities		549		(1)		—		—		549		(1)		1,050		—		—		—		1,050		—
	$	114,750	$	(2,188)	$	69,412	$	(4,616)	$	184,162	$	(6,804)
													$	48,872	$	(2,231)	$	—	$	—	$	48,872	$	(2,231)

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)		19,127		(31)		—		—		19,127		(31)
Municipal securities		28,356		(394)		15,932		(309)		44,288		(703)		12,105		(84)		—		—		12,105		(84)
Asset-backed securities														16,611		(329)		—		—		16,611		(329)
Other securities		4,249		(4)		—		—		4,249		(4)		1,977		(23)		—		—		1,977		(23)
	$	46,980	$	(580)	$	179,072	$	(5,536)	$	226,052	$	(6,116)
													$	49,820	$	(467)	$	—	$	—	$	49,820	$	(467)


	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, 2019:
Securities HTM:
Municipal securities	$	509	$	(1)	$	10,047	$	(142)	$	10,556	$	(143)
Other securities		550		—		—		—		550		—
	$	1,059	$	(1)	$	10,047	$	(142)	$	11,106	$	(143)
Securities AFS:
U.S. govt. sponsored agency securities	$	1,431	$	(21)	$	2,117	$	(56)	$	3,548	$	(77)
Residential mortgage-backed and related securities		2,263		(17)		17,862		(165)		20,125		(182)
Municipal securities		—		—		724		(4)		724		(4)
Asset-backed securities		16,886		(71)		—		—		16,886		(71)
Other securities		249		(1)		—		—		249		(1)
	$	20,829	$	(110)	$	20,703	$	(225)	$	41,532	$	(335)

At June 30, ~~2019,~~2020, the investment portfolio included ~~587~~609 securities. Of this number, 6954 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~0.2%~~0.4% of the total amortized cost of the portfolio. Of these 6954 securities, 670 securities had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At June 30, 2020, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

The Company did not recognize OTTI on any investment securities for the three or six months ended June 30, ~~2019~~2020 and ~~2018.~~

2019.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

All sales of securities for the three and six months ended June 30, 2020 and June 30, 2019 were securities identified as AFS. ~~There were no sales for the three and six months ended June 30, 2018. Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:~~

Three and Six Months Ended

June 30, 2019

(dollars in thousands)

Proceeds from sales of securities

$
4,661

Gross gains from sales of securities

—

Gross losses from sales of securities

(52)


	Three and Six Months Ended
	June 30, 2020		June 30, 2019

		(dollars in thousands)

Proceeds from sales of securities	$	6,327	$	4,661
Gross gains from sales of securities		134		—
Gross losses from sales of securities		(69)		(52)

The amortized cost and fair value of securities as of June 30, ~~2019~~2020 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the ~~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

(dollars in thousands)
Securities HTM:




Due in one year or less

$
2,781

$
2,794
Due after one year through five years

32,323

32,929
Due after five years

353,609

370,489

$
388,713

$
406,212
Securities AFS:




Due in one year or less

$
1,624

$
1,633
Due after one year through five years

27,466

27,638
Due after five years

65,042

66,591

94,132

95,862
Residential mortgage-backed and related securities

157,760

159,228

$
251,892

$
255,090


	Amortized Cost		Fair Value

	(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,448	$	3,469
Due after one year through five years		35,903		36,526
Due after five years		386,625		405,073
	$	425,976	$	445,068
Securities AFS:
Due in one year or less	$	1,921	$	1,903
Due after one year through five years		14,976		15,411
Due after five years		116,704		120,124
		133,601		137,438
Residential mortgage-backed and related securities		138,044		145,672
Asset-backed securities		39,712		39,797
	$	311,357	$	322,907

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

(dollars in thousands)
Securities HTM:




Municipal securities

$
188,313

$
193,173




Securities AFS:




U.S. govt. sponsored agency securities

4,999

5,003
Municipal securities

44,184

45,185
Other securities

6,505

6,662

$
55,688

$
56,850


	Amortized Cost		Fair Value

	(dollars in thousands)
Securities HTM:
Municipal securities	$	202,436	$	205,736

Securities AFS:
Municipal securities		84,011		86,534
Other securities		4,500		4,650
	$	88,511	$	91,184

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

As of June 30, ~~2019,~~2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by ~~101~~97 issuers with fair values totaling ~~$81.0~~$83.3 million and revenue bonds issued by ~~159~~170 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$377.3~~$462.0 million. The Company held investments in general obligation bonds in 2423 states, including ~~six~~7 states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 1922 states, including ~~seven~~12 states in which the aggregate fair value exceeded $5.0 million.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

As of December 31, ~~2018,~~2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by ~~110~~93 issuers with fair values totaling ~~$86.4~~$77.2 million and revenue bonds issued by ~~160~~154 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$371.9~~$396.6 million. The Company held investments in general obligation bonds in 2622 states, including ~~six~~ 6states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 1917 states, including ~~seven~~9 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 30, ~~2019 and~~2020 the Company did not hold any revenue bonds of one single issuer of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. As of December 31, ~~2018~~2019, 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~~4 charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of June 30, ~~2019,~~2020, 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 30, ~~2019,~~2020, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 is presented as follows:

As of June 30,

As of December 31,


2019

2018

(dollars in thousands)

C&I loans *

$
1,548,657

$
1,429,410
CRE loans



Owner-occupied CRE

494,638

500,654
Commercial construction, land development, and other land

312,578

236,787
Other non owner-occupied CRE

1,030,257

1,028,670

1,837,473

1,766,111

Direct financing leases **

101,180

117,969
Residential real estate loans ***

293,479

290,759
Installment and other consumer loans

120,947

119,381

3,901,736

3,723,630
Plus deferred loan/lease origination costs, net of fees

8,783

9,124

3,910,519

3,732,754
Less allowance

(41,104)

(39,847)

$
3,869,415

$
3,692,907
** Direct financing leases:




Net minimum lease payments to be received

$
111,764

$
130,371
Estimated unguaranteed residual values of leased assets

690

828
Unearned lease/residual income

(11,274)

(13,230)

101,180

117,969
Plus deferred lease origination costs, net of fees

2,760

3,642

103,940

121,611
Less allowance

(1,459)

(1,792)

$
102,481

$
119,819


	2020		2019

	(dollars in thousands)

C&I loans*	$	1,850,110	$	1,507,825
CRE loans
Owner-occupied CRE		467,537		443,989
Commercial construction, land development, and other land		441,364		378,797
Other non owner-occupied CRE		960,261		913,610
		1,869,162		1,736,396

Direct financing leases **		79,105		87,869
Residential real estate loans ***		241,069		239,904
Installment and other consumer loans		99,150		109,352
		4,138,596		3,681,346
Plus deferred loan/lease origination costs, net of fees		1,663		8,859
		4,140,259		3,690,205
Less allowance		(60,827)		(36,001)
	$	4,079,432	$	3,654,204
** Direct financing leases:
Net minimum lease payments to be received	$	87,389	$	97,025
Estimated unguaranteed residual values of leased assets		616		547
Unearned lease/residual income		(8,900)		(9,703)
		79,105		87,869
Plus deferred lease origination costs, net of fees		1,448		1,892
		80,553		89,761
Less allowance		(1,639)		(1,464)
	$	78,914	$	88,297

* Includes equipment financing agreements outstanding at m2, totaling ~~$122.6~~$153.7 million and ~~$103.4~~$142.0 million as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 months ended June 30, 2019 and 2018.~~

*** Includes residential real estate loans held for sale totaling ~~$4.2~~$8.3 million and ~~$1.3~~$3.7 million as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Changes in accretable yield for acquired loans were as follows:

Three months ended June 30, 2019

Six months ended June 30, 2019


PCI

Performing


PCI

Performing


Loans

Loans

Total

Loans

Loans

Total

(dollars in thousands)

Balance at the beginning of the period

$
(319)

$
(8,830)

$
(9,149)

$
(667)

$
(9,656)

$
(10,323)

Reclassification of nonaccretable discount to accretable

(159)

—

(159)

(159)

—

(159)

Accretion recognized

327

812

1,139

675

1,638

2,313

Balance at the end of the period

$
(151)

$
(8,018)

$
(8,169)

$
(151)

$
(8,018)

$
(8,169)


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

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

													(dollars in thousands)

Balance at the beginning of the period	$	(157)	$	(5,659)	$	(5,816)	$	(191)	$	(6,280)	$	(6,471)	$	(59)	$	(5,725)	$	(5,784)	$	(57)	$	(6,378)	$	(6,435)
Reclassification of nonaccretable discount to accretable														—		—		—		(30)		—		(30)
Accretion recognized		15		608		623		49		1,229		1,278		1		790		791		29		1,443		1,472
Balance at the end of the period	$	(142)	$	(5,051)	$	(5,193)	$	(142)	$	(5,051)	$	(5,193)	$	(58)	$	(4,935)	$	(4,993)	$	(58)	$	(4,935)	$	(4,993)


	Three months ended June 30, 2019						Six months ended June 30, 2019
	PCI		Performing				PCI		Performing
	Loans		Loans		Total		Loans		Loans		Total

	(dollars in thousands)

Balance at the beginning of the period	$	(319)	$	(9,301)	$	(9,620)	$	(667)	$	(10,127)	$	(10,794)
Reclassification of nonaccretable discount to accretable		(159)		—		(159)		(159)		—		(159)
Accretion recognized		327		812		1,139		675		1,638		2,313
Balance at the end of the period	$	(151)	$	(8,489)	$	(8,640)	$	(151)	$	(8,489)	$	(8,640)

The aging of the loan/lease portfolio by classes of loans/leases as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 is presented as follows:

As of June 30, 2019

Accruing Past

30-59 Days

60-89 Days

Due 90 Days or

Nonaccrual

Classes of Loans/Leases

Current

Past Due

Past Due

More

Loans/Leases

Total

(dollars in thousands)

C&I

$
1,540,661

$
4,136

$
307

$
—

$
3,553

$
1,548,657

CRE













Owner-Occupied CRE

493,877

571

—

—

190

494,638

Commercial Construction, Land Development, and Other Land

312,288

96

—

—

194

312,578

Other Non Owner-Occupied CRE

1,024,769

67

11

—

5,410

1,030,257

Direct Financing Leases

98,581

971

80

—

1,548

101,180

Residential Real Estate

291,605

190

160

54

1,470

293,479

Installment and Other Consumer

120,082

78

—

4

783

120,947

$
3,881,863

$
6,109

$
558

$
58

$
13,148

$
3,901,736













As a percentage of total loan/lease portfolio

99.49
%

0.16
%

0.01
%

0.00
%

0.34
%

100.00
%


	As of December 31, 2018
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual

																			As of June 30, 2020
																												Accruing Past
																						30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total			Current			Past Due			Past Due			More			Loans/Leases			Total
	(dollars in thousands)

																			(dollars in thousands)

C&I	$	1,423,406		$	930		$	597		$	389		$	4,088		$	1,429,410		$	1,846,417		$	1,650		$	311		$	62		$	1,670		$	1,850,110
CRE
Owner-Occupied CRE		500,138			—			193			107			216			500,654			467,032			—			185			—			320			467,537
Commercial Construction, Land Development, and Other Land		234,704			1,764			—			—			319			236,787			441,336			28			—			—			—			441,364
Other Non Owner-Occupied CRE		1,022,664			484			—			—			5,522			1,028,670			950,993			1,776			—			—			7,492			960,261
Direct Financing Leases		114,078			1,642			488			—			1,761			117,969			77,637			277			151			—			1,040			79,105
Residential Real Estate		284,844			3,877			206			89			1,743			290,759			239,729			—			404			—			936			241,069
Installment and Other Consumer		118,343			356			24			47			611			119,381			98,435			11			27			37			640			99,150
	$	3,698,177		$	9,053		$	1,508		$	632		$	14,260		$	3,723,630

																			$	4,121,579		$	3,742		$	1,078		$	99		$	12,099		$	4,138,596

As a percentage of total loan/lease portfolio		99.32	%		0.24	%		0.04	%		0.02	%		0.38	%		100.00	%		99.59	%		0.09	%		0.03	%		—	%		0.29	%		100.00	%


	As of December 31, 2019
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total

	(dollars in thousands)

C&I	$	1,499,891		$	6,126		$	572		$	—		$	1,236		$	1,507,825
CRE
Owner-Occupied CRE		443,707			177			71			—			34			443,989
Commercial Construction, Land Development, and Other Land		375,940			2,857			—			—			—			378,797
Other Non Owner-Occupied CRE		909,684			73			—			—			3,853			913,610
Direct Financing Leases		85,636			463			253			—			1,517			87,869
Residential Real Estate		235,845			2,939			414			—			706			239,904
Installment and Other Consumer		108,750			3			10			33			556			109,352
	$	3,659,453		$	12,638		$	1,320		$	33		$	7,902		$	3,681,346

As a percentage of total loan/lease portfolio		99.41	%		0.34	%		0.04	%		0.00	%		0.21	%		100.00	%

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NPLs by classes of loans/leases as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are presented as follows:

As of June 30, 2019

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

$
—

$
3,553

$
1,112

$
4,665

32.13
%
CRE











Owner-Occupied CRE

—

190

104

294

2.02
%
Commercial Construction, Land Development, and Other Land

—

194

—

194

1.34
%
Other Non Owner-Occupied CRE

—

5,410

—

5,410

37.26
%
Direct Financing Leases

—

1,548

97

1,645

11.33
%
Residential Real Estate

54

1,470

—

1,524

10.50
%
Installment and Other Consumer

4

783

—

787

5.42
%

$
58

$
13,148

$
1,313

$
14,519

100.00
%


	As of June 30, 2020
	Accruing Past
	Due 90 Days or		Nonaccrual						Percentage of
Classes of Loans/Leases	More		Loans/Leases **		Accruing TDRs		Total NPLs		Total NPLs

	(dollars in thousands)

C&I	$	62	$	1,670	$	652	$	2,384	18.17	%
CRE
Owner-Occupied CRE		—		320		—		320	2.44	%
Commercial Construction, Land Development, and Other Land		—		—		—		—	-	%
Other Non Owner-Occupied CRE		—		7,492		—		7,492	57.12	%
Direct Financing Leases		—		1,040		268		1,308	9.97	%
Residential Real Estate		—		936		—		936	7.14	%
Installment and Other Consumer		37		640		—		677	5.16	%
	$	99	$	12,099	$	920	$	13,118	100.00	%

** Nonaccrual loans/leases included ~~$2.8 million~~$352 thousand of TDRs, including ~~$28~~$129 thousand in ~~C&I~~commercial and industrial loans, ~~$2.2 million in CRE loans, $314~~$138 thousand in direct financing leases, ~~$286~~$31 thousand in residential real estate loans, and $2$54 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.


	As of December 31, 2019
	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	$	—	$	1,236	$	646	$	1,882	21.12	%
CRE
Owner-Occupied CRE		—		34		—		34	0.38	%
Commercial Construction, Land Development, and Other Land		—		—		—		—	-	%
Other Non Owner-Occupied CRE		—		3,853		—		3,853	43.22	%
Direct Financing Leases		—		1,517		333		1,850	20.75	%
Residential Real Estate		—		706		—		706	7.92	%
Installment and Other Consumer		33		556		—		589	6.61	%
	$	33	$	7,902	$	979	$	8,914	100.00	%

** Nonaccrual loans/leases included ~~$2.3 million~~$747 thousand of TDRs, including ~~$265~~$98 thousand in C&I loans, ~~$1.4 million~~$269 thousand in CRE loans, ~~$321~~$294 thousand in direct financing leases, ~~$344~~$31 thousand in residential real estate loans, and $3$55 thousand in installment loans.

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 months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, are presented as follows:


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

	Three Months Ended June 30, 2019
					Direct Financing		Residential Real		Installment and
	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	$	18,151	$	19,269	$	1,303	$	2,313	$	1,197	$	42,233
Provisions (credits) charged to expense		1,116		414		331		86		(6)		1,941
Provisions charged to expense														7,859		10,365		887		697		107		19,915
Loans/leases charged off		(193)		(1,369)		(497)		(73)		(20)		(2,152)		(340)		(511)		(595)		—		(4)		(1,450)
Recoveries on loans/leases previously charged off		65		15		19		31		21		151		78		—		44		—		7		129
Balance, ending	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104	$	25,748	$	29,123	$	1,639	$	3,010	$	1,307	$	60,827


													Three Months Ended June 30, 2019
																	Direct Financing		Residential Real		Installment and
													C&I		CRE		Leases		Estate		Other Consumer		Total

	Three Months Ended June 30, 2018
					Direct Financing		Residential Real		Installment and
	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	$	17,260	$	18,303	$	1,606	$	2,538	$	1,457	$	41,164
Provisions (credits) charged to expense		777		872		688		57		(93)		2,301		1,116		414		331		86		(6)		1,941
Loans/leases charged off		(729)		—		(794)		—		(1)		(1,524)		(193)		(1,369)		(497)		(73)		(20)		(2,152)
Recoveries on loans/leases previously charged off		121		9		100		1		5		236		65		15		19		31		21		151
Balance, ending	$	15,234	$	15,819	$	2,724	$	2,433	$	1,335	$	37,545	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104


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

	Six Months Ended June 30, 2019
					Direct Financing		Residential Real		Installment and
	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	$	16,072	$	15,379	$	1,464	$	1,948	$	1,138	$	36,001
Provisions charged to expense		2,123		948		776		68		160		4,075		11,556		14,181		1,281		1,033		231		28,282
Loans/leases charged off		(527)		(1,369)		(1,149)		(73)		(94)		(3,212)		(1,979)		(511)		(1,195)		—		(100)		(3,785)
Recoveries on loans/leases previously charged off		232		65		40		30		27		394		99		74		89		29		38		329
Balance, ending	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104	$	25,748	$	29,123	$	1,639	$	3,010	$	1,307	$	60,827


													Six Months Ended June 30, 2019
																	Direct Financing		Residential Real		Installment and
													C&I		CRE		Leases		Estate		Other Consumer		Total

	Six Months Ended June 30, 2018
					Direct Financing		Residential Real		Installment and
	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	$	16,420	$	17,719	$	1,792	$	2,557	$	1,359	$	39,847
Provisions charged to expense		1,585		1,837		1,293		18		108		4,841
Provisions (credits) charged to expense														2,123		948		776		68		160		4,075
Loans/leases charged off		(824)		—		(1,079)		(52)		(6)		(1,961)		(527)		(1,369)		(1,149)		(73)		(94)		(3,212)
Recoveries on loans/leases previously charged off		150		19		128		1		11		309		232		65		40		30		27		394
Balance, ending	$	15,234	$	15,819	$	2,724	$	2,433	$	1,335	$	37,545	$	18,248	$	17,363	$	1,459	$	2,582	$	1,452	$	41,104

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The allowance by impairment evaluation and by portfolio segment as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 is presented as follows:


																			As of June 30, 2020
																									Direct Financing			Residential Real			Installment and
																			C&I			CRE			Leases			Estate			Other Consumer			Total

	As of June 30, 2019
							Direct Financing			Residential Real			Installment and
	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		$	341		$	1,692		$	20		$	23		$	78		$	2,154
Allowance for nonimpaired loans/leases		17,163			16,918			1,366			2,390			1,300			39,137			25,407			27,431			1,619			2,987			1,229			58,673
	$	18,248		$	17,363		$	1,459		$	2,582		$	1,452		$	41,104

																			$	25,748		$	29,123		$	1,639		$	3,010		$	1,307		$	60,827

Impaired loans/leases	$	4,520		$	7,736		$	1,860		$	1,628		$	1,052		$	16,796		$	2,547		$	7,815		$	1,419		$	884		$	640		$	13,305
Nonimpaired loans/leases		1,544,137			1,829,737			99,320			291,851			119,895			3,884,940			1,847,563			1,861,347			77,686			240,185			98,510			4,125,291
	$	1,548,657		$	1,837,473		$	101,180		$	293,479		$	120,947		$	3,901,736

																			$	1,850,110		$	1,869,162		$	79,105		$	241,069		$	99,150		$	4,138,596

Allowance as a percentage of impaired loans/leases		24.00	%		5.75	%		5.00	%		11.79	%		14.45	%		11.71	%		13.39	%		21.65	%		1.41	%		2.60	%		12.19	%		16.19	%
Allowance as a percentage of nonimpaired loans/leases		1.11	%		0.92	%		1.38	%		0.82	%		1.08	%		1.01	%		1.38	%		1.47	%		2.08	%		1.24	%		1.25	%		1.42	%
Total allowance as a percentage of total loans/leases		1.18	%		0.94	%		1.44	%		0.88	%		1.20	%		1.05	%		1.39	%		1.56	%		2.07	%		1.25	%		1.32	%		1.47	%


	As of December 31, 2019
							Direct Financing			Residential Real			Installment and
	C&I			CRE			Leases			Estate			Other Consumer			Total

	(dollars in thousands)

Allowance for impaired loans/leases	$	170		$	125		$	270		$	15		$	80		$	660
Allowance for nonimpaired loans/leases		15,902			15,254			1,194			1,933			1,058			35,341
	$	16,072		$	15,379		$	1,464		$	1,948		$	1,138		$	36,001

Impaired loans/leases	$	1,846		$	3,585		$	2,025		$	649		$	556		$	8,661
Nonimpaired loans/leases		1,505,979			1,732,811			85,844			239,255			108,796			3,672,685
	$	1,507,825		$	1,736,396		$	87,869		$	239,904		$	109,352		$	3,681,346

Allowance as a percentage of impaired loans/leases		9.21	%		3.49	%		13.33	%		2.31	%		14.41	%		7.62	%
Allowance as a percentage of nonimpaired loans/leases		1.06	%		0.88	%		1.39	%		0.81	%		0.97	%		0.96	%
Total allowance as a percentage of total loans/leases		1.07	%		0.89	%		1.67	%		0.81	%		1.04	%		0.98	%

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.

