U~~NITED~~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, 2017~~ended March 31, 2018

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

For the transition period from to________

Commission file number 0-22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

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

3551 7^th Street, Moline, Illinois 61265

(Address of principal executive offices,, including zip code)

(309) 736-3580

(~~Registrant~~’sRegistrant’s telephone number, including area code)

Indicate by check mark whether the ~~registrant~~: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 and posted on its corporate Web site, if any, every Interactive ~~Dat~~aData File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]

Smaller reporting company [ ] Emerging growth company [ ]

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

~~Yes [ ] No [ X~~ ]

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

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

Yes [ ] No [ X ]

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 2, 2017,~~May 1, 2018, the Registrant had outstanding ~~13,181,153~~13,952,800 shares of common stock, $1.00 par value per share.

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

				Page Number(s)
Part I	FINANCIAL INFORMATION

	Item 1	Consolidated Financial Statements (Unaudited)

		Consolidated Balance Sheets		3
		As of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017

		Consolidated Statements of Income
		For the Three Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~		4

		Consolidated Statements of Comprehensive Income
		For the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~		5

		Consolidated Statements of ~~Comprehensive Income~~Changes in Stockholders' Equity
		For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~		6

		Consolidated Statements of ~~Changes in Stockholders' Equity~~Cash Flows
		For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~		7

		Notes to Consolidated Financial Statements ~~of Cash Flows~~
		~~For the Six Months Ended June 30, 2017 and 2016~~	8

		~~Notes to Consolidated Financial Statements~~Note 1. Summary of Significant Accounting Policies	10	9
		Note 2. Investment Securities		11
		Note 3. Loans/Leases Receivable		16
		Note 4. Earnings Per Share		25
		Note 5. Fair Value		25
		Note 6. Business Segment Information		29
		Note 7. Regulatory Capital Requirements		30
		Note 8. Revenue Recognition		32
		Note 9. Acquisitions		33

		~~Note 1.~~ ~~Summary of Significant Accounting Policies~~	10
		~~Note 2.~~ ~~Investment Securities~~	12
		~~Note 3.~~ ~~Loans/Leases Receivable~~	17
		~~Note 4.~~ ~~Earnings Per Share~~	27
		~~Note 5.~~ ~~Fair Value~~	27
		~~Note 6.~~ ~~Business Segment Information~~	31
		~~Note 7.~~ ~~Regulatory Capital Requirements~~	32
		~~Note 8. Acquisition of Guaranty Bank and Trust Company~~	34

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

		Introduction		34
		General		34
		Executive Overview		35
		~~General~~Long-Term Financial Goals	35
		~~Executive Overview~~	36
		~~Long-Term Financial Goals~~Strategic Developments		37
		~~Strategic Developments~~GAAP to Non-GAAP Reconciliations		3839
		~~GAAP to Non-GAAP Reconciliations~~Net Interest Income (Tax Equivalent Basis)		4041
		~~Net Interest Income (Tax Equivalent Basis)~~Critical Accounting Policies		4345
		~~Critical Accounting Policies~~Results of Operations		45
		Interest Income		4845
		~~Results of Operations~~Interest Expense		46
		~~Interest~~Provision for Loan/Lease Losses		46
		Noninterest Income		47
		Noninterest Expense		49
		~~Interest Expense~~Income Taxes		4951

Table of Contents

~~Provision for Loan/Lease Losses~~Financial Condition	50
~~Noninterest Income~~	51
~~Noninterest Expense~~Investment Securities		5452
~~Income Taxes~~Loans/Leases	56

		~~Financial Condition~~	56 53
		~~Investment Securities~~Allowance for Estimated Losses on Loans/Leases		55
		Nonperforming Assets		57
		~~Loans/Leases~~Deposits		58
		~~Allowance for Estimated Losses on Loans/Leases~~Borrowings		59
		Stockholders' Equity		60
		Liquidity and Capital Resources		61
		~~Nonperforming Assets~~Special Note Concerning Forward-Looking Statements		63
		~~Deposits~~	64
		~~Borrowings~~	64
		~~Stockholders' Equity~~	66
		~~Liquidity and Capital Resources~~	67
		~~Special Note Concerning Forward-Looking Statements~~	69

	Item 3	Quantitative and Qualitative Disclosures About Market Risk		7064

	Item 4	Controls and Procedures		7266

Part II	OTHER INFORMATION

	Item 1	Legal Proceedings		7367

	Item 1A	Risk Factors		7367

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		7367

	Item 3	Defaults upon Senior Securities		7367

	Item 4	Mine Safety Disclosures		7367

	Item 5	Other Information		7367

	Item 6	Exhibits		7468

Signatures				7569


Throughout ~~the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations,~~this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1.

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017

	June 30,			December 31,			March 31,			December 31,
	2017			2016			2018			2017
ASSETS
Cash and due from banks	$	77,161,353		$	70,569,993		$	61,845,988		$	75,721,663
Federal funds sold		19,183,000			22,257,000			14,505,000			30,197,000
Interest-bearing deposits at financial institutions		53,171,325			63,948,925			45,051,555			55,765,012

Securities held to maturity, at amortized cost		324,203,634			322,909,056			378,584,337			379,474,205
Securities available for sale, at fair value		269,281,713			251,113,139			259,644,940			272,907,907
Total securities		593,485,347			574,022,195			638,229,277			652,382,112

Loans receivable held for sale		705,800			1,135,500			279,750			645,001
Loans/leases receivable held for investment		2,552,859,808			2,404,351,485			3,054,622,689			2,963,840,399
Gross loans/leases receivable		2,553,565,608			2,405,486,985			3,054,902,439			2,964,485,400
Less allowance for estimated losses on loans/leases		(33,356,632	)		(30,757,448	)		(36,532,602	)		(34,355,728	)
Net loans/leases receivable		2,520,208,976			2,374,729,537			3,018,369,837			2,930,129,672

Bank-owned life insurance		58,186,098			57,257,051			59,477,481			59,059,494
Premises and equipment, net		61,218,425			60,643,508			63,564,277			62,838,255
Restricted investment securities		16,103,925			14,997,025			22,413,075			19,782,525
Other real estate owned, net		5,173,521			5,523,104			12,750,023			13,558,308
Goodwill		13,110,913			13,110,913			28,334,092			28,334,092
Core deposit intangible		6,919,480			7,381,213			8,774,402			9,078,953
Other assets		33,264,332			37,503,284			52,999,407			45,817,687
Total assets	$	3,457,186,695		$	3,301,943,748		$	4,026,314,414		$	3,982,664,773

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	760,624,943		$	797,415,090		$	784,815,082		$	789,547,696
Interest-bearing		2,109,609,296			1,871,846,183			2,495,186,410			2,477,107,360
Total deposits		2,870,234,239			2,669,261,273			3,280,001,492			3,266,655,056

Short-term borrowings		18,217,393			39,971,387			16,859,753			13,993,122
Federal Home Loan Bank advances		106,500,000			137,500,000			216,345,000			192,000,000
Other borrowings		72,000,000			80,000,000			64,062,500			66,000,000
Junior subordinated debentures		33,546,425			33,480,202			37,534,402			37,486,487
Other liabilities		51,605,203			55,690,087			51,083,350			53,242,979
Total liabilities		3,152,103,260			3,015,902,949			3,665,886,497			3,629,377,644

STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; shares authorized 250,000 June 2017 and December 2016 - No shares issued or outstanding		-			-
Common stock, $1 par value; shares authorized 20,000,000 June 2017 - 13,175,234 shares issued and outstanding December 2016 - 13,106,845 shares issued and outstanding		13,175,234			13,106,845
Preferred stock, $1 par value; shares authorized 250,000 March 2018 and December 2017 - No shares issued or outstanding								-			-
Common stock, $1 par value; shares authorized 20,000,000 March 2018 - 13,936,957 shares issued and outstanding December 2017 - 13,918,168 shares issued and outstanding								13,936,957			13,918,168
Additional paid-in capital		158,001,006			156,776,642			189,684,858			189,077,550
Retained earnings		135,254,306			118,616,901			162,345,792			151,962,661
Accumulated other comprehensive loss:
Securities available for sale		(468,190	)		(1,527,433	)		(4,917,148	)		(866,223	)
Interest rate cap derivatives		(878,921	)		(932,156	)		(622,542	)		(805,027	)
Total stockholders' equity		305,083,435			286,040,799			360,427,917			353,287,129
Total liabilities and stockholders' equity	$	3,457,186,695		$	3,301,943,748		$	4,026,314,414		$	3,982,664,773

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended ~~June 30,~~March 31,

	2017		2016		2018		2017
Interest and dividend income:
Loans/leases, including fees	$	28,114,729	$	20,238,179	$	34,213,732	$	27,211,417
Securities:
Taxable		1,260,575		1,192,541		1,555,884		1,142,235
Nontaxable		2,688,243		2,276,203		3,289,002		2,647,722
Interest-bearing deposits at financial institutions		219,714		62,242		197,003		198,652
Restricted investment securities		131,890		133,546		234,344		130,430
Federal funds sold		38,117		10,573		56,331		14,643
Total interest and dividend income		32,453,268		23,913,284		39,546,296		31,345,099

Interest expense:
Deposits		2,990,603		1,344,398		4,881,149		2,232,756
Short-term borrowings		19,157		18,065		32,913		23,960
FHLB advances		354,213		415,933
Federal Home Loan Bank advances						1,064,113		403,469
Other borrowings		695,669		824,437		718,176		683,208
Junior subordinated debentures		346,929		301,638		447,027		332,823
Total interest expense		4,406,571		2,904,471		7,143,378		3,676,216
Net interest income		28,046,697		21,008,813		32,402,918		27,668,883

Provision for loan/lease losses		2,022,993		1,197,850		2,539,839		2,105,109
Net interest income after provision for loan/lease losses		26,023,704		19,810,963		29,863,079		25,563,774

Noninterest income:
Trust department fees		1,692,001		1,512,083		2,237,081		1,740,207
Investment advisory and management fees		868,835		692,738		952,344		961,599
Deposit service fees		1,458,359		946,810		1,531,453		1,316,390
Gains on sales of residential real estate loans		112,628		84,413
Gains on sales of government guaranteed portions of loans		87,053		1,603,890
Gains on sales of residential real estate loans, net						100,815		96,323
Gains on sales of government guaranteed portions of loans, net						358,434		950,641
Swap fee income		327,577		167,582		958,694		113,520
Securities gains, net		38,464		18,030
Earnings on bank-owned life insurance		459,359		480,520		417,987		469,687
Debit card fees		743,521		343,748		766,108		702,801
Correspondent banking fees		200,057		244,939		264,827		245,189
Other		794,664		667,648		953,706		687,397
Total noninterest income		6,782,518		6,762,401		8,541,449		7,283,754

Noninterest expense:
Salaries and employee benefits		12,930,944		10,917,473		15,977,975		13,307,331
Occupancy and equipment expense		2,698,336		1,884,556		3,065,811		2,502,219
Professional and data processing fees		2,340,699		1,542,322		2,707,716		2,083,392
Acquisition costs		-		354,969		92,539		5,630
FDIC insurance, other insurance and regulatory fees		645,277		649,604		756,211		621,242
Loan/lease expense		260,284		154,349		290,747		293,538
Net cost of operations of other real estate		27,957		277,911		131,742		14,230
Advertising and marketing		567,588		433,451		693,239		609,431
Bank service charges		447,445		415,350		440,571		423,901
Correspondent banking expense		201,693		181,776		204,754		198,351
CDI amortization						304,551		230,867
Other		1,284,406		931,992		1,197,641		982,985
Total noninterest expense		21,404,629		17,743,753		25,863,497		21,273,117
Net income before income taxes		11,401,593		8,829,611		12,541,031		11,574,411
Federal and state income tax expense		2,635,576		2,153,144		1,991,070		2,389,446
Net income	$	8,766,017	$	6,676,467	$	10,549,961	$	9,184,965

Basic earnings per common share	$	0.67	$	0.54	$	0.76	$	0.70
Diluted earnings per common share	$	0.65	$	0.53	$	0.74	$	0.68

Weighted average common shares outstanding		13,170,283		12,335,077		13,888,661		13,133,382
Weighted average common and common equivalent shares outstanding		13,516,592		12,516,474		14,205,584		13,488,417

Cash dividends declared per common share	$	0.05	$	0.04	$	0.06	$	0.05

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
~~Six~~Three Months Ended ~~June 30,~~March 31, 2018 and 2017

2017

2016

Interest and dividend income:

Loans/leases, including fees
$ 55,326,146 $ 39,938,549
Securities:

Taxable
2,402,810 2,548,744
Nontaxable
5,335,965 4,518,218
Interest-bearing deposits at financial institutions
418,366 122,559
Restricted investment securities
262,320 264,110
Federal funds sold
52,760 23,163
Total interest and dividend income
63,798,367 47,415,343
Interest expense:

Deposits
5,223,359 2,634,196
Short-term borrowings
43,117 61,131
FHLB advances
757,682 857,637
Other borrowings
1,378,877 1,649,520
Junior subordinated debentures
679,752 606,524
Total interest expense
8,082,787 5,809,008
Net interest income
55,715,580 41,606,335

Provision for loan/lease losses
4,128,102 3,270,835
Net interest income after provision for loan/lease losses
51,587,478 38,335,500

Noninterest income:

Trust department fees
3,432,208 3,087,990
Investment advisory and management fees
1,830,434 1,351,123
Deposit service fees
2,774,749 1,877,889
Gains on sales of residential real estate loans
208,951 144,799
Gains on sales of government guaranteed portions of loans
1,037,694 2,482,418
Swap fee income
441,097 1,024,540
Securities gains, net
38,464 376,510
Earnings on bank-owned life insurance
929,046 874,129
Debit card fees
1,446,322 651,399
Correspondent banking fees
445,246 547,069
Other
1,482,061 1,167,008
Total noninterest income
14,066,272 13,584,874

Noninterest expense:

Salaries and employee benefits
26,238,275 21,718,380
Occupancy and equipment expense
5,200,555 3,711,544
Professional and data processing fees
4,424,091 2,989,735
Acquisition costs
- 354,969
FDIC insurance, other insurance and regulatory fees
1,266,519 1,283,969
Loan/lease expense
553,822 317,168
Net cost of operations of other real estate
42,187 380,094
Advertising and marketing
1,177,019 819,710
Bank service charges
871,346 831,281
Losses on debt extinguishment, net
- 83,197
Correspondent banking expense
400,044 358,765
Other
2,503,888 1,849,439
Total noninterest expense
42,677,746 34,698,251
Net income before income taxes
22,976,004 17,222,123
Federal and state income tax expense
5,025,022 4,172,167
Net income
$ 17,950,982 $ 13,049,956
Basic earnings per common share
$ 1.36 $ 1.08
Diluted earnings per common share
$ 1.33 $ 1.07
Weighted average common shares outstanding
13,151,833 12,064,349
Weighted average common and common equivalent shares outstanding
13,502,505 12,235,212
Cash dividends declared per common share
$ 0.10 $ 0.08

	Three Months Ended March 31,
	2018			2017
Net income	$	10,549,961		$	9,184,965

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		(5,366,113	)		598,190
Less reclassification for adoption of ASU 2016-01		666,900			-
		(4,699,213	)		598,190
Unrealized gains (losses) on interest rate cap derivatives:
Unrealized holding gains (losses) arising during the period before tax		150,478			(45,202	)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(80,515	)		(122,813	)
		230,993			77,611

Other comprehensive income (loss), before tax		(4,468,220	)		675,801
Tax expense (benefit)		(1,266,680	)		265,062
Other comprehensive income (loss), net of tax		(3,201,540	)		410,739

Comprehensive income	$	7,348,421		$	9,595,704

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~

Three Months Ended June 30,

2017

2016

Net income
$ 8,766,017 $ 6,676,467

Other comprehensive income:

Unrealized gains on securities available for sale:

Unrealized holding gains arising during the period before tax
1,170,310 2,081,800
Less reclassification adjustment for gains included in net income before tax
38,464 18,030
1,131,846 2,063,770
Unrealized losses on interest rate cap derivatives:

Unrealized holding losses arising during the period before tax
(132,352 ) (159,691 )
Less reclassification adjustment for ineffectiveness and caplet amortization before tax
(136,639 ) 20,154
4,287 (179,845 )

Other comprehensive income, before tax
1,136,133 1,883,925
Tax expense
434,394 703,292
Other comprehensive income, net of tax
701,739 1,180,633

Comprehensive income
$ 9,467,756 $ 7,857,100

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

(Loss)

Total

Balance December 31, 2017

13,918,168

189,077,550

151,962,661

(1,671,250

)

353,287,129

Net income

10,549,961

Other comprehensive loss, net of tax

(3,201,540

)

(3,201,540

)

Impact of adoption of ASU 2016-01

666,900

(666,900

)

Common cash dividends declared, $0.06 per share

(833,730

)

(833,730

)

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

2,669

100,262

102,931

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

13,074

192,522

205,596

Stock-based compensation expense

495,493

Restricted stock awards - 6,860 shares of common stock

6,860

(6,860

)

Exchange of 3,814 shares of common stock in connection with stock options exercised and restricted stock vested