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 six months ended June 30, ~~2019~~2020 are presented as follows:



											Interest Income
							Average				Recognized for
	Recorded		Unpaid Principal		Related		Recorded		Interest Income		Cash Payments

													Six Months Ended June 30, 2020

																							Interest Income
																			Average				Recognized for
													Recorded		Unpaid Principal		Related		Recorded		Interest Income		Cash Payments
Classes of Loans/Leases	Investment		Balance		Allowance		Investment		Recognized		Received		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	$	1,978	$	2,051	$	—	$	1,512	$	25	$	25
CRE
Owner-Occupied CRE		216		232		—		187		11		11		320		577		—		128		—		—
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		965		965		—		742		14		14
Direct Financing Leases		1,600		1,600		—		1,901		16		16		1,364		1,364		—		1,379		11		11
Residential Real Estate		810		1,001		—		765		1		1		624		652		—		474		—		—
Installment and Other Consumer		875		875		—		797		7		7		562		562		—		525		—		—
	$	9,512	$	10,994	$	—	$	10,141	$	192	$	192

													$	5,813	$	6,171	$	—	$	4,760	$	50	$	50

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	2,472	$	2,478	$	1,085	$	1,917	$	18	$	18	$	569	$	569	$	341	$	479	$	—	$	—
CRE
Owner-Occupied CRE		124		124		21		129		—		—		—		—		—		—		—		—
Commercial Construction, Land Development, and Other Land		142		142		31		145		—		—		—		—		—		—		—		—
Other Non Owner-Occupied CRE		3,291		3,291		393		1,588		—		—		6,530		6,530		1,692		5,329		—		—
Direct Financing Leases		260		260		93		196		1		1		55		55		20		59		—		—
Residential Real Estate		818		818		192		829		3		3		260		260		23		206		—		—
Installment and Other Consumer		177		177		152		136		—		—		78		78		78		67		—		—
	$	7,284	$	7,290	$	1,967	$	4,940	$	22	$	22

													$	7,492	$	7,492	$	2,154	$	6,140	$	—	$	—

Total Impaired Loans/Leases:
C&I	$	4,520	$	4,566	$	1,085	$	3,597	$	70	$	70	$	2,547	$	2,620	$	341	$	1,991	$	25	$	25
CRE
Owner-Occupied CRE		340		356		21		316		11		11		320		577		—		128		—		—
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		7,495		7,495		1,692		6,071		14		14
Direct Financing Leases		1,860		1,860		93		2,097		17		17		1,419		1,419		20		1,438		11		11
Residential Real Estate		1,628		1,819		192		1,594		4		4		884		912		23		680		—		—
Installment and Other Consumer		1,052		1,052		152		933		7		7		640		640		78		592		—		—
	$	16,796	$	18,284	$	1,967	$	15,081	$	214	$	214

													$	13,305	$	13,663	$	2,154	$	10,900	$	50	$	50

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 30, ~~2019~~2020 and ~~2018, respectively~~2019 are presented as follows:


	Three Months Ended June 30, 2019						Three Months Ended June 30, 2018
					Interest Income						Interest Income
	Average				Recognized for		Average				Recognized for
	Recorded		Interest Income		Cash Payments		Recorded		Interest Income		Cash Payments

													Three Months Ended June 30, 2020						Three Months Ended June 30, 2019
																	Interest Income						Interest Income
													Average				Recognized for		Average				Recognized for
													Recorded		Interest Income		Cash Payments		Recorded		Interest Income		Cash Payments
Classes of Loans/Leases	Investment		Recognized		Received		Investment		Recognized		Received		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	$	1,742	$	13	$	13	$	1,683	$	29	$	29
CRE
Owner-Occupied CRE		194		7		7		289		6		6		174		—		—		194		7		7
Commercial Construction, Land Development, and Other Land		603		6		6		—		—		—		—		—		—		603		6		6
Other Non Owner-Occupied CRE		3,985		22		22		1,105		—		—		978		7		7		3,985		22		22
Direct Financing Leases		1,795		7		7		2,199		3		3		1,411		6		6		1,795		7		7
Residential Real Estate		801		—		—		929		—		—		524		—		—		801		—		—
Installment and Other Consumer		816		3		3		101		—		—		550		—		—		816		3		3
	$	9,877	$	74	$	74	$	6,024	$	68	$	68

													$	5,379	$	26	$	26	$	9,877	$	74	$	74

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	2,046	$	9	$	9	$	353	$	2	$	2	$	568	$	—	$	—	$	2,046	$	9	$	9
CRE
Owner-Occupied CRE		127		—		—		145		—		—		—		—		—		127		—		—
Commercial Construction, Land Development, and Other Land		143		—		—		5,492		—		—		—		—		—		143		—		—
Other Non Owner-Occupied CRE		1,980		—		—		—		—		—		6,560		—		—		1,980		—		—
Direct Financing Leases		227		—		—		566		—		—		57		—		—		227		—		—
Residential Real Estate		822		1		1		512		3		3		220		—		—		822		1		1
Installment and Other Consumer		150		—		—		117		—		—		70		—		—		150		—		—
	$	5,495	$	10	$	10	$	7,185	$	5	$	5

													$	7,475	$	—	$	—	$	5,495	$	10	$	10

Total Impaired Loans/Leases:
C&I	$	3,729	$	38	$	38	$	1,754	$	61	$	61	$	2,310	$	13	$	13	$	3,729	$	38	$	38
CRE
Owner-Occupied CRE		321		7		7		434		6		6		174		—		—		321		7		7
Commercial Construction, Land Development, and Other Land		746		6		6		5,492		—		—		—		—		—		746		6		6
Other Non Owner-Occupied CRE		5,965		22		22		1,105		—		—		7,538		7		7		5,965		22		22
Direct Financing Leases		2,022		7		7		2,765		3		3		1,468		6		6		2,022		7		7
Residential Real Estate		1,623		1		1		1,441		3		3		744		—		—		1,623		1		1
Installment and Other Consumer		966		3		3		218		—		—		620		—		—		966		3		3
	$	15,372	$	84	$	84	$	13,209	$	73	$	73
													$	12,854	$	26	$	26	$	15,372	$	84	$	84

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~~2019 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


			Unpaid
	Recorded		Principal		Related
Classes of Loans/Leases	Investment		Balance		Allowance

	(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	1,607	$	1,647	$	—
CRE
Owner-Occupied CRE		34		50		—
Commercial Construction, Land Development, and Other Land		—		—		—
Other Non Owner-Occupied CRE		684		686		—
Direct Financing Leases		1,642		1,642		—
Residential Real Estate		469		614		—
Installment and Other Consumer		476		476		—
	$	4,912	$	5,115	$	—

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	239	$	239	$	170
CRE
Owner-Occupied CRE		—		—		—
Commercial Construction, Land Development, and Other Land		—		—		—
Other Non Owner-Occupied CRE		2,867		2,867		125
Direct Financing Leases		383		383		270
Residential Real Estate		180		180		15
Installment and Other Consumer		80		80		80
	$	3,749	$	3,749	$	660

Total Impaired Loans/Leases:
C&I	$	1,846	$	1,886	$	170
CRE
Owner-Occupied CRE		34		50		—
Commercial Construction, Land Development, and Other Land		—		—		—
Other Non Owner-Occupied CRE		3,551		3,553		125
Direct Financing Leases		2,025		2,025		270
Residential Real Estate		649		794		15
Installment and Other Consumer		556		556		80
	$	8,661	$	8,864	$	660

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

For C&I and CRE loans, the ~~Company's~~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~~Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the ~~Company's~~Company’s loan system.

Table of Contents

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 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

As of June 30, 2019

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)

$
1,398,762

$
487,200

$
308,269

$
1,008,427

$
3,202,658

98.14
%
Special Mention (Rating 6)

9,811

4,236

64

5,802

19,913

0.61
%
Substandard (Rating 7)

17,460

3,202

4,245

16,028

40,935

1.25
%
Doubtful (Rating 8)

—

—

—

—

—

—
%

$
1,426,033

$
494,638

$
312,578

$
1,030,257

$
3,263,506

100.00
%

As of June 30, 2019

Direct Financing

Residential Real

Installment and

As a % of

Delinquency Status *

C&I

Leases

Estate

Other Consumer

Total

Total

(dollars in thousands)

Performing

$
121,836

$
99,536

$
291,955

$
120,160

$
633,487

99.26
%
Nonperforming

788

1,644

1,524

787

4,743

0.74
%

$
122,624

$
101,180

$
293,479

$
120,947

$
638,230

100.00
%



	As of June 30, 2020
			CRE
					Non-Owner Occupied
					Commercial
					Construction,
					Land
			Owner-Occupied		Development,						As a % of
Internally Assigned Risk Rating	C&I		CRE		and Other Land		Other CRE		Total		Total

	(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,643,654	$	463,570	$	430,206	$	883,724	$	3,421,154	95.95	%
Special Mention (Rating 6)		29,046		857		11,158		63,547		104,608	2.93	%
Substandard (Rating 7)		23,755		3,110		—		12,990		39,855	1.12	%
Doubtful (Rating 8)		—		—		—		—		—	—	%
	$	1,696,455	$	467,537	$	441,364	$	960,261	$	3,565,617	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


													As of June 30, 2020
															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	$	102,713	$	116,097	$	288,827	$	118,714	$	626,351	99.18	%	$	151,242	$	77,797	$	240,133	$	98,472	$	567,644	99.07	%
Nonperforming		691		1,872		1,932		667		5,162	0.82	%		2,413		1,308		936		678		5,335	0.93	%
	$	103,404	$	117,969	$	290,759	$	119,381	$	631,513	100.00	%
													$	153,655	$	79,105	$	241,069	$	99,150	$	572,979	100.00	%



	As of December 31, 2019
			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)	$	1,334,446	$	439,418	$	378,572	$	896,206	$	3,048,642	98.28	%
Special Mention (Rating 6)		12,962		3,044		41		3,905		19,952	0.65	%
Substandard (Rating 7)		18,439		1,527		184		13,499		33,649	1.09	%
Doubtful (Rating 8)		—		—		—		—		—	0.01	%
	$	1,365,847	$	443,989	$	378,797	$	913,610	$	3,102,243	100.00	%


	As of December 31, 2019
			Direct Financing		Residential Real		Installment and				As a % of
Delinquency Status *	C&I		Leases		Estate		Other Consumer		Total		Total

	(dollars in thousands)

Performing	$	140,992	$	86,019	$	239,198	$	108,763	$	574,972	99.29	%
Nonperforming		986		1,850		706		589		4,131	0.71	%
	$	141,978	$	87,869	$	239,904	$	109,352	$	579,103	100.00	%

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

As of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, TDRs totaled ~~$4.1~~$1.3 million and ~~$6.5~~$1.7 million, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. 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




Pre-

Post-





Pre-

Post-


Modification

Modification

Modification

Modification

Number of

Recorded

Recorded

Specific

Number of

Recorded

Recorded

Specific

Classes of Loans/Leases

Loans / Leases

Investment

Investment

Allowance

Loans / Leases

Investment

Investment

Allowance

(dollars in thousands)

CONCESSION - Significant Payment Delay

















C&I

1

$
52

$
52

$
—

—

$
—

$
—

$
—

1

$
52

$
52

$
—

—

$
—

$
—

$
—

















CONCESSION - Foregiveness of Principal

















C&I

1

$
587

$
537

$
—

—

$
—

$
—

$
—

1

$
587

$
537

$
—

—

$
—

$
—

$
—

TOTAL

2

$
639

$
589

$
—

—

$
—

$
—

$
—


	For the six months ended June 30, 2019							For the six months ended June 30, 2018
		Pre-		Post-					Pre-		Post-
		Modification		Modification					Modification		Modification
	Number of	Recorded		Recorded		Specific		Number of	Recorded		Recorded		Specific

															For the three months ended June 30, 2020							For the three months ended June 30, 2019
																Pre-		Post-					Pre-		Post-
																Modification		Modification					Modification		Modification
															Number of	Recorded		Recorded		Specific		Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans/Leases	Investment		Investment		Allowance		Loans/Leases	Investment		Investment		Allowance		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	$	52	$	52	$	—
Residential Real Estate	—		—		—		—	1		46		46		—
Direct Financing Leases	3		103		103		5	2		48		48		—	2		78		78		—	—		—		—		—
	5	$	174	$	174	$	5	3	$	94	$	94	$	—

															2	$	78	$	78	$	—	1	$	52	$	52	$	—

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

															—	$	—	$	—	$	—	1	$	587	$	537	$	—

TOTAL	6	$	761	$	711	$	5	3	$	94	$	94	$	—	2	$	78	$	78	$	—	2	$	639	$	589	$	—


	For the six months ended June 30, 2020								For the six months ended June 30, 2019
		Pre-		Post-				��		Pre-		Post-
		Modification		Modification						Modification		Modification
	Number of	Recorded		Recorded		Specific			Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans / Leases	Investment		Investment		Allowance			Loans / Leases	Investment		Investment		Allowance

	(dollars in thousands)
CONCESSION - Significant Payment Delay
C & I	2	$	111	$	111	$	—		2	$	71	$	71	$	—
Direct Financing Leases	3		145		145		—		3		103		103		5
	5	$	256	$	256	$	—		5	$	174	$	174	$	5

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

TOTAL	5	$	256	$	256	$	—		6	$	761	$	711	$	5

Of the loans restructured during the six months ended June 30, ~~2019, two with post-modification recorded balances of $65 thousand~~2020, NaN were on nonaccrual. Of the loans restructured during the six months ended June 30, ~~2018, one~~2019, 2 with a post-modification recorded ~~balance~~balances of ~~$46~~$65 thousand ~~was~~were on nonaccrual.

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

For the three and six months ended June 30, 2019,3 of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. NaN of these TDRs were related to one customer whose leases were restructured in the first quarter of 2019 with pre-modification balances totaling $66 thousand. The other TDR related to a customer whose loan was restructured in the third quarter of 2018 with an original pre-modification balance of $2.9 million and a current pre-modification balance of $1.5 million and a partial charge off of $879 thousand in the second quarter of 2019.

Table of Contents

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

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Not included in the table above, the Company had ~~three~~7 TDRs that were restructured and charged off for the six months ended June 30, 2020, totaling $354 thousand. The Company had 3 TDRs that were restructured and charged off for the six months ended June 30, 2019, totaling $161 thousand.

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

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

The Company ~~had eight TDRs that were restructured and charged off~~implemented its LRP offering to extend qualifying customers’ payments for ~~the six months ended~~90 days. As of June 30, ~~2018,~~2020, the program has provided 1,466 Bank modifications of loans to commercial and consumer clients totaling ~~$577 thousand.~~$491 million and 935 m2 modifications of loans and leases totaling $53 million, representing 11.86% and 1.2% of the total loan and lease portfolio, respectively.

2627

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

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~~in December 2019 to hedge against the risk of rising interest rates on ~~short-term~~ liabilities. The ~~short-term~~ liabilities consist of ~~$30.0~~$375.0 million of ~~1-month FHLB advances,~~deposits and the benchmark ~~rate~~rates hedged isvary at 1-month ~~LIBOR.~~LIBOR, 3-month LIBOR and Prime. The interest rate caps are designated as a cash flow ~~hedge~~hedges in accordance with ASC 815. An initial premium of ~~$2.1~~$4.3 million was paid upfront for the ~~caps. As noted below, one of the~~ caps ~~matured during the quarter ended June 30,~~executed in 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~~


			Balance Sheet					Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		June 30, 2020		December 31, 2019
(dollars in thousands)

Deposits	1/1/2020	1/1/2023	Other Assets	$	25,000	1.75	%	$	13	$	112
Deposits	1/1/2020	1/1/2023	Other Assets		50,000	1.57			26		218
Deposits	1/1/2020	1/1/2023	Other Assets		25,000	1.90			12		96
Deposits	1/1/2020	1/1/2023	Other Assets		25,000	1.80			13		109
Deposits	1/1/2020	1/1/2024	Other Assets		25,000	1.75			26		214
Deposits	1/1/2020	1/1/2024	Other Assets		50,000	1.57			52		401
Deposits	2/1/2020	2/1/2024	Other Assets		25,000	1.90			26		202
Deposits	1/1/2020	1/1/2024	Other Assets		25,000	1.80			26		201
Deposits	1/1/2020	1/1/2025	Other Assets		25,000	1.75			48		337
Deposits	1/1/2020	1/1/2025	Other Assets		50,000	1.57			97		617
Deposits	3/1/2020	3/1/2025	Other Assets		25,000	1.90			50		332
Deposits	1/1/2020	1/1/2025	Other Assets		25,000	1.80			48		309
				$	375,000			$	437	$	3,148

The Company has entered into interest rate swaps to hedge against the risk of rising rates on its rolling fixed rate short-term FHLB advances or brokered CDs and its variable rate trust preferred securities. ~~The floating rate trust preferred securities are tied to 3-month LIBOR, and~~All of the ~~interest rate swaps utilize 3-month LIBOR, so the hedge is effective. The~~ interest rate swaps are designated as a cash flow ~~hedge~~hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:

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
(dollars in thousands)

QCR Holdings Statutory Trust II

9/30/2018

9/30/2028

Other Liabilities

$
10,000

5.17
%

5.85
%

$
(965)

$
(298)
QCR Holdings Statutory Trust III

9/30/2018

9/30/2028

Other Liabilities

8,000

5.17
%

5.85
%

(772)

(239)
QCR Holdings Statutory Trust V

7/7/2018

7/7/2028

Other Liabilities

10,000

4.15
%

4.54
%

(940)

(288)
Community National Statutory Trust II

9/20/2018

9/20/2028

Other Liabilities

3,000

4.56
%

5.17
%

(288)

(89)
Community National Statutory Trust III

9/15//2018

9/15/2028

Other Liabilities

3,500

4.16
%

4.75
%

(336)

(104)
Guaranty Bankshares Statutory Trust I

9/15/2018

9/15/2028

Other Liabilities

4,500

4.16
%

4.75
%

(431)

(133)



$
39,000

4.65
%

5.24
%

$
(3,732)

$
(1,151)


			Balance Sheet							Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		June 30, 2020		December 31, 2019
(dollars in thousands)
CRBT - FHLB Advances or Brokered CDs	3/16/2020	3/16/2023	Derivatives - Liabilities	$	30,000	0.31	%	1.12	%	$	(730)	$	-
SFCB - FHLB Advances or Brokered CDs	3/16/2020	3/16/2023	Derivatives - Liabilities		10,000	0.32	%	0.95	%		(200)		-
QCR Holdings Statutory Trust II	9/30/2018	9/30/2028	Derivatives - Liabilities		10,000	3.16	%	5.85	%		(2,051)		(971)
QCR Holdings Statutory Trust III	9/30/2018	9/30/2028	Derivatives - Liabilities		8,000	3.16	%	5.85	%		(1,641)		(777)
QCR Holdings Statutory Trust V	7/7/2018	7/7/2028	Derivatives - Liabilities		10,000	2.77	%	4.54	%		(1,993)		(944)
Community National Statutory Trust II	9/20/2018	9/20/2028	Derivatives - Liabilities		3,000	2.48	%	5.17	%		(613)		(291)
Community National Statutory Trust III	9/15//2018	9/15/2028	Derivatives - Liabilities		3,500	2.06	%	4.75	%		(715)		(339)
Guaranty Bankshares Statutory Trust I	9/15/2018	9/15/2028	Derivatives - Liabilities		4,500	2.06	%	4.75	%		(919)		(436)
				$	79,000	1.92	%	5.24	%	$	(8,862)	$	(3,758)

Changes in fair values of ~~derivatives designated~~derivative financial instruments accounted for as cash flow hedges, ~~are recorded in OCI~~ to the extent that they are included in the ~~hedge is effective, and reclassified to earnings~~assessment of effectiveness, are recorded 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.~~component of AOCI.

The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third party financial institution. Additionally, the Company receives an upfront fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value of the

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.

June 30, 2019

December 31, 2018

Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:

Interest rate swap contracts

$
596,451

$
65,824

$
445,022

$
22,196
Non-Hedging Interest Rate Derivatives Liabilities:

Interest rate swap contracts

$
596,451

$
65,824

$
445,022

$
22,196

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


		June 30, 2020				December 31, 2019
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value

	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	1,100,913	$	224,727	$	787,221	$	84,679
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	1,100,913	$	224,727	$	787,221	$	84,679

Swap fee income totaled ~~$11.1~~$19.9 million and ~~$2.6~~$7.9 million for the three months ended June 30, 2020 and 2019, respectively. Swap fee income totaled $26.7 million and $11.1 million for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~Swap fee income totaled $10.8 million for the year ended December 31, 2018.~~

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

~~NOTE 5 –BORROWINGS~~

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

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.


	June 30, 2020		December 31, 2019

	(dollars in thousands)

Cash	$	80,250	$	10,990
U.S govt. sponsored agency securities		3,657		3,541
Municipal securities		41,863		68,089
Residential mortgage-backed and related securities		107,190		27,027
	$	232,960	$	109,647

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

The Company ~~prepaid two wholesale structured repurchase agreements~~may be exposed to credit risk in the ~~second quarter~~event of ~~2019 using excess funds generated~~non-performance by ~~strong deposit growth.~~the counterparties to its interest rate derivative agreements. The ~~first wholesale structured repurchase agreement totaled $5.0 million~~Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and ~~had original maturity date~~financial information. Additionally, the Company enters into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The ISDA master agreements contain bilateral collateral agreements with the amount of ~~March 13, 2020 with a~~collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company does not currently anticipate any losses from failure of 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 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 sourcederivative counterparties 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.~~honor their obligations.

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

NOTE 65 - 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,
		2020		2019		2020		2019

	(dollars in thousands, except share data)

Net income	$	13,739	$	13,504	$	24,967	$	26,422


Basic EPS	$	0.87	$	0.86	$	1.58	$	1.68
Diluted EPS	$	0.86	$	0.85	$	1.56	$	1.66


Weighted average common shares outstanding		15,747,056		15,714,588		15,771,926		15,703,967
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan		148,280		223,789		185,032		226,692
Weighted average common and common equivalent shares outstanding		15,895,336		15,938,377		15,956,958		15,930,659

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~~Table 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.~~Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 76 – 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 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs


Fair Value

(Level 1)

(Level 2)

(Level 3)

(dollars in thousands)
June 30, 2019:








Securities AFS:








U.S. govt. sponsored agency securities

$
35,762

$
—

$
35,762

$
—
Residential mortgage-backed and related securities

159,228

—

159,228

—
Municipal securities

53,189

—

53,189

—
Other securities

6,911

—

6,911

—
Interest rate caps

98

—

98

—
Interest rate swaps - assets

65,824

—

65,824

—
Total assets measured at fair value

$
321,012

$
—

$
321,012

$
—








Interest rate swaps - liabilities

$
69,556

$
—

$
69,556

$
—
Total liabilities measured at fair value

$
69,556

$
—

$
69,556

$
—
















December 31, 2018:








Securities AFS:








U.S. govt. sponsored agency securities

$
36,411

$
—

$
36,411

$
—
Residential mortgage-backed and related securities

159,249

—

159,249

—
Municipal securities

58,546

—

58,546

—
Other securities

6,850

—

6,850

—
Interest rate caps

459

—

459

—
Interest rate swaps - assets

22,196

—

22,196

—
Total assets measured at fair value

$
283,711

$
—

$
283,711

$
—








Interest rate swaps - liabilities

$
23,347

$
—

$
23,347

$
—
Total liabilities measured at fair value

$
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 months ended June 30, 2019 or 2018.~~


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

	(dollars in thousands)
June 30, 2020:
Securities AFS:
U.S. govt. sponsored agency securities	$	17,472	$	—	$	17,472	$	—
Residential mortgage-backed and related securities		145,672		—		145,672		—
Municipal securities		101,266		—		101,266		—
Asset-backed securities		39,797		—		39,797		—
Other securities		18,700		—		18,700		—
Derivatives		225,164		—		225,164		—
Total assets measured at fair value	$	548,071	$	—	$	548,071	$	—

Derivatives	$	233,589	$	—	$	233,589	$	—
Total liabilities measured at fair value	$	233,589	$	—	$	233,589	$	—


December 31, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	20,078	$	—	$	20,078	$	—
Residential mortgage-backed and related securities		120,587		—		120,587		—
Municipal securities		48,257		—		48,257		—
Asset-backed securities		16,887		—		16,887		—
Other securities		4,886		—		4,886		—
Derivatives		87,827		—		87,827		—
Total assets measured at fair value	$	298,522	$	—	$	298,522	$	—

Derivatives	$	88,437	$	—	$	88,437	$	—
Total liabilities measured at fair value	$	88,437	$	—	$	88,437	$	—

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

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Interest rate swaps are ~~executed~~used for ~~select commercial customers.~~the purpose of hedging interest rate risk on FHLB advances, brokered deposits and junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

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

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when 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 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs


Fair Value

Level 1

Level 2

Level 3

(dollars in thousands)
June 30, 2019:








Impaired loans/leases

$
7,539

$
—

$
—

$
7,539
OREO

9,328

—

—

9,328

$
16,867

$
—

$
—

$
16,867

December 31, 2018:








Impaired loans/leases

$
9,657

$
—

$
—

$
9,657
OREO

10,128

—

—

10,128

$
19,785

$
—

$
—

$
19,785


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

	(dollars in thousands)
June 30, 2020:
Impaired loans/leases	$	5,821	$	—	$	—	$	5,821
OREO		170		—		—		170
	$	5,991	$	—	$	—	$	5,991

December 31, 2019:
Impaired loans/leases	$	3,394	$	—	$	—	$	3,394
OREO		4,459		—		—		4,459
	$	7,853	$	—	$	—	$	7,853

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

Fair Value

Fair Value

June 30,

December 31,


2019

2018

Valuation Technique

Unobservable Input

Range

(dollars in thousands)

Impaired loans/leases

$
7,539

$
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)
%


	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	June 30,		December 31,
	2020		2019		Valuation Technique	Unobservable Input	Range

	(dollars in thousands)

Impaired loans/leases	$	5,821	$	3,394	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		170		4,459	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 months ended June 30, ~~2019~~2020 and ~~2018.~~

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

2019.

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

Fair Value

As of June 30, 2019

As of December 31, 2018

Hierarchy

Carrying

Estimated

Carrying

Estimated


Level

Value

Fair Value

Value

Fair Value

(dollars in thousands)

Cash and due from banks

Level 1

$
87,919

$
87,919

$
85,523

$
85,523
Federal funds sold

Level 2

10,215

10,215

26,398

26,398
Interest-bearing deposits at financial institutions

Level 2

195,282

195,282

133,198

133,198
Investment securities:



HTM

Level 2

388,713

406,212

401,913

400,770
AFS

See Previous Table

255,090

255,090

261,056

261,056
Loans/leases receivable, net

Level 3

6,981

7,539

8,942

9,657
Loans/leases receivable, net

Level 2

3,862,434

3,842,781

3,683,965

3,639,329
Interest rate caps

Level 2

98

98

459

459
Interest rate swaps - assets

Level 2

65,824

65,824

22,196

22,196
Deposits:



Nonmaturity deposits

Level 2

3,275,004

3,275,004

3,002,327

3,002,327
Time deposits

Level 2

1,047,506

1,033,017

974,704

968,906
Short-term borrowings

Level 2

19,191

19,191

28,774

28,774
FHLB advances

Level 2

105,733

105,768

266,492

265,926
Other borrowings

Level 2

—

—

67,250

67,770
Subordinated notes

Level 2

68,274

68,478

4,782

4,933
Junior subordinated debentures

Level 2

37,755

30,465

37,670

29,992
Interest rate swaps - liabilities

Level 2

69,556

69,556

23,347

23,347


	Fair Value	As of June 30, 2020				As of December 31, 2019
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value

		(dollars in thousands)

Cash and due from banks	Level 1	$	88,577	$	88,577	$	76,254	$	76,254
Federal funds sold	Level 2		2,125		2,125		9,800		9,800
Interest-bearing deposits at financial institutions	Level 2		140,775		140,775		147,891		147,891
Investment securities:
HTM	Level 2		425,976		445,068		400,646		426,545
AFS	*		322,907		322,907		210,695		210,695
Loans/leases receivable, net	Level 3		5,390		5,821		3,143		3,394
Loans/leases receivable, net	Level 2		4,074,042		4,049,076		3,651,061		3,606,520
Derivatives	Level 2		225,164		225,164		87,827		87,827

Deposits:
Nonmaturity deposits	Level 2		3,674,337		3,674,337		3,184,726		3,184,726
Time deposits	Level 2		675,438		682,827		726,325		742,444
Short-term borrowings	Level 2		124,818		124,818		13,423		13,423
FHLB advances	Level 2		145,000		146,788		159,300		159,193
Subordinated notes	Level 2		68,516		68,705		68,394		68,563
Junior subordinated debentures	Level 2		37,916		30,458		37,838		30,477
Derivatives	Level 2		233,589		233,589		88,437		88,437

*See previous table in Note 2.

NOTE 87 – 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.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The Company's primary segment, Commercial Banking, is geographically divided by markets into the secondary segments comprised of the ~~five~~4 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~~ 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. NoNaN assets of the subsidiary banks have been allocated to the Wealth Management segment.

The Company's All Other segment includes the corporate operations of the parent and operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds. ~~This segment includes~~The financial results for RB&T prior to the ~~corporate operations~~sale of the ~~parent company.~~

~~Table~~majority of ~~Contents~~

~~Part I~~

~~Item 1~~

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

its assets and liabilities at November 30, 2019 are also included in the Company’s All Other Segment as are the assets held for sale at June 30, 2020.

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~~2020 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

2019.


	Commercial Banking								Wealth				Intercompany		Consolidated
	QCBT		CRBT		CSB		SFC Bank		Management		All other		Eliminations		Total

	(dollars in thousands)
Three Months Ended June 30, 2020
Total revenue	$	19,727	$	34,612	$	9,752	$	9,533	$	3,627	$	17,813	$	(17,788)	$	77,276
Net interest income		15,653		12,820		7,538		6,201		—		(1,509)		245		40,948
Provision for loan/lease losses		7,539		7,160		2,811		2,405		—		—		—		19,915
Net income (loss) from continuing operations		3,307		10,580		591		1,899		986		13,797		(17,421)		13,739
Goodwill		3,223		14,980		9,888		45,975		—		182		—		74,248
Intangibles		—		2,437		3,643		6,344		—		1,448		—		13,872
Total assets		1,984,245		2,021,043		903,648		745,470		—		715,740		(765,385)		5,604,761

Three Months Ended June 30, 2019
Total revenue	$	20,374	$	23,575	$	9,730	$	7,757	$	4,249	$	23,431	$	(17,870)	$	71,246
Net interest income		12,632		10,785		7,294		5,425		—		1,877		—		38,013
Provision for loan/lease losses		973		300		151		485		—		32		—		1,941
Net income (loss) from continuing operations		4,505		6,928		2,207		2,079		583		14,369		(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		—		1,164,901		(613,033)		5,194,852

Six Months Ended June 30, 2020
Total revenue	$	39,227	$	56,607	$	19,802	$	18,224	$	7,665	$	33,431	$	(33,502)	$	141,454
Net interest income		30,080		24,206		15,038		11,843		—		(2,998)		477		78,646
Provision for loan/lease losses		10,722		9,410		4,775		3,375		—		—		—		28,282
Net income (loss)		8,210		16,957		1,629		4,105		1,806		24,934		(32,674)		24,967
Goodwill		3,223		14,980		9,888		45,975		—		182		—		74,248
Intangibles		—		2,437		3,643		6,344		—		1,448		—		13,872
Total assets		1,984,245		2,021,043		903,648		745,470		—		715,740		(765,385)		5,604,761

Six Months Ended June 30, 2019
Total revenue	$	38,918	$	42,819	$	19,000	$	15,045	$	8,478	$	43,609	$	(32,528)	$	135,341
Net interest income		24,771		21,193		14,260		10,651		—		4,046		—		74,921
Provision for loan/lease losses		1,993		725		301		985		—		71		—		4,075
Net income (loss) from continuing operations		8,690		12,028		4,363		3,732		1,741		27,485		(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		—		1,164,901		(613,033)		5,194,852

NOTE 98 – 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~~off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 30, 2020 and December 31, 2019 are presented in the following table (dollars in thousands). As of June 30, 2020 and December 31, 2019, 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, 2020:
Company:
Total risk-based capital	$	630,347	13.71	%	$	367,866	>	8.00	%	$	482,824	>	10.50	%	$	459,832	>	10.00	%
Tier 1 risk-based capital		509,216	11.07			275,899	>	6.00			390,858	>	8.50			367,866	>	8.00
Tier 1 leverage		509,216	8.91			228,572	>	4.00			228,572	>	4.00			285,716	>	5.00
Common equity Tier 1		471,300	10.25			206,925	>	4.50			321,883	>	7.00			298,891	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	200,053	12.40	%	$	129,068	>	8.00	%	$	169,401	>	10.50	%	$	161,335	>	10.00	%
Tier 1 risk-based capital		179,859	11.15			96,801	>	6.00			137,134	>	8.50			129,068	>	8.00
Tier 1 leverage		179,859	7.57			95,014	>	4.00			95,014	>	4.00			118,767	>	5.00
Common equity Tier 1		179,859	11.15			72,601	>	4.50			112,934	>	7.00			104,867	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	200,479	12.15	%	$	132,034	>	8.00	%	$	173,295	>	10.50	%	$	165,043	>	10.00	%
Tier 1 risk-based capital		179,841	10.90			99,026	>	6.00			140,287	>	8.50			132,034	>	8.00
Tier 1 leverage		179,841	9.66			74,475	>	4.00			74,475	>	4.00			93,094	>	5.00
Common equity Tier 1		179,841	10.90			74,269	>	4.50			115,530	>	7.00			107,278	>	6.50
Community State Bank:
Total risk-based capital	$	96,839	12.76	%	$	60,732	>	8.00	%	$	79,710	>	10.50	%	$	75,915	>	10.00	%
Tier 1 risk-based capital		87,338	11.50			45,549	>	6.00			64,527	>	8.50			60,732	>	8.00
Tier 1 leverage		87,338	9.86			35,430	>	4.00			35,430	>	4.00			44,287	>	5.00
Common equity Tier 1		87,338	11.50			34,162	>	4.50			53,140	>	7.00			49,344	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	79,054	13.43	%	$	47,106	>	8.00	%	$	61,827	>	10.50	%	$	58,883	>	10.00	%
Tier 1 risk-based capital		68,519	11.64			35,330	>	6.00			50,050	>	8.50			47,106	>	8.00
Tier 1 leverage		68,519	9.29			29,494	>	4.00			29,494	>	4.00			36,867	>	5.00
Common equity Tier 1		68,519	11.64			26,497	>	4.50			41,218	>	7.00			38,274	>	6.50


										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of December 31, 2019:
Company:
Total risk-based capital	$	581,234	13.33	%	$	348,937	>	8.00	%	$	457,980	>	10.500	%	$	436,171	>	10.00	%
Tier 1 risk-based capital		481,702	11.04			261,703	>	6.00			370,746	>	8.500			348,937	>	8.00
Tier 1 leverage		481,702	9.53			202,207	>	4.00			202,207	>	4.000			252,758	>	5.00
Common equity Tier 1		443,864	10.18			196,277	>	4.50			305,320	>	7.000			283,511	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	183,855	11.83	%	$	124,362	>	8.00	%	$	163,225	>	10.500	%	$	155,452	>	10.00	%
Tier 1 risk-based capital		170,137	10.94			93,271	>	6.00			132,134	>	8.500			124,362	>	8.00
Tier 1 leverage		170,137	9.94			68,479	>	4.00			68,479	>	4.000			85,598	>	5.00
Common equity Tier 1		170,137	10.94			69,953	>	4.50			108,817	>	7.000			101,044	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	175,498	11.90	%	$	117,953	>	8.00	%	$	154,813	>	10.500	%	$	147,441	>	10.00	%
Tier 1 risk-based capital		162,127	11.00			88,465	>	6.00			125,325	>	8.500			117,953	>	8.00
Tier 1 leverage		162,127	10.41			62,286	>	4.00			62,286	>	4.000			77,857	>	5.00
Common equity Tier 1		162,127	11.00			66,349	>	4.50			103,209	>	7.000			95,837	>	6.50
Community State Bank:
Total risk-based capital	$	92,095	12.32	%	$	59,813	>	8.00	%	$	78,504	>	10.500	%	$	74,766	>	10.00	%
Tier 1 risk-based capital		85,437	11.43			44,860	>	6.00			63,551	>	8.500			59,813	>	8.00
Tier 1 leverage		85,437	10.39			32,902	>	4.00			32,902	>	4.000			41,128	>	5.00
Common equity Tier 1		85,437	11.43			33,645	>	4.50			52,336	>	7.000			48,598	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	71,074	12.72	%	$	44,704	>	8.00	%	$	58,674	>	10.500	%	$	55,880	>	10.00	%
Tier 1 risk-based capital		63,956	11.45			33,528	>	6.00			47,498	>	8.500			44,704	>	8.00
Tier 1 leverage		63,956	9.70			26,379	>	4.00			26,379	>	4.000			32,974	>	5.00
Common equity Tier 1		63,956	11.45			25,146	>	4.50			39,116	>	7.000			36,322	>	6.50

3334

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

~~December 31,~~

NOTE 9 – PENDING SALE

On April 2, 2020, the Company entered into a stock purchase agreement to sell all the issued and outstanding capital stock of the Bates Companies. The aggregate consideration to be paid to the Company shall be an amount equal to $500,000 plus cancellation of all future amounts otherwise to become payable to the purchaser by the Company under an earn-out agreement entered into between the same parties in 2018 ~~are presented~~with a non-discounted value of approximately $1.6 million at June 30, 2020.

This transaction received regulatory approval and the closing date is scheduled for August 10, 2020.

Goodwill impairment related to the execution of the agreement to sell the Bates Companies was $500,000 in the ~~following table (dollars in thousands). As~~first quarter 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

Adequacy Purposes

Capitalized Under

For Capital

With Capital

Prompt Corrective

Actual

Adequacy Purposes

Conservation Buffer

Action Provisions


Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2018:

Company:

Total risk-based capital

$
460,416

10.69
%
$
344,551
>
8.00
%
$
425,305
>
9.875
%
$
430,689
>
10.00
%
Tier 1 risk-based capital

420,569

9.77
%

258,413
>
6.00

339,168
>
7.875

344,551
>
8.00

Tier 1 leverage

420,569

8.87
%

189,858
>
4.00

189,858
>
4.000

237,322
>
5.00

Common equity Tier 1

382,899

8.89
%

193,810
>
4.50

274,564
>
6.375

279,948
>
6.50

Quad City Bank & Trust:







Total risk-based capital

$
162,009

11.38
%
$
113,900
>
8.00
%
$
140,596
>
9.875
%
$
142,376
>
10.00
%
Tier 1 risk-based capital

148,529

10.43
%

85,425
>
6.00

112,121
>
7.875

113,900
>
8.00

Tier 1 leverage

148,529

9.04
%

65,744
>
4.00

65,744
>
4.000

82,180
>
5.00

Common equity Tier 1

148,529

10.43
%

64,069
>
4.50

90,764
>
6.375

92,544
>
6.50

Cedar Rapids Bank & Trust:







Total risk-based capital

$
146,292

11.55
%
$
101,310
>
8.00
%
$
125,054
>
9.875
%
$
126,637
>
10.00
%
Tier 1 risk-based capital

133,982

10.58
%

75,982
>
6.00

99,727
>
7.875

101,310
>
8.00

Tier 1 leverage

133,982

9.98
%

53,682
>
4.00

53,682
>
4.000

67,103
>
5.00

Common equity Tier 1

133,982

10.58
%

56,987
>
4.50

80,731
>
6.375

82,314
>
6.50

Community State Bank:







Total risk-based capital

$
75,233

11.24
%
$
53,567
>
8.00
%
$
66,122
>
9.875
%
$
66,959
>
10.00
%
Tier 1 risk-based capital

69,101

10.32
%

40,175
>
6.00

52,730
>
7.875

53,567
>
8.00

Tier 1 leverage

69,101

9.19
%

30,070
>
4.00

30,070
>
4.000

37,588
>
5.00

Common equity Tier 1

69,101

10.32
%

30,131
>
4.50

42,686
>
6.375

43,523
>
6.50

Springfield First Community Bank:







Total risk-based capital

$
57,051

12.24
%
$
37,278
>
8.00
%
$
46,016
>
9.875
%
$
46,598
>
10.00
%
Tier 1 risk-based capital

51,279

11.00
%

27,959
>
6.00

36,696
>
7.875

37,278
>
8.00

Tier 1 leverage

��
51,279

9.39
%

21,849
>
4.00

21,849
>
4.000

27,312
>
5.00

Common equity Tier 1

51,279

11.00
%

20,969
>
4.50

29,706
>
6.375

30,289
>
6.50

Rockford Bank & Trust:







Total risk-based capital

$
50,648

10.89
%
$
37,208
>
8.00
%
$
45,929
>
9.875
%
$
46,511
>
10.00
%
Tier 1 risk-based capital

44,821

9.64
%

27,906
>
6.00

36,627
>
7.875

37,208
>
8.00

Tier 1 leverage

44,821

8.93
%

20,081
>
4.00

20,081
>
4.000

25,101
>
5.00

Common equity Tier 1

44,821

9.64
%

20,930
>
4.50

29,650
>
6.375

30,232
>
6.50

2020.

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

3435

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~INTRODUCTION~~

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 months ending June 30, ~~2019.~~2020. 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~~

GENERAL

QCR Holdings, Inc. is a financial holding company and the parent company of QCBT, CRBT, CSB and SFC ~~Bank and RB&T.~~Bank. QCBT, CRBT and CSB are Iowa-chartered commercial banks and SFC Bank is a Missouri-chartered commercial ~~bank, and RB&T is an Illinois-chartered commercial~~ bank. All four charters 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~~and provides full-service commercial and consumer banking services to the Springfield, Missouri area through its main office located on Glenstone Avenue in Springfield, Missouri.

IMPACT OF COVID-19

The progression of the COVID-19 pandemic in the United States has had an adverse impact on the Company’s financial condition and results of operations as of and for the three and six months ended June 30, 2020, and could have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on the Company’s Market Areas

The Company offers commercial and consumer banking products and services primarily in Illinois, Missouri and Iowa. Each of these three states has recently taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. In Illinois, Governor J.B Pritzker has moved the state into Phase 4 of Restore Illinois which allows

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

businesses to open with Illinois Department of Public Health approved safety guidance and requires certain businesses to open at reduced capacity. This went into effect on June 26, 2020. In Missouri, Governor Mike Parson announced the full opening of the state, effective June 16, 2020. In Iowa, Governor Kim Reynolds lifted all capacity limits on businesses effective June 10, 2020. Despite these measures, the reopening of each jurisdiction is subject to change, delay and setbacks based on ongoing regional monitoring of the pandemic. However, currently all of the subsidiary banks’ branches are open during normal business hours with the exception of four branch locations that are currently limiting lobby access to appointment only.

Each state has experienced rapidly increasing unemployment levels as a result of the curtailment of business activities, rising from an average of 4.6% in Illinois in March 2020 to an average of 15.2% in May 2020, according to the Illinois Department of Employment Security. The unemployment rate in Illinois improved slightly in June 2020 to an average of 14.6%. Unemployment rose from an average of 4.5% in Missouri in March 2020 to 10.1% in May 2020, according to the Missouri Department of Labor and Industrial Relations. The unemployment rate in Missouri improved in June 2020 to an average of 7.9%. In Iowa, unemployment rose from an average of 3.7% in March 2020 to 10.0% in May 2020, according to the Iowa Workforce Development. The unemployment rate in Iowa improved in June 2020 to an average of 7.9%.

Policy and Regulatory Developments

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

●

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

●

On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, which provided for cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act, which authorized an additional $310 billion of PPP loans. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to limitations and eligibility criteria. The original timeframe for PPP lending expired on June 30, 2020, but Congress acted on June 30, 2020 to provide a 5-week PPP extension for lending to allow small businesses additional time to apply for the remaining PPP funds allocated by Congress in connection with the CARES Act. The subsidiary banks are participating as lenders in the PPP.

●

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

●

On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: the MSNLF and the MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve has provided additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to such a facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion. As of June 30, 2020, the Company is only participating in the PPP and not the Main Street Business Lending Program.

Effects on the Company’s Business

The Company currently expects that the COVID-19 pandemic and the specific developments referred to above could have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, entertainment and retail industries will continue to endure significant economic distress, and could adversely affect their ability to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, may impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. In addition, the Company’s loan and lease growth could slow exclusive of the PPP loans, while deposit growth could accelerate as businesses and consumers navigate the impact. As a result, the Company anticipates that its financial condition, capital levels, asset quality and results of operations could be adversely affected, as described in further detail below.

The Company’s Response

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

~~RB&T commenced operations in January 2005~~●

The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. The program has provided 2,401 modifications of loans and ~~provides full-service~~leases totaling $544.0 million to commercial and consumer clients as of June 30, 2020.

●

As the Company moved to protect the health and safety of its employees and clients, digital collaboration and digital banking applications have become business critical. The Company is using virtual meetings to stay connected with its clients and customers are leveraging the Company’s mobile banking capabilities. The Company’s digital communications tool is a modern enterprise video application, with an easy, reliable and secure cloud platform for video and audio conferencing, chat and web conferencing across mobile, desktop and room systems. It has enabled the Company to continue to collaborate in real-time across the enterprise and to meet face-to-face with our clients while working remotely to adhere to the Center for Disease Control’s

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

physical distancing guidelines. Clients are using the Company’s existing mobile banking and ~~trust~~mobile payment capabilities including: on-line banking, remote deposit, on-line retail loan applications and ~~asset management~~person-to-person payment applications that are available across multiple form factors. These applications have enabled customers to engage with the Company virtually to meet their community banking needs. The Company proactively reached out to customers to make sure that they knew how to use these tools and increased their mobile deposit limits to enable expanded use of remote deposit features. The Company also worked with primary digital banking solution providers to make adjustments to their hosting capabilities to accommodate the unprecedented levels of volume through this digital channel.