(3,814

)

(174,109

)

(177,923

)

Balance March 31, 2018

13,936,957

189,684,858

162,345,792

(5,539,690

)

360,427,917

Six Months Ended June 30,

2017

2016

Net income
$ 17,950,982 $ 13,049,956

Other comprehensive income:

Unrealized gains on securities available for sale:

Unrealized holding gains arising during the period before tax
1,768,500 6,945,518
Less reclassification adjustment for gains included in net income before tax
38,464 376,510
1,730,036 6,569,008
Unrealized losses on interest rate cap derivatives:

Unrealized holding losses arising during the period before tax
(177,554 ) (549,627 )
Less reclassification adjustment for ineffectiveness and caplet amortization before tax
(259,452 ) 35,591
81,898 (585,218 )

Other comprehensive income, before tax
1,811,934 5,983,790
Tax expense
699,456 2,277,746
Other comprehensive income, net of tax
1,112,478 3,706,044

Comprehensive income
$ 19,063,460 $ 16,756,000

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

(Loss)

Total

Balance December 31, 2016

13,106,845

156,776,642

118,616,901

(2,459,589

)

286,040,799

Net income

9,184,965

Other comprehensive income, net of tax

410,739

Common cash dividends declared, $0.05 per share

(656,574

)

(656,574

)

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

3,573

83,091

86,664

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

44,284

630,290

674,574

Stock-based compensation expense

388,753

Restricted stock awards - 13,289 shares of common stock

13,289

(13,289

)

Exchange of 6,772 shares of common stock in connection with stock options exercised and restricted stock vested

(6,772

)

(283,518

)

(290,290

)

Balance March 31, 2017

13,161,219

157,581,969

127,145,292

(2,048,850

)

295,839,630

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)~~
~~Three Months and Six Months Ended June 30, 2017 and 2016~~

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total

Balance, December 31, 2016
$ 13,106,845 $ 156,776,642 $ 118,616,901 $ (2,459,589 ) $ 286,040,799
Net income
- - 9,184,965 - 9,184,965
Other comprehensive income, net of tax
- - - 410,739 410,739
Common cash dividends declared, $0.05 per share
- - (656,574 ) - (656,574 )
Proceeds from issuance of 3,573 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
3,573 83,091 - - 86,664
Proceeds from issuance of 44,284 shares of common stock as a result of stock options exercised
44,284 630,290 - - 674,574
Stock compensation expense
- 388,753 388,753
Restricted stock awards - 13,289 shares of common stock
13,289 (13,289 ) - - -
Exchange of 6,772 shares of common stock in connection with stock options exercised and restricted stock vested
(6,772 ) (283,518 ) - - (290,290 )
Balance, March 31, 2017
$ 13,161,219 $ 157,581,969 $ 127,145,292 $ (2,048,850 ) $ 295,839,630
Net income
- - 8,766,017 - 8,766,017
Other comprehensive income, net of tax
- - - 701,739 701,739
Common cash dividends declared, $0.05 per share
- - (657,003 ) - (657,003 )
Proceeds from issuance of 4,582 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
4,582 170,061 - - 174,643
Proceeds from issuance of 8,027 shares of common stock as a result of stock options exercised
8,027 109,392 - - 117,419
Stock compensation expense
- 168,314 168,314
Restricted stock awards - 2,000 shares of common stock
2,000 (2,000 ) - - -
Exchange of 594 shares of common stock in connection with stock options exercised
(594 ) (26,730 ) - - (27,324 )
Balance June 30, 2017
$ 13,175,234 $ 158,001,006 $ 135,254,306 $ (1,347,111 ) $ 305,083,435

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total

Balance, December 31, 2015
$ 11,761,083 $ 123,282,851 $ 92,965,645 $ (2,123,829 ) $ 225,885,750
Net income
- - 6,373,489 - 6,373,489
Other comprehensive income, net of tax
- - - 2,525,411 2,525,411
Common cash dividends declared, $0.04 per share
- - (470,873 ) - (470,873 )
Proceeds from issuance of 5,054 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
5,054 94,560 - - 99,614
Proceeds from issuance of 46,020 shares of common stock as a result of stock options exercised
46,020 729,473 - - 775,493
Stock compensation expense
- 382,761 382,761
Tax benefit of nonqualified stock options exercised
- 22,508 - - 22,508
Restricted stock awards - 22,382 shares of common stock
22,382 (22,382 ) - - -
Exchange of 19,628 shares of common stock in connection with stock options exercised and restricted stock vested
(19,628 ) (431,806 ) - - (451,434 )
Balance, March 31, 2016
$ 11,814,911 $ 124,057,965 $ 98,868,261 $ 401,582 $ 235,142,719
Net income
- - 6,676,467 - 6,676,467
Other comprehensive income, net of tax
- - - 1,180,633 1,180,633
Common cash dividends declared, $0.04 per share
- - (520,701 ) - (520,701 )
Proceeds from the issuance of 1,215,000 shares of common stock, net of issuance costs
1,215,000 28,613,916 - - 29,828,916
Proceeds from issuance of 6,982 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
6,982 142,887 - - 149,869
Proceeds from issuance of 20,975 shares of common stock as a result of stock options exercised
20,975 230,671 - - 251,646
Tax basis adjustment related to the acquisition of noncontrolling interest in m2 Lease Funds
- 2,132,415 - - 2,132,415
Stock compensation expense
- 187,569 187,569
Tax benefit of nonqualified stock options exercised
- 87,858 - - 87,858
Restricted stock awards - 500 shares of common stock
(500 ) 500 - - -
Balance June 30, 2016
$ 13,057,368 $ 155,453,781 $ 105,024,027 $ 1,582,215 $ 275,117,391

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

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
~~Six~~Three Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~

	2017			2016			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	17,950,982		$	13,049,956		$	10,549,961		$	9,184,965
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,847,963			1,552,176			1,020,975			896,952
Provision for loan/lease losses		4,128,102			3,270,835			2,539,839			2,105,109
Stock-based compensation expense		557,067			570,330			495,493			388,753
Deferred compensation expense accrued		724,422			623,831			511,502			404,723
Losses on other real estate owned, net		3,596			157,739			118,159			-
Amortization of premiums on securities, net		1,005,121			611,900			438,641			347,178
Securities gains, net		(38,464	)		(376,510	)
Loans originated for sale		(32,130,683	)		(43,526,263	)		(12,939,466	)		(21,416,325	)
Proceeds on sales of loans		33,807,027			45,160,830			13,763,966			22,547,789
Gains on sales of residential real estate loans		(208,951	)		(144,799	)		(100,815	)		(96,323	)
Gains on sales of government guaranteed portions of loans		(1,037,694	)		(2,482,418	)		(358,434	)		(950,641	)
Losses on debt extinguishment, net		-			83,197
Amortization of core deposit intangible		461,733			99,756			304,551			230,867
Accretion of acquisition fair value adjustments, net		(3,578,379	)		(61,065	)		(732,689	)		(1,915,001	)
Increase in cash value of bank-owned life insurance		(929,046	)		(874,129	)		(417,987	)		(469,687	)
Decrease (increase) in other assets		3,412,207			(4,330,548	)		(4,403,592	)		5,427,798
Increase (decrease) in other liabilities		(7,059,305	)		1,386,323
Decrease in other liabilities								(2,886,830	)		(5,852,341	)
Net cash provided by operating activities	$	18,915,698		$	14,771,141		$	7,903,274		$	10,833,816

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold		3,074,000			(975,000	)
Net decrease in federal funds sold								15,692,000			6,459,000
Net decrease (increase) in interest-bearing deposits at financial institutions		10,777,600			(11,293,339	)		10,713,457			(93,471,781	)
Proceeds from sales of other real estate owned		487,815			864,817			736,370			34,191
Activity in securities portfolio:
Purchases		(85,169,891	)		(97,132,279	)		(7,100,109	)		(12,138,040	)
Calls, maturities and redemptions		33,079,683			96,704,276			4,540,000			17,385,968
Paydowns		21,606,220			13,321,512			9,085,377			8,486,628
Sales		13,554,075			61,075,145
Activity in restricted investment securities:
Purchases		(2,407,600	)		(1,857,200	)		(4,450,550	)		(7,600	)
Redemptions		1,300,700			-			1,820,000			1,315,500
Net increase in loans/leases originated and held for investment		(146,365,255	)		(124,972,098	)		(90,378,382	)		(29,236,438	)
Purchase of premises and equipment		(2,422,880	)		(2,953,356	)		(704,413	)		(1,396,902	)
Net cash used in investing activities	$	(152,485,534	)	$	(67,217,522	)	$	(60,046,250	)	$	(102,569,474	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		201,041,035			92,920,820			13,377,517			136,704,261
Net decrease in short-term borrowings		(21,753,994	)		(93,100,968	)
Activity in FHLB advances:
Net increase (decrease) in short-term borrowings								2,866,631			(20,501,291	)
Activity in Federal Home Loan Bank advances:
Calls and maturities		(6,000,000	)		(9,000,000	)		-			(4,000,000	)
Net change in short-term and overnight advances		(25,000,000	)		64,900,000			24,345,000			(26,950,000	)
Prepayments		-			(10,524,197	)
Activity in other borrowings:
Calls, maturities and scheduled principal payments		(8,000,000	)		-			(1,937,500	)		(8,000,000	)
Prepayments		-			(10,759,000	)
Retirement of junior subordinated debentures		-			(3,955,000	)
Payment of cash dividends on common stock		(1,179,146	)		(939,456	)		(692,874	)		(522,574	)
Net proceeds from the common stock offering, 1,215,000 shares issued		-			29,828,916
Proceeds from issuance of common stock, net		1,053,300			914,099			308,527			761,238
Net cash provided by financing activities	$	140,161,195		$	60,285,214		$	38,267,301		$	77,491,634
Net increase in cash and due from banks		6,591,360			7,838,833
Net decrease in cash and due from banks								(13,875,675	)		(14,244,024	)
Cash and due from banks, beginning		70,569,993			41,742,321			75,721,663			70,569,993
Cash and due from banks, ending	$	77,161,353		$	49,581,154		$	61,845,988		$	56,325,969

(Continued)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued
~~Six~~Three Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~

	2017			2016			2018			2017
Supplemental disclosure of cash flow information, cash payments for:
Interest	$	7,876,668		$	5,852,789		$	3,654,713		$	3,747,218
Income/franchise taxes, net	$	7,450,738		$	4,869,300
Income/franchise taxes							$	74,604		$	4,842

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net	$	1,112,478		$	3,706,044		$	(3,201,540	)	$	410,739
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised	$	(317,614	)	$	(451,434	)	$	(177,923	)	$	(290,290	)
Tax benefit of nonqualified stock options exercised	$	N/A		$	110,366
Transfers of loans to other real estate owned	$	141,828		$	51,000		$	46,244		$	136,450
Due to broker for purchases of securities	$	(4,662,631	)	$	(1,500,000	)
Dividends payable	$	657,003		$	520,701		$	833,730		$	656,574
Tax basis adjustment related to the acquisition of noncontrolling interest in m2 Lease Funds	$	-		$	2,132,415
Decrease (increase) in the fair market value of interest rate swap assets and liabilities	$	(209,185	)	$	6,823,332
Increase in the fair value of interest rate swap assets and liabilities							$	103,080		$	303,383
Transfer of equity securities from securities available for sale to other assets at fair value							$	2,614,261		$	-

See Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~June 30, 2017~~March 31, 2018

NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, ~~2016,~~ 2017, included in the Company’s Annual Report on Form ~~10-K~~10-K filed with the SEC on March ~~10, 2017.~~ 12, 2018. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with ~~U.S.~~ 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.~~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, 2017,~~ March 31, 2018 are not necessarily indicative of the results expected for the year ending December 31, ~~2017,~~ 2018, 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 ~~Bank: Guaranty Bank and Trust Company~~Bankshares, Ltd.
AOCI: Accumulated other comprehensive income (loss)	~~HTM: Held to maturity~~Guaranty Bank: Guaranty Bank and Trust Company
AFS: Available for sale	HTM: Held to maturity
ASC: Accounting Standards Codification	m2:m2 Lease Funds, LLC
~~ASC: Acocunting~~ASU: Accounting Standards ~~Codification~~Update	NIM: Net interest margin
~~ASU: Accounting Standards Update~~Bates Companies: Bates Financial Advisors, Inc., Bates	NPA: Nonperforming asset
Financial Services, Inc., Bates Securities, Inc. and	NPL: Nonperforming loan
Bates Financial Group, Inc.	OREO: Other real estate owned
BOLI: Bank-owned life insurance	~~NPL: Nonperforming loan~~OTTI: Other-than-temporary impairment
Caps: Interest rate cap derivatives	~~OREO: Other real estate owned~~PCI: Purchased credit impaired
CDI: Core deposit intangible	Provision: Provision for loan/lease losses
Community National: Community National Bancorporation	~~OTTI: Other-than-temporary impairment~~QCBT: Quad City Bank & Trust Company
CRBT: Cedar Rapids Bank & Trust Company	~~PCI: Purchased credit impaired~~RB&T: Rockford Bank & Trust Company
CRE: Commercial real estate	~~Provision: Provision for loan/lease losses~~ROAA: Return on Average Assets
CSB: Community State Bank	~~QCBT: Quad City Bank & Trust Company~~SBA: U.S. Small Business Administration
C&I: Commercial and industrial	~~RB&T: Rockford Bank & Trust Company~~SEC: Securities and Exchange Commission
Dodd-Frank Act: Dodd-Frank Wall Street Reform and	~~ROAA: Return on Average Assets~~SFC Bank: Springfield First Community Bank
Consumer Protection Act	~~SBA: U.S. Small Business Administration~~Springfield Bancshares: Springfield Bancshares, Inc.
EPS: Earnings per share	~~SEC: Securities and Exchange Commission~~TA: Tangible assets
Exchange Act: Securities Exchange Act of 1934, as amended	~~TA: Tangible assets~~Tax Act: Tax Cuts and Jobs Act of 2017
FASB: Financial Accounting Standards Board	TCE: Tangible common equity
FDIC: Federal Deposit Insurance Corporation	TDRs: Troubled debt restructurings
FHLB: Federal Home Loan Bank	TEY: Tax equivalent yield
FRB: Federal Reserve Bank of Chicago	The Company: QCR Holdings, Inc.
GAAP: Generally Accepted Accounting Principles	USDA: U.S. Department of Agriculture
~~Guaranty: Guaranty Bankshares, Ltd.~~

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include four commercial banks: QCBT, CRBT, CSB and RB&T. All are state-chartered commercial ~~banks.~~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. All material intercompany transactions and balances have been eliminated in consolidation.

TheThe acquisition of CSB occurred on August 31, 2016; therefore, the Consolidated Balance Sheets included herein for both June 30, 2017 and December 31, 2016 include CSB. The Consolidated Statements of Income included herein include CSB for the quarter and six months ended June 30, 2017, however, do not include CSB for the comparative periods ending June 30, 2016.

~~On June 8, 2017, the Company announced the signing of a definitive agreement to acquire~~ Guaranty Bank, headquartered in Cedar Rapids, Iowa ~~from Guaranty. The transaction is expected to be completed late in the third quarter or early in the fourth quarter of~~occurred on October 2, 2017 ~~subject to certain customary closing conditions.~~ and Guaranty Bank was merged into CRBT on December 2, 2017. The financial results ~~of Guaranty~~for the periods since acquisition are ~~not recognized~~included in this ~~Report.~~report. See Note ~~8 to~~2 of the ~~Consolidated Financial Statements~~ Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for additional information about the ~~planned~~ acquisition.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL ~~STATEMEN~~TSSTATEMENTS (UNAUDITED)-continued

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

In January 2016, FASB issued ASU ~~2016-01,~~ 2016-01,Financial ~~Instruments –~~ Instruments–Overall. ASU ~~2016-01~~2016-01 makes targeted adjustments to GAAP by eliminating the AFS classification for equity securities and requiring equity investments to be measured at fair value with changes in fair value recognized in net income. The standard also requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes. The standard clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to AFS securities in combination with the entity’s other deferred tax assets. It also requires an entity to present separately (within other comprehensive income) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, the standard eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Upon adoption of ASU ~~2016-01~~2016-01 by the Company on January 1, 2018, the fair value of the Company’s loan portfolio is ~~effective~~now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for ~~fiscal years beginning after December 15, 2017, including interim periods within those fiscal years~~estimating fair value of financial assets and ~~it is~~ liabilities that are not ~~expected to have~~ measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update had no significant impact on the ~~Company’s~~ consolidated financial statements.

In February 2016, the FASB issued ASU ~~2016-02,~~ 2016-02,Leases. Under ASU ~~2016-02,~~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.~~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~~2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is in the process of analyzing the impact of adoption 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 (including loans, leases and AFS securities) will be presented at the net amount expected to be collected. Rather than the “incurred” model that is currently being utilized, the standard will require the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life. For public companies, ASU ~~2016-13~~2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Companies may choose to early adopt for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of analyzing the impact of adoption on the Company’s consolidated financial statements.