●

The Company began to execute on its Public Emergency Preparedness Plan (“PEP”) mid-February. The PEP was created to coordinate resources in an organized manner to respond to any public emergency that may significantly affect staffing. One of the situations specifically called out in the plan is a health-related event such as a specific threat of influenza, or other disease, creating pandemic conditions. This program is an important part of the Company’s Business Continuity Program, which specifically addresses rapid recovery from an occurrence that would disable any entity for a period exceeding 48 hours. The goal of the plan is to protect employees, customers, facilities, systems, property and operations during any public emergency and maintain normal operations, to the extent possible, consistent with those goals. In the event that normal operations cannot be maintained, the goals will be to maximize the continuity of the essential services to ~~Rockford, Illinois~~our customers, protect the health and ~~adjacent communities through its main office located~~safety of employees and customers, and minimize adverse financial impact to our institutions. Finally, the plan will provide for a return to full operations and services as quickly as possible. The plan was fully implemented during the first two weeks of March and the following strategies were executed:

Emergency Preparedness Response Team critical members were identified to direct the Company’s planning, preparedness, training and response to lead the recovery effort with the COVID-19 pandemic;

increased cash reserves at all charters were established and the charters began monitoring cash outflows;

IT testing began to ensure the Company’s systems were capable of handling traffic generated by employees working from home;

reviewed cross training lists for each department in case of staff shortages;

split specific departments into shifts so not all employees were working together at the same time; and

communication sites were activated in case emergency information needed to be communicated to employees.

●

The PPP was approved as part of the CARES Act and authorized up to $349 billion in forgivable loans to small businesses to pay their employees and for other operating expenses, during the COVID-19 crisis, and an additional $310 billion of loans were authorized to be made under the PPP in a second phase of funding. The Company has processed 1,655 loans for a total of $358.1 million as of June 30, 2020. The Company is continuing to take PPP applications and is currently processing new loans under newly approved additional funding. PPP loans are included in the C&I category of loans in Note 3 of the Consolidated Financial Statements.

●

The Company has implemented a number of actions to support a healthy workforce, including:

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

adopting alternative work practices such as working in shifts, social distancing in our facilities and adding remote work options for approximately half of our workforce;

discontinued business travel, large events and meetings; and

utilizing online meeting platforms.

●

On February 28, 2020, the Company’s Board of Directors authorized a share repurchase program, permitting the repurchase of up to 800,000 shares of the Company’s outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. As disclosed in the Company’s Annual Report on ~~Guilford Road~~Form 10-K for the year ended December 31, 2019, the Company will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if the Company does not maintain 2.5% in ~~Rockford~~Common Equity Tier 1 Capital attributable to a capital conservation buffer. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic and ~~its branch facility~~it is uncertain when the Company will resume the repurchase of shares as part of this program in ~~downtown Rockford.~~

the future.

EXECUTIVE OVERVIEW

The Company reported net income of $13.7 million and diluted EPS of $0.86 for the quarter ended June 30, 2020. By comparison, for the quarter ended March 31, 2020, the Company reported net income of $11.2 million and diluted EPS of $0.70. For the quarter ended June 30, 2019, the Company reported net income of $13.5 million, and diluted EPS of ~~$0.85 for~~$0.85. For the ~~quarter~~six months ended June 30, ~~2019. By comparison, for the quarter ended March 31, 2019,~~2020, the Company reported net income of ~~$12.9~~$25.0 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~~$1.56. By comparison, for the six months ended June 30, 2019, the Company reported net income of $26.4 million, and diluted EPS of $1.66.

The second quarter of 2020 was also highlighted by the following results and events:

●

Net income of $13.7 million, or $0.86 per diluted share;

●

Adjusted net income (non-GAAP) of $14.0 million, or $0.88 per diluted share;

●

Noninterest income of $28.6 million;

●

Net interest margin was stable, excluding the impact of excess liquidity;

●

Pre-Provision/Pre-Tax Adjusted Net Income (non-GAAP) of $36.8 million;

●

Provision expense of $19.9 million for the quarter, increasing ALLL to Loans by 33 bps to 1.47%;

●

Nonperforming assets to total assets of 0.24%, improving 8 basis points from the prior quarter;

●

Annualized core loan and lease growth of 8.4% for the quarter, excluding newly originated SBA PPP loans;

●

Annualized deposit growth of 17.2% for the quarter; and

●

PPP loan participation of 1,655 totaling $358.1 million to both new and existing clients.

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~By comparison, for the six months ended June 30, 2018, the Company reported net income of $21.0 million, and diluted EPS of $1.48.~~

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

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

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

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

~~Annualized deposit growth of 12.2% for the quarter and 17.4% 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 down $3.2 million, or 12.2%, from the prior quarter.~~

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

For the three months ended

For the six months ended

June 30, 2019

March 31, 2019

June 30, 2018

June 30, 2019

June 30, 2018

(dollars in thousands)

Net income

$
13,504

$
12,918

$
10,445

$
26,422

$
20,995

Diluted earnings per common share

$
0.85

$
0.81

$
0.73

$
1.66

$
1.48

Weighted average common and common equivalent shares outstanding

15,938,377

15,922,940

14,232,423

15,930,659

14,219,003

~~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.~~


	For the three months ended						For the six months ended
	June 30, 2020		March 31, 2020		June 30, 2019		June 30, 2020		June 30, 2019

	(dollars in thousands)

Net income	$	13,739	$	11,228	$	13,504	$	24,967	$	26,422

Diluted earnings per common share	$	0.86	$	0.70	$	0.85	$	1.56	$	1.66

Weighted average common and common equivalent shares outstanding		15,895,336		16,011,456		15,938,377		15,956,958		15,930,659

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


											For the three months ended						For the six months ended
											June 30, 2020		March 31, 2020		June 30, 2019		June 30, 2020		June 30, 2019

	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)

											(dollars in thousands)
Net interest income	$	38,013	$	36,908	$	32,085	$	74,921	$	64,488	$	40,948	$	37,698	$	38,013	$	78,646	$	74,921
Provision expense		1,941		2,134		2,301		4,075		4,841		19,915		8,367		1,941		28,282		4,075
Noninterest income		17,065		11,993		8,912		29,058		17,454		28,626		15,196		17,065		43,822		29,058
Noninterest expense		36,560		32,435		26,370		68,995		52,234		33,122		31,415		36,560		64,537		68,995
Federal and state income tax expense		3,073		1,414		1,881		4,487		3,872		2,798		1,884		3,073		4,682		4,487
Net income	$	13,504	$	12,918	$	10,445	$	26,422	$	20,995	$	13,739	$	11,228	$	13,504	$	24,967	$	26,422

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

●

Net interest income in the second quarter of 2020 was up 9% compared to the first quarter of 2020. The increase was primarily due to growth in average interest earning assets of $791.6 million, or 17.7% on a linked quarter basis, of which $404.9 million of the increase was due to excess cash derived from outsized deposit growth. Net interest income increased 8% compared to the second quarter of 2019 and 5% when comparing the first six months of 2020 to the same period of the prior year. The increase was primarily due to loan growth during the first six months of 2020.

●

Provision expense in the second quarter of 2020 increased $11.5 million compared to the first quarter of 2020. Provision expense increased $18.0 million compared to the second quarter of 2019 and $24.2 million when comparing the first six months of 2020 to the same period in the prior year. The increase was primarily due to increased qualitative allocations in response to deteriorating economic conditions as related to the effects of COVID-19. See the Provision for Loan Lease Losses section of this report for additional details.

●

Noninterest income in the second quarter of 2020 increased 88% compared to the first quarter of 2020 primarily due to higher swap fee income. Noninterest income increased 68% compared to the second quarter of 2019 and 51% when comparing the first six months of 2020 to the same period in the prior year. This increase was primarily attributable to higher swap fee income in the first six months of 2020.

●

Noninterest expense increased 5% in the second quarter of 2020 compared to the first quarter of 2020. Salaries and employee benefits were $21.3 million in the second quarter of 2020 as compared to $18.5 million in the first quarter of 2020 primarily due to higher incentive compensation as a result of the higher swap fee income. FDIC and other insurance, and regulatory fees were $908 thousand in the second quarter of 2020 as compared to $683 thousand in the first quarter of 2020 due to FDIC insurance assessment credits included in first quarter 2020 totals. Loss on liability extinguishment was $429 thousand in the second quarter of 2020 as compared to $147

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

~~Net interest income~~thousand in ~~the second quarter of 2019 was up 3% compared to~~ the first quarter of ~~2019. The increase was primarily~~2020 due to ~~an $85.5 million increase~~increased early payoffs of brokered certificate of deposits in ~~average interest earning assets, as reported net interest margin remained stable between quarters. Net interest income increased 18%~~the second quarter. Noninterest expense decreased 9% compared to the second quarter of ~~2018~~2019 and ~~16%~~decreased 6% when comparing the first six months of ~~2019~~2020 to the same period in the prior year. ~~These increases~~Salaries and employee benefits were ~~primarily due to strong loan growth and the addition of SFC Bank.~~

~~Provision expense in the second quarter of 2019 decreased~~down 9% compared to the first quarter of 2019. Provision expense decreased 16% compared to the second quarter of 2018 and 16% when comparing the first six months of 2019 to the same period in the prior year. The decreases 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 quarter of 2019 increased 42% compared to the first quarter of 2019 primarily due to higher swap fee income. Noninterest income increased 91% compared to the second quarter of 2018 and 66% when comparing the first six 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% in the second 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 million in the second quarter of 2019 primarily due to a write down of an OREO property of $1 million, as compared to $298 thousand in the first quarter of 2019. Additionally, the Company incurred approximately $2.5 million in additional bonus and commission expense during the second quarter due to strong year-to-date results and higher than expected fee income. Noninterest expense increased 39% compared to the second quarter of 2018 and 32% when comparing the first six months of 2019 to the same period in thefrom prior year primarily due to reduced bonus compensation as a result of the ~~addition~~impact of ~~SFC Bank.~~

COVID-19 and the sale of RB&T.

●

Federal and state income tax expense in the second quarter of ~~2019~~2020 increased ~~117%~~49% compared to the first quarter of ~~2019.~~2020. Federal and state income tax expense ~~increased 63%~~decreased 9% compared to the second quarter of ~~2018~~2019 and ~~16%~~increased 4% when comparing the first six months of ~~2019~~2020 to the same period in the prior year. See the “Income Taxes” section of this report for additional details on these ~~decreases.~~

increases.

~~LONG-TERM~~

STRATEGIC FINANCIAL ~~GOALS~~METRICS

~~As previously stated, the~~The Company has established certain strategic financial ~~goals~~metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these ~~goals,~~metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these ~~goals~~metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2018.~~2019. The Company's long-term strategic financial ~~goals~~metrics are as follows:

●

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

9% per year, funded by core deposits;

●

~~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~~fee-based income by ~~10% annually.~~

at least 6% per year; and

●

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

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

For the Quarter Ending

Goal
Key Metric
Target **

June 30, 2019

March 31, 2019

June 30, 2018

Balance sheet efficiency
Gross loans and leases to total assets
73% - 78%

75
%

75
%

76
%

NIM TEY (non-GAAP)*
> 3.35%

3.40
%

3.40
%

3.52
%

Profitability
ROAA
> 1.10%

1.06
%

1.04
%

1.03
%

Adjusted ROAA (non-GAAP)*
> 1.10%

1.11
%

1.05
%

1.08
%

Asset quality
NPAs to total assets
< 0.75%

0.45
%

0.52
%

0.65
%

Net charge-offs to average loans and leases***
< 0.25% annually

0.15
%

0.09
%

0.11
%

Reliance on wholesale funding
Wholesale funding to total assets****
< 15%

10
%

12
%

13
%

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

Grow wealth management net income***
> 10% annually

11
%

50
%

54
%


			Year to Date
Strategic Financial Metric	Key Metric	Target	June 30, 2020*
Loans and leases growth organically	Loans and leases growth	> 9% annually		5.0	%
Fee income growth	Fee income growth	> 6% annually		31.7	%
Improve operational efficiencies and hold noninterest expense growth	Noninterest expense growth	< 5% annually		(11.6)	%

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

**** Wholesale funding Loans and leases growth excludes PPP loans.

It should be noted that these initiatives are long-term targets. Due to ~~total assets is calculated by dividing total borrowings and brokered deposits by total assets.~~the impact of the COVID-19 pandemic, the Company may not be able to achieve these goals for the full year 2020.

~~STRATEGIC DEVELOPMENTS~~

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

The Company grew loans and leases in the second quarter of 2019 by 11.7% on an annualized basis and 9.5% year-to-date. Strong loan and lease growth for the remainder of the year will help 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, as an acquirer in the consolidation taking place in our markets to continue to grow EPS, further boost ROAA and improve the Company's efficiency ratio.

The Company has continued to focus on lowering the NPAs to total assets ratio. This ratio decreased by seven basis points to 0.45% compared to the first quarter 2019. The Company remains committed to improving 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% in the second quarter of 2019 due to the strong core deposit growth which outpaced the Company’s loan growth. Management continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the second quarter of 2020 to support its corporate strategy:

●

The Company grew loans and leases organically in the second quarter of 2020 by 8.4% on an annualized basis, excluding PPP loans (non-GAAP), reflecting healthy demand across all markets.

●

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 191 downstream banks with average total noninterest bearing deposits of $249.2 million and average total interest bearing deposits of $505.2 million during the first six months of 2020. By comparison, the Company acted as the correspondent bank for 192 downstream banks with average total noninterest bearing deposits of $168.9 million and average total interest bearing deposits of $310.1 million during the first six months of 2019. By comparison, the Company acted as the correspondent bank for 192 downstream banks with average total noninterest bearing deposits of $215.3 million and average total interest bearing deposits of $208.3 million during the first six months of 2018. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

●

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 $26.7 million for the six months ended June 30, 2020 as compared to $11.1 million for the six months ended June 30, ~~2019~~2019.

●

Noninterest expense for the first six months of 2020 totaled $64.5 million as compared to ~~$2.6~~$69.0 million ~~for~~in the first six months ~~ended June 30, 2018.~~

~~Wealth management is another core line~~ of ~~business for the Company~~2019. The decrease was primarily due to a decline in salaries and ~~includes~~employee benefits as a ~~full range~~result of ~~products, including trust services, brokerage~~reduced bonus and investment advisory services, asset management, estate planning and financial planning. As of June 30, 2019, the Company had $2.95 billion of total financial assets in trust (and related) accounts and $1.75 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 servicesincentive compensation due 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 acquisitionimpact of ~~managed assets.~~

COVID-19.

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”, “pre-provision/pre-tax adjusted income”, “NIM (TEY)”, “adjusted NIM”, ~~and~~“pre-provision/pre-tax adjusted ROAA”, “efficiency ratio”, “ALLL to total loans and leases excluding PPP loans” and “loan growth annualized excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:

●

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

●

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

●

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

●

Pre-provision/Pre-tax adjusted income and pre-provision/pre-tax 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.~~

income; and

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

●

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

The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets. The TCE/TA ratio excluding PPP loans non-GAAP ratio is provided as the Company’s management believes this financial measure is important to investors as total assets for the quarter ended June 30, 2020 was materially higher due to the addition of PPP loans. By excluding the PPP loans, management believes the investor is provided a better comparison to prior periods for analysis.

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

The pre-provision/pre-tax adjusted income and pre-provision/pre-tax adjusted ROAA are measurements of the Company’s financial performance excluding provision and income taxes as well as non-recurring income and expense items. The Company’s management believes this financial measure is important to investors as provision for the quarter ended June 30, 2020 was materially higher due to the impact of COVID-19 as well as its impact on income taxes. By excluding the provision and income taxes as well as non-recurring income and expense items, the investor is provided a better comparison to prior periods for analysis.

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~~comparisons difficult.

~~Table of Contents~~

~~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 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

June 30,

March 31,

June 30,

RECONCILIATIONS

2019

2019

2018

(dollars in thousands, except per share data)

TCE/TA RATIO





Stockholders' equity (GAAP)

$
504,300

$
488,407

$
369,588

Less: Intangible assets

93,837

94,790

36,561

TCE (non-GAAP)

$
410,463

$
393,617

$
333,027

Total assets (GAAP)

$
5,194,852

$
5,066,662

$
4,106,883

Less: Intangible assets

93,837

94,790

36,561

TA (non-GAAP)

$
5,101,015

$
4,971,872

$
4,070,322

TCE/TA ratio (non-GAAP)

8.05
%

7.92
%

8.18
%

For the Quarter Ended

For the Six Months Ended

June 30,

March 31,

June 30,

June 30,

June 30,


2019

2019

2018


2019

2018

(dollars in thousands, except per share data)

ADJUSTED NET INCOME

Net income (GAAP)

$
13,504

$
12,918

$
10,445

$
26,422

$
20,995

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









Income:











   Securities losses, net

$
(41)

$
—

$
—

$
(41)

$
—

Total nonrecurring income (non-GAAP)

$
(41)

$
—

$
—

$
(41)

$
—

Expense:











Acquisition costs

$
—

$
—

$
327

$
—

$
400

Post-acquisition compensation, transition and integration costs

559

106

130

665

130

Total nonrecurring expense (non-GAAP)

$
559

$
106

$
457

$
665

$
530

Adjusted net income (non-GAAP)

$
14,104

$
13,024

$
10,902

$
27,128

$
21,525

ADJUSTED EPS











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

$
14,104

$
13,024

$
10,902

$
27,128

$
21,525

Weighted average common shares outstanding

15,714,588

15,693,345

13,919,565

15,703,967

13,904,113

Weighted average common and common equivalent shares outstanding

15,938,377

15,922,940

14,232,423

15,930,659

14,219,003

Adjusted EPS (non-GAAP):











Basic

$
0.90

$
0.83

$
0.78

$
1.73

$
1.55

Diluted

$
0.88

$
0.82

$
0.77

$
1.70

$
1.51

ADJUSTED ROAA











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

$
14,104

$
13,024

$
10,902

$
27,128

$
21,525

Average Assets

$
5,077,900

$
4,968,502

$
4,053,684

$
5,023,201

$
4,024,188

Adjusted ROAA (annualized) (non-GAAP)

1.11
%

1.05
%

1.08
%

1.08
%

1.07
%

ADJUSTED NIM (TEY)*

Net interest income (GAAP)

$
38,013

$
36,908

$
32,085

$
74,921

$
64,488

Plus: Taxequivalent adjustment

1,808

1,794

1,462

3,509

2,815

Net interest income - taxequivalent (non-GAAP)

$
39,821

$
38,702

$
33,547

$
78,430

$
67,303

    Less: Accquisition accounting net accretion

1,076

1,069

545

2,145

1,244

Adjusted net interest income

38,745

37,633

33,002

76,285

66,059

Average earning assets

$
4,698,021

$
4,612,553

$
3,820,333

$
4,655,287

$
3,789,905

NIM (GAAP)

3.25
%

3.25
%

3.37
%

3.25
%

3.43
%
NIM (TEY) (non-GAAP)

3.40
%

3.40
%

3.52
%

3.40
%

3.58
%
Adjusted NIM (TEY) (non-GAAP)

3.31
%

3.31
%

3.46
%

3.30
%

3.51
%



EFFICIENCY RATIO









Noninterest expense (GAAP)

$
36,560

$
32,435

$
26,370

$
68,995

$
52,234

Net interest income (GAAP)

$
38,013

$
36,908

$
32,085

$
74,921

$
64,488

Noninterest income (GAAP)

17,065

11,993

8,912

29,058

17,454

Total income

$
55,078

$
48,901

$
40,997

$
103,979

$
81,942

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

66.38
%

66.33
%

64.32
%

66.35
%

63.75
%

* ~~Nonrecurring items (after-tax)~~ALLL to total loans and leases, excluding PPP loans and loan growth annualized, excluding PPP loans are ~~calculated using~~ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the quarter ended June 30, 2020 was materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an ~~estimated effective tax rate of 21%.~~

increase in ALLL. By excluding the PPP loans, the investor is provided a better comparison to prior periods for analysis.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued


	As of
GAAP TO NON-GAAP	June 30,			March 31,			June 30,
RECONCILIATIONS	2020			2020			2019

		(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	556,020		$	539,139		$	504,300
Less: Intangible assets		88,120			88,669			93,837
TCE (non-GAAP)	$	467,900		$	450,470		$	410,463

Total assets (GAAP)	$	5,604,761		$	5,232,075		$	5,194,852
Less: Intangible assets		88,120			88,669			93,837
TA (non-GAAP)	$	5,516,641		$	5,143,406		$	5,101,015

TCE/TA ratio (non-GAAP)		8.48	%		8.76	%		8.05	%


TCE/TA RATIO EXCLUDING PPP LOANS
Stockholders' equity (GAAP)	$	556,020		$	539,139		$	504,300
Less: PPP loan interest income (post-tax)		2,085			—			—
Less: Intangible assets		88,120			88,669			93,837
TCE (non-GAAP)	$	465,815		$	450,470		$	410,463

Total assets (GAAP)	$	5,604,761		$	5,232,075		$	5,194,852
Less: PPP loans		358,052			—			—
Less: Intangible assets		88,120			88,669			93,837
TA (non-GAAP)	$	5,158,589		$	5,143,406		$	5,101,015

TCE/TA ratio excluding PPP loans (non-GAAP)		9.03	%		8.76	%		8.05	%

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued


	For the Quarter Ended									For the Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2020			2020			2019			2020			2019

	(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	13,739		$	11,228		$	13,504		$	24,967		$	26,422
Less non-core items (post-tax) (*):
Income:
Securities gains (losses), net	$	51		$	—		$	(41)		$	51		$	(41)
Total non-core income (non-GAAP)	$	51		$	—		$	—		$	51		$	(41)
Expense:
Losses on debt extinguishment	$	339		$	116		$	—		$	455		$	—
Goodwill impairment		—			500			—			500			—
Disposition costs		(66)			408			—			343			—
Post-acquisition compensation, transition and integration costs		55			119			559			175			665
Total non-core expense (non-GAAP)	$	329		$	1,143		$	559		$	1,472		$	2,281


Adjusted net income (non-GAAP)	$	14,016		$	12,371		$	14,104		$	26,388		$	27,128

PRE-PROVISION/PRE-TAX ADJUSTED INCOME
Net income (GAAP)	$	13,739		$	11,228		$	13,504		$	24,967		$	26,422
Less: Non-core income not tax-effected		65			—			(52)			65			(52)
Plus: Non-core expense not tax-effected		416			1,315			708			1,731			842
Provision expense		19,915			8,367			1,941			28,282			4,075
Federal and state income tax expense		2,798			1,884			3,073			4,682			4,487
Pre-provision/pre-tax adjusted income (non-GAAP)	$	36,803		$	22,794		$	19,278		$	59,597		$	35,878

PRE-PROVISION/PRE-TAX ADJUSTED RETURN ON AVERAGE ASSETS (NON-GAAP)
Pre-provision/pre-tax adjusted income (non-GAAP)	$	36,803		$	22,794		$	19,278		$	59,597		$	35,878

Average assets		5,800,164			4,948,311			5,077,900			5,374,224			5,023,201

Pre-provision/pre-tax adjusted return on average assets (non-GAAP)		2.54	%		1.84	%		1.52	%		2.22	%		1.43	%

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	14,016		$	12,371		$	14,104		$	26,388		$	27,128

Weighted average common shares outstanding		15,747,056			15,796,796			15,714,588			15,771,926			15,703,967
Weighted average common and common equivalent shares outstanding		15,895,336			16,011,456			15,938,377			15,956,958			15,930,659

Adjusted EPS (non-GAAP):
Basic	$	0.89		$	0.78		$	0.90		$	1.67		$	1.73
Diluted	$	0.88		$	0.77		$	0.88		$	1.65		$	1.70

ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	14,016		$	12,371		$	14,104		$	26,388		$	27,128

Average Assets	$	5,800,164		$	4,948,311		$	5,077,900		$	5,374,224		$	5,023,201

Adjusted ROAA (annualized) (non-GAAP)		0.97	%		1.00	%		1.11	%		0.98	%		1.08	%

ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	40,948		$	37,698		$	38,013		$	78,646		$	74,921
Plus: Tax equivalent adjustment		1,728			1,790			1,808			3,517			3,509
Net interest income - tax equivalent (non-GAAP)	$	42,676		$	39,488		$	39,821		$	82,163		$	78,430
Less: Acquisition accounting net accretion		736			625			1,076			1,361			2,145
Adjusted net interest income		41,940			38,863			38,745			80,802			76,285

Average earning assets	$	5,252,663		$	4,461,018		$	4,698,021		$	4,856,842		$	4,655,288

NIM (GAAP)		3.14	%		3.40	%		3.25	%		3.26	%		3.25	%
NIM (TEY) (non-GAAP)		3.27	%		3.56	%		3.40	%		3.40	%		3.40	%
Adjusted NIM (TEY) (non-GAAP)		3.21	%		3.50	%		3.31	%		3.35	%		3.30	%

EFFICIENCY RATIO
Noninterest expense (GAAP)	$	33,122		$	31,415		$	36,560		$	64,537		$	68,995

Net interest income (GAAP)	$	40,948		$	37,698		$	38,013		$	78,646		$	74,921
Noninterest income (GAAP)		28,626			15,196			17,065			43,822			29,058
Total income	$	69,574		$	52,894		$	55,078		$	122,468		$	103,979

Efficiency ratio (noninterest expense/total income) (non-GAAP)		47.61	%		59.39	%		66.38	%		52.70	%		66.35	%

ALLLTO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS
ALLL	$	60,827		$	42,233		$	41,104		$	60,827		$	41,104

Total loans and leases	$	4,140,259		$	3,704,668		$	3,910,519		$	4,140,259		$	3,910,519
Less: PPP loans		358,052			—			—			358,052			—
Total loans and leases, excluding PPP loans	$	3,782,207		$	3,704,668		$	3,910,519		$	3,782,207		$	3,910,519

ALLL to total loans and leases, excluding PPP loans		1.61	%		1.14	%		1.05	%		1.61	%		1.05	%

LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS
Total loans and leases	$	4,140,259		$	3,704,668		$	3,910,519		$	4,140,259		$	3,910,519
Less: PPP loans		358,052			—			—			358,052			—
Total loans and leases, excluding PPP loans	$	3,782,207		$	3,704,668		$	3,910,519		$	3,782,207		$	3,910,519

Loan growth annualized, excluding PPP loans		8.37	%		1.57	%		13.57	%		4.99	%		9.52	%

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

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~~$42.7 million for the quarter ended June 30, ~~2019,~~2020 compared to the same quarter of the prior year, and increased ~~17%~~5% to ~~$78.4~~$82.2 million for the six months ended June 30, ~~2019~~2020 compared to the same period of the prior year. Excluding the tax equivalent adjustments, net interest income increased ~~18%~~8% for the quarter ended June 30, ~~2019~~2020 compared to the same quarter of the prior year, and increased ~~16%~~5% for the six months ended June 30, ~~2019~~2020 compared to the same period of the prior year. Net interest income improved due to ~~two main~~the following factors:

●

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

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

growth;

●

Significant growth in PPP loans in the early part of the second quarter of 2020;

●

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

●

Significant reduction in cost of funds.

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


	Tax Equivalent Basis						GAAP
	For the Quarter Ended						For the Quarter Ended
	June 30,		March 31,		June 30,		June 30,		March 31,		June 30,
	2019		2019		2018		2019		2019		2018

													Tax Equivalent Basis						GAAP
													For the Quarter Ended						For the Quarter Ended
													June 30,		March 31,		June 30,		June 30,		March 31,		June 30,
													2020		2020		2019		2020		2020		2019
Average Yield on Interest-Earning Assets	4.78	%	4.74	%	4.44	%	4.63	%	4.58	%	4.28	%	3.86	%	4.58	%	4.78	%	3.70	%	4.39	%	4.63	%
Average Cost of Interest-Bearing Liabilities	1.76	%	1.72	%	1.21	%	1.76	%	1.72	%	1.21	%	0.80	%	1.33	%	1.76	%	0.79	%	1.33	%	1.76	%
Net Interest Spread	3.02	%	3.02	%	3.23	%	2.87	%	2.86	%	3.07	%	3.06	%	3.24	%	3.02	%	2.91	%	3.07	%	2.87	%
NIM	3.40	%	3.40	%	3.52	%	3.25	%	3.25	%	3.37	%	3.27	%	3.56	%	3.40	%	3.14	%	3.40	%	3.25	%
NIM Excluding Acquisition Accounting Net Accretion	3.31	%	3.31	%	3.46	%	3.15	%	3.15	%	3.31	%	3.21	%	3.50	%	3.31	%	3.10	%	3.37	%	3.15	%


	Tax Equivalent Basis				GAAP
	For the Six Months Ended				For the Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2019		2018		2019		2018

									Tax Equivalent Basis				GAAP
									For the Six Months Ended				For the Six Months Ended
									June 30,		June 30,		June 30,		June 30,
									2020		2019		2020		2019
Average Yield on Interest-Earning Assets	4.76	%	4.42	%	4.60	%	4.28	%	4.19	%	4.76	%	4.02	%	4.60	%
Average Cost of Interest-Bearing Liabilities	1.74	%	1.13	%	1.74	%	1.13	%	1.05	%	1.74	%	0.78	%	1.74	%
Net Interest Spread	3.02	%	3.29	%	2.86	%	3.15	%	3.14	%	3.02	%	3.24	%	2.86	%
NIM	3.40	%	3.58	%	3.25	%	3.43	%	3.40	%	3.40	%	3.26	%	3.25	%
NIM Excluding Acquisition Accounting Net Accretion	3.30	%	3.51	%	3.15	%	3.37	%	3.35	%	3.30	%	3.21	%	3.15	%

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~~it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:

For the Quarter Ended

For the Six Months Ended

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 Six Months Ended
		June 30,		March 31,		June 30,		June 30,		June 30,
		2020		2020		2019		2020		2019
		(dollars in thousands)						(dollars in thousands)

Acquisition Accounting Net Accretion in NIM	$	736	$	625	$	1,076	$	1,361	$	2,145

NIM on a tax equivalent basis ~~remained stable~~ was down 29 basis pointson a linked quarter ~~basis at 3.40%.~~basis. Excluding acquisition accounting net accretion, NIM ~~also remained stable~~was down 29 basis points on a linked quarter ~~basis at 3.31%.~~basis. The ~~stability~~decrease in net interest margin during the quarter was due to a 472 basis point ~~increase~~decline in the yield on ~~interest~~ earning assets, partially offset by a 453 basis point ~~increase~~decline in ~~the~~ total cost of interest-bearing funds (due to both mix and rate). Due to significant core deposit growth outpacing loans throughout

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

the quarter, the Company carried excess liquidity of approximately $400 million which contributed to 30 bps of the decline in NIM. Excluding the impact of this excess liquidity, Adjusted NIM would have been stable with the first quarter.

The ~~Company's~~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

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2019 and 2020.

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


																	For the Three Months Ended June 30,
																	2020								2019
																				Interest		Average						Interest		Average
																	Average			Earned		Yield or			Average			Earned		Yield or
																	Balance			or Paid		Cost			Balance			or Paid		Cost

	For the three months ended June 30,
	2019								2018
				Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or
	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	%	$	865		$	1		0.46	%	$	9,690		$	56		2.32	%
Interest-bearing deposits at financial institutions		182,651			1,168		2.56	%		54,879			228		1.67	%		533,483			134		0.10	%		182,651			1,168		2.56	%
Investment securities (1)		644,999			6,062		3.77	%		648,276			5,752		3.56	%		697,559			6,536		3.77	%		644,999			6,062		3.77	%
Restricted investment securities		21,007			290		5.54	%		21,100			212		4.03	%		21,234			288		5.46	%		21,007			290		5.54	%
Gross loans/leases receivable (1) (2) (3)		3,839,674			48,413		5.06	%		3,077,517			36,008		4.69	%		3,999,522			43,417		4.37	%		3,839,674			48,413		5.06	%
Total interest earning assets		4,698,021			55,989		4.78	%		3,820,333			42,261		4.44	%		5,252,663			50,376		3.86	%		4,698,021			55,989		4.78	%


Noninterest-earning assets:
Cash and due from banks		82,394								68,266								82,171								82,394
Premises and equipment		78,008								63,665								73,376								78,008
Less allowance		(41,224)								(36,960)								(42,878)								(41,224)
Other		260,701								138,380								434,865								260,701
Total assets	$	5,077,900							$	4,053,684							$	5,800,197							$	5,077,900


LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	2,461,768			8,271		1.35	%	$	1,919,406			4,089		0.85	%	$	2,840,860			2,429		0.34	%	$	2,461,768			8,271		1.35	%
Time deposits		1,013,391			5,554		2.20	%		665,643			2,439		1.47	%		809,233			3,337		1.66	%		1,013,391			5,554		2.20	%
Short-term borrowings		16,145			81		2.01	%		19,024			63		1.33	%		25,064			22		0.35	%		16,145			81		2.01	%
FHLB advances		76,154			601		3.17	%		174,826			1,019		2.34	%		95,616			347		1.46	%		76,154			601		3.17	%
Other borrowings		10,550			92		3.50	%		67,044			596		3.57	%		—			—		—	%		10,550			92		3.50	%
Subordinated notes		68,239			993		5.84	%		—			—		—	%		68,480			994		5.84	%		68,239			993		5.84	%
Junior subordinated debentures		37,731			576		6.12	%		37,558			508		5.43	%		37,891			573		6.07	%		37,731			576		6.12	%
Total interest-bearing liabilities		3,683,978			16,168		1.76	%		2,883,501			8,714		1.21	%		3,877,144			7,702		0.80	%		3,683,978			16,168		1.76	%


Noninterest-bearing demand deposits		796,232								757,954								1,082,532								796,232
Other noninterest-bearing liabilities		99,427								47,198								284,461								99,427
Total liabilities		4,579,637								3,688,653								5,244,137								4,579,637


Stockholders' equity		498,263								365,031								556,060								498,263
Total liabilities and stockholders' equity	$	5,077,900							$	4,053,684							$	5,800,197							$	5,077,900
Net interest income				$	39,821							$	33,547							$	42,674							$	39,821
Net interest spread							3.02	%							3.23	%							3.06	%							3.02	%
Net interest margin							3.25	%							3.37	%							3.14	%							3.25	%
Net interest margin (TEY)(Non-GAAP)							3.40	%							3.52	%							3.27	%							3.40	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.31	%							3.46	%							3.21	%							3.31	%
Ratio of average interest-earning assets to average interest-bearing liabilities		127.53	%							132.49	%							135.48	%							127.53	%

(1)

~~(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)

~~(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)

~~(3)~~

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

4248

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended June 30, ~~2019~~2020



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


	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume
	2019 vs. 2018
	(dollars in thousands)
							2020 vs. 2019
							(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	(5)	$	141	$	(146)	$	(55)	$	(26)	$	(29)
Interest-bearing deposits at financial institutions		940		177		763		(1,033)		(6,343)		5,310
Investment securities (2)		310		501		(191)		474		(14)		488
Restricted investment securities		78		85		(7)		(2)		(16)		14
Gross loans/leases receivable (2) (3)		12,405		2,961		9,444		(4,996)		(16,223)		11,227
Total change in interest income		13,728		3,865		9,863		(5,612)		(22,622)		17,010


INTEREST EXPENSE
Interest-bearing deposits		4,182		2,807		1,375		(5,842)		(13,308)		7,466
Time deposits		3,115		1,517		1,598		(2,217)		(1,218)		(999)
Short-term borrowings		18		73		(55)		(59)		(250)		191
Federal Home Loan Bank advances		(418)		1,617		(2,035)		(254)		(1,008)		754
Other borrowings		(504)		(11)		(493)		(92)		(46)		(46)
Subordinated notes		993		—		993		1		—		1
Junior subordinated debentures		68		66		2		(4)		(16)		12
Total change in interest expense		7,454		6,069		1,385		(8,467)		(15,846)		7,379


Total change in net interest income	$	6,274	$	(2,204)	$	8,478	$	2,855	$	(6,776)	$	9,631

(1)

~~(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)

~~(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)

~~(3)~~

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

For the six months ended June 30,

2019

2018

Interest

Average

Interest

Average

Average

Earned

Yield or

Average

Earned

Yield or


Balance

or Paid

Cost


Balance

or Paid

Cost


(dollars in thousands)

ASSETS













Interest earning assets:













Federal funds sold

$
12,713

$
150

2.38
%

$
19,132

$
118

1.24
%
Interest-bearing deposits at financial institutions

169,057

2,091

2.49
%

52,205

425

1.64
%
Investment securities (1)

652,727

12,158

3.76
%

648,656

11,418

3.55
%
Restricted investment securities

21,146

598

5.70
%

21,465

446

4.19
%
Gross loans/leases receivable (1) (2) (3)

3,799,645

94,795

5.03
%

3,048,447

70,753

4.68
%
Total interest earning assets

4,655,287

109,792

4.76
%

3,789,905

83,160

4.42
%

Noninterest-earning assets:













Cash and due from banks

80,513

67,745

Premises and equipment, net

77,266

63,530

Less allowance for estimated losses on loans/leases

(40,843)

(36,048)

Other

250,979

139,057

Total assets

$
5,023,201

$
4,024,189

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
%
Time deposits

1,012,925

10,859

2.16
%

641,152

4,301

1.35
%
Short-term borrowings

15,261

152

2.01
%

18,148

95

1.06
%
Federal Home Loan Bank advances

111,755

1,662

3.00
%

205,758

2,215

2.17
%
Other borrowings

27,126

539

4.01
%

65,862

1,182

3.62
%
Subordinated notes

53,438

1,557

5.88
%

—

—

—

Junior subordinated debentures

37,709

1,148

6.14
%

37,534

955

5.13
%
Total interest-bearing liabilities

3,633,151

31,362

1.74
%

2,842,271

15,857

1.13
%

Noninterest-bearing demand deposits

803,266

776,314

Other noninterest-bearing liabilities

96,441

44,826

Total liabilities

4,532,858

3,663,411

Stockholders' equity

490,343

360,778

Total liabilities and stockholders' equity

$
5,023,201

$
4,024,189

Net interest income

$
78,430

$
67,303

Net interest spread

3.02
%

3.29
%
Net interest margin

3.25
%

3.43
%
Net interest margin (TEY)(Non-GAAP)

3.40
%

3.58
%
Adjusted net interest margin (TEY)(Non-GAAP)

3.30
%

3.51
%
Ratio of average interest earning assets to average interest-bearing liabilities

128.13
%

133.34
%


	For the Six Months Ended June 30,
	2020								2019
				Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost

	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	3,095		$	18		1.17	%	$	12,713		$	150		2.38	%
Interest-bearing deposits at financial institutions		331,048			495		0.30	%		169,057			2,091		2.49	%
Investment securities (1)		658,433			12,616		3.85	%		652,727			12,158		3.76	%
Restricted investment securities		21,300			546		5.16	%		21,146			598		5.70	%
Gross loans/leases receivable (1) (2) (3)		3,842,966			87,474		4.58	%		3,799,645			94,795		5.03	%
Total interest earning assets		4,856,842			101,149		4.19	%		4,655,288			109,792		4.76	%

Noninterest-earning assets:
Cash and due from banks		90,799								80,513
Premises and equipment, net		73,641								77,266
Less allowance for estimated losses on loans/leases		(39,439)								(40,843)
Other		392,401								250,978
Total assets	$	5,374,242							$	5,023,201

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	2,610,248			7,756		0.60	%	$	2,374,939			15,445		1.31	%
Time deposits		797,184			7,216		1.82	%		1,012,925			10,859		2.16	%
Short-term borrowings		22,190			86		0.78	%		15,261			152		2.01	%
Federal Home Loan Bank advances		103,512			796		1.55	%		111,755			1,662		3.00	%
Other borrowings		—			—		—	%		27,126			539		4.01	%
Subordinated notes		68,449			1,988		5.84	%		53,438			1,557		5.88
Junior subordinated debentures		37,872			1,144		6.07	%		37,709			1,148		6.14	%
Total interest-bearing liabilities		3,639,455			18,986		1.05	%		3,633,151			31,362		1.74	%

Noninterest-bearing demand deposits		936,223								803,266
Other noninterest-bearing liabilities		247,697								96,441
Total liabilities		4,823,374								4,532,858

Stockholders' equity		550,869								490,343
Total liabilities and stockholders' equity	$	5,374,242							$	5,023,201
Net interest income				$	82,163							$	78,430
Net interest spread							3.14	%							3.02	%
Net interest margin							3.26	%							3.25	%
Net interest margin (TEY)(Non-GAAP)							3.40	%							3.40	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.35	%							3.30	%
Ratio of average interest earning assets to average interest-bearing liabilities		133.45	%							128.13	%

(1)

~~(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)

~~(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)

~~(3)~~

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense							Analysis of Changes of Interest Income/Interest Expense
For the six months ended June 30, 2020							For the six months ended June 30, 2020

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


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

	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume
	2019 vs. 2018
	(dollars in thousands)
								2020 vs. 2019
								(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	32	$	140	$	(108)		$	(132)	$	(53)	$	(79)
Interest-bearing deposits at other financial institutions		1,666		314		1,352			(1,596)		(4,631)		3,035
Investment securities (2)		740		668		72			458		342		116
Restricted investment securities		152		171		(19)			(52)		(65)		13
Gross loans/leases receivable (2) (3) (4)		24,042		5,606		18,436
Gross loans/leases receivable (2) (3)									(7,321)		(10,368)		3,047
Total change in interest income		26,632		6,899		19,733			(8,643)		(14,775)		6,132

INTEREST EXPENSE
Interest-bearing demand deposits		8,336		6,065		2,271			(7,689)		(11,727)		4,038
Time deposits		6,558		3,330		3,228			(3,643)		(1,552)		(2,091)
Short-term borrowings		57		100		(43)			(66)		(198)		132
Federal Home Loan Bank advances		(553)		1,606		(2,159)			(866)		(752)		(114)
Other borrowings		(643)		334		(977)			(539)		(270)		(269)
Subordinated notes		1,557		—		1,557			431		—		431
Junior subordinated debentures		193		—		193			(4)		—		(4)
Total change in interest expense		15,505		11,435		4,070			(12,376)		(14,499)		2,123
Total change in net interest income	$	11,127	$	(4,536)	$	15,663		$	3,733	$	(276)	$	4,009

(1)

~~(1)~~

(2)

~~(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)

~~(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. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2018.~~2019.

Due to the economic impact of COVID-19 during the first quarter of 2020, management concluded that factors such as the decline in macroeconomic conditions led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of March 31, 2020. There was no occurrence of a triggering event in the second quarter of 2020, therefore no impairment test of goodwill was performed as of June 30, 2020. When such an assessment is

4551

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

performed, should the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Based upon the results of the interim goodwill assessment during the first quarter of 2020, the Company concluded that an impairment did not exist on the bank reporting units as of the time of the assessment.

During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies. This was the result of the announcement of a sale of the Bates Companies as discussed in Note 9 of the Consolidated Financial Statements.

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~~10-K for the year ended December 31, ~~2018.~~2019.

The Company believes the COVID-19 pandemic may have an adverse effect on the credit quality of its loan portfolio during the remainder of 2020. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the allowance for loan and lease losses.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income ~~increased 33%~~decreased 10%, comparing the second quarter of ~~2019~~2020 to the same period of ~~2018,~~2019, and ~~increased 32%~~decreased 8% comparing the first half of ~~2019~~2020 to the same period of ~~2018.~~2019. This ~~increase~~decrease was primarily the result of ~~the addition of SFC Bank, strong organic loan growth~~a reduction in average yields on loans and ~~loans repricing with the rising rate environment.~~leases.

Overall, the Company's average earning assets increased ~~23%~~12%, comparing the second quarter of ~~2019~~2020 to the second quarter of ~~2018.~~2019. During the same time period, ~~average~~excess liquidity increased by 15%. Average gross loans and leases increased ~~25%~~4%, while average investment securities ~~decreased 1%.~~increased 8% during the same time period. Average earning assets increased ~~23%~~4%, comparing the first half of ~~2019~~2020 to the same period of ~~2018.~~2019. Excess liquidity increased by $235 million comparing the first half of 2020 to the same period of 2019. Average gross loans and leases ~~increased 25%~~ and average investment securities both increased ~~1%, comparing the first half of 2019 to~~slightly during the same ~~period of 2018. These~~time period. The increases in excess liquidity were the result of outsized growth in core deposits led by the ~~addition of SFC Bank and strong organic loan growth.~~Company’s correspondent banking client base.

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 quarter of ~~2019 increased 86%~~2020 decreased 52% from the second quarter of ~~2018~~2019 and ~~increased 98%~~decreased 39%, comparing the first half of ~~2019~~2020 to the same period of ~~2018.~~2019. 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 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~~average interest-bearing liabilities has ~~increased~~decreased with the ~~rising~~current rate environment. During the last month of the first quarter, market interest rates fell as the Federal Reserve cut the Federal Funds rate by 150 bps to a range of 0%-0.25%. As a direct result, the Company’s interest expense declined sharply 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.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

PROVISION FOR LOAN/LEASE LOSSES

The Company’s provision for loan and lease losses totaled $19.9 million for the second quarter of 2020, which is significantly higher than $1.9 million for the second quarter of 2019. Provision for the first six months of 2020 totaled $28.3 million, which was up from $4.1 million in the first six months of 2019. The increase in the provision for loan and lease losses was primarily due to increased qualitative allocations in response to deteriorating economic conditions related to the effects of COVID-19.

The Company anticipates the provision to be elevated in future periods due to the broad reach of COVID-19 across many impacted individuals and industries. The dramatic slowdown in economic activity will likely negatively impact the credit quality of the Company’s loan portfolio with increased levels of loan defaults. The CARES Act provides significant resources for individuals and industries that could lessen the impact of COVID-19, in addition to the Company’s own loan relief programs.

The Company has elected to defer its implementation of CECL as allowed by the CARES Act. See Note 1 of the Consolidated Financial Statements for further discussion.