~~Effective January 1, 2017, the Company adopted ASU 2016-09,~~ ~~Compensation – Stock Compensation~~. Under the standard, the excess tax benefit (deficiency) related to stock options exercised and restricted stock awards vested is recorded as an adjustment to income tax expense. In the past, this tax benefit (deficiency) was recorded directly to equity. This change in accounting resulted in $90 thousand of reduced income tax in the second quarter of 2017 and $623 thousand of reduced income tax expense in the first six months of 2017.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

In February 2018, the FASB issued ASU 2018-02,Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under the standard, entities are allowed to make a one-time reclassification from AOCI to retained earnings for the effect of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a result of the change in the federal tax rate as defined by the Tax Act. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Companies may choose to early adopt for fiscal years or interim periods that have not been issued or made available for issuance as of February 14, 2018. The Company chose to early adopt ASU 2018-02 and apply the guidance to the consolidated financial statements for the year ended December 31, 2017.

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

NOTE 2 – INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 are summarized as follows:

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
June 30, 2017:
March 31, 2018:
Securities HTM:
Municipal securities	$	323,153,634	$	2,027,969	$	(3,242,226	)	$	321,939,377	$	377,534,337	$	2,244,218	$	(5,024,697	)	$	374,753,858
Other securities		1,050,000		-		-			1,050,000		1,050,000		-		(11,175	)		1,038,825
	$	324,203,634	$	2,027,969	$	(3,242,226	)	$	322,989,377	$	378,584,337	$	2,244,218	$	(5,035,872	)	$	375,792,683

Securities AFS:
U.S. govt. sponsored agency securities	$	42,037,160	$	96,651	$	(189,347	)	$	41,944,464	$	37,591,155	$	21,236	$	(744,881	)	$	36,867,510
Residential mortgage-backed and related securities		166,063,973		245,551		(1,894,691	)		164,414,833		162,453,605		60,222		(5,224,784	)		157,289,043
Municipal securities		57,881,338		471,713		(252,541	)		58,100,510		61,862,665		238,583		(899,444	)		61,201,804
Other securities		4,065,468		778,988		(22,550	)		4,821,906		4,254,716		31,867		-			4,286,583
	$	270,047,939	$	1,592,903	$	(2,359,129	)	$	269,281,713	$	266,162,141	$	351,908	$	(6,869,109	)	$	259,644,940

December 31, 2016:
December 31, 2017:
Securities HTM:
Municipal securities	$	321,859,056	$	2,200,577	$	(4,694,734	)	$	319,364,899	$	378,424,205	$	2,763,718	$	(2,488,119	)	$	378,699,804
Other securities		1,050,000		-		-			1,050,000		1,050,000		-		-			1,050,000
	$	322,909,056	$	2,200,577	$	(4,694,734	)	$	320,414,899	$	379,474,205	$	2,763,718	$	(2,488,119	)	$	379,749,804

Securities AFS:
U.S. govt. sponsored agency securities	$	46,281,306	$	132,886	$	(330,585	)	$	46,083,607	$	38,409,157	$	37,344	$	(349,967	)	$	38,096,534
Residential mortgage-backed and related securities		150,465,222		174,993		(2,938,088	)		147,702,127		165,459,470		155,363		(2,313,529	)		163,301,304
Municipal securities		52,816,541		425,801		(637,916	)		52,604,426		66,176,364		660,232		(211,100	)		66,625,496
Other securities		4,046,332		703,978		(27,331	)		4,722,979		4,014,004		896,384		(25,815	)		4,884,573
	$	253,609,401	$	1,437,658	$	(3,933,920	)	$	251,113,139	$	274,058,995	$	1,749,323	$	(2,900,411	)	$	272,907,907

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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

The ~~Company~~’sCompany’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.

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous ~~unrealized~~unrealized loss position as of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016,~~ 2017, are summarized as follows:

Less than 12 Months

12 Months or More

Total

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

March 31, 2018:

Securities HTM:

Municipal securities

69,404,232

(2,881,032

)

59,545,239

(2,143,665

)

128,949,471

(5,024,697

)

Other securities

1,038,825

(11,175

)

1,038,825

(11,175

)

70,443,057

(2,892,207

)

59,545,239

(2,143,665

)

129,988,296

(5,035,872

)

Securities AFS:

U.S. govt. sponsored agency securities

29,643,497

(589,515

)

3,634,609

(155,365

)

33,278,106

(744,880

)

Residential mortgage-backed and related securities

94,102,512

(2,858,578

)

55,394,159

(2,366,206

)

149,496,671

(5,224,784

)

Municipal securities

36,845,821

(659,492

)

8,217,318

(239,952

)

45,063,139

(899,444

)

160,591,830

(4,107,585

)

67,246,086

(2,761,523

)

227,837,916

(6,869,108

)

December 31, 2017:

Securities HTM:

Municipal securities

23,750,826

(354,460

)

72,611,780

(2,133,659

)

96,362,606

(2,488,119

)

Securities AFS:

U.S. govt. sponsored agency securities

28,576,258

(200,022

)

3,640,477

(149,945

)

32,216,735

(349,967

)

Residential mortgage-backed and related securities

88,927,779

(871,855

)

57,931,731

(1,441,674

)

146,859,510

(2,313,529

)

Municipal securities

10,229,337

(41,151

)

9,997,433

(169,949

)

20,226,770

(211,100

)

Other securities

923,535

(25,815

)

923,535

(25,815

)

128,656,909

(1,138,843

)

71,569,641

(1,761,568

)

200,226,550

(2,900,411

)

Less than 12 Months

12 Months or More

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

June 30, 2017:

Securities HTM:

Municipal securities
$ 64,001,034 $ (1,792,524 ) $ 30,641,106 $ (1,449,702 ) $ 94,642,140 $ (3,242,226 )

Securities AFS:

U.S. govt. sponsored agency securities
$ 27,793,290 $ (184,702 ) $ 4,775,235 $ (4,645 ) $ 32,568,525 $ (189,347 )
Residential mortgage-backed and related securities
129,347,074 (1,614,041 ) 8,839,471 (280,650 ) 138,186,545 (1,894,691 )
Municipal securities
25,578,044 (234,044 ) 336,441 (18,497 ) 25,914,485 (252,541 )
Other securities
926,800 (22,550 ) - - 926,800 (22,550 )
$ 183,645,208 $ (2,055,337 ) $ 13,951,147 $ (303,792 ) $ 197,596,355 $ (2,359,129 )

December 31, 2016:

Securities HTM:

Municipal securities
$ 122,271,533 $ (4,076,647 ) $ 13,010,803 $ (618,087 ) $ 135,282,336 $ (4,694,734 )

Securities AFS:

U.S. govt. sponsored agency securities
$ 21,788,139 $ (257,640 ) $ 5,499,012 $ (72,945 ) $ 27,287,151 $ (330,585 )
Residential mortgage-backed and related securities
121,506,582 (2,641,664 ) 7,437,615 (296,424 ) 128,944,197 (2,938,088 )
Municipal securities
34,152,822 (618,462 ) 338,099 (19,454 ) 34,490,921 (637,916 )
Other securities
3,177,414 (27,331 ) - - 3,177,414 (27,331 )
$ 180,624,957 $ (3,545,097 ) $ 13,274,726 $ (388,823 ) $ 193,899,683 $ (3,933,920 )

At ~~June 30, 2017,~~ March 31, 2018, the investment portfolio included ~~568~~604 securities. Of this number, ~~212~~290 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~0.9%~~1.8% of the total amortized cost of the portfolio. Of these ~~212~~290 securities, 30105 securities had an unrealized loss for twelve months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not ~~more-likely-than-not~~ more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. ~~At June 30, 2017 and December 31, 2016, equity securities represented less than 1% of the total portfolio.~~

The Company did not recognize OTTI on any ~~debt or equity~~investment securities for the three ~~or six~~ months ended ~~June 30, 2017~~ March 31, 2018 and ~~2016.~~ 2017.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

~~All~~There were no sales of securities for the three months ended March 31, 2018 and ~~six months~~ ~~ended June 30, 2017 and 2016 were from securities identified as AFS. Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:~~2017.

Three Months Ended

Six Months Ended

June 30, 2017

June 30, 2016

June 30, 2017

June 30, 2016

Proceeds from sales of securities
$ 13,554,075 $ 5,548,294 $ 13,554,075 $ 61,075,145
Pre-tax gross gains from sales of securities
59,568 18,030 59,568 533,545
Pre-tax gross losses from sales of securities
(21,104 ) - (21,104 ) (157,035 )

The amortized cost and ~~fai~~rfair value of securities as of ~~June 30, 2017~~ March 31, 2018 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table. ~~“Other securities” AFS are excluded from the maturity categories as there is no fixed maturity date for those securities.~~

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities HTM:
Due in one year or less	$	7,479,990	$	7,478,528	$	3,344,356	$	3,345,990
Due after one year through five years		18,040,753		18,137,483		25,163,524		25,191,668
Due after five years		298,682,891		297,373,366		350,076,457		347,255,025
	$	324,203,634	$	322,989,377	$	378,584,337	$	375,792,683

Securities AFS:
Due in one year or less	$	3,498,188	$	3,504,089	$	3,368,633	$	3,381,748
Due after one year through five years		31,550,278		31,700,139		23,949,100		23,738,028
Due after five years		64,870,032		64,840,746		76,390,803		75,236,121
	$	99,918,498	$	100,044,974		103,708,536		102,355,897
Residential mortgage-backed and related securities		166,063,973		164,414,833		162,453,605		157,289,043
Other securities		4,065,468		4,821,906
	$	270,047,939	$	269,281,713	$	266,162,141	$	259,644,940

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

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities HTM:
Municipal securities	$	170,556,294	$	170,715,228	$	209,306,946	$	207,262,788


Securities AFS:
U.S. govt. sponsored agency securities		5,048,597		5,040,134		5,048,812		4,947,644
Municipal securities		41,135,349		41,095,251		54,016,828		53,258,850
	$	46,183,946	$	46,135,385	$	59,065,640	$	58,206,494

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of ~~June 30, 2017,~~ March 31, 2018, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by ~~124~~128 issuers with fair values totaling ~~$107.9~~$101.3 million and revenue bonds issued by ~~126~~148 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$272.2~~$334.6 million. The Company held investments in general obligation bonds in 2126 states, including six states in which the aggregate fair value exceeded ~~$5.0~~$5.0 million. The Company held investments in revenue bonds in 1316 states, including ~~six~~seven states in which the aggregate fair value exceeded ~~$5.0~~$5.0 million.

As of December 31, ~~201~~6, 2017, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by ~~116~~131 issuers with fair values totaling ~~$116.5~~$108.0 million and revenue bonds issued by ~~120~~145 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$255.5~~$337.3 million. The Company held investments in general obligation bonds in 2126 states, including ~~five~~six states in which the aggregate fair value exceeded ~~$5.0~~$5.0 million. The Company held investments in revenue bonds in ~~twelve~~16 states, including ~~six~~seven states in which the aggregate fair value exceeded ~~$5.0~~$5.0 million.

The amortized cost and fair values of the ~~Company~~’sCompany’s portfolio of general obligation bonds are summarized in the following tables by the issuer’s state:

March 31, 2018:

U.S. State:

Number of

Issuers

Amortized Cost

Fair Value

Average

Exposure Per

Issuer
(Fair Value)

North Dakota

21,627,097

20,756,566

2,965,224

Illinois

18,532,776

18,513,766

925,688

Iowa

13,878,991

13,830,003

864,375

Texas

10,763,333

10,554,430

620,849

Missouri

8,314,872

8,323,476

489,616

Ohio

7,378,887

7,296,859

912,107

Other

22,261,263

22,068,390

513,218

Total general obligation bonds

128

102,757,219

101,343,490

791,746

June 30, 2017:

U.S. State:

Number of
Issuers

Amortized Cost

Fair Value

Average
Exposure Per
Issuer
(Fair Value)

Iowa
26 $ 31,131,484 $ 31,242,925 $ 1,201,651
North Dakota
7 21,619,812 21,514,855 3,073,551
Illinois
19 14,872,773 15,051,806 792,200
Missouri
16 9,078,540 9,123,733 570,233
Ohio
10 8,716,542 8,588,019 858,802
Texas
8 5,347,075 5,336,188 667,024
Other
38 16,886,554 16,997,159 447,294
Total general obligation bonds
124 $ 107,652,780 $ 107,854,685 $ 869,796

December 31, 2016:
December 31, 2017:
U.S. State:	Number of Issuers		Amortized Cost		Fair Value		Average Exposure Per Issuer (Fair Value)		Number of Issuers		Amortized Cost		Fair Value		Average Exposure Per Issuer (Fair Value)

North Dakota										7	$	21,626,574	$	21,724,197	$	3,103,457
Illinois										20		19,328,700		19,514,024		975,701
Iowa		27	$	32,258,612	$	32,231,936	$	1,193,775		16		13,881,689		13,969,512		873,095
Illinois		19		29,214,559		29,308,438		1,542,549
North Dakota		7		22,169,050		21,499,075		3,071,296
Texas										17		11,253,775		11,308,848		665,226
Missouri		14		8,291,192		8,323,245		594,518		17		9,243,355		9,308,287		547,546
Ohio		8		6,790,398		6,651,897		831,487		9		8,002,705		7,938,028		882,003
Other		41		18,481,496		18,458,044		450,196		45		24,000,278		24,215,119		538,114
Total general obligation bonds		116	$	117,205,307	$	116,472,635	$	1,004,074		131	$	107,337,076	$	107,978,015	$	824,260

Table of Contents

P~~art~~

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The amortized cost and fair values of the ~~Company~~’sCompany’s portfolio of revenue bonds are summarized in the following tables by the issuer’s state:

March 31, 2018:

U.S. State:

Number of

Issuers

Amortized Cost

Fair Value

Average

Exposure Per

Issuer
(Fair Value)

Missouri

108,311,804

108,445,780

1,869,755

Iowa

68,370,374

68,236,038

2,352,967

Ohio

55,757,914

55,699,375

5,569,938

Indiana

49,258,364

48,833,113

1,878,197

Illinois

17,205,951

17,373,994

8,686,997

Kansas

12,651,338

12,172,961

2,028,827

North Dakota

11,220,278

10,644,441

2,128,888

Other

13,863,760

13,206,470

1,100,539

Total revenue bonds

148

336,639,783

334,612,172

2,260,893

June 30, 2017:

U.S. State:

Number of
Issuers

Amortized Cost

Fair Value

Average
Exposure Per
Issuer
(Fair Value)

Missouri
54 $ 107,360,504 $ 106,983,845 $ 1,981,182
Iowa
27 57,862,675 57,834,419 2,142,016
Indiana
21 50,114,290 49,578,767 2,360,894
Ohio
5 19,691,358 19,493,348 3,898,670
Kansas
6 13,178,963 13,179,104 2,196,517
North Dakota
5 11,729,782 11,676,766 2,335,353
Other
8 13,444,620 13,438,953 1,679,869
Total revenue bonds
126 $ 273,382,192 $ 272,185,202 $ 2,160,200

December 31, 2016:
December 31, 2017:
U.S. State:	Number of Issuers		Amortized Cost		Fair Value		Average Exposure Per Issuer (Fair Value)		Number of Issuers		Amortized Cost		Fair Value		Average Exposure Per Issuer (Fair Value)

Missouri		47	$	90,784,441	$	89,664,013	$	1,907,745		56	$	106,259,015	$	106,232,837	$	1,897,015
Iowa		31		70,788,393		71,142,393		2,294,916		29		68,724,899		69,079,470		2,382,051
Ohio										10		55,766,091		55,820,203		5,582,020
Indiana		22		47,994,737		47,582,138		2,162,824		26		51,171,818		50,861,336		1,956,205
Illinois										2		17,211,441		17,408,544		8,704,272
Kansas		6		13,476,366		13,427,491		2,237,915		6		12,873,329		12,877,087		2,146,181
North Dakota		4		8,089,067		7,796,381		1,949,095		5		11,451,560		11,351,676		2,270,335
Ohio		3		13,650,000		13,405,222		4,468,407
Other		7		12,687,286		12,479,052		1,782,722		11		13,805,340		13,716,132		1,246,921
Total revenue bonds		120	$	257,470,290	$	255,496,690	$	2,129,139		145	$	337,263,493	$	337,347,285	$	2,326,533

Both general obligation and revenue bonds are diversified across many issuers. As of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016,~~ 2017, the Company did not hold general obligation or revenue bonds of any single issuer, the aggregate book or market value of which exceeded 5% of the Company’s stockholders’ equity. 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~~’sCompany’s municipal securities are owned by each of the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of ~~June 30, 2017,~~ March 31, 2018, 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, 2017,~~ March 31, 2018, 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, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 is presented as follows:

	As of March 31,			As of December 31,
	2018			2017

C&I loans*	$	1,201,085,625		$	1,134,516,315
CRE loans
Owner-occupied CRE		346,996,627			332,742,477
Commercial construction, land development, and other land		171,404,628			186,402,404
Other non owner-occupied CRE		839,302,131			784,347,000
		1,357,703,386			1,303,491,882

Direct financing leases **		137,614,465			141,448,232
Residential real estate loans ***		254,484,231			258,646,265
Installment and other consumer loans		95,911,569			118,610,799
		3,046,799,276			2,956,713,493
Plus deferred loan/lease origination costs, net of fees		8,103,163			7,771,907
		3,054,902,439			2,964,485,400
Less allowance		(36,532,602	)		(34,355,728	)
	$	3,018,369,837		$	2,930,129,672


* Direct financing leases:
Net minimum lease payments to be received	$	152,430,047		$	156,583,887
Estimated unguaranteed residual values of leased assets		929,932			929,932
Unearned lease/residual income		(15,745,514	)		(16,065,587	)
		137,614,465			141,448,232
Plus deferred lease origination costs, net of fees		4,350,767			4,624,027
		141,965,232			146,072,259
Less allowance		(2,730,301	)		(2,382,098	)
	$	139,234,931		$	143,690,161

* Includes equipment financing agreements outstanding at m2, totaling $78,911,791 and $66,758,397 as of March 31, 2018 and December 31, 2017, respectively.