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 and securities 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.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

In accordance with GAAP for business combination accounting, acquired loans are recorded at fair value; therefore, no allowance is associated with such loans at acquisition. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance through provision. This provision, when coupled with net charge-offs of ~~$2.8~~$3.46 million for the first six months of ~~2019,~~2020, increased the Company's allowance to ~~$41.1~~$60.8 million at June 30, ~~2019.~~2020. As of June 30, ~~2019,~~2020, the Company's allowance to total loans/leases was ~~1.05%~~1.47%, which was ~~down~~up from ~~1.07%~~1.14% at ~~December~~March 31, ~~2018~~2020 and ~~down from 1.21%~~1.05% at June 30, ~~2018.~~2019. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($~~9.3~~5.5 million and ~~$6.6~~$9.3 million at June 30, ~~2019~~2020 and June 30, ~~2018,~~2019, respectively).

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


	As of June 30,
	2020
			% of Total Gross
	Amount		Loans and Leases

	(dollars in thousands)

Retail and Lessors of Property Secured by Retail Property	$	236,147	5.70	%
Hotels		86,543	2.09
Restaurants (full service and limited service only)		41,077	0.99
Arts & Entertainment		30,513	0.74
Aviation		—	0.00
Energy		—	0.00
	$	394,280	9.52	%

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.


									Three Months Ended
									June 30,		June 30,
									2020		2019		$ Change		% Change

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

									(dollars in thousands)

Trust department fees	$	2,361	$	2,058	$	303	14.7	%	$	2,227	$	2,361	$	(134)	(5.7)	%
Investment advisory and management fees		1,888		1,058		830	78.4			1,399		1,888		(489)	(25.9)
Deposit service fees		1,658		1,610		48	3.0			1,286		1,658		(372)	(22.4)
Gains on sales of residential real estate loans, net		489		102		387	379.4			1,196		489		707	144.6
Gains on sales of government guaranteed portions of loans, net		39		—		39	100.0			—		39		(39)	(100.0)
Swap fee income		7,891		1,649		6,242	378.5			19,927		7,891		12,036	152.5
Securities losses, net		(52)		—		(52)	(100.0)
Securities gains (losses), net										65		(52)		117	(100.0)
Earnings on bank-owned life insurance		412		399		13	3.3			612		412		200	48.5
Debit card fees		914		844		70	8.3			775		914		(139)	(15.2)
Correspondent banking fees		172		213		(41)	(19.2)			198		172		26	15.1
Other		1,293		979		314	32.1			941		1,293		(352)	(27.2)
Total noninterest income	$	17,065	$	8,912	$	8,153	91.5	%	$	28,626	$	17,065	$	11,561	67.7	%


									Six Months Ended
									June 30,		June 30,
									2020		2019		$ Change		% Change

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

									(dollars in thousands)

Trust department fees	$	4,854	$	4,295	$	559	13.0	%	$	4,539	$	4,854	$	(315)	(6.5)	%
Investment advisory and management fees		3,624		2,010		1,614	80.3			3,126		3,624		(498)	(13.7)
Deposit service fees		3,212		3,142		70	2.2			2,763		3,212		(449)	(14.0)
Gains on sales of residential real estate loans, net		858		203		655	322.7			1,848		858		990	115.4
Gains on sales of government guaranteed portions of loans, net		70		358		(288)	(80.4)			—		70		(70)	(100.0)
Swap fee income		11,089		2,608		8,481	325.2			26,731		11,089		15,642	141.1
Securities losses, net		(52)		—		(52)	(100.0)
Securities gains (losses), net										65		(52)		117	(100.0)
Earnings on bank-owned life insurance		952		817		135	16.5			941		952		(11)	(1.2)
Debit card fees		1,706		1,610		96	6.0			1,533		1,706		(173)	(10.1)
Correspondent banking fees		388		477		(89)	(18.7)			413		388		25	6.4
Other		2,357		1,934		423	21.9			1,863		2,357		(494)	(21.0)
Total noninterest income	$	29,058	$	17,454	$	11,604	66.5	%	$	43,822	$	29,058	$	14,764	50.8	%

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~~by $291.3 million in the second quarter of 2020, however assets under management decreased $183.4 million in the first six months of ~~2019 with 186 new client relationships.~~2020 due to deteriorating economic conditions caused by the COVID-19 pandemic. With ~~strong growth~~the decrease in assets under management, trust department fees ~~increased 15%~~decreased 7%, comparing the ~~second quarter~~first six months of ~~2019 to the same period of the prior year. Trust~~

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~department fees increased 13%, when comparing the first half of 2019~~2020 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. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations.

Investment advisory and management fees ~~increased 78%~~decreased 26%, comparing the second quarter of ~~2019~~2020 to the same period of the prior year and they ~~increased 80%~~decreased 14% when comparing the first half of ~~2019~~2020 to the first half of ~~2018. In October 2018,~~2019. Brokerage assets decreased $124.1 million in the ~~Company acquired~~first six months of 2020 due to deteriorating economic conditions caused by the ~~Bates Companies which increased assets under management by approximately $704 million as~~COVID-

Table of ~~closing. Management has placed a stronger emphasis on growing its investment advisory and management services.~~ Contents

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).I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

19 pandemic. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations. The levels of trust and brokerage assets under management were negatively impacted by the decline in the market as a result of COVID-19.

Deposit service fees ~~expanded 3%~~decreased 22% comparing the second quarter of ~~2019~~2020 to the same period of the prior year, and ~~expanded 2%~~decreased 14% when comparing the first half of ~~2019~~2020 to the same period of the prior year. This decrease was primarily due to the sale of RB&T, as well as lower transactional volume due to current economic conditions. The Company continues ~~its emphasis on~~to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, increased ~~379%~~145% when comparing the second quarter of ~~2019~~2020 to the same period of the prior year, and increased ~~323%~~115% when comparing the first half of ~~2019~~2020 to the same period of the prior year. The increase was primarily due to the ~~addition of SFC Bank which recognized gains on sales~~refinancing of residential real estate ~~of $351 thousand in the second quarter of 2019 and $635 thousand~~loans with lower interest rates in the first half of 2019. Overall, refinancing activity has slowed, as many of the Company's existing and prospective customers have already executed a refinancing. Therefore, this area has generally become a smaller contributor to overall noninterest income.2020.

The ~~Company's~~Company did not have any gains on the sale of government-guaranteed portions of loans for the second quarter of 2019 increased 100% compared to the second quarter of 2018 and decreased 80% when comparing the first half of 2019 to the same period of the prior year. Given the nature of these gains, largethree or six months ended June 30, 2020. 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 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 $19.9 million for the second quarter of 2020, compared to $7.9 million for the second quarter of ~~2019, compared to $1.6 million for the second quarter of 2018.~~2019. Swap fee income totaled ~~$11.1~~$26.7 million for the first half of ~~2019,~~2020, compared to ~~$2.6~~$11.1 million in the first half of ~~2018.~~2020. The increase in swap fee income for the first ~~three and~~ six months of ~~2019,~~2020, 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.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

Securities gains totaled $65 thousand for the three and six months ended June 30, 2020. By comparison, securities losses totaled $52 thousand for the three and six months ended June 30, 2019. ~~By comparison, there were no securities losses for the three and six months ended June 30, 2018.~~

Earnings on BOLI increased 3%49% comparing the second quarter of ~~2019~~2020 to the second quarter of ~~2018,~~2019, and ~~increased 17%~~decreased 1% comparing the first half of ~~2019~~2020 to the first half of ~~2018.~~2019. 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~~markets 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%~~decreased 15% comparing the second quarter of ~~2019~~2020 to the second quarter of the prior year, and ~~increased 6%~~decreased 10% comparing the first half

Table of ~~2019~~Contents

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

of 2020 to the first half of ~~2018. This increase was primarily related to recent acquisitions.~~2019. 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%~~increased 15% comparing the second quarter of ~~2019~~2020 to the second quarter of the prior year, ~~as well as~~and increased 6% comparing the first half of ~~2019~~2020 to the first half of ~~2018.~~2019. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue 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~~191 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income ~~increased 32%~~decreased 27% comparing the second quarter of ~~2019~~2020 to the second quarter of the prior year, and ~~increased 22%~~decreased 21% comparing the first half of ~~2019~~2020 to the first half of ~~2018.~~2019. This ~~increase~~decrease was primarily due to ~~loan related fee income, equity investment income and gain on disposal~~the sale of ~~leased assets.~~RB&T.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.


									Three Months Ended
									June 30,		June 30,
									2020		2019		$ Change		% Change

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

									(dollars in thousands)

Salaries and employee benefits	$	22,749	$	15,804	$	6,945	43.9	%	$	21,304	$	22,749	$	(1,445)	(6.4)	%
Occupancy and equipment expense		3,533		3,133		400	12.8			3,748		3,533		215	6.1
Professional and data processing fees		3,031		2,771		260	9.4			3,646		3,031		615	20.3
Acquisition costs		—		414		(414)	(100.0)
Post-acquisition compensation, transition and integration costs		708		165		543	329.1			70		708		(638)	(90.1)
Disposition costs										(83)		—		(83)	100.0
FDIC insurance, other insurance and regulatory fees		926		840		86	10.2			908		926		(18)	(1.9)
Loan/lease expense		312		260		52	20.0			339		312		27	8.7
Net cost of (income from) and gains/losses on operations of other real estate		1,182		(70)		1,252	(1,788.6)			(332)		1,182		(1,514)	(128.1)
Advertising and marketing		1,037		753		284	37.7			552		1,037		(485)	(46.8)
Bank service charges		508		466		42	9.0			501		508		(7)	(1.4)
Loss on liability extinguishment										429		—		429	100.0
Correspondent banking expense		206		204		2	1.0			212		206		6	2.9
Intangibles amortization		615		305		310	101.6			548		615		(67)	(10.9)
Other		1,753		1,325		428	32.3			1,280		1,753		(473)	(27.0)
Total noninterest expense	$	36,560	$	26,370	$	10,190	38.6	%	$	33,122	$	36,560	$	(3,438)	(9.4)	%

Six Months Ended

June 30,

June 30,


2019

2018

$ Change

% Change

(dollars in thousands)

Salaries and employee benefits

$
43,628

$
31,782

$
11,846

37.3
%

Occupancy and equipment expense

7,227

6,198

1,029

16.6

Professional and data processing fees

5,781

5,479

302

5.5

Acquisition costs

—

506

(506)

(100.0)

Post-acquisition compensation, transition and integration costs

842

165

677

410.3

FDIC insurance, other insurance and regulatory fees

1,890

1,597

293

18.3

Loan/lease expense

526

551

(25)

(4.5)

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

1,480

62

1,418

2,287.1

Advertising and marketing

1,822

1,446

376

26.0

Bank service charges

991

907

84

9.3

Correspondent banking expense

410

409

1

0.2

Intangibles amortization

1,147

609

538

88.3

Other

3,251

2,523

728

28.9

Total noninterest expense

$
68,995

$
52,234

$
16,761

32.1
%


	Six Months Ended
	June 30,		June 30,
	2020		2019		$ Change		% Change

	(dollars in thousands)

Salaries and employee benefits	$	39,823	$	43,628	$	(3,805)	(8.7)	%
Occupancy and equipment expense		7,780		7,227		553	7.7
Professional and data processing fees		7,015		5,781		1,234	21.3
Post-acquisition compensation, transition and integration costs		221		842		(621)	(73.8)
Disposition costs		434		—		434	100.0
FDIC insurance, other insurance and regulatory fees		1,591		1,890		(299)	(15.8)
Loan/lease expense		567		526		41	7.8
Net cost of (income from) and gains/losses on operations of other real estate		(319)		1,480		(1,799)	(121.6)
Advertising and marketing		1,234		1,822		(588)	(32.3)
Bank service charges		1,005		991		14	1.4
Losses on liability extinguishment, net		576		—		576	100.0
Correspondent banking expense		428		410		18	4.4
Intangibles amortization		1,097		1,147		(50)	(4.4)
Goodwill Impairment		500		—		500	100.0
Other		2,585		3,251		(666)	(20.5)
Total noninterest expense	$	64,537	$	68,995	$	(4,458)	(6.5)	%

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. ~~One-time charges to 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~~decreased from the second quarter of 2019 to the second quarter of ~~2018~~2020 by ~~44%~~6%. This line item also ~~increased 37%~~decreased 9% when comparing the first half of ~~2019~~2020 to the first half of ~~2018.~~2019. This ~~increase~~decrease was primarily related to ~~bonuses~~the sale of RB&T, deferred costs due to PPP loans and ~~commissions on elevated swap fee income,~~reduced bonus and incentive compensation due to the ~~addition~~impact 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.

COVID-19.

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Occupancy and equipment expense increased ~~13%~~6% comparing the second quarter of ~~2019~~2020 to the same period of the prior year, and increased ~~17%~~8% comparing the first half of ~~2019~~2020 to the same period of the prior year. The increased expense was due to higher information technology service contract costs and increases in repairs and maintenance costs ~~and the additions of SFC Bank and the Bates Companies.~~to existing buildings.

Professional and data processing fees increased 9%20% comparing the ~~first~~second quarter of ~~2019~~2020 to the same period in ~~2018,~~2019, and increased 6%21% comparing the first half of ~~2019~~2020 to the same period of the prior year. This increased expense was mostly due to recent mergers/acquisitions. Legal expense continues to be elevated due to a legal matter at RB&T where two employees have been charged with wrongdoing in connection with an SBA loan application. The Company anticipates these legal expenses will continue 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 andhigher data processing ~~fees can fluctuate depending on certain one-time project~~ costs. Management will continue to focus on minimizing one-time costs and driving recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.

~~There were no acquisition costs in the first six months of 2019. Acquisition~~Post-acquisition costs totaled ~~$414 thousand and $506~~$70 thousand for the second quarter of ~~2018 and first half of 2018, respectively. These costs were comprised primarily of legal, accounting and investment banking costs related to mergers/acquisitions.~~

~~Post-acquisition costs totaled $708 thousand for the second quarter of 2019~~2020 as compared to ~~$165~~$708 thousand for the same period of the prior year. Post-acquisition costs totaled ~~$842~~$221 thousand for the first half of ~~2019~~2020 as compared to ~~$165~~$842 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 previous mergers/acquisitions.

Disposition costs totaled $434 thousand for the first half of 2020. The costs were primarily legal, accounting, personnel costs and IT deconversion costs related to the sale of RB&T in the fourth quarter of 2019. There were no disposition costs for the first quarter or first half of 2019.

FDIC insurance, other insurance and regulatory fee expense ~~increased 10%~~decreased 2%, comparing the second quarter of ~~2019~~2020 to the second quarter of ~~2018,~~2019, and ~~increased 18%~~decreased 16% comparing the first half of ~~2019~~2020 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 that carried forward into 2020.

Loan/lease expense increased ~~20%~~9% when comparing the second quarter of ~~2019~~2020 to the same quarter of ~~2018,~~2019, and ~~decreased 5%~~increased 8% comparing the first half of ~~2019~~2020 to the same period of the prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net ~~cost of (income from)~~income from and gains/losses on operations of other real estate totaled $332 thousand for the second quarter of 2020, compared to net cost of and gains/losses on operations of other real estate of $1.2 million for the second quarter of ~~2019, compared to $70 thousand for the second quarter of 2018.~~2019. Net ~~cost of (income from)~~income from and gains/losses on operations of other real estate totaled ~~$1.5 million~~$319 thousand for the first half of ~~2019~~2020 compared to ~~$62 thousand~~net cost of and gains/losses on operations of other real estate of $1.5 million for the same period of the prior year. In the ~~second quarter~~first half of ~~2019,~~2020, the Company ~~wrote down an~~has sold OREO property ~~by $1 million.~~of $4 million with corresponding gains of $369 thousand.

Advertising and marketing expense ~~increased 38%~~decreased 47% comparing the second quarter of ~~2019~~2020 to the second quarter of ~~2018,~~2019, and ~~increased 26%~~decreased 32% comparing the ~~first~~second half of ~~2019~~2020 to the same period of the prior year. The ~~increase~~decrease in expense was primarily due to the ~~addition~~sale of ~~SFC Bank.~~RB&T.

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~~decreased 1% when comparing the second quarter of ~~2018~~2020 to the ~~second~~same quarter of 2019, ~~as well as~~and increased 1% comparing the first half of ~~2019~~2020 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 liability extinguishment were $429 thousand for the second quarter of 2020 and $576 thousand for the first half of 2020. These losses relate to the prepayment of certain high-cost brokered and public certificates of deposit. There were no losses on debt extinguishment for the three and six months ended June 30, 2019.

Correspondent banking expense increased 1%3% when comparing the second quarter of ~~2019~~2020 to the second quarter of ~~2018~~2019 and ~~remained flat~~increased 4% when comparing the first half of ~~2019~~2020 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%~~decreased 11% when comparing the second quarter of ~~2019~~2020 to the ~~second~~same quarter of ~~2018,~~2019 and ~~increased 88%~~decreased 4% when comparing the first half of ~~2019~~2020 to the same period of the prior year. The ~~increase was due~~second quarter of 2019 included $82 thousand of intangible amortization expense related to the ~~addition~~finalization of ~~SFC Bank and~~purchase accounting related to the acquisition of Bates Companies.

Goodwill impairment expense totaled $500 thousand in the first half of 2020 related to the sale of the Bates Companies. There was no goodwill impairment expense in the first half of 2019.

Other noninterest expense ~~was up 32%~~decreased 27% when comparing the second quarter of ~~2019~~2020 to the second quarter of ~~2018,~~2019, and ~~increased 29%~~decreased 21% when comparing the first half of ~~2019~~2020 to the same period of the prior year. This was primarily due to the sale of RB&T. 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 quarter of ~~2019,~~2020, the Company incurred income tax expense of ~~$3.1~~$2.8 million. During the first half of the year, the Company incurred income tax expense of ~~$4.5~~$4.7 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 months ended June 30, ~~2019~~2020 and ~~2018.~~2019.


																	For the Three Months Ended June 30,								For the Six Months Ended June 30,
																	2020				2019				2020				2019
																			% of				% of				% of				% of
																			Pretax				Pretax				Pretax				Pretax
																	Amount		Income		Amount		Income		Amount		Income		Amount		Income

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2019				2018				2019				2018
			% of				% of				% of				% of
			Pretax				Pretax				Pretax				Pretax
	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	%	$	3,472	21.0	%	$	3,481	21.0	%	$	6,226	21.0	%	$	6,491	21.0	%
Tax exempt income, net		(1,068)	(6.5)			(956)	(7.8)			(2,175)	(7.1)			(1,899)	(7.6)			(1,247)	(7.5)			(1,068)	(6.5)			(2,472)	(8.3)			(2,175)	(7.1)
Bank-owned life insurance		(87)	(0.5)			(84)	(0.7)			(200)	(0.6)			(172)	(0.7)			(115)	(0.7)			(87)	(0.5)			(170)	(0.6)			(200)	(0.6)
State income taxes, net of federal benefit, current year		772	4.7			558	4.5			1,421	4.6			1,109	4.5			776	4.7			772	4.7			1,453	4.9			1,421	4.6
Tax credits		(38)	(0.2)			—	—			(77)	(0.3)			—	—			(116)	(0.7)			(38)	(0.2)			(232)	(0.8)			(77)	(0.3)
True-up adjustment to year-end provision		—	—			—	—			(715)	(2.3)			—	—			—	—			—	—			—	—			(715)	(2.3)
Excess tax benefit on stock options exercised and restricted stock awards vested		(54)	(0.3)			(201)	(1.6)			(154)	(0.5)			(333)	(1.3)			2	—			(54)	(0.3)			(262)	(0.9)			(154)	(0.5)
Other		67	0.3			(25)	(0.1)			(104)	(0.3)			(55)	(0.3)			26	0.1			67	0.3			139	0.5			(104)	(0.3)
Federal and state income tax expense	$	3,073	18.5	%	$	1,881	15.3	%	$	4,487	14.5	%	$	3,872	15.6	%	$	2,798	16.9	%	$	3,073	18.5	%	$	4,682	15.8	%	$	4,487	14.5	%

The effective tax rate for the quarter ended June 30, ~~2019~~2020 was ~~18.5%~~16.9%, which was a ~~3.2% increase~~decrease from the effective tax rate of ~~15.3%~~18.5% for the quarter ended June 30, ~~2018.~~2019. The effective tax rate for the six months ended June 30, ~~2019~~2020 was ~~14.5%~~15.8%, which was ~~a decrease~~an increase over the effective tax rate of ~~15.6%~~14.5% for the six months ended June 30, ~~2018.~~2019. 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% for the six months ended June 30, 2019.

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FINANCIAL CONDITION

Following is a table that represents the major categories of the Company’s balance sheet. On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T. As a result, those assets and liabilities of RB&T are not included in the Company’s results of its financial condition as of June 30, 2020, March 31, 2020 and December 31, 2019, the removal of which impacts balance sheet comparisons to June 30, 2019.