As of June 30,

As of December 31,

2017

2016

C&I loans
$ 942,538,419 $ 827,637,263
CRE loans

Owner-occupied CRE
317,225,055 332,387,621
Commercial construction, land development, and other land
179,316,027 165,149,491
Other non owner-occupied CRE
635,365,041 595,921,748
1,131,906,123 1,093,458,860

Direct financing leases *
153,336,548 165,419,360
Residential real estate loans **
233,870,678 229,233,104
Installment and other consumer loans
84,047,403 81,665,695
2,545,699,171 2,397,414,282
Plus deferred loan/lease origination costs, net of fees
7,866,437 8,072,703
2,553,565,608 2,405,486,985
Less allowance
(33,356,632 ) (30,757,448 )
$ 2,520,208,976 $ 2,374,729,537

* Direct financing leases:

Net minimum lease payments to be received
$ 170,143,561 $ 184,274,802
Estimated unguaranteed residual values of leased assets
1,085,154 1,085,154
Unearned lease/residual income
(17,892,167 ) (19,940,596 )
153,336,548 165,419,360
Plus deferred lease origination costs, net of fees
5,216,015 5,881,778
158,552,563 171,301,138
Less allowance
(2,638,301 ) (3,111,898 )
$ 155,914,262 $ 168,189,240

**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, 2017~~ March 31, 2018 and ~~2016.~~2017.

***Includes residential real estate loans h~~eld~~held for sale totaling ~~$705,800~~$279,750 and ~~$1,135,500~~$645,001 as of ~~June 30, 2017,~~ March 31, 2018, and December 31, ~~2016,~~ 2017, 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 March 31, 2018

PCI

Performing

Loans

Total

Balance at the beginning of the period

(191,132

)

(6,280,075

)

(6,471,207

)

Accretion recognized

34,236

620,532

654,768

Balance at the end of the period

(156,896

)

(5,659,543

)

(5,816,439

)

Three months ended June 30, 2017

Six months ended June 30, 2017

PCI

Performing

PCI

Performing

Loans

Loans

Total

Loans

Loans

Total

Balance at the beginning of the period
$ (127,616 ) $ (6,944,074 ) $ (7,071,690 ) $ (194,306 ) $ (9,115,614 ) $ (9,309,920 )
Accretion recognized
43,756 1,618,603 1,662,359 110,446 3,790,143 3,900,589
Balance at the end of the period
$ (83,860 ) $ (5,325,471 ) $ (5,409,331 ) $ (83,860 ) $ (5,325,471 ) $ (5,409,331 )

Three months ended March 31, 2017

PCI

Performing

Loans

Total

Balance at the beginning of the period

(194,306

)

(9,115,614

)

(9,309,920

)

Accretion recognized

66,690

2,171,540

2,238,230

Balance at the end of the period

(127,616

)

(6,944,074

)

(7,071,690

)

The aging of the loan/lease portfolio by ~~classe~~sclasses of loans/leases as of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 is presented as follows:

	As of June 30, 2017																		As of March 31, 2018
Classes of Loans/Leases	Current			30-59 Days Past Due			60-89 Days Past Due			Accruing Past Due 90 Days or More			Nonaccrual Loans/Leases			Total			Current			30-59 Days Past Due			60-89 Days Past Due			Accruing Past Due 90 Days or More			Nonaccrual Loans/Leases			Total

C&I	$	937,716,988		$	271,248		$	430,367		$	45,812		$	4,074,004		$	942,538,419		$	1,197,675,583		$	1,714,614		$	210,724		$	36,162		$	1,448,542		$	1,201,085,625
CRE
Owner-Occupied CRE		316,555,536			514,499			-			-			155,020			317,225,055			346,524,727			142,587			-			-			329,313			346,996,627
Commercial Construction, Land Development, and Other Land		174,851,763			117,247			-			-			4,347,017			179,316,027			168,928,348			55,561			568,523			-			1,852,196			171,404,628
Other Non Owner-Occupied CRE		632,539,426			1,503,560			-			-			1,322,055			635,365,041			834,328,826			105,223			-			-			4,868,082			839,302,131
Direct Financing Leases		151,027,116			155,553			106,185			-			2,047,694			153,336,548			133,012,415			1,196,302			599,350			-			2,806,398			137,614,465
Residential Real Estate		232,076,296			92,966			395,734			257,771			1,047,911			233,870,678			250,956,900			2,304,607			35,457			-			1,187,267			254,484,231
Installment and Other Consumer		83,377,699			253,751			71,882			120,363			223,708			84,047,403			95,435,771			190,027			13,806			4,778			267,187			95,911,569
	$	2,528,144,824		$	2,908,824		$	1,004,168		$	423,946		$	13,217,409		$	2,545,699,171		$	3,026,862,570		$	5,708,921		$	1,427,860		$	40,940		$	12,758,985		$	3,046,799,276

As a percentage of total loan/lease portfolio		99.31	%		0.11	%		0.04	%		0.02	%		0.52	%		100.00	%		99.34	%		0.19	%		0.05	%		0.00	%		0.42	%		100.00	%

	As of December 31, 2016																		As of December 31, 2017
Classes of Loans/Leases	Current			30-59 Days Past Due			60-89 Days Past Due			Accruing Past Due 90 Days or More			Nonaccrual Loans/Leases			Total			Current			30-59 Days Past Due			60-89 Days Past Due			Accruing Past Due 90 Days or More			Nonaccrual Loans/Leases			Total

C&I	$	821,637,507		$	1,455,185		$	10,551		$	346,234		$	4,187,786		$	827,637,263		$	1,124,734,486		$	8,306,829		$	243,647		$	-		$	1,231,353		$	1,134,516,315
CRE
Owner-Occupied CRE		331,812,571			-			242,902			-			332,148			332,387,621			331,868,142			540,435			-			-			333,900			332,742,477
Commercial Construction, Land Development, and Other Land		160,760,034			35,638			-			-			4,353,819			165,149,491			181,558,092			-			-			-			4,844,312			186,402,404
Other Non Owner-Occupied CRE		594,384,926			100,673			-			-			1,436,149			595,921,748			782,526,249			572,877			4,146			-			1,243,728			784,347,000
Direct Financing Leases		161,452,627			730,627			574,700			215,225			2,446,181			165,419,360			137,708,397			1,305,191			259,600			-			2,175,044			141,448,232
Residential Real Estate		227,023,552			473,478			365,581			294,854			1,075,639			229,233,104			253,261,821			3,552,709			393,410			74,519			1,363,806			258,646,265
Installment and Other Consumer		81,199,766			204,973			63,111			110,501			87,344			81,665,695			117,773,259			517,537			56,760			14,152			249,091			118,610,799
	$	2,378,270,983		$	3,000,574		$	1,256,845		$	966,814		$	13,919,066		$	2,397,414,282		$	2,929,430,446		$	14,795,578		$	957,563		$	88,671		$	11,441,234		$	2,956,713,493

As a percentage of total loan/lease portfolio		99.20	%		0.13	%		0.05	%		0.04	%		0.58	%		100.00	%		99.08	%		0.50	%		0.03	%		0.00	%		0.39	%		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, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 are presented as follows:

	As of June 30, 2017											As of March 31, 2018
Classes of Loans/Leases	Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases *		Accruing TDRs		Total NPLs		Percentage of Total NPLs			Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases *		Accruing TDRs		Total NPLs		Percentage of Total NPLs

C&I	$	45,812	$	4,074,004	$	4,858,983	$	8,978,799		43.68	%	$	36,162	$	1,448,542	$	4,714,450	$	6,199,154		34.29	%
CRE
Owner-Occupied CRE		-		155,020		-		155,020		0.75	%		-		329,313		107,322		436,635		2.42	%
Commercial Construction, Land Development, and Other Land		-		4,347,017		-		4,347,017		21.15	%		-		1,852,196		-		1,852,196		10.25	%
Other Non Owner-Occupied CRE		-		1,322,055		-		1,322,055		6.43	%		-		4,868,082		-		4,868,082		26.93	%
Direct Financing Leases		-		2,047,694		1,689,086		3,736,780		18.18	%		-		2,806,398		169,198		2,975,596		16.46	%
Residential Real Estate		257,771		1,047,911		350,704		1,656,386		8.06	%		-		1,187,267		271,694		1,458,961		8.07	%
Installment and Other Consumer		120,363		223,708		16,400		360,471		1.75	%		4,778		267,187		12,828		284,793		1.58	%
	$	423,946	$	13,217,409	$	6,915,173	$	20,556,528		100.00	%	$	40,940	$	12,758,985	$	5,275,492	$	18,075,417		100.00	%

*Nonaccrual loans/leases included ~~$2,167,863~~$2,637,483 of TDRs, including ~~$268,629~~$25,984 in C&I loans, ~~$1,148,818~~$1,312,469 in CRE loans, ~~$519,178~~$1,208,050 in direct financing leases, ~~$179,881 in construction loans, $41,465~~$84,555 in residential real estate loans, and ~~$9,892~~$6,425 in installment loans.

	As of December 31, 2016											As of December 31, 2017
Classes of Loans/Leases	Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases **		Accruing TDRs		Total NPLs		Percentage of Total NPLs			Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases **		Accruing TDRs		Total NPLs		Percentage of Total NPLs

C&I	$	346,234	$	4,187,786	$	4,733,997		9,268,017		43.65	%	$	-	$	1,231,353	$	5,224,182	$	6,455,535		34.63	%
CRE
Owner-Occupied CRE		-		332,148		-		332,148		1.56	%		-		333,900		107,322		441,222		2.37	%
Commercial Construction, Land Development, and Other Land		-		4,353,819		-		4,353,819		20.51	%		-		4,844,312		-		4,844,312		25.99	%
Other Non Owner-Occupied CRE		-		1,436,149		-		1,436,149		6.77	%		-		1,243,728		-		1,243,728		6.67	%
Direct Financing Leases		215,225		2,446,181		1,008,244		3,669,650		17.28	%		-		2,175,044		1,494,448		3,669,492		19.68	%
Residential Real Estate		294,854		1,075,639		585,541		1,956,034		9.21	%		74,519		1,363,806		272,493		1,710,818		9.18	%
Installment and Other Consumer		110,501		87,344		18,746		216,591		1.02	%		14,152		249,091		14,027		277,270		1.49	%
	$	966,814	$	13,919,066	$	6,346,528	$	21,232,408		100.00	%	$	88,671	$	11,441,234	$	7,112,472	$	18,642,377		100.00	%

**Nonaccrual loans/leases included ~~$2,300,479~~$2,282,495 of TDRs, including ~~$48,501~~$122,598 in C&I loans, ~~$1,380,047~~$1,336,871 in CRE loans, ~~$816,149~~$700,255 in direct financing leases, ~~$43,579~~$115,190 in residential real estate loans, and ~~$12,203~~$7,581 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, 2017~~ March 31, 2018 and ~~2016,~~2017, respectively, are presented as follows:

Three Months Ended June 30, 2017

C&I

CRE

Direct Financing Leases

Residential Real Estate

Installment and Other Consumer

Total

Balance, beginning
$ 12,954,090 $ 12,643,266 $ 2,978,260 $ 2,375,864 $ 1,107,670 $ 32,059,150
Provisions (credits) charged to expense
1,281,786 339,857 297,672 116,151 (12,473 ) 2,022,993
Loans/leases charged off
(74,071 ) (10,375 ) (684,079 ) (61,561 ) (21,518 ) (851,604 )
Recoveries on loans/leases previously charged off
45,928 26,485 46,448 - 7,232 126,093
Balance, ending
$ 14,207,733 $ 12,999,233 $ 2,638,301 $ 2,430,454 $ 1,080,911 $ 33,356,632

Three Months Ended June 30, 2016

C&I

CRE

Direct Financing Leases

Residential Real Estate

Installment and Other Consumer

Total

Balance, beginning
$ 10,991,979 $ 10,090,567 $ 3,287,231 $ 1,836,622 $ 1,189,043 $ 27,395,442
Provisions (credits) charged to expense
(241,600 ) 919,596 460,997 194,988 (136,131 ) 1,197,850
Loans/leases charged off
(48,983 ) (23,101 ) (534,716 ) (17,523 ) (9,892 ) (634,215 )
Recoveries on loans/leases previously charged off
23,110 - 12,682 900 101,721 138,413
Balance, ending
$ 10,724,506 $ 10,987,062 $ 3,226,194 $ 2,014,987 $ 1,144,741 $ 28,097,490

Six Months Ended June 30, 2017

Commercial and Industrial

Commercial Real Estate

Direct Financing Leases

Residential Real Estate

Installment and Other Consumer

Total

Balance, beginning
$ 12,545,110 $ 11,670,609 $ 3,111,898 $ 2,342,344 $ 1,087,487 $ 30,757,448
Provisions (credits) charged to expense
1,875,144 1,306,128 802,687 159,671 (15,528 ) 4,128,102
Loans/leases charged off
(292,344 ) (10,375 ) (1,342,763 ) (75,184 ) (23,564 ) (1,744,230 )
Recoveries on loans/leases previously charged off
79,823 32,871 66,479 3,623 32,516 215,312
Balance, ending
$ 14,207,733 $ 12,999,233 $ 2,638,301 $ 2,430,454 $ 1,080,911 $ 33,356,632

	Six Months Ended June 30, 2016
																			Three Months Ended March 31, 2018
	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total			C&I			CRE		Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Balance, beginning	$	10,484,080		$	9,375,117		$	3,395,088		$	1,790,150		$	1,096,471		$	26,140,906		$	14,323,036		$	13,962,688	$	2,382,098		$	2,466,431		$	1,221,475		$	34,355,728
Provisions (credits) charged to expense		498,231			1,635,046			939,242			257,644			(59,328	)		3,270,835			808,161			965,383		604,783			(39,337	)		200,849			2,539,839
Loans/leases charged off		(292,549	)		(23,101	)		(1,135,654	)		(33,707	)		(17,488	)		(1,502,499	)		(95,499	)		-		(283,887	)		(52,325	)		(4,747	)		(436,458	)
Recoveries on loans/leases previously charged off		34,744			-			27,518			900			125,086			188,248			29,547			9,949		27,307			450			6,240			73,493
Balance, ending	$	10,724,506		$	10,987,062		$	3,226,194		$	2,014,987		$	1,144,741		$	28,097,490		$	15,065,245		$	14,938,020	$	2,730,301		$	2,375,219		$	1,423,817		$	36,532,602

Three Months Ended March 31, 2017

C&I

CRE

Direct Financing

Leases

Residential Real

Estate

Installment and

Other Consumer

Total

Balance, beginning

12,545,110

11,670,609

3,111,898

2,342,344

1,087,487

30,757,448

Provisions charged to expense

593,359

966,271

505,015

43,520

(3,056

)

2,105,109

Loans/leases charged off

(218,273

)

(658,684

)

(13,623

)

(2,046

)

(892,626

)

Recoveries on loans/leases previously charged off

33,894

6,386

20,031

3,623

25,285

89,219

Balance, ending

12,954,090

12,643,266

2,978,260

2,375,864

1,107,670

32,059,150

~~Part I~~

~~Item 1~~

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

The allowance by impairment evaluation and by portfolio segment as of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 is presented as follows:

As of March 31, 2018

C&I

CRE

Direct Financing

Leases

Residential Real

Estate

Installment and

Other Consumer

Total

Allowance for impaired loans/leases

567,321

1,670,897

628,379

248,592

112,177

3,227,366

Allowance for nonimpaired loans/leases

14,497,924

13,267,123

2,101,922

2,126,627

1,311,640

33,305,236

15,065,245

14,938,020

2,730,301

2,375,219

1,423,817

36,532,602

Impaired loans/leases

6,010,688

7,094,483

2,975,596

1,556,817

281,197

17,918,781

Nonimpaired loans/leases

1,195,074,937

1,350,608,903

134,638,869

252,927,414

95,630,372

3,028,880,495

1,201,085,625

1,357,703,386

137,614,465

254,484,231

95,911,569

3,046,799,276

Allowance as a percentage of impaired loans/leases

9.44

23.55

21.12

15.97

39.89

18.01

Allowance as a percentage of nonimpaired loans/leases

1.21

0.98

1.56

0.84

1.37

1.10

Total allowance as a percentage of total loans/leases

1.25

1.10

1.98

0.93

1.48

1.20

As of June 30, 2017

C&I

CRE

Direct Financing Leases

Residential Real Estate

Installment and Other Consumer

Total

Allowance for impaired loans/leases
$ 1,580,113 $ 938,450 $ 550,575 $ 266,217 $ 20,365 $ 3,355,720
Allowance for nonimpaired loans/leases
12,627,620 12,060,783 2,087,726 2,164,237 1,060,546 30,000,912
$ 14,207,733 $ 12,999,233 $ 2,638,301 $ 2,430,454 $ 1,080,911 $ 33,356,632