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

	Amount		%		Amount		%		Amount		%		Amount		%

																	As of
																	June 30, 2020				March 31, 2020				December 31, 2019				June 30, 2019
																	(dollars in thousands)

																	Amount		%		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	293,416	6	%	$	292,559	6	%	$	245,119	5	%	$	120,736	3	%	$	231,477	4	%	$	376,535	7	%	$	233,945	5	%	$	293,416	6	%
Securities		643,803	12	%		655,749	13	%		662,969	13	%		657,997	16	%		748,883	13	%		684,571	13	%		611,341	12	%		643,803	12	%
Net loans/leases		3,869,415	75	%		3,758,268	74	%		3,692,907	75	%		3,077,247	75	%		4,079,432	73	%		3,662,435	70	%		3,654,204	75	%		3,869,415	75	%
Derivatives																		225,164	4	%		195,973	4	%		87,827	2	%		65,922	1	%
Other assets		388,218	7	%		360,086	7	%		348,715	7	%		250,903	6	%		309,040	6	%		301,803	6	%		309,767	6	%		322,296	6	%
Assets held for sale																		10,765	-	%		10,758	-	%		11,966	-	%		—	-	%
Total assets	$	5,194,852	100	%	$	5,066,662	100	%	$	4,949,710	100	%	$	4,106,883	100	%	$	5,604,761	100	%	$	5,232,075	100	%	$	4,909,050	100	%	$	5,194,852	100	%


Total deposits	$	4,322,510	83	%	$	4,194,220	83	%	$	3,977,031	80	%	$	3,298,276	81	%	$	4,349,775	78	%	$	4,170,478	80	%	$	3,911,051	80	%	$	4,322,510	84	%
Total borrowings		230,953	4	%		282,994	5	%		404,968	8	%		380,392	9	%		376,250	7	%		244,399	5	%		278,955	5	%		230,953	4	%
Derivatives																		233,589	4	%		203,744	4	%		88,437	2	%		69,556	1	%
Other liabilities		137,089	3	%		101,041	2	%		94,573	2	%		58,627	1	%		87,539	1	%		71,185	1	%		90,253	2	%		67,533	1	%
Liabilities held for sale																		1,588	-	%		3,130	0	%		5,003	-	%		—	-	%
Total stockholders' equity		504,300	10	%		488,407	10	%		473,138	10	%		369,588	9	%		556,020	10	%		539,139	10	%		535,351	11	%		504,300	10	%
Total liabilities and stockholders' equity	$	5,194,852	100	%	$	5,066,662	100	%	$	4,949,710	100	%	$	4,106,883	100	%	$	5,604,761	100	%	$	5,232,075	100	%	$	4,909,050	100	%	$	5,194,852	100	%

During the second quarter of ~~2019,~~2020, the Company's total assets increased ~~$128~~$372.7 million, or ~~3%,~~7% from March 31, 2020, to a total of ~~$5.2~~$5.6 billion. The ~~Company grew its net loan/lease portfolio $111 million, which was primarily funded by an increase in core deposits. Deposits grew $128~~Company’s loans increased $417.0 million in the second quarter of ~~2019, while borrowings decreased $52~~2020. Included in this amount was $358.1 million of PPP loans made to both new and existing customers. Total deposits increased $179.3 million in the second quarter of ~~2019.~~2020 primarily due to an increase in noninterest-bearing demand deposits. Borrowings increased $131.9 million in the second quarter of 2020 which consisted primarily of an increase in overnight FRB borrowings of $70.0 million and an increase in short-term FHLB advances of $50.0 million. During the quarter, the Company had significant core deposit growth mostly from its correspondent banking clients. The outsized deposit growth exceeded the strong loan growth and led to the Company carrying excess liquidity during the quarter. At the end of the quarter, a large portion of the outsized correspondent banking deposits shifted off balance sheet temporarily which prompted some overnight borrowing. Subsequently, the majority of the balances have returned to the balance sheet.

INVESTMENT SECURITIES

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

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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
																					June 30, 2020					March 31, 2020					December 31, 2019					June 30, 2019
																					Amount			%		Amount			%		Amount			%		Amount			%

	As of
	June 30, 2019					March 31, 2019					December 31, 2018					June 30, 2018
	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	%	$	17,472		2	%	$	19,457		3	%	$	20,078		3	%	$	35,762		6	%
Municipal securities		440,852		68	%		450,376		69	%		459,409		70	%		458,510		70	%		526,192		71	%		493,664		72	%		447,853		73	%		440,852		68	%
Residential mortgage-backed and related securities		159,228		25	%		161,692		25	%		159,249		24	%		158,534		24	%		145,672		19	%		122,853		18	%		120,587		20	%		159,228		25	%
Asset-backed securities																						39,797		5	%		28,499		4	%		16,887		3	%		—		—	%
Other securities		7,961		1	%		7,838		1	%		7,900		1	%		5,286		1	%		19,750		3	%		20,098		3	%		5,936		1	%		7,961		1	%
	$	643,803		100	%	$	655,749		100	%	$	662,969		100	%	$	657,997		100	%

																					$	748,883		100	%	$	684,571		100	%	$	611,341		100	%	$	643,803		100	%

Securities as a % of Total Assets		12.39	%				12.94	%				13.39	%				16.02	%				13.36	%				13.11	%				12.45	%				12.39	%
Net Unrealized Gains (Losses) as a % of Amortized Cost		3.23	%				1.46	%				(1.01)	%				(1.58)	%
Net Unrealized Gains as a % of Amortized Cost																						4.16	%				3.73	%				4.88	%				3.23	%
Duration (in years)		6.4					6.6					6.8					7.0					6.3					6.7					6.7					6.4
Yield on investment securities (tax equivalent)		3.77	%				3.74	%				3.58	%				3.56	%				3.77	%				3.95	%				3.80	%				3.77	%
Quarterly Yield on Investment Securities (GAAP)		3.20	%				3.18	%				2.85	%				3.02	%

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

The duration of the securities portfolio shortened modestly with the TEY on the portfolio increasing 19 basis points in the first half of 2019; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 35 basis points.

~~The~~ Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities. The asset-backed securities, which are comprised of collateral loan obligations, are backed by pools of senior secured commercial loans and were AAA rated as of June 30, 2020.

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

LOANS/LEASES

Total loans/leases, excluding PPP loans (non-GAAP), grew ~~11.7%~~8.4% on an annualized basis during the second quarter of ~~2019~~2020 and ~~9.5%~~5.0% year-to-date. The Company experienced several large payoffs during the first quarter, which impacted loan growth, as well as slower growth in the first half of the year due to the pandemic. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following table.


																	As of
																	June 30, 2020				March 31, 2020				December 31, 2019				June 30, 2019
																	Amount		%		Amount		%		Amount		%		Amount		%

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

C&I loans	$	1,548,657	40	%	$	1,479,247	39	%	$	1,429,410	38	%	$	1,273,000	42	%
																	(dollars in thousands)

C&I loans*																	$	1,850,110	45	%	$	1,484,979	41	%	$	1,507,825	41	%	$	1,548,657	40	%
CRE loans		1,837,473	46	%		1,790,845	47	%		1,766,111	48	%		1,349,319	43	%		1,869,162	45	%		1,783,086	48	%		1,736,396	47	%		1,837,473	46	%
Direct financing leases		101,180	3	%		108,543	3	%		117,969	3	%		133,196	4	%		79,105	2	%		83,324	2	%		87,869	2	%		101,180	3	%
Residential real estate loans		293,479	8	%		288,502	8	%		290,759	8	%		257,434	8	%		241,069	6	%		237,742	6	%		239,904	7	%		293,479	8	%
Installment and other consumer loans		120,947	3	%		123,087	3	%		119,381	3	%		92,952	3	%		99,150	2	%		106,728	3	%		109,352	3	%		120,947	3	%
Total loans/leases	$	3,901,736	100	%	$	3,790,224	100	%	$	3,723,630	100	%	$	3,105,901	100	%	$	4,138,596	100	%	$	3,695,859	100	%	$	3,681,346	100	%	$	3,901,736	100	%
Plus deferred loan/lease origination costs, net of fees		8,783				9,208				9,124				8,891				1,663				8,809				8,859				8,783
Less allowance		(41,104)				(41,164)				(39,847)				(37,545)				(60,827)				(42,233)				(36,001)				(41,104)
Net loans/leases	$	3,869,415			$	3,758,268			$	3,692,907			$	3,077,247			$	4,079,432			$	3,662,435			$	3,654,204			$	3,869,415

*Excludes PPP loans totaling $358.1 million as of June 30, 2020.

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~~non-owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of June 30, ~~2019~~2020 and ~~December~~March 31, ~~2018, respectively,~~2020, approximately ~~27%~~25% and ~~28%~~26% of the CRE loan portfolio was ~~owner-occupied.~~

owner-occupied, respectively.

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~~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 million during the current quarter.~~

A syndicated loan is a commercial loan provided by a group of lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. The nationally syndicated loans invested in by the Company consist of fully-funded, highly-liquid 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.

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,
																	2020				2020				2019				2019
																	Amount		%		Amount		%		Amount		%		Amount		%

	As of June 30,				As of March 31,				As of December 31,				As of June 30,
	2019				2019				2018				2018
	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	%	$	593,063	32	%	$	546,384	31	%	$	553,142	32	%	$	612,526	33	%
Lessors of Residential Buildings		394,235	21	%		355,850	20	%		346,270	19	%		230,187	17	%		545,026	29	%		500,871	28	%		465,172	27	%		394,235	21	%
Hotels		82,180	5	%		81,107	5	%		81,345	5	%		73,335	5	%		70,675	4	%		56,573	3	%		63,720	4	%		82,180	5	%
New Housing For-Sale Builders																		56,229	3	%		56,916	3	%		55,525	3	%		43,520	2	%
Land Subdivision																		55,555	3	%		53,899	3	%		46,318	2	%		45,847	3	%
Nonresidential Property Managers		58,207	3	%		65,736	4	%		69,885	4	%		55,979	4	%		44,887	2	%		48,069	3	%		48,059	3	%		58,207	3	%
Land Subdivision		45,847	3	%		46,042	3	%		48,378	3	%		39,883	3	%
New Housing For-Sale Builders		43,520	2	%		47,276	3	%		47,598	3	%		38,392	3	%
Lessors of Other Real Estate Property																		40,248	2	%		42,260	2	%		39,297	2	%		36,706	2	%
Other Activities Related to Real Estate																		38,044	2	%		39,352	2	%		42,060	2	%		32,652	2	%
New Single-Family Housing Construction																		36,837	2	%		31,856	2	%		28,708	2	%		27,962	2	%
Other *		600,958	33	%		581,810	31	%		560,308	32	%		472,476	35	%		388,598	21	%		406,906	23	%		394,395	22	%		503,638	27	%
Total CRE Loans	$	1,837,473	100	%	$	1,790,845	100	%	$	1,766,111	100	%	$	1,349,319	100	%	$	1,869,162	100	%	$	1,783,086	100	%	$	1,736,396	100	%	$	1,837,473	100	%

* “Other” consists of all other industries. None of these had concentrations greater than ~~$36.8~~$23.8 million, or approximately ~~2.0%~~1.3% 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~~15-year, 20-year and ~~20‑year~~30-year fixed rate residential real estate loans that meet certain credit guidelines.

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

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


																	As of June 30,				As of March 31,				As of December 31,				As of June 30,
																	2020				2020				2019				2019
																	Amount		%		Amount		%		Amount		%		Amount		%

	As of June 30,				As of March 31,				As of December 31,				As of June 30,
	2019				2019				2018				2018
	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	%	$	59,782	26	%	$	57,225	25	%	$	55,749	24	%	$	46,650	20	%
Manufacturing - General		17,879	8	%		16,952	7	%		16,760	7	%		16,794	7	%		16,939	7	%		16,277	7	%		15,847	7	%		17,879	8	%
Food Processing Equipment																		16,244	7	%		16,703	7	%		16,742	7	%		15,863	7	%
Construction - General		16,026	7	%		16,295	7	%		17,236	8	%		18,494	8	%		15,156	7	%		15,038	7	%		16,236	7	%		16,026	7	%
Food Processing Equipment		15,863	7	%		15,622	7	%		15,334	7	%		14,377	6	%
Marine - Travelifts		11,659	5	%		11,819	5	%		12,370	5	%		12,875	6	%		11,642	5	%		10,908	5	%		11,556	5	%		11,659	5	%
Computer Hardware																		11,385	5	%		12,142	5	%		11,509	5	%		6,282	3	%
Trailers		9,303	4	%		9,603	4	%		9,842	4	%		10,137	4	%		9,541	4	%		9,469	4	%		9,907	4	%		9,303	4	%
Manufacturing - CNC		6,832	3	%		6,702	3	%		6,616	3	%		6,344	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	%		92,071	39	%		90,821	40	%		92,301	41	%		107,014	46	%
Total m2 loans and leases	$	230,676	100	%	$	228,356	100	%	$	228,646	100	%	$	233,297	100	%	$	232,760	100	%	$	228,583	100	%	$	229,847	100	%	$	230,676	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.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 are presented as follows:


									Three Months Ended				Six Months Ended
									June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019

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

									(dollars in thousands)

Balance, beginning	$	41,164	$	36,532	$	39,847	$	34,356	$	42,233	$	41,164	$	36,001	$	39,847
Provisions charged to expense		1,941		2,301		4,075		4,841		19,915		1,941		28,282		4,075
Loans/leases charged off		(2,152)		(1,524)		(3,212)		(1,961)		(1,450)		(2,152)		(3,785)		(3,212)
Recoveries on loans/leases previously charged off		151		236		394		309		129		151		329		394
Balance, ending	$	41,104	$	37,545	$	41,104	$	37,545	$	60,827	$	41,104	$	60,827	$	41,104

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~~10-K for the year ended December 31, ~~2018,~~2019, 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.

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			June 30, 2020			March 31, 2020			December 31, 2019			June 30, 2019
	(dollars in thousands)

													(dollars in thousands)

Special Mention (Rating 6)	$	19,913		$	24,769		$	42,058		$	44,202		$	104,608		$	34,738		$	19,952		$	19,913
Substandard (Rating 7)		40,935			43,696			28,593			42,492			39,855			36,612			33,649			40,935
Doubtful (Rating 8)		—			—			—			—			—			—			—			—
	$	60,848		$	68,465		$	70,651		$	86,694

													$	144,463		$	71,350		$	53,601		$	60,848

Criticized Loans **	$	60,848		$	68,465		$	70,651		$	86,694		$	144,463		$	71,350		$	53,601		$	60,848
Classified Loans ***	$	40,935		$	43,696		$	28,593		$	42,492		$	39,855		$	36,612		$	33,649		$	40,935


Criticized Loans as a % of Total Loans/Leases		1.56	%		1.80	%		1.89	%		2.79	%		3.49	%		1.93	%		1.45	%		1.56	%
Classified Loans as a % of Total Loans/Leases		1.05	%		1.16	%		0.77	%		1.37	%		0.96	%		0.99	%		0.91	%		1.05	%

* 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~~Criticized loans increased 102% and classified loans ~~during the second quarter of 2019. Classified~~increased 9% from March 31, 2020 to June 30, 2020. Criticized loans increased ~~43%~~170% during the first six months of ~~2019.~~2020 primarily due to loans related to borrowers in industries impacted by COVID-19 including hotels. Classified loan increased 18% during the first six months of 2020. 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~~classified

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~~decreased 11% during the second quarter of 2019 and 14% during the first six months of 2019.~~loans was due to a few isolated relationships. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.


	As of
	June 30, 2019		March 31, 2019		December 31, 2018		June 30, 2018

									As of
									June 30, 2020		March 31, 2020		December 31, 2019		June 30, 2019
Allowance / Gross Loans/Leases	1.05	%	1.08	%	1.07	%	1.21	%	1.47	%	1.14	%	0.98	%	1.05	%
Allowance / NPLs	283.10	%	238.48	%	214.80	%	270.09	%	463.69	%	310.72	%	403.87	%	283.10	%

Although management believes that the allowance at June 30, ~~2019~~2020 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Based on current economic indicators, the Company increased the economic allocations within the allowance for loan losses calculation. The Company anticipates that the allowance for loan losses as a percent of total loans may increase in future periods based on the belief that the credit quality of the loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's allowance.

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,
													2020			2020			2019			2019

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

													(dollars in thousands)

Nonaccrual loans/leases (1) (2)	$	13,148		$	13,406		$	14,260		$	12,554		$	12,099		$	11,628		$	7,902		$	13,148
Accruing loans/leases past due 90 days or more (3)		58			61			632			20
Accruing loans/leases past due 90 days or more														99			1,419			33			58
TDRs - accruing		1,313			3,794			3,659			1,327			920			545			979			1,313
Total NPLs		14,519			17,261			18,551			13,901			13,118			13,592			8,914			14,519
OREO		8,637			9,110			9,378			12,750			157			3,298			4,129			8,637
Other repossessed assets		—			—			8			150			25			45			41			—
Total NPAs	$	23,156		$	26,371		$	27,937		$	26,801		$	13,300		$	16,935		$	13,084		$	23,156
											.

NPLs to total loans/leases		0.37	%		0.45	%		0.50	%		0.45	%		0.32	%		0.37	%		0.24	%		0.37	%
NPAs to total loans/leases plus repossessed property		0.59	%		0.69	%		0.75	%		0.86	%		0.32	%		0.46	%		0.35	%		0.59	%
NPAs to total assets		0.45	%		0.52	%		0.56	%		0.65	%		0.24	%		0.32	%		0.27	%		0.45	%

(1)

~~(1)~~

Includes government guaranteed portion of loans, as applicable.

(2)

~~(2)~~

Includes TDRs of $352 thousand at June 30, 2020, $298 thousand at March 31, 2020, $747 thousand at December 31, 2019, and $2.8 million at June 30, ~~2019, $1.5 million at March 31, 2019, $2.3 million at December 31, 2018, and $1.8 million at June 30, 2018.~~

2019.

~~(3)~~

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

NPAs at June 30, ~~2019~~2020 were ~~$23.2~~$13.3 million, down ~~$3.2~~$3.6 million from March 31, ~~2019~~2020 and down ~~$3.6~~$9.9 million from June 30, ~~2018.~~2019. The decrease in NPAs in the second quarter of 2020 was primarily due to the sale of one OREO property. The improvement from prior year was primarily attributed to the sale of RB&T.

The ratio of NPAs to total assets was 0.24% at June 30, 2020, down from 0.32% at March 31, 2020 and down from 0.45% at June 30, ~~2019, down from 0.52% at March 31, 2019 and down from 0.65% at June 30, 2018.~~2019.

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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.

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

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

~~DEPOSITS~~Due to the economic impacts of COVID-19, the Company established its LRP for its clients. The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term. Those deferred payments will be added to the end of the original term of the loan through a three month extension of the maturity date. The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest for up to 90 days. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020. The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. As of June 30, 2020, the program has provided 1,466 Bank modifications of loans to commercial and consumer clients totaling $491 million and 935 m2 modifications of loans and leases totaling $53 million, representing 11.86% and 1.2% of the total loan and lease portfolio, respectively.

DEPOSITS

Deposits increased ~~$128.3~~$179.3 million during the second quarter of ~~2019,~~2020, primarily due to ~~growth~~an increase in noninterest bearing correspondent ~~bank~~ deposits, ~~and growth in~~net of prepayment of large ~~customers’ balances.~~brokered certificates of deposits. The table below presents the composition of the Company's deposit portfolio.


																	As of
																	June 30, 2020				March 31, 2020				December 31, 2019				June 30, 2019
																	Amount		%		Amount		%		Amount		%		Amount		%

	As of
	June 30, 2019				March 31, 2019				December 31, 2018				June 30, 2018
	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	%	$	1,177,482	27	%	$	829,782	20	%	$	777,224	20	%	$	795,951	18	%
Interest bearing demand deposits		2,505,956	58	%		2,334,474	55	%		2,204,205	55	%		1,865,382	57	%		2,488,755	57	%		2,440,907	58	%		2,407,502	61	%		2,505,956	57	%
Time deposits		733,135	17	%		719,286	17	%		704,903	18	%		519,999	16	%		560,982	13	%		617,979	15	%		571,343	15	%		733,135	17	%
Brokered deposits		287,468	7	%		318,861	8	%		276,821	7	%		166,073	5	%		122,556	3	%		281,810	7	%		154,982	4	%		287,468	7	%
	$	4,322,510	100	%	$	4,194,220	100	%	$	3,977,031	100	%	$	3,298,276	100	%
																	$	4,349,775	100	%	$	4,170,478	100	%	$	3,911,051	100	%	$	4,322,510	100	%

Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity. During the quarter, the Company had significant core deposit growth mostly from its correspondent banking clients. The outsized deposit growth exceeded the strong loan growth and led to the Company carrying excess liquidity during the quarter. At the end of the quarter, a large portion of the outsized correspondent banking deposits shifted off balance sheet temporarily which prompted some overnight borrowing. Subsequently, the majority of the balances have returned to the balance sheet. As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits.

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

~~BORROWINGS~~65

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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
									June 30, 2020		March 31, 2020		December 31, 2019		June 30, 2019

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

									(dollars in thousands)

Overnight repurchase agreements	$	2,181	$	3,056	$	2,084	$	2,186	$	2,368	$	2,377	$	2,193	$	2,181
Federal funds purchased		17,010		12,830		26,690		15,400		22,450		10,690		11,230		17,010
	$	19,191	$	15,886	$	28,774	$	17,586
Overnight federal reserve borrowings										100,000		30,000		—		—
									$	124,818	$	43,067	$	13,423	$	19,191

The Company's federal funds purchased ~~fluctuates~~and Federal Reserve borrowings fluctuate based on the short-term funding needs of the Company's subsidiary banks. At the end of the quarter, a large portion of the outsized correspondent banking deposits shifted off balance sheet temporarily which prompted some overnight borrowing. Subsequently, the majority of the balances have returned to the balance sheet.

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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~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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


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


									As of
									June 30, 2020		March 31, 2020		December 31, 2019		June 30, 2019
									(dollars in thousands)

Term FHLB advances	$	46,433	$	66,380	$	76,327	$	46,600	$	90,000	$	55,000	$	50,000	$	46,433
Overnight FHLB advances		59,300		59,800		190,165		207,500		55,000		40,000		109,300		59,300
	$	105,733	$	126,180	$	266,492	$	254,100
									$	145,000	$	95,000	$	159,300	$	105,733

~~Term~~ FHLB advances ~~decreased $19.9~~increased $50.0 million in the current quarter as compared to the prior quarter due to ~~maturities. Due to strong deposit~~the temporary liquidity need from the aforementioned temporary shift of excess liquidity straddling quarter-end. All of the net growth ~~the Company did not replace these maturities. Overnight FHLB~~in advances ~~decreased slightly in the second quarter~~were either overnight or shorter term with maximum maturities 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 customer 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 30, 2019, $68.2 million as of March 31, 2019 and $4.8 million as of December 31, 2018. There were no outstanding subordinated notes as of June 30, 2018. See Note 5 to the Company’s Consolidated Financial Statements for additional information regarding our subordinated notes, including the repayment of our term notes (totaling $21.3 million) and our revolving line of credit (totaling $9.0 million) during the first quarter of 2019.3 months.

The Company renewed its revolving credit note in the second quarter of ~~2019. See Note 5~~2020. At renewal, the line amount was increased from $20.0 million to $25.0 million. The interest on the revolving line of credit is now calculated at a rate per annum equal to the ~~Consolidated Financial Statements for additional details regarding this renewal.~~greater of (a) Prime less 0.50% and (b) 3.00% per annum. Prior to the renewal, the interest on the revolving line of credit was calculated at the effective LIBOR rate plus 2.25% per annum. The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries. There was no outstanding balance on the revolving line of credit at June 30, 2020.

The Company had subordinated notes totaling $68.5 million as of June 30, 2020, relatively unchanged from $68.4 million as of December 31, 2019.

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.

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


	June 30, 2019				December 31, 2018
			Weighted				Weighted
			Average				Average

									June 30, 2020				December 31, 2019
											Weighted				Weighted
											Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate
	(dollars in thousands)
									(dollars in thousands)
Year ending December 31:
2019	$	315,799	2.34	%	$	510,736	2.35	%
2020		58,382	2.23			48,557	2.31		$	214,156	0.63	%	$	200,110	0.85	%
2021		15,050	2.31			15,050	2.31			5,000	1.55			43,887	1.82
2022		3,970	2.00			3,970	2.00			28,400	1.65			50,285	1.79
2023										20,000	1.84			20,000	1.84
Total Wholesale Funding	$	393,201	2.32	%	$	578,313	2.35	%	$	267,556	0.85	%	$	314,282	1.20	%

During the first six months of ~~2019,~~2020, wholesale funding decreased ~~$185.1 million. FHLB overnight advances and term advances decreased $130.9~~$46.7 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~~Company grew core deposits to build on balance sheet liquidity and the ~~first half~~Company used a portion of ~~2019 with $25.0 million~~that excess liquidity to prepay brokered certificates of ~~prepayments (with original maturities in 2020) and a $10.0 million maturity.~~deposits.