Impaired loans/leases
$ 8,985,913 $ 5,727,375 $ 3,553,173 $ 1,398,615 $ 240,107 $ 19,905,183
Nonimpaired loans/leases
933,552,506 1,126,178,748 149,783,375 232,472,063 83,807,296 2,525,793,988
$ 942,538,419 $ 1,131,906,123 $ 153,336,548 $ 233,870,678 $ 84,047,403 $ 2,545,699,171

Allowance as a percentage of impaired loans/leases
17.58 % 16.39 % 15.50 % 19.03 % 8.48 % 16.86 %
Allowance as a percentage of nonimpaired loans/leases
1.35 % 1.07 % 1.39 % 0.93 % 1.27 % 1.19 %
Total allowance as a percentage of total loans/leases
1.51 % 1.15 % 1.72 % 1.04 % 1.29 % 1.31 %

	As of December 31, 2016																		As of December 31, 2017
	C&I			CRE			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total			C&I			CRE			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Allowance for impaired loans/leases	$	1,771,537		$	693,919		$	848,919		$	289,112		$	39,481		$	3,642,968		$	715,627		$	1,429,460		$	504,469		$	355,167		$	38,596		$	3,043,319
Allowance for nonimpaired loans/leases		10,773,573			10,976,690			2,262,979			2,053,232			1,048,006			27,114,480			13,607,409			12,533,228			1,877,629			2,111,264			1,182,879			31,312,409
	$	12,545,110		$	11,670,609		$	3,111,898		$	2,342,344		$	1,087,487		$	30,757,448		$	14,323,036		$	13,962,688		$	2,382,098		$	2,466,431		$	1,221,475		$	34,355,728

Impaired loans/leases	$	8,936,451		$	6,112,114		$	3,256,264		$	1,661,180		$	106,090		$	20,072,099		$	6,248,209		$	6,529,262		$	3,669,492		$	1,704,846		$	202,354		$	18,354,163
Nonimpaired loans/leases		818,700,812			1,087,346,746			162,163,096			227,571,924			81,559,605			2,377,342,183			1,128,268,106			1,296,962,620			137,778,740			256,941,419			118,408,445			2,938,359,330
	$	827,637,263		$	1,093,458,860		$	165,419,360		$	229,233,104		$	81,665,695		$	2,397,414,282		$	1,134,516,315		$	1,303,491,882		$	141,448,232		$	258,646,265		$	118,610,799		$	2,956,713,493

Allowance as a percentage of impaired loans/leases		19.82	%		11.35	%		26.07	%		17.40	%		37.21	%		18.15	%		11.45	%		21.89	%		13.75	%		20.83	%		19.07	%		16.58	%
Allowance as a percentage of nonimpaired loans/leases		1.32	%		1.01	%		1.40	%		0.90	%		1.28	%		1.14	%		1.21	%		0.97	%		1.36	%		0.82	%		1.00	%		1.07	%
Total allowance as a percentage of total loans/leases		1.52	%		1.07	%		1.88	%		1.02	%		1.33	%		1.28	%		1.26	%		1.07	%		1.68	%		0.95	%		1.03	%		1.16	%

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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.

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the ~~six~~three months ended ~~June 30, 2017~~ March 31, 2018 are presented as follows:

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

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	993,551	$	1,003,988	$	-	$	802,367	$	16,751	$	16,751	$	5,038,888	$	5,053,164	$	-	$	5,297,775	$	75,406	$	75,406
CRE
Owner-Occupied CRE		-		-		-		-		-		-		289,261		289,261		-		289,261		5,822		5,822
Commercial Construction, Land Development, and Other Land		-		-		-		-		-		-		-		-		-		-		-		-
Other Non Owner-Occupied CRE		1,148,818		1,148,818		-		1,171,229		-		-		1,227,579		1,227,579		-		1,235,654		-		-
Direct Financing Leases		2,739,319		2,739,319		-		2,557,608		57,844		57,844		1,927,663		1,927,663		-		2,355,745		6,291		6,291
Residential Real Estate		710,118		784,896		-		628,555		1,161		1,161		911,804		986,583		-		884,441		-		-
Installment and Other Consumer		189,018		189,019		-		144,838		218		218		140,857		140,857		-		120,043		-		-
	$	5,780,824	$	5,866,040	$	-	$	5,304,597	$	75,974	$	75,974	$	9,536,052	$	9,625,107	$	-	$	10,182,919	$	87,519	$	87,519

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	7,992,362	$	7,996,201	$	1,580,113	$	7,930,142	$	97,721	$	97,721	$	957,524	$	957,524	$	567,321	$	824,536	$	1,983	$	1,983
CRE
Owner-Occupied CRE		155,020		155,020		111,520		266,439		-		-		147,375		147,375		43,875		149,669		-		-
Commercial Construction, Land Development, and Other Land		4,347,017		4,347,017		820,811		4,350,034		-		-		5,430,268		5,430,268		1,627,022		5,137,290		-		-
Other Non Owner-Occupied CRE		76,519		76,519		6,119		25,506		-		-		-		-		-		-		-		-
Direct Financing Leases		813,854		813,854		550,575		739,561		-		-		1,047,933		1,047,933		628,379		962,961		-		-
Residential Real Estate		688,497		688,497		266,217		604,450		7,229		7,229		547,158		570,234		248,592		544,558		2,934		2,934
Installment and Other Consumer		51,090		51,090		20,365		29,137		-		-		140,340		140,340		112,177		128,285		83		83
	$	14,124,359	$	14,128,198	$	3,355,720	$	13,945,269	$	104,950	$	104,950	$	8,270,598	$	8,293,674	$	3,227,366	$	7,747,299	$	5,000	$	5,000

Total Impaired Loans/Leases:
C&I	$	8,985,913	$	9,000,189	$	1,580,113	$	8,732,509	$	114,472	$	114,472	$	5,996,412	$	6,010,688	$	567,321	$	6,122,311	$	77,389	$	77,389
CRE
Owner-Occupied CRE		155,020		155,020		111,520		266,439		-		-		436,636		436,636		43,875		438,930		5,822		5,822
Commercial Construction, Land Development, and Other Land		4,347,017		4,347,017		820,811		4,350,033		-		-		5,430,268		5,430,268		1,627,022		5,137,290		-		-
Other Non Owner-Occupied CRE		1,225,337		1,225,337		6,119		1,196,735		-		-		1,227,579		1,227,579		-		1,235,654		-		-
Direct Financing Leases		3,553,173		3,553,173		550,575		3,297,169		57,844		57,844		2,975,596		2,975,596		628,379		3,318,706		6,291		6,291
Residential Real Estate		1,398,615		1,473,393		266,217		1,233,005		8,390		8,390		1,458,962		1,556,817		248,592		1,428,999		2,934		2,934
Installment and Other Consumer		240,108		240,109		20,365		173,975		218		218		281,197		281,197		112,177		248,328		83		83
	$	19,905,183	$	19,994,2388	$	3,355,720	$	19,249,865	$	180,924	$	180,924	$	17,806,650	$	17,918,781	$	3,227,366	$	17,930,218	$	92,519	$	92,519

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

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,~~March 31, 2017 ~~and 2016, respectively,~~ are presented as follows:

	Three Months Ended June 30, 2017						Three Months Ended June 30, 2016
Classes of Loans/Leases	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	805,309	$	9,399	$	9,399	$	2,524,056	$	3,519	$	3,519	$	835,955	$	846,392	$	-	$	927,387	$	7,352	$	7,352
CRE
Owner-Occupied CRE		-		-		-		121,444		-		-		-		-		-		-		-		-
Commercial Construction, Land Development, and Other Land		-		-		-		-		-		-		-		-		-		-		-		-
Other Non Owner-Occupied CRE		1,160,161		-		-		1,311,540		-		-		1,174,260		1,174,260		-		1,183,813		-		-
Direct Financing Leases		2,560,019		38,949		38,949		1,510,987		19,897		19,897		1,593,104		1,593,104		-		1,868,355		18,895		18,895
Residential Real Estate		712,793		-		-		621,354		1,013		1,013		1,147,434		1,222,215		-		1,025,656		1,161		1,161
Installment and Other Consumer		173,585		218		218		229,207		-		-		175,957		175,957		-		115,846		-		-
	$	5,411,867	$	48,566	$	48,566	$	6,318,588	$	24,429	$	24,429	$	4,926,710	$	5,011,928	$	-	$	5,121,057	$	27,408	$	27,408

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	8,066,702	$	35,055	$	35,055	$	2,292,483	$	-	$	-	$	8,352,499	$	8,356,338	$	1,751,774	$	8,110,658	$	62,666	$	62,666
CRE
Owner-Occupied CRE		238,584		-		-		-		-		-		322,148		322,148		57,398		322,148		-		-
Commercial Construction, Land Development, and Other Land		4,348,142		-		-		190,174		-		-		4,349,267		4,349,267		823,061		4,351,542		-		-
Other Non Owner-Occupied CRE		38,260		-		-		658,220		-		-		78,386		78,386		7,986		39,193		-		-
Direct Financing Leases		757,602		-		-		995,446		-		-		1,488,964		1,488,964		795,840		1,300,811		-		-
Residential Real Estate		624,641		2,989		2,989		919,271		1,948		1,948		633,340		633,340		274,566		636,134		4,240		4,240
Installment and Other Consumer		34,333		-		-		218,742		1,468		1,468		48,770		48,770		37,932		49,563		112		112
	$	14,108,264	$	38,044	$	38,044	$	5,274,336	$	3,416	$	3,416	$	15,273,374	$	15,277,213	$	3,748,557	$	14,810,049	$	67,018	$	67,018

Total Impaired Loans/Leases:
C&I	$	8,872,011	$	44,454	$	44,454	$	4,816,539	$	3,519	$	3,519	$	9,188,454	$	9,202,730	$	1,751,774	$	9,038,045	$	70,018	$	70,018
CRE
Owner-Occupied CRE		238,584		-		-		121,444		-		-		322,148		322,148		57,398		322,148		-		-
Commercial Construction, Land Development, and Other Land		4,348,142		-		-		190,174		-		-		4,349,267		4,349,267		823,061		4,351,542		-		-
Other Non Owner-Occupied CRE		1,198,421		-		-		1,969,760		-		-		1,252,646		1,252,646		7,986		1,223,006		-		-
Direct Financing Leases		3,317,621		38,949		38,949		2,506,433		19,897		19,897		3,082,068		3,082,068		795,840		3,169,166		18,895		18,895
Residential Real Estate		1,337,434		2,989		2,989		1,540,625		2,961		2,961		1,780,774		1,855,555		274,566		1,661,790		5,401		5,401
Installment and Other Consumer		207,918		218		218		447,949		1,468		1,468		224,727		224,727		37,932		165,409		112		112
	$	19,520,131	$	86,610	$	86,610	$	11,592,924	$	27,845	$	27,845	$	20,200,084	$	20,289,141	$	3,748,557	$	19,931,106	$	94,426	$	94,426

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

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, ~~2016~~ 2017 are presented as follows:

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

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	841,895	$	951,600	$	-	$	1,634,269	$	1,644,706	$	-
CRE
Owner-Occupied CRE		-		93,774		-		289,261		289,261		-
Commercial Construction, Land Development, and Other Land		-		-		-		-		-		-
Other Non Owner-Occupied CRE		1,196,549		1,196,549		-		1,171,565		1,171,565		-
Direct Financing Leases		1,690,121		1,690,121		-		2,944,540		2,944,540		-
Residential Real Estate		853,294		892,495		-		943,388		1,018,167		-
Installment and Other Consumer		55,734		55,734		-		134,245		134,245		-
	$	4,637,593	$	4,880,273	$	-	$	7,117,268	$	7,202,484	$	-

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	8,094,556	$	8,098,395	$	1,771,537	$	4,613,940	$	4,617,879	$	715,627
CRE
Owner-Occupied CRE		322,148		322,148		57,398		151,962		151,962		48,462
Commercial Construction, Land Development, and Other Land		4,353,819		4,353,817		577,611		4,844,312		4,844,312		1,379,235
Other Non Owner-Occupied CRE		239,600		239,600		58,910		72,163		72,163		1,763
Direct Financing Leases		1,566,141		1,566,143		848,919		724,953		724,953		504,469
Residential Real Estate		807,886		882,018		289,112		761,458		761,458		355,167
Installment and Other Consumer		50,356		50,356		39,481		68,109		68,109		38,596
	$	15,434,506	$	15,512,477	$	3,642,968	$	11,236,897	$	11,240,836	$	3,043,319

Total Impaired Loans/Leases:
C&I	$	8,936,451	$	9,049,995	$	1,771,537	$	6,248,209	$	6,262,585	$	715,627
CRE
Owner-Occupied CRE		322,148		415,922		57,398		441,222		441,222		48,462
Commercial Construction, Land Development, and Other Land		4,353,819		4,353,817		577,611		4,844,312		4,844,312		1,379,235
Other Non Owner-Occupied CRE		1,436,149		1,436,149		58,910		1,243,728		1,243,728		1,763
Direct Financing Leases		3,256,262		3,256,264		848,919		3,669,492		3,669,492		504,469
Residential Real Estate		1,661,180		1,774,513		289,112		1,704,846		1,779,625		355,167
Installment and Other Consumer		106,090		106,090		39,481		202,354		202,354		38,596
	$	20,072,099	$	20,392,750	$	3,642,968	$	18,354,163	$	18,443,318	$	3,043,319

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

For C&I and CRE loans, the Company’s credit quality indicator consists of internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.

For certain C&I loans (equipment financing agreements), direct financing leases, residential real estate loans, and installment and other consumer loans, the ~~Company~~’sCompany’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016:~~2017:

As of June 30, 2017

CRE

Non Owner-Occupied

Internally Assigned Risk Rating

C&I

Owner-Occupied CRE

Commercial Construction,
Land
Development,
and Other Land

Other CRE

Total

As a % of
Total

Pass (Ratings 1 through 5)
$ 904,511,211 $ 301,874,401 $ 172,442,816 $ 622,588,629 $ 2,001,417,057 96.48 %
Special Mention (Rating 6)
10,814,298 10,448,915 1,780,000 4,693,909 27,737,122 1.34 %
Substandard (Rating 7)
27,212,910 4,901,739 5,093,211 8,082,503 45,290,363 2.18 %
Doubtful (Rating 8)
- - - - - 0.00 %
$ 942,538,419 $ 317,225,055 $ 179,316,027 $ 635,365,041 $ 2,074,444,542 100.00 %

As of March 31, 2018

CRE

Non Owner-Occupied

Internally Assigned Risk Rating

C&I

Owner-Occupied

CRE

Commercial

Construction,

Land

Development,

and Other Land

Other CRE

Total

As a % of

Total

Pass (Ratings 1 through 5)

1,079,132,775

337,628,357

166,752,090

813,622,461

2,397,135,683

96.66

Special Mention (Rating 6)

20,327,365

5,576,201

1,780,000

15,242,642

42,926,208

1.73

Substandard (Rating 7)

22,713,694

3,792,069

��

2,872,538

10,437,028

39,815,329

1.61

Doubtful (Rating 8)

1,122,173,834

346,996,627

171,404,628

839,302,131

2,479,877,220

100.00

As of March 31, 2018

Delinquency Status *

C&I

Direct Financing

Leases

Residential Real

Estate

Installment and

Other Consumer

Total

As a % of

Total

Performing

77,987,539

134,638,869

253,025,270

95,626,776

561,278,454

99.00

Nonperforming

924,252

2,975,596

1,458,961

284,793

5,643,602

1.00

78,911,791

137,614,465

254,484,231

95,911,569

566,922,056

100.00

As of June 30, 2017

Delinquency Status *

Direct Financing Leases

Residential
Real Estate

Installment and
Other Consumer

Total

As a % of Total

Performing
$ 149,599,768 $ 232,214,292 $ 83,686,932 $ 465,500,992 98.78 %
Nonperforming
3,736,780 1,656,386 360,471 5,753,637 1.22 %
$ 153,336,548 $ 233,870,678 $ 84,047,403 $ 471,254,629 100.00 %

As of December 31, 2017

CRE

Non Owner-Occupied

Internally Assigned Risk Rating

C&I

Owner-Occupied

CRE

Commercial

Construction,

Land

Development,

and Other Land

Other CRE

Total

As a % of

Total

Pass (Ratings 1 through 5)

1,031,963,703

318,293,608

179,142,839

767,119,909

2,296,520,059

96.85

Special Mention (Rating 6)