STOCKHOLDERS' EQUITY

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


													As of
													June 30, 2020			March 31, 2020			December 31, 2019			June 30, 2019

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

													(dollars in thousands)

Common stock	$	15,773		$	15,755		$	15,718		$	13,974		$	15,791		$	15,774		$	15,828		$	15,773
Additional paid in capital		272,744			271,673			270,761			190,533			274,315			273,867			274,785			272,744
Retained earnings		216,741			204,179			192,203			171,955			267,081			254,287			245,836			216,741
AOCI (loss)		(958)			(3,200)			(5,544)			(6,874)			(1,167)			(4,789)			(1,098)			(958)
Total stockholders' equity	$	504,300		$	488,407		$	473,138		$	369,588		$	556,020		$	539,139		$	535,351		$	504,300


TCE / TA ratio (non-GAAP)		8.05	%		7.92	%		7.78	%		8.18	%		8.48	%		8.76	%		9.25	%		8.05	%

* 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.

AOCI improved $3.6 million during the quarter for mark-to-market adjustments on interest rate caps and an interest rate swap on trust preferred securities and an increase in net unrealized gains on AFS securities portfolio. Furthermore as it relates to the Company’s TCE/TA, the Company experienced net dilution as TCE/TA fell from 8.76% to 8.48% which was primarily driven by an inflated balance sheet at quarter-end. Specifically, the balance sheet was inflated by PPP loans totaling $358.1 million. Excluding the impact of PPP loans, the adjusted TCE/TA at June 30, 2020 was 9.03% (non-GAAP).

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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~~$534.3 million during the second quarter of ~~2019~~2020 and ~~$159.7~~$334.1 million during the ~~full year~~first six months of ~~2018.~~2020. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The Federal Reserve Bank has provided a lending facility that will allow the Company, if desired, to obtain funding specifically for loans that the Company makes under the PPP, which will allow the Company to retain existing sources of liquidity for traditional operations. The Company has been able to access available funding sources to address liquidity needs during the COVID-19 pandemic.

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of

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

credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio.

At June 30, ~~2019,~~2020, the subsidiary banks had 3429 lines of credit totaling ~~$373.0~~$627.9 million, of which ~~$1.7~~$294.4 million was secured and ~~$371.3~~$333.5 million was unsecured. At June 30, ~~2019,~~2020, the ~~full $373.0~~Company had $527.9 million ~~was~~of the $627.9 million available.

At December 31, ~~2018,~~2019, the subsidiary banks had 3327 lines of credit totaling ~~$363.7~~$380.6 million, of which ~~$1.7~~$45.3 million was secured and ~~$362.0~~$335.3 million was unsecured. At December 31, ~~2018, $343.7 million of~~2019, the ~~$363.7~~full $380.6 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~~$25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, ~~2020.~~2021. At June 30, ~~2019,~~2020, the full ~~$20.0~~$25.0 million was available.

As of June 30, ~~2019,~~2020, the Company had ~~$479.0~~$754.4 million in average correspondent banking deposits spread over ~~192~~191 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.

Investing activities used cash of ~~$197.1~~$560.2 million during the first six months of ~~2019,~~2020, compared to ~~$137.9~~$197.1 million for the same period of ~~2018.~~2019. The net decrease in federal funds sold was ~~$16.2~~$7.7 million for the first six months of ~~2019,~~2020, compared to a net decrease of ~~$19.3~~$16.2 million for the same period of ~~2018.~~2019. The net ~~increase~~decrease in interest-bearing deposits at financial institutions was ~~$62.1~~$7.1 million for the first six months of ~~2019,~~2020, compared to a net ~~decrease~~increase of ~~$15.0~~$62.1 million for the same period of ~~2018.~~2019. Proceeds from calls, maturities, and paydowns of securities were ~~$33.0~~$34.5 million for the first six months of ~~2019,~~2020, compared to ~~$39.8~~$33.0 million for the same period of ~~2018.~~2019. Purchases of securities used cash of ~~$10.7~~$171.1 million for the first six months of ~~2019,~~2020, compared to ~~$55.0~~$10.7 million for the same period of ~~2018.~~2019. Proceeds from sales of securities were ~~$4.7~~$6.3 million for the first six months of ~~2019,~~2020, compared to ~~no proceeds~~$4.7 million in proceed from sales of securities for the first six months of ~~2018.~~2019. The net increase in loans/leases used cash of ~~$176.4~~$447.4 million for the first six months of ~~2019~~2020 compared to ~~$151.0~~$176.4 million for the same period of ~~2018.~~2019.

Financing activities provided cash of ~~$170.2~~$530.6 million for the first six months of ~~2019,~~2020, compared to ~~$101.9~~$170.2 million for same period of ~~2018.~~2019. Net increases in deposits totaled ~~$345.6~~$409.0 million for the first six months of ~~2019,~~2020, compared to ~~$31.7~~$345.6 million for the same period of ~~2018.~~2019. During the first six months of ~~2019,~~2020, the Company's short-term borrowings ~~decreased $9.6~~increased

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$111.4 million, compared to ~~an increase~~a decrease in short-term borrowings of ~~$3.6~~$9.6 million for the same period of ~~2018.~~2019. Long-term FHLB advances increased $85.0 million during the first six months of 2020, compared to $5.0 million for the same period of 2020. In the first six months of 2020, the Company decreased short-term and overnight FHLB advances by $59.3 million. Maturities and principal payments on FHLB term advances totaled $40.0 million in the first six months of 2020. In the first six months of 2019, the Company decreased short-term and overnight FHLB advances by $130.9 million. Maturities and principal payments on FHLB term advances totaled $35.0 million and on other borrowings totaled $11.9 million in the first six months of 2019. Prepayments on other borrowings totaled $46.3 million in the first six months of 2019. Prepayments on brokered and public time deposits totaled $29.2 million during the first six months of 2020. During the first six months of 2019, proceeds from subordinated notes were $63.4 million. In the first six months of 2018, the Company increased short-term and overnight FHLB advances by $72.1 million and increased other borrowings by $9.0 million. Maturities and principal payments on borrowings totaled $13.9 million in the first six months of 2018.

Total cash provided by operating activities was ~~$29.3~~$41.9 million for the first six months of ~~2019,~~2020, compared to ~~$29.4~~$29.3 million for the same period of ~~2018.~~2019.

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

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

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

Amount

Amount






Outstanding

Outstanding

June 30,

December 31,

Interest Rate as of

Interest Rate as of

Name
Date Issued

2019

2018

Interest Rate

June 30, 2019

December 31, 2018

(dollars in thousands)

QCR Holdings Statutory Trust II
February 2004

$
10,310

$
10,310

2.85% over 3-month LIBOR

5.17
%
5.65
%
QCR Holdings Statutory Trust III
February 2004

8,248

8,248

2.85% over 3-month LIBOR

5.17
%
5.65
%
QCR Holdings Statutory Trust V
February 2006

10,310

10,310

1.55% over 3-month LIBOR

4.15
%
3.99
%
Community National Statutory Trust II
September 2004

3,093

3,093

2.17% over 3-month LIBOR

4.56
%
4.96
%
Community National Statutory Trust III
March 2007

3,609

3,609

1.75% over 3-month LIBOR

4.16
%
4.54
%
Guaranty Bankshares Statutory Trust I
May 2005

4,640

4,640

1.75% over 3-month LIBOR

4.16
%
4.54
%



$
40,210

$
40,210

Weighted Average Rate

4.65
%
4.94
%

As described in Note 4 to the Consolidated Financial Statements, on June 21, 2018 the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities. The floating rate trust preferred securities are tied to 3-month LIBOR, and the interest rate swaps utilize 3-month LIBOR, so the hedge is effective. The interest rate swaps are designated as a cash flow hedge in accordance with ASC 815. See Note 4 for the notional amount swapped and the related effective fixed rates.

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 the 2020 presidential election and 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 threats and attacks, ~~acts of war~~widespread disease or ~~threats thereof~~pandemics (including the COVID-19 pandemic in the United States), or other adverse external events that could cause economic deterioration or instability in credit markets, and the response of the ~~United States~~local, state and national governments to any such ~~threats and attacks.~~

adverse events.

~~The impact of cybersecurity risks.~~

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●

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

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

PCAOB (including the new CECL impairment standards, that will change how the Company estimates credit losses when implemented).

●

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

●

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

●

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

●

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

●

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

possibility that transaction costs may be greater than anticipated.

●

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

key executives or employees.

●

Changes in consumer spending.

●

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

●

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~~10-K for the year ended December 31, ~~2018.~~2019.

Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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

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
			As of June 30,		As of December 31,		As of December 31,

									NET INTEREST INCOME EXPOSURE in YEAR 1
											As of June 30,		As of December 31,		As of December 31,
INTEREST RATE SCENARIO	POLICY LIMIT		2019		2018		2017		POLICY LIMIT		2020		2019		2018


100 basis point downward shift	(10.0)	%	0.7	%	0.7	%	0.3	%	(10.0)	%	0.6	%	0.5	%	0.7	%
200 basis point upward shift	(10.0)	%	(2.7)	%	(2.7)	%	(3.7)	%	(10.0)	%	0.9	%	1.2	%	(2.7)	%
300 basis point upward shock	(25.0)	%	(6.4)	%	(9.0)	%	(8.4)	%	(25.0)	%	7.2	%	4.9	%	(9.0)	%

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 30, ~~2019~~2020 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.

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)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) promulgated under the Exchange Act of 1934) as of June 30, ~~2019.~~2020. 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.

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~~ In addition to the risk factors ~~applicable to the Company from those disclosed in~~set forth under Part I, Item ~~1.A.~~1A “Risk ~~Factors,”~~Factors” in the ~~Company's~~Company’s Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2018. Please refer~~2019, the following risk factors apply to the Company:

The outbreak of COVID-19 has led to an economic recession and other severe disruptions in the U.S. economy and has adversely disrupted banking and other financial activity and industries in the areas in which the Company operates. As a result, we are starting to see the impact of COVID-19 on our business, and we believe that ~~section~~it could be significant, adverse and potentially material.

Currently, COVID-19 is spreading through the United States and the world. The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. The resulting concerns on the part of the ~~Company's Form 10‑K~~U.S. and global populations have resulted in a recessionary environment, reduced economic activity and caused significant volatility in the global stock markets. The Company has experienced disruptions across the Company’s business due to these effects, leading to decreased earnings and slowdowns in loan collections.

The outbreak of COVID-19 has resulted in a decline in our clients’ businesses, a decrease in consumer confidence, an increase in unemployment and a disruption in the services provided by our vendors. Continued disruption to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, declines in assets under management and wealth management revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy. Although the U.S. government has introduced a number of programs designed to soften the impact of COVID-19 on small businesses, once these programs expire, our borrowers may not be able to satisfy their financial obligations to us.

COVID-19 has impacted and will likely continue to impact businesses’ and consumers’ financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of the Company’s borrowers are in or have exposure to the hotel, restaurant, entertainment and retail industries and are located in areas that are or were quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on the Company’s direct lease financing, commercial real estate and consumer loan portfolios. Any new or prolonged quarantine or stay-at-home orders would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

As a result of the COVID-19 pandemic we may experience adverse financial consequences due to a number of other factors, including, but not limited to:

●

a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill and other intangible assets that could result in an impairment charge being

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recorded for that period, and adversely impact our results of operations and the ability of our subsidiary banks to pay dividends to us;

●

the negative effect on earnings resulting from the subsidiary banks modifying loans and agreeing to loan payment deferrals due to the COVID-19 crisis;

●

increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to our business continuity plan;

●

the potential for reduced liquidity and its negative effect on our capital and leverage ratios;

●

increased cyber and payment fraud risk due to increased online and remote activity; and

●

other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it.

Overall, we believe that the economic impact from COVID-19 may be severe and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 as a global pandemic may have, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.

The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business and results of operations.

On March 27, 2020, President Trump signed into law the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. In addition to implementing the programs contemplated by the CARES Act, the federal bank regulatory agencies have issued a steady stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation:

●

requiring banks to focus on business continuity and pandemic planning;

●

adding pandemic scenarios to stress testing;

●

encouraging bank use of capital buffers and reserves in lending programs;

●

permitting certain regulatory reporting extensions;

●

reducing margin requirements on swaps;

●

permitting certain otherwise prohibited investments in investment funds;

●

issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and

●

providing credit under the CRA for certain pandemic-related loans, investments and public service.

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The COVID-19 pandemic has significantly affected the financial markets, and the Federal Reserve has taken a number of actions in response. In March 2020, the Federal Reserve dramatically reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability. The Federal Reserve also launched the Main Street Lending Program, which will offer deferred interest on four-year loans to small and mid-sized businesses. The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies, programs and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material adverse effect on our business and results of operations.

COVID-19 has disrupted banking and other financial activities in the areas in which we operate and could potentially create widespread business continuity issues for ~~disclosures~~us.

The COVID-19 pandemic has negatively impacted the ability of our employees and clients to engage in banking and other financial transactions in the geographic area in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of an outbreak or escalation of the COVID-19 pandemic in our market area, including because of illness, quarantines, government actions or other restrictions in connection with the COVID-19 pandemic. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. Further, we rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our clients.

As a participating lender in the PPP, the Company and the subsidiary banks are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The subsidiary banks are participating as lenders in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has authorized an additional $310 billion funding for PPP loans; however, it is unknown if and ~~uncertainties~~when this the additional authorized amount will be exhausted and whether Congress will again authorize additional PPP loan funding.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. The Company and the subsidiary banks may be exposed to the risk of similar litigation, from both customers and non-customers that approached the banks regarding PPP loans, regarding their process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the subsidiary banks and is not resolved in a manner favorable to the Company or the banks, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The subsidiary banks also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the banks, such as an

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issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ~~Company's business.~~ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic and it is uncertain when the Company will resume the repurchase of shares as part of this program in the future. All shares repurchased under the share repurchase program were retired.


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

April 1-30, 2020	—	—	100,932	699,068
May 1-31, 2020	—	—	100,932	699,068
June 1-30, 2020	—	—	100,932	699,068

~~None~~

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

6778

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6 Exhibits



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

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

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

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

101	Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, ~~2019~~2020 and December 31, ~~2018;~~2019; (ii) Consolidated Statements of Income for the three and six months ended June 30, ~~2019~~2020 and June 30, ~~2018;~~2019; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, ~~2019~~2020 and June 30, ~~2018;~~2019; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and ~~six~~ months ended June 30, ~~2019~~2020 and June 30, ~~2018;~~2019; (v) Consolidated Statements of Cash Flows for the six months ended June 30, ~~2019~~2020 and June 30, ~~2018;~~2019; and (vi) Notes to the Consolidated Financial Statements.
104	Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101.

6879

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~~SIGNATURES~~

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, 2019~~7, 2020	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer


Date	August ~~6, 2019~~7, 2020	/s/ Todd A. Gipple
		Todd A. Gipple, President
		Chief Operating Officer
		Chief Financial Officer


Date	August ~~6, 2019~~7, 2020	/s/ ~~Elizabeth A. Grabin~~Nick W. Anderson
		~~Elizabeth A. Grabin, Senior Vice President~~Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)

6980


			Page Number(s)
Part I	FINANCIAL INFORMATION

	Item 1	Consolidated Financial Statements (Unaudited)

		Consolidated Balance Sheets As of June 30, ~~2019~~2020 and December 31, ~~2018~~2019	4

		Consolidated Statements of Income For the Three Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	5


		Consolidated Statements of Income
		For the Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	6


		Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	7


		Consolidated Statements of Changes in Stockholders' Equity For the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	8


		Consolidated Statements of Cash Flows For the Six ~~months~~Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	9


		Notes to Consolidated Financial Statements	11


		Note 1. Summary of Significant Accounting Policies	11
		Note 2. Investment Securities	13
		Note 3. Loans/Leases Receivable	17
		~~Note 4. Derivatives~~	27
		~~Note 5. Borrowings~~	28
		~~Note 6. Earnings Per Share~~	29
		~~Note 7. Fair Value~~	29
		~~Note 8. Business Segment Information~~	32
		~~Note 9. Regulatory Capital Requirements~~	33

		~~Item 2~~Note 4. Derivatives and Hedging Activities	28
		Note 5. Earnings Per Share	29
		Note 6. Fair Value	30
		Note 7. Business Segment Information	32
		Note 8. Regulatory Capital Requirements	33
		Note 9. Pending Sale	35

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

		Introduction	35 36
		General	35 36
		~~Executive Overview~~Impact of COVID-19	35 36
		~~Long-Term Financial Goals~~Executive Overview	37 40
		Strategic ~~Developments~~Financial Metrics	38 42
		Strategic Developments	43
		GAAP to Non-GAAP Reconciliations	39 43
		Net Interest Income - (Tax Equivalent Basis)	41 47
		Critical Accounting Policies	45 51
		Goodwill	45 51
		Allowance for Loan and Lease Losses	46 52


		Results of Operations	52
		~~Results of Operations~~Interest Income	46 52
		Interest ~~Income~~Expense	46 52
		~~Interest Expense~~	46
		Provision for Loan/Lease Losses	46 53
		Noninterest Income	47 54
		Noninterest Expense	50 57
		Income Taxes	52 59
		Financial Condition	53 60
		Investment Securities	53 60
		Loans/Leases	54 61
		Allowance for Estimated Losses on Loans/Leases	56 63
		Nonperforming Assets	57 64
		Deposits	58 65
		Borrowings	58 66
		Stockholders' Equity	60 67
		Liquidity and Capital Resources	60 68
		Special Note Concerning Forward-Looking Statements	62
			69

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	64
			71

	Item 4	Controls and Procedures	66 73

Part II	OTHER INFORMATION		67
			74
	~~Item 1~~	~~Legal Proceedings~~	67

	Item 1A1	~~Risk Factors~~Legal Proceedings	67
			74

	Item 21A	Risk Factors	74

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	67
			78
	~~Item 3~~	~~Defaults upon Senior Securities~~	67

	Item 43	~~Mine Safety Disclosures~~Defaults Upon Senior Securities	67
			78
	~~Item 5~~	~~Other Information~~	67

	Item 64	~~Exhibits~~Mine Safety Disclosures	68 78

	Item 5	Other Information	78

	Item 6	Exhibits	79

Signatures			69 80


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

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

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

Bank-owned life insurance		68,735		67,783
Premises and equipment, net		78,887		75,582
Restricted investment securities		22,195		25,689
Other real estate owned, net		8,637		9,378
Goodwill		77,748		77,832
Intangibles		16,089		17,450
Other assets		115,927		75,001
Total assets	$	5,194,852	$	4,949,710

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

Short-term borrowings		19,191		28,774
Federal Home Loan Bank advances		105,733		266,492
Other borrowings		—		67,250
Subordinated notes		68,274		4,782
Junior subordinated debentures		37,755		37,670
Other liabilities		137,089		94,573
Total liabilities		4,690,552		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
Additional paid-in capital		272,744		270,761
Retained earnings		216,741		192,203
Accumulated other comprehensive income (loss):
Securities available for sale		2,412		(4,268)
Derivatives		(3,370)		(1,276)
Total stockholders' equity		504,300		473,138
Total liabilities and stockholders' equity	$	5,194,852	$	4,949,710


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

Net income	$	13,504	$	10,445

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		4,669		(1,512)
Less reclassification adjustment for losses included in net income before tax		(52)		—
		4,721		(1,512)
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(1,780)		(323)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(134)		178
		(1,646)		(501)

Other comprehensive income (loss), before tax		3,075		(2,013)
Tax expense (benefit)		833		(679)
Other comprehensive income (loss), net of tax		2,242		(1,334)

Comprehensive income	$	15,746	$	9,111


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

Net income	$	26,422	$	20,995

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		8,813		(6,879)
Less reclassification adjustment for losses included in net income before tax		(52)		—
Less reclassification adjustment for adoption of ASU 2016-01		—		855
		8,865		(6,024)
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(2,942)		(172)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(291)		97
		(2,651)		(269)

Other comprehensive income (loss), before tax		6,214		(6,293)
Tax expense (benefit)		1,628		(1,757)
Other comprehensive income (loss), net of tax		4,586		(4,536)

Comprehensive income	$	31,008	$	16,459


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

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


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

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


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

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


	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Due in one year or less	$	2,781	$	2,794
Due after one year through five years		32,323		32,929
Due after five years		353,609		370,489
	$	388,713	$	406,212
Securities AFS:
Due in one year or less	$	1,624	$	1,633
Due after one year through five years		27,466		27,638
Due after five years		65,042		66,591
		94,132		95,862
Residential mortgage-backed and related securities		157,760		159,228
	$	251,892	$	255,090


			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


	As of June 30, 2019
			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)	$	1,398,762	$	487,200	$	308,269	$	1,008,427	$	3,202,658	98.14	%
Special Mention (Rating 6)		9,811		4,236		64		5,802		19,913	0.61	%
Substandard (Rating 7)		17,460		3,202		4,245		16,028		40,935	1.25	%
Doubtful (Rating 8)		—		—		—		—		—	—	%
	$	1,426,033	$	494,638	$	312,578	$	1,030,257	$	3,263,506	100.00	%


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

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

TOTAL	2	$	639	$	589	$	—	—	$	—	$	—	$	—


			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


			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
June 30, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	35,762	$	—	$	35,762	$	—
Residential mortgage-backed and related securities		159,228		—		159,228		—
Municipal securities		53,189		—		53,189		—
Other securities		6,911		—		6,911		—
Interest rate caps		98		—		98		—
Interest rate swaps - assets		65,824		—		65,824		—
Total assets measured at fair value	$	321,012	$	—	$	321,012	$	—

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


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

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


	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


										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 the Quarter Ending
Goal	Key Metric	Target **	June 30, 2019			March 31, 2019			June 30, 2018
Balance sheet efficiency	Gross loans and leases to total assets	73% - 78%		75	%		75	%		76	%
	NIM TEY (non-GAAP)*	> 3.35%		3.40	%		3.40	%		3.52	%
Profitability	ROAA	> 1.10%		1.06	%		1.04	%		1.03	%
	Adjusted ROAA (non-GAAP)*	> 1.10%		1.11	%		1.05	%		1.08	%
Asset quality	NPAs to total assets	< 0.75%		0.45	%		0.52	%		0.65	%
	Net charge-offs to average loans and leases***	< 0.25% annually		0.15	%		0.09	%		0.11	%
Reliance on wholesale funding	Wholesale funding to total assets****	< 15%		10	%		12	%		13	%
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
	Grow wealth management net income***	> 10% annually		11	%		50	%		54	%


	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	%


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

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