10,944,924

8,230,060

1,780,000

10,068,870

31,023,854

1.31

Substandard (Rating 7)

24,578,731

6,218,809

5,479,565

7,158,221

43,435,326

1.83

Doubtful (Rating 8)

270,559

0.01

1,067,757,917

332,742,477

186,402,404

784,347,000

2,371,249,799

100.00

As of December 31, 2016

CRE

Non Owner-Occupied

Internally Assigned Risk Rating

C&I

Owner-Occupied CRE

Commercial Construction,
Land
Development,
and Other Land

Other CRE

Total

As a % of
Total

Pass (Ratings 1 through 5)
$ 796,568,451 $ 314,447,662 $ 158,108,465 $ 582,854,048 $ 1,851,978,626 96.40 %
Special Mention (Rating 6)
6,305,772 7,559,380 1,780,000 4,437,122 20,082,274 1.05 %
Substandard (Rating 7)
24,763,040 10,380,369 5,261,026 8,630,578 49,035,013 2.55 %
Doubtful (Rating 8)
- 210 - - 210 0.00 %
$ 827,637,263 $ 332,387,621 $ 165,149,491 $ 595,921,748 $ 1,921,096,123 100.00 %

	As of December 31, 2016											As of December 31, 2017
Delinquency Status *	Direct Financing Leases		Residential Real Estate		Installment and Other Consumer		Total		As a % of Total			C&I		Direct Financing Leases		Residential Real Estate		Installment and Other Consumer		Total		As a % of Total

Performing	$	161,749,710	$	227,277,070	$	81,449,104	$	470,475,884		98.77	%	$	65,847,177	$	137,778,740	$	256,935,448	$	118,333,529	$	578,894,894		98.88	%
Nonperforming		3,669,650		1,956,034		216,591		5,842,275		1.23	%		911,220		3,669,492		1,710,818		277,270		6,568,800		1.12	%
	$	165,419,360	$	229,233,104	$	81,665,695	$	476,318,159		100.00	%	$	66,758,397	$	141,448,232	$	258,646,266	$	118,610,799	$	585,463,694		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, 2017~~ March 31, 2018 and December 31, ~~2016,~~ 2017, TDRs totaled ~~$9,083,036~~$7,912,975 and ~~$8,647,007,~~$9,394,967, 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, 2017~~ March 31, 2018 and ~~2016.~~2017. 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, 2017								For the three months ended June 30, 2016								For the three months ended March 31, 2018								For the three months ended March 31, 2017
Classes of Loans/Leases	Number of Loans / Leases		Pre- Modification Recorded Investment		Post-Modification Recorded Investment		Specific Allowance		Number of Loans / Leases		Pre- Modification Recorded Investment		Post-Modification Recorded Investment		Specific Allowance		Number of Loans / Leases		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Specific Allowance		Number of Loans / Leases		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Specific Allowance

CONCESSION - Extension of Maturity
CONCESSION - Significant Payment Delay
C&I		-		-		-		-		1	$	52,286	$	52,286	$	-		-	$	-	$	-	$	-		2	$	133,689	$	133,689	$	-
Residential Real Estate																		1		46,320		46,320		-		-		-		-		-
Direct Financing Leases		1	$	98,119	$	98,119	$	-		-	$	-	$	-	$	-		2		47,524		47,524		-		8		669,861		669,861		-
		1	$	98,119	$	98,119	$	-		1	$	52,286	$	52,286	$	-		3	$	93,844	$	93,844	$	-		10	$	803,550	$	803,550	$	-

CONCESSION - Significant Payment Delay
C&I		1	$	47,509	$	47,509	$	-		1	$	62,140	$	62,140	$	-
CONCESSION - Extension of Maturity
Direct Financing Leases		15		802,542		802,542		-		4		494,692		494,692		-		-	$	-	$	-	$	-		1	$	6,263	$	6,263	$	-
		16	$	850,051	$	850,051	$	-		5	$	556,832	$	556,832	$	-		-	$	-	$	-	$	-		1	$	6,263	$	6,263	$	-

CONCESSION - Significant Payment Delay
C&I		-	$	-	$	-	$	-		1	$	1,233,740	$	1,233,740	$	-
		-	$	-	$	-	$	-		1	$	1,233,740	$	1,233,740	$	-


TOTAL		17	$	948,170	$	948,170	$	-		7	$	1,842,858	$	1,842,858	$	-		3	$	93,844	$	93,844	$	-		11	$	809,813	$	809,813	$	-

For the six months ended June 30, 2017

For the six months ended June 30, 2016

Classes of Loans/Leases

Number of Loans /
Leases

Pre-
Modification Recorded Investment

Post-Modification Recorded Investment

Specific Allowance

Number of Loans /
Leases

Pre-
Modification Recorded Investment

Post-Modification Recorded Investment

Specific Allowance

CONCESSION - Extension of Maturity

C&I
- $ - $ - $ - 1 $ 52,286 $ 52,286 $ -
Direct Financing Leases
2 104,382 104,382 - 4 410,653 410,653 -
2 $ 104,382 $ 104,382 $ - 5 $ 462,939 $ 462,939 $ -

CONCESSION - Significant Payment Delay

C&I
3 $ 181,198 $ 181,198 $ - 1 $ 62,140 $ 62,140 $ -
Direct Financing Leases
23 1,472,403 1,472,403 - 5 540,631 540,631 -
26 $ 1,653,601 $ 1,653,601 $ - 6 $ 602,771 $ 602,771 $ -

CONCESSION - Interest Rate Adjusted Below Market

CRE - Other
- $ - $ - $ - 1 $ 1,233,740 $ 1,233,740 $ -
- $ - $ - $ - 1 1,233,740 1,233,740 -

TOTAL
28 $ 1,757,983 $ 1,757,983 $ - 12 $ 2,299,450 $ 2,299,450 $ -

Of the TDRs reported above, ~~none were on nonaccrual as of June 30, 2017. One~~one with a post-modification recorded balance of ~~$1,233,740~~$46,320 was on nonaccrual as of ~~June 30, 2016.~~March 31, 2018. Of the TDRs reported above, none were on nonaccrual as of March 31, 2017.

For the three ~~and six~~ months ended ~~June 30, 2017, two~~March 31, 2018, eight 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.

For the three months ended March 31, 2017, two of the Company’s TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These two TDRs were related to the same customer and were restructured in the fourth quarter of 2016 with pre-modification balances totaling ~~$195~~$195 thousand.

~~For the three~~ ~~and six months ended June 30, 2016, none of the Company’s TDRs had redefaulted within 12 months subsequent to restructure.~~

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 4 - 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				Three months ended
	June 30,				June 30,				March 31,
	2017		2016		2017		2016		2018		2017

Net income	$	8,766,017	$	6,676,467	$	17,950,982	$	13,049,956	$	10,549,961	$	9,184,965

Basic EPS	$	0.67	$	0.54	$	1.36	$	1.08	$	0.76	$	0.70
Diluted EPS	$	0.65	$	0.53	$	1.33	$	1.07	$	0.74	$	0.68

Weighted average common shares outstanding		13,170,283		12,335,077		13,151,833		12,064,349		13,888,661		13,133,382
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan		346,309		181,397		350,672		170,863		316,923		355,035
Weighted average common and common equivalent shares outstanding		13,516,592		12,516,474		13,502,505		12,235,212		14,205,584		13,488,417

The increase in weighted average common shares outstanding ~~from~~ ~~June 30, 2016~~ when comparing the three months ended March 31, 2018 to ~~June 30,~~March 31, 2017 was primarily due to the common stock issuance discussed in Note 2 of to the Consolidated Financial Statements included in the Company’s Annual Report on Form ~~10-K~~10-K for the year ended December 31, ~~2016.~~2017.

NOTE 5 – 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, 2017~~ March 31, 2018 and December 31, ~~2016:~~2017:

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

June 30, 2017:
March 31, 2018:
Securities AFS:
U.S. govt. sponsored agency securities	$	41,944,464	$	-	$	41,944,464	$	-	$	36,867,510	$	-	$	36,867,510	$	-
Residential mortgage-backed and related securities		164,414,833		-		164,414,833		-		157,289,043		-		157,289,043		-
Municipal securities		58,100,510		-		58,100,510		-		61,201,804		-		61,201,804		-
Other securities		4,821,906		1,050		4,820,856		-		4,286,583		-		4,286,583		-
Interest rate caps		398,973		-		398,973		-		657,178		-		657,178		-
Interest rate swaps - assets		2,547,466		-		2,547,466		-		4,500,318		-		4,500,318		-
Total assets measured at fair value	$	272,228,152	$	1,050	$	272,227,102	$	-	$	264,802,436	$	-	$	264,802,436	$	-

Interest rate swaps - liabilities	$	2,547,466	$	-	$	2,547,466	$	-	$	4,500,318	$	-	$	4,500,318	$	-
Total liabilities measured at fair value	$	2,547,466	$	-	$	2,547,466	$	-	$	4,500,318	$	-	$	4,500,318	$	-


December 31, 2016:
December 31, 2017:
Securities AFS:
U.S. govt. sponsored agency securities	$	46,083,607	$	-	$	46,083,607	$	-	$	38,096,534	$	-	$	38,096,534	$	-
Residential mortgage-backed and related securities		147,702,127		-		147,702,127		-		163,301,304		-		163,301,304		-
Municipal securities		52,604,426		-		52,604,426		-		66,625,496		-		66,625,496		-
Other securities		4,722,979		1,361		4,721,618		-		4,884,573		1,028		4,883,545		-
Interest rate caps		576,527		-		576,527		-		506,700		-		506,700		-
Interest rate swaps - assets		2,338,281		-		2,338,281		-		4,397,238		-		4,397,238		-
Total assets measured at fair value	$	254,027,947	$	1,361	$	254,026,586	$	-	$	277,811,845	$	1,028	$	277,810,817	$	-

Interest rate swaps - liabilities	$	2,338,281	$	-	$	2,338,281	$	-	$	4,397,238	$	-	$	4,397,238	$	-
Total liabilities measured at fair value	$	2,338,281	$	-	$	2,338,281	$	-	$	4,397,238	$	-	$	4,397,238	$	-

There were no transfers of assets or liabilities between Levels 1,2, and 3 of the fair value hierarchy for thethree ~~and six~~ months ended ~~June 30, 2017~~ March 31, 2018 or ~~2016.~~2017.

A small portion of the securities ~~available for sale~~AFS portfolio consists of common stock issued by various unrelated bank holding companies. The fair values used by the Company are obtained from an independent pricing service and represent quoted market prices for the identical securities (Level 1 inputs).

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The ~~remainder of the~~ securities ~~available for sale~~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).

I~~nterest~~Interest rate caps are used for the purpose of hedging interest rate risk. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

Interest rate swaps are executed for select commercial customers. The interest rate swaps are further described in Note 1 of to the ~~Company~~’sConsolidated Financial Statements included in the Company’s Annual Report on Form ~~10-K~~10-K for the year ended December 31, ~~2016.~~ 2017. 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).

Assets measured at fair value on a non-recurring basis comprise the following at ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016:~~2017:

			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
June 30, 2017:
March 31, 2018:
Impaired loans/leases	$	11,760,878	$	-	$	-	$	11,760,878	$	5,564,760	$	-	$	-	$	5,564,760
OREO		5,587,403		-		-		5,587,403		13,770,025		-		-		13,770,025
	$	17,348,281	$	-	$	-	$	17,348,281	$	19,334,785	$	-	$	-	$	19,334,785

December 31, 2016:
December 31, 2017:
Impaired loans/leases	$	12,823,121	$	-	$	-	$	12,823,121	$	8,972,337	$	-	$	-	$	8,972,337
OREO		5,964,952		-		-		5,964,952		14,642,973		-		-		14,642,973
	$	18,788,073	$	-	$	-	$	18,788,073	$	23,615,310	$	-	$	-	$	23,615,310

Impaired loans/leases are evaluated and valued at the time the loan/lease is id~~entified~~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
June 30, 2017

Fair Value
December 31, 2016

Valuation Technique

Unobservable Input

Range

Fair Value
March 31, 2018

Fair Value
December 31, 2017

Valuation Technique

Unobservable Input

Range

Impaired loans/leases

11,760,878

12,823,121

Appraisal of collateral

Appraisal adjustments

-10.00%

-50.00%

5,564,760

8,972,337

Appraisal of collateral

Appraisal adjustments

-10.00%

-30.00%

OREO

5,587,403

5,964,952

Appraisal of collateral

Appraisal adjustments

0.00%

-35.00%

13,770,025

14,642,973

Appraisal of collateral

Appraisal adjustments

0.00%

-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 measured at fair value during the three ~~and six~~ months ended ~~June 30, 2017~~ March 31, 2018 and ~~2016.~~2017.

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the ~~Company~~’sCompany’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, 2017

As of December 31, 2016

Fair Value

As of March 31, 2018

As of December 31, 2017

Hierarchy

Carrying

Estimated

Carrying

Estimated

Hierarchy

Carrying

Estimated

Carrying

Estimated

Level

Value

Fair Value

Value

Fair Value

Level

Value

Fair Value

Value

Fair Value

Cash and due from banks

Level 1

77,161,353

70,569,993

Level 1

61,845,988

75,721,663

Federal funds sold

Level 2

19,183,000

22,257,000

Level 2

14,505,000

30,197,000

Interest-bearing deposits at financial institutions

Level 2

53,171,325

63,948,925

Level 2

45,051,555

55,765,012

Investment securities:

HTM

Level 2

324,203,634

322,989,377

322,909,056

320,414,899

Level 2

378,584,337

375,792,683

379,474,205

379,749,804

AFS

See Previous Table

269,281,713

251,113,139

See Previous Table

259,644,940

272,907,907

Loans/leases receivable, net

Level 3

10,889,702

11,760,878

11,873,260

12,823,121

Level 3

5,152,556

5,564,760

8,307,719

8,972,337

Loans/leases receivable, net

Level 2

2,509,319,274

2,491,370,000

2,362,856,277

2,344,462,740

Level 2

3,013,217,281

2,948,650,000

2,921,821,953

2,892,963,000

Interest rate caps

Level 2

398,973

576,527

Level 2

657,178

506,700

Interest rate swaps - assets

Level 2

2,547,466

2,338,281

Level 2

4,500,318

4,397,238

Deposits:

Nonmaturity deposits

Level 2

2,311,779,642

2,188,683,349

Level 2

2,603,999,039

2,670,583,178

Time deposits

Level 2

558,454,597

557,833,000

480,577,924

479,605,000

Level 2

676,002,453

670,297,000

596,071,878

591,772,000

Short-term borrowings

Level 2

18,217,393

39,971,387

Level 2

16,859,753

13,993,122

FHLB advances

Level 2

106,500,000

107,071,000

137,500,000

138,338,000

Level 2

216,345,000

216,397,000

192,000,000

192,115,000

Other borrowings

Level 2

72,000,000

73,041,000

80,000,000

81,282,000

Level 2

64,062,500

64,583,000

66,000,000

66,520,000

Junior subordinated debentures

Level 2

33,546,425

25,169,023

33,480,202

24,881,494

Level 2

37,534,402

29,318,931

37,486,487

29,253,624

Interest rate swaps - liabilities

Level 2

2,547,466

2,338,281

Level 2

4,500,318

4,397,238

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 6 – BUSINESS SEGMENT INFORMATION

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

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

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

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

Selected financial information on the ~~Company~~’sCompany’s business segments is presented as follows as of and for the three ~~and six~~ months ended ~~June 30, 2017~~ March 31, 2018 and ~~2016.~~2017.

		Commercial Banking								Wealth					Intercompany			Consolidated		Commercial Banking								Wealth					Intercompany			Consolidated
	��	QCBT		CRBT		CSB		RB&T		Management		All Other			Eliminations			Total		QCBT		CRBT		CSB		RB&T		Management		All Other			Eliminations			Total
Three Months Ended June 30, 2017
Three Months Ended March 31, 2018
Total revenue		$	14,210,040	$	10,149,769	$	8,171,307	$	4,241,431	$	2,560,836	$	10,181,814		$	(10,279,411	)	$	39,235,786	$	15,807,570	$	15,997,332	$	8,163,323	$	4,997,945	$	3,189,425	$	12,532,043		$	(12,599,893	)	$	48,087,745
Net interest income		$	11,414,818	$	7,230,425	$	6,920,820	$	3,095,512	$	-	$	(614,878	)	$	-		$	28,046,697		12,120,302		10,835,848		6,743,947		3,465,154		-		(762,333	)		-			32,402,918
Provision for loan/lease losses		$	552,993	$	300,000	$	861,000	$	309,000	$	-	$	-		$	-		$	2,022,993
Provision																					1,120,409		601,828		575,602		242,000		-		-			-			2,539,839
Net income		$	4,073,777	$	2,870,582	$	1,920,040	$	834,842	$	454,465	$	8,766,014		$	(10,153,703	)	$	8,766,017		4,457,868		4,616,528		1,868,588		741,295		770,865		10,514,510			(12,419,693	)		10,549,961
Goodwill		$	3,222,688	$	-	$	9,888,225	$	-	$	-	$	-		$	-		$	13,110,913		3,222,688		15,223,179		9,888,225		-		-		-			-			28,334,092
Core deposit intangible		$	-	$	1,172,141	$	5,747,339	$	-	$	-	$	-		$	-		$	6,919,480		-		3,566,728		5,207,674		-		-		-			-			8,774,402
Total assets		$	1,400,307,827	$	993,768,912	$	642,761,140	$	426,159,677	$	-	$	382,407,292		$	(388,218,153	)	$	3,457,186,695		1,526,829,646		1,331,208,620		696,978,705		468,112,032		-		447,591,932			(444,406,521	)		4,026,314,414

Three Months Ended June 30, 2016
Three Months Ended March 31, 2017
Total revenue		$	14,162,914	$	10,438,092	$	-	$	3,918,629	$	2,204,821	$	8,244,495		$	(8,293,266	)	$	30,675,685	$	13,535,941	$	10,386,545	$	8,131,706	$	3,947,799	$	2,701,806	$	9,876,143		$	(9,951,087	)	$	38,628,853
Net interest income		$	11,207,759	$	7,135,725	$	-	$	2,945,417	$	-	$	(280,088	)	$	-		$	21,008,813		11,301,482		6,974,047		7,026,508		2,968,074		-		(601,228	)		-			27,668,883
Provision for loan/lease losses		$	747,850	$	150,000	$	-	$	300,000	$	-	$	-		$	-		$	1,197,850
Provision																					931,109		250,000		774,000		150,000		-		-			-			2,105,109
Net income		$	3,898,343	$	3,144,986	$	-	$	772,169	$	386,202	$	6,676,467		$	(8,201,700	)	$	6,676,467		3,655,006		2,892,560		1,895,134		844,569		561,062		9,184,968			(9,848,334	)		9,184,965
Goodwill		$	3,222,688	$	-	$	-	$	-	$	-	$	-		$	-		$	3,222,688		3,222,688		-		9,888,225		-		-		-			-			13,110,913
Core deposit intangible		$	-	$	1,371,653	$	-	$	-	$	-	$	-		$	-		$	1,371,653		-		1,222,019		5,928,327		-		-		-			-			7,150,346
Total assets		$	1,390,025,232	$	904,367,275	$	-	$	402,157,473	$	-	$	328,099,700		$	(341,215,392	)	$	2,683,434,288		1,442,952,197		929,111,309		608,431,003		398,454,864		-		377,316,912			(375,253,667	)		3,381,012,618

Six Months Ended June 30, 2017
Total revenue		$	27,745,981	$	20,536,314	$	16,303,013	$	8,189,230	$	5,262,642	$	20,057,957		$	(20,230,498	)	$	77,864,639
Net interest income		$	22,716,300	$	14,204,472	$	13,947,328	$	6,063,586	$	-	$	(1,216,106	)	$	-		$	55,715,580
Provision for loan/lease losses		$	1,484,102	$	550,000	$	1,635,000	$	459,000	$	-	$	-		$	-		$	4,128,102
Net income		$	7,728,783	$	5,763,142	$	3,815,174	$	1,679,411	$	1,015,527	$	17,950,982		$	(20,002,037	)	$	17,950,982
Goodwill		$	3,222,688	$	-	$	9,888,225	$	-	$	-	$	-		$	-		$	13,110,913
Core deposit intangible		$	-	$	1,172,141	$	5,747,339	$	-	$	-	$	-		$	-		$	6,919,480
Total assets		$	1,400,307,827	$	993,768,912	$	642,761,140	$	426,159,677	$	-	$	382,407,292		$	(388,218,153	)	$	3,457,186,695

Six Months Ended June 30, 2016
Total revenue		$	27,679,846	$	21,277,313	$	-	$	7,712,876	$	4,439,113	$	15,104,270		$	(15,213,201	)	$	61,000,217
Net interest income		$	22,169,206	$	14,160,713	$	-	$	5,857,391	$	-	$	(580,975	)	$	-		$	41,606,335
Provision for loan/lease losses		$	1,970,835	$	700,000	$	-	$	600,000	$	-	$	-		$	-		$	3,270,835
Net income		$	6,730,039	$	6,079,717	$	-	$	1,389,954	$	833,972	$	13,049,955		$	(15,033,681	)	$	13,049,956
Goodwill		$	3,222,688	$	-	$	-	$	-	$	-	$	-		$	-		$	3,222,688
Core deposit intangible		$	-	$	1,371,653	$	-	$	-	$	-	$	-		$	-		$	1,371,653
Total assets		$	1,390,025,232	$	904,367,275	$	-	$	402,157,473	$	-	$	328,099,700		$	(341,215,392	)	$	2,683,434,288

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 7 – 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~~’banks’ financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016,~~ 2017, 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~~’banks’ actual capital amounts and ratios as of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 are ~~also~~ presented in the following table (dollars in thousands). As of ~~June 30, 2017~~ March 31, 2018 and December 31, ~~2016,~~ 2017, each of the subsidiary banks met the requirements to be “well capitalized”.

										��	For Capital					To Be Well															For Capital					To Be Well
											Adequacy Purposes					Capitalized Under															Adequacy Purposes					Capitalized Under
						For Capital					With Capital					Prompt Corrective										For Capital					With Capital					Prompt Corrective
	Actual					Adequacy Purposes					Conservation Buffer*					Action Provisions					Actual					Adequacy Purposes					Conservation Buffer*					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2017:
As of March 31, 2018:
Company:
Total risk-based capital	$	347,033		11.65	%	$	238,402	>	8.000	%	$	275,652	>	9.25	%	$	298,003	>	10.0	%	$	395,160		11.25	%	$	281,109	>	8.00	%	$	346,994	>	9.875	%	$	351,386	>	10.00	%
Tier 1 risk-based capital		313,333		10.51	%		178,802	>	6.000			216,052	>	7.25			238,402	>	8.0			358,627		10.21	%		210,832	>	6.00			276,717	>	7.875			281,109	>	8.00
Tier 1 leverage		313,333		9.34	%		134,142	>	4.000			134,142	>	4.00			167,677	>	5.0			358,627		9.08	%		157,993	>	4.00			157,993	>	4.000			197,491	>	5.00
Common equity Tier 1		281,774		9.46	%		134,101	>	4.500			171,352	>	5.75			193,702	>	6.5			321,093		9.14	%		158,124	>	4.50			224,009	>	6.375			228,401	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	149,008		12.59	%	$	94,717	>	8.000	%	$	109,516	>	9.25	%	$	118,396	>	10.0	%	$	160,996		12.32	%	$	104,544	>	8.00	%	$	129,047	>	9.875	%	$	130,680	>	10.00	%
Tier 1 risk-based capital		135,628		11.46	%		71,038	>	6.000			85,837	>	7.25			94,717	>	8.0			147,618		11.30	%		78,408	>	6.00			102,911	>	7.875			104,544	>	8.00
Tier 1 leverage		135,628		9.56	%		56,719	>	4.000			56,719	>	4.00			70,898	>	5.0			147,618		9.63	%		61,343	>	4.00			61,343	>	4.000			76,678	>	5.00
Common equity Tier 1		135,628		11.46	%		53,278	>	4.500			68,078	>	5.75			76,957	>	6.5			147,618		11.30	%		58,806	>	4.50			83,309	>	6.375			84,942	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	110,561		12.19	%	$	72,578	>	8.000	%	$	83,918	>	9.25	%	$	90,722	>	10.0	%	$	142,034		11.96	%	$	94,998	>	8.00	%	$	117,264	>	9.875	%	$	118,748	>	10.00	%
Tier 1 risk-based capital		99,216		10.94	%		54,434	>	6.000			65,774	>	7.25			72,578	>	8.0			129,507		10.91	%		71,249	>	6.00			93,514	>	7.875			94,998	>	8.00
Tier 1 leverage		99,216		10.43	%		38,044	>	4.000			38,044	>	4.00			47,555	>	5.0			129,507		9.87	%		52,483	>	4.00			52,483	>	4.000			65,603	>	5.00
Common equity Tier 1		99,216		10.94	%		40,825	>	4.500			52,165	>	5.75			58,969	>	6.5			129,507		10.91	%		53,437	>	4.50			75,702	>	6.375			77,186	>	6.50
Community State Bank:
Total risk-based capital	$	69,222		13.32	%	$	41,577	>	8.000	%	$	48,074	>	9.25	%	$	51,972	>	10.0	%	$	67,996		11.39	%	$	47,738	>	8.00	%	$	58,926	>	9.875	%	$	59,672	>	10.00	%
Tier 1 risk-based capital		66,089		12.72	%		31,183	>	6.000			37,679	>	7.25			41,577	>	8.0			63,105		10.58	%		35,803	>	6.00			46,992	>	7.875			47,738	>	8.00
Tier 1 leverage		66,089		10.91	%		24,231	>	4.000			24,231	>	4.00			30,289	>	5.0			63,105		9.35	%		27,010	>	4.00			27,010	>	4.000			33,763	>	5.00
Common equity Tier 1		66,089		12.72	%		23,387	>	4.500			29,884	>	5.75			33,782	>	6.5			63,105		10.58	%		26,853	>	4.50			38,041	>	6.375			38,787	>	6.50
Rockford Bank & Trust
Rockford Bank & Trust:
Total risk-based capital	$	44,068		11.78	%	$	29,922	>	8.000	%	$	34,598	>	9.25	%	$	37,403	>	10.0	%	$	46,567		11.07	%	$	33,644	>	8.00	%	$	41,530	>	9.875	%	$	42,055	>	10.00	%
Tier 1 risk-based capital		39,384		10.53	%		22,442	>	6.000			27,117	>	7.25			29,922	>	8.0			41,305		9.82	%		25,233	>	6.00			33,119	>	7.875			33,644	>	8.00
Tier 1 leverage		39,384		9.63	%		16,354	>	4.000			16,354	>	4.00			20,442	>	5.0			41,305		8.93	%		18,498	>	4.00			18,498	>	4.000			23,123	>	5.00
Common equity Tier 1		39,384		10.53	%		16,831	>	4.500			21,507	>	5.75			24,312	>	6.5			41,305		9.82	%		18,925	>	4.50			26,810	>	6.375			27,336	>	6.50

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

												For Capital					To Be Well															For Capital					To Be Well
												Adequacy Purposes					Capitalized Under															Adequacy Purposes					Capitalized Under
							For Capital					With Capital					Prompt Corrective										For Capital					With Capital					Prompt Corrective
		Actual					Adequacy Purposes					Conservation Buffer*					Action Provisions					Actual					Adequacy Purposes					Conservation Buffer*					Action Provisions
		Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2016:
As of December 31, 2017:
Company:	��
Total risk-based capital		$	327,440		11.56	%	$	226,587	>	8.000	%	$	244,289	>	8.625	%	$	283,233	>	10.0	%	$	383,282		11.15	%	$	275,090	>	8.00	%	$	318,073	>	9.25	%	$	343,862	>	10.00	%
Tier 1 risk-based capital			296,366		10.46	%		169,940	>	6.000			187,642	>	6.625			226,587	>	8.0			348,530		10.14	%		206,317	>	6.00			249,300	>	7.25			275,090	>	8.00
Tier 1 leverage			296,366		9.10	%		130,229	>	4.000			130,229	>	4.000			162,787	>	5.0			348,530		8.98	%		155,256	>	4.00			155,256	>	4.00			194,070	>	5.00
Common equity Tier 1			266,419		9.41	%		127,455	>	4.500			145,157	>	5.125			184,102	>	6.5			313,012		9.10	%		154,738	>	4.50			197,721	>	5.75			223,510	>	6.50
Quad City Bank & Trust:
Total risk-based capital		$	142,990		12.27	%	$	93,212	>	8.000	%	$	100,494	>	8.625	%	$	116,515	>	10.0	%	$	160,112		12.35	%	$	103,711	>	8.00	%	$	119,916	>	9.25	%	$	129,639	>	10.00	%
Tier 1 risk-based capital			129,524		11.12	%		69,909	>	6.000			77,191	>	6.625			93,212	>	8.0			147,472		11.38	%		77,783	>	6.00			93,988	>	7.25			103,711	>	8.00
Tier 1 leverage			129,524		9.18	%		56,445	>	4.000			56,445	>	4.000			70,556	>	5.0			147,472		9.52	%		61,985	>	4.00			61,985	>	4.00			77,481	>	5.00
Common equity Tier 1			129,524		11.12	%		52,432	>	4.500			59,714	>	5.125			75,735	>	6.5			147,472		11.38	%		58,337	>	4.50			74,542	>	5.75			84,265	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital		$	106,791		12.82	%	$	66,623	>	8.000	%	$	71,828	>	8.625	%	$	83,279	>	10.0	%	$	138,492		11.88	%	$	93,272	>	8.00	%	$	107,846	>	9.25	%	$	116,590	>	10.00	%
Tier 1 risk-based capital			96,369		11.57	%		49,968	>	6.000			55,173	>	6.625			66,623	>	8.0			126,601		10.86	%		69,954	>	6.00			84,528	>	7.25			93,272	>	8.00
Tier 1 leverage			96,369		10.69	%		36,061	>	4.000			36,061	>	4.000			45,076	>	5.0			126,601		11.68	%		43,348	>	4.00			43,348	>	4.00			54,185	>	5.00
Common equity Tier 1			96,369		11.57	%		37,476	>	4.500			42,681	>	5.125			54,132	>	6.5			126,601		10.86	%		52,465	>	4.50			67,039	>	5.75			75,783	>	6.50
Community State Bank:
Total risk-based capital		$	68,216		13.81	%	$	39,521	>	8.000	%	$	42,609	>	8.625	%	$	49,402	>	10.0	%	$	66,271		11.71	%	$	45,293	>	8.00	%	$	52,370	>	9.25	%	$	56,616	>	10.00	%
Tier 1 risk-based capital			66,746		13.51	%		29,641	>	6.000			32,729	>	6.625			39,522	>	8.0			61,941		10.94	%		33,970	>	6.00			41,047	>	7.25			45,293	>	8.00
Tier 1 leverage			66,746		11.75	%		22,726	>	4.000			22,726	>	4.000			28,408	>	5.0			61,941		9.77	%		25,354	>	4.00			25,354	>	4.00			31,693	>	5.00
Common equity Tier 1			66,746		13.51	%		22,231	>	4.500			25,319	>	5.125			32,111	>	6.5			61,941		10.94	%		25,477	>	4.50			32,554	>	5.75			36,801	>	6.50
Rockford Bank & Trust:
Total risk-based capital		$	42,007		12.26	%	$	27,410	>	8.000	%	$	29,551	>	8.625	%	$	34,262	>	10.0	%	$	45,684		11.28	%	$	32,413	>	8.00	%	$	37,477	>	9.25	%	$	40,516	>	10.00	%
Tier 1 risk-based capital			37,716		11.01	%		20,558	>	6.000			22,699	>	6.625			27,410	>	8.0			40,615		10.02	%		24,310	>	6.00			29,374	>	7.25			32,413	>	8.00
Tier 1 leverage			37,716		9.57	%		15,772	>	4.000			15,772	>	4.000			19,716	>	5.0			40,615		8.94	%		18,177	>	4.00			18,177	>	4.00			22,721	>	5.00
Common equity Tier 1			37,716		11.01	%		15,418	>	4.500			17,559	>	5.125			22,270	>	6.5			40,615		10.02	%		18,232	>	4.50			23,297	>	5.75			26,335	>	6.50

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 8 – ~~ACQUISITION OF GUARANTY BANK AND TRUST COMPANY~~REVENUE RECOGNITION

As of January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. The adoption of the guidance had no material impact on the measurement or recognition of revenue as approximately 89% of the Company’s revenue (based on 2017 audited financial results) is outside the scope of this guidance; however, additional disclosures have been added in accordance with the ASU. See Note 1 for additional information on this new accounting standard.

Descriptions of our revenue-generating contracts with customers that are within the scope of ASU 2014-09, which are presented in our income statements as components of non-interest income are as follows:

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

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

Correspondent banking fees: A contract between the Company and its correspondent banks for corresponding banking services. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans. Correspondent banking fee income is tied to transaction activity and revenue is recognized monthly as earned for services provided.

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 9 –ACQUISITIONS

BATES COMPANIES

On ~~June 8, 2017,~~ March 20, 2018 the Company announced the signing of definitive agreements to acquire the Bates Companies, headquartered in Rockford, Illinois. The acquisition and subsequent merger of the Bates Companies into RB&T will enhance the wealth management services of RB&T by adding approximately $700.0 million of assets under management.

In the acquisition, the Company will acquire 100% of the Bates Companies’ outstanding common stock for an aggregate consideration of $3.0 million cash and up to $3.0 million of the Company’s common stock. In a private placement exempt from registration with the SEC, the Company expects to issue upon closing of the transaction approximately 21,528 common shares or $1.0 million of Company stock. Assuming all future performance based contingent consideration is realized total stock consideration can reach $3.0 million, which would result in the Company expecting to issue approximately 64,583 common shares based on closing stock price at the date of announcement.

This transaction is subject to regulatory approval and certain closing conditions. The transaction is expected to close late in second quarter or early third quarter of 2018.

SPRINGFIELD BANCSHARES, INC.

On April 18, 2018, the Company announced the signing of a definitive agreement to ~~acquire Guaranty~~purchase 100% of the outstanding common stock of Springfield Bancshares, the holding company of SFC Bank, ~~and Trust Company (Guaranty Bank) ,~~ headquartered in ~~Cedar Rapids, Iowa, from Guaranty Bankshares, Ltd. (Guaranty). Guaranty~~Springfield, Missouri. The Company will continue to operate SFC Bank, ~~is an Iowa-chartered bank that operates five~~ retaining its separate charter and brand within the Springfield, Missouri market. SFC Bank has one banking ~~locations throughout the Cedar Rapids metropolitan area. As of June 30, 2017, Guaranty Bank had $264~~location and approximately $563.2 million in assets and ~~$212~~$446.5 million in ~~deposits.~~deposits as of March 31, 2018.

~~The Company filed~~ ~~a registration statement on Form S-4 with~~In the ~~SEC on July 27, 2017 for 881,631~~acquisition, the stockholders of Springfield Bancshares will receive 0.3060 shares of the Company’s common stock and $1.50in ~~connection with its proposed acquisition~~cash in exchange for each common share of ~~Guaranty Bank.~~

~~The purchase and assumption agreement provides for~~Springfield Bancshares held. Based upon the ~~sale by Guaranty of substantially all of its assets, including all of the capital stock of Guaranty Bank, and the assumption by the Company of certain of Guaranty~~’s assets and liabilities. The sale is anticipated to be completed late in the third quarter or early fourth quarter of 2017. At a date following the completion of the sale, the Company intends to merge Guaranty Bank with and into CRBT, with CRBT as the surviving bank. At such time, Guaranty Bank’s banking offices will become banking offices of CRBT. Until the banks are merged, the Company will own and operate Guaranty Bank as a separate bank subsidiary.

~~The total consideration to be paid to Guaranty by the Company at the closing of the sale pursuant to the purchase and assumption agreement, subject to adjustment, is equal to: (1)~~ Guaranty’s adjusted tangible equity as of the end of the month immediately preceding the closing date up to an amount equal to $24,286,985 multiplied by 1.53; plus (2) Guaranty’s adjusted tangible equity as of the end of the month immediately preceding the closing date in excess of the core capital. Guaranty intends to pay a special dividend to its shareholders in an amount equal to the excess capital immediately prior to the closing of the sale. Therefore, the total consideration to be paid to Guaranty at the closing of the sale is expected to be an amount equal to 1.53 multiplied by the core capital, or approximately $37.2 million. The cash portion of the sale consideration is expected to be approximately ~~$7.8 million. Based on a~~ closing price of the ~~Company's~~Company’s common stock ~~of $46.05~~ as of April 16, 2018, the ~~end of day August 3, 2017, the stock portion of the sale consideration would equal~~transaction is valued at approximately ~~638,400 shares of the Company's common stock with an aggregate market value of approximately $29.4~~$86.7 million. The cash and stock portions of the sale consideration will be paid directly to Guaranty, and not to Guaranty’s shareholders. No fractional shares of the Company's common stock will be issued in the sale.

~~In June 2017,~~This transaction is subject to regulatory approvals, approval by Springfield Bancshares’ stockholders and certain customary closing conditions. The transaction is expected to close in the Company executed a $7.0 million term note commitment with a four-year term with interest calculated at the effective LIBOR rate plus 3.00% per annum (4.16% at June 30, 2017). This $7.0 million term note commitment may be drawn upon at closingthird quarter of ~~the acquisition of Guaranty Bank to help fund the cash portion of the purchase price.~~ ~~Any additional cash consideration paid to Guaranty beyond this $7.0 million would come from operating cash.~~2018.

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Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three ~~and six~~ months ending ~~June 30, 2017.~~March 31, 2018. 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 are presented in the table of contents.

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

GENERAL

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

QCBT, CRBT and CSB are Iowa-chartered commercial banks, and RB&T is an Illinois-chartered commercial bank. All are members of the Federal Reserve system with depository accounts insured to the maximum amount permitted by law by the FDIC.

●

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

●

CRBT commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its ~~main office~~five offices located ~~on First Avenue~~ in ~~downtown~~ Cedar Rapids ~~Iowa~~ and ~~its branch facility located on Council Street in northern Cedar Rapids.~~Marion, Iowa. Cedar Falls and Waterloo, Iowa and adjacent communities are served through three additional CRBT offices (two in Waterloo and one in Cedar Falls).

●

CSB was acquired by QCR in 2016, as further described in Note 2 ofto the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. CSB provides full-service commercial and consumer banking to the Des Moines, Iowa area and adjacent communities through its 10 ~~branch locations,~~offices, including its main office located on North Ankeny Boulevard in Ankeny, Iowa.

●

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

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

EXECUTIVE OVERVIEW

TheThe Company reported net income of ~~$8.8~~$10.5 million and diluted EPS of ~~$0.65~~$0.74 for the quarter ended ~~June 30, 2017.~~March 31, 2018. By comparison, for the quarter ended December 31, 2017, the Company reported net income of $9.9 million and diluted EPS of $0.70. For the quarter ended March 31, 2017, the Company reported net income of $9.2 million and diluted EPS of $0.68. ~~For the quarter ended June 30, 2016, the Company reported net income of $6.7 million and diluted EPS of $0.53.~~

~~For the six months ended June 30, 2017, the Company reported net income of~~ ~~$18.0 million, and diluted EPS of $1.33. By comparison, for the six months ended June 30, 2016, the Company reported net income of $13.0 million, and diluted EPS of $1.07.~~

The ~~second~~first quarter of ~~2017~~2018 was highlighted by several significant items:

●

~~Loan and lease~~ Annualized net interest income growth ~~totaled $117.7 million for the quarter, or an annualized growth rate~~ of ~~19.2%~~7.5%;

●

~~Nonperforming assets decreased $1.4 million in the current quarter. The ratio~~Annualized loan and lease growth of ~~nonperforming assets to total assets was 0.75% at June 30, 2017, which was down from 0.81% at March 31, 2017;~~12.2% ;

●

~~Return on average assets (annualized) increased to 1.08% for the six months ended June 30, 2017 as compared to 1.00% for the six months ended June 30, 2016;~~Annualized wealth management revenue growth of 10.8%;

●

~~The Company announced~~Swap fee income and gains on the ~~signing~~sale of agovernment guaranteed loans of $1.3 million; and

●

A definitive agreement to ~~acquire Guaranty Bank.~~enter the Springfield, Missouri market by merging with Springfield Bancshares.

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

	For the three months ended						For the six months ended				For the three months ended
	June 30, 2017		March 31, 2017		June 30, 2016		June 30, 2017		June 30, 2016		March 31, 2018		December 31, 2017		March 31, 2017

Net income	$	8,766,017	$	9,184,965	$	6,676,467	$	17,950,982	$	13,049,956	$	10,549,961	$	9,901,590	$	9,184,965

Diluted earnings per common share	$	0.65	$	0.68	$	0.53	$	1.33	$	1.07	$	0.74	$	0.70	$	0.68


Weighted average common and common equivalent shares outstanding		13,516,592		13,488,417		12,516,474		13,502,505		12,235,212		14,205,584		14,193,191		13,488,417

The increase in weighted average common shares outstanding ~~from~~ ~~June 30, 2016~~when comparing the three months ended March 31, 2018 and December 31, 2017 to ~~June 30,~~March 31, 2017 was primarily due to the common stock ~~issuance discussed in Note 2 of the Company’s Annual Report on Form 10-K~~issued to Guaranty as consideration for the ~~year ended December 31, 2016.~~acquisition of Guaranty Bank.

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

	For the three months ended						For the six months ended				For the three months ended
	June 30, 2017		March 31, 2017		June 30, 2016		June 30, 2017		June 30, 2016		March 31, 2018		December 31, 2017			March 31, 2017

Net interest income	$	28,046,697	$	27,668,883	$	21,008,813	$	55,715,580	$	41,606,335	$	32,402,918	$	31,793,353		$	27,668,883
Provision expense		2,022,993		2,105,109		1,197,850		4,128,102		3,270,835		2,539,839		2,255,381			2,105,109
Noninterest income		6,782,518		7,283,754		6,762,401		14,066,272		13,584,874		8,541,449		9,714,717			7,283,754
Noninterest expense		21,404,629		21,273,117		17,743,753		42,677,746		34,698,251		25,863,497		31,351,204			21,273,117
Federal and state income tax expense		2,635,576		2,389,446		2,153,144		5,025,022		4,172,167
Federal and state income tax expense (benefit)												1,991,070		(2,000,105	)		2,389,446
Net income	$	8,766,017	$	9,184,965	$	6,676,467	$	17,950,982	$	13,049,956	$	10,549,961	$	9,901,590		$	9,184,965

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

F~~ollowing~~Following are some noteworthy changes in the Company’s financial results:

●

Net interest income in the ~~second~~first quarter of 2018 was up 2% compared to the fourth quarter of 2017 ~~was~~and up 1%17% compared to the first quarter of ~~2017. Net interest income increased 33% compared to the second quarter of 2016 and 34% when comparing the first six months of~~ 2017 ~~to the same period in the prior year primarily~~ due to strong loan and lease growth and the ~~addition~~acquisition of ~~CSB.~~Guaranty Bank.

●

Pr~~ovision~~Provision expense in ~~the second quarter of 2017 decreased 4% compared to~~ the first quarter of ~~2017. Provision expense~~2018 increased ~~69%~~13% compared to the fourth quarter of 2017 and 21% from the same period of ~~2016. The increase from the second quarter of 2016 to the second quarter of~~ 2017 and was ~~primarily~~ attributable to ~~CSB.~~both strong loan growth and accounting for acquired loans. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance. ~~This resulted in $861 thousand of provision expense in the second quarter of 2017.~~

●

Noninterest income in the ~~second~~first quarter of ~~2017~~2018 decreased 7%12% compared to the ~~first~~fourth quarter of 2017, primarily due to ~~smaller gains on the sale of government guaranteed portions of loans.~~lower swap fee income. Noninterest income in the ~~second~~first quarter of 2018 increased 17% from the first quarter of 2017, which was ~~flat from the second quarter of 2016.~~primarily attributable to higher swap fee income, as well as solid growth in wealth management fee income.

●

Noninterest expense ~~was flat~~decreased 18% from the fourth quarter of 2017. The fourth quarter of 2017 included $4.4 million of non-recurring costs related to the acquisition of Guaranty Bank and a core processor termination fee related to CSB. Noninterest expense increased 22% from the first quarter of ~~2017. Noninterest expense increased 21% from the second quarter of 2016~~2017 primarily due to the ~~addition~~acquisition of ~~CSB’s cost structure.~~Guaranty Bank.

●

~~Feder~~alFederal and state income tax expense in the ~~second~~first quarter of 2018 increased significantly compared to the fourth quarter of 2017. The fourth quarter of 2017 ~~increased 10%~~included a one-time tax benefit of $2.9 million as a result of the Tax Act. Federal and state income tax expense in the first quarter of 2018 decreased 17% compared to the first quarter of ~~2017. Federal and state income~~2017 primarily due to a lower federal tax ~~in the second quarter of 2017 increased 22% compared to the second quarter of 2016.~~rate. See the Income Taxes section of this ~~Report~~report for additional details.

LONG-TERM FINANCIAL GOALS

As previously stated, the Company has established certain financial goals by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these goals, there is no assurance that they will be met. Moreover, the ~~Company~~’sCompany’s ability to achieve these goals will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. The Company’s long-term financial goals are as follows:

●

Improve balance sheet efficiency by maintaining a gross loans and leases to total assets ratio in the range of 7073 – ~~75%~~78%;

●

Improve profitability (measured by NIM and ROAA);

●

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

●

Maintain reliance on wholesale funding at less than 15% of total assets;

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

●

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

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

●

Continue to focus on generating gains on ~~sale~~ssales of government guaranteed portions of loans and swap fee income to more than $4 million annually; and

●

Grow wealth management segment net income by 10% annually.

The following table shows the evaluation of the Company’s long-term financial goals.

For the Quarter Ending

Goal Key Metric Target**

June 30,
2017
March 31,
2017
June 30,
2016

Balance sheet efficiency
Gross loans and leases to total assets
70 - 75%
74%
72%
72%

NIM (TEY)(non-GAAP)*
> 3.85%
3.81%
3.90%
3.62%

Profitability
ROAA
> 1.10%
1.04%
1.12%
1.01%

Core ROAA (non-GAAP)*
1.04%
1.12%
1.00%

Asset quality
NPAs to total assets
< 0.75%
0.75%
0.81%
0.70%

Net charge-offs to average loans and leases***
< 0.25% annually
0.13%
0.13%
0.12%

Reliance on wholesale funding
Wholesale funding to total assets****
< 15%
10%
9%
18%

Funding mix
Noninterest bearing deposits as a percentage of total assets
> 30%
22%
23%
23%

Consistent, high quality noninterest income revenue streams
Gains on sales of government guaranteed portions of loans and swap fee income***
> $4 million annually
$3.0 million
$4.3 million
$7.1 million

Grow wealth management segment net income***
> 10% annually
22%
25%
2%

			For the Quarter Ending
Goal	Key Metric	Target**	March 31, 2018	December 31, 2017	March 31, 2017
Balance sheet efficiency	Gross loans and leases to total assets	73 - 78%	76%	74%	72%
	NIM(TEY)(non-GAAP)*	> 3.65%	3.64%	3.69%	3.90%
Profitability	ROAA	> 1.10%	1.06%	1.01%	1.12%
	Core ROAA (non-GAAP)*		1.06%	1.01%	1.12%
	NPAs to total assets	< 0.75%	0.77%	0.81%	0.81%
Asset quality	Net charge-offs to average loans and leases***	< 0.25% annually	0.05%	0.19%	0.13%
Reliance on wholesale funding	Wholesale funding to total assets****	< 15%	14%	10%	9%
Funding mix	Noninterest bearing deposits as a percentage of total assets	> 30%	19%	20%	23%
Consistent, high quality noninterest income revenue streams	Gains on sales of government guaranteed portions of loans and swap fee income***	> $4 million annually	$5.3 million	$4.3 million	$4.3 million
	Grow wealth management segment net income***	> 10% annually	37%	35%	25%

	*	See GAAP to Non-GAAP reconciliations.
	**	Targets will be re-evaluated and adjusted as appropriate.
	***	Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period, that are then annualized for comparison.
	****	Wholesale funding into total assets is calculated by dividing total borrowings and brokered deposits by total assets.

STRATEGIC DEVELOPMENTS

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

●

The Company grew loans and leases in the ~~second quarter~~first three months of ~~2017~~2018 by ~~19%~~12.2% on an annualized basis. This growth exceeded the targeted organic growth of 10-12% for the full year. Strong loan and lease growth for the remainder of the year will help keep the Company’s loan and leases to asset ratio within the ~~top end of the~~ targeted range of ~~70-75%~~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. InThe Company announced in March 2018 the ~~third quarter~~signing of ~~2016,~~definitive agreements to acquire and merge the Bates Companies into RB&T. The Company ~~acquired CSB, headquartered~~announced in ~~Ankeny, Iowa.~~April 2018 the signing of a definitive agreement to acquire Springfield Bancshares. See Note 2 of the Company’s 2016 Annual Report on Form 10-K for the year ended December 31, 2016 for additional details. The Company plans to close the acquisition of Guaranty Bank late in the third quarter of early in the fourth quarter of 2017, pending regulatory and shareholder approvals and certain customary closing conditions. See Note 89 to the Consolidated Financial Statements for additional ~~details.~~details about these strategic transactions.

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

●

The Company ~~continues~~has continued to focus on ~~reducing~~lowering the NPAs to total assets ratio. This ratio ~~improved~~decreased by 6four basis points to ~~0.75%~~0.77%, as compared to the ~~first~~fourth quarter 2017. The Company remains committed to improving asset quality ratios in ~~2017.~~2018 and beyond.

●

Management ~~continues~~has continued to focus on reducing the Company’s reliance on wholesale funding. ~~The~~Wholesale funding increased in the first quarter 2018 due to the strong loan and lease growth which outpaced the Company’s deposit growth. All increases to wholesale funding were short-term in nature. Management continues to prioritize core deposit growth through a variety of strategies including growth in the first half of 2017 allowed the Company to further reduce wholesale borrowings and also provides liquidity for future loan and lease growth. Management also continues to evaluate opportunities for continued reduction in wholesale funding.correspondent banking.

●

Correspondent banking ~~continues~~has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the three states currently served – Iowa, Illinois and ~~Wisconsin.~~Wisconsin and to expand into the Missouri market. The Company acts as the correspondent bank for ~~181~~192 downstream banks with average total noninterest bearing deposits of ~~$288.6~~$220.9 million and average total interest bearing deposits of $206.1 million during the ~~second~~first quarter of 2018. The Company acted as the correspondent bank for 183 downstream banks with average total noninterest bearing deposits of correspondents of $320.7 million during the first quarter of 2017. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

●

SBA and USDA lending is a specialty lending area on which the Company has focused. Once these loans are originated, the government-guaranteed portion of the loan can be sold to the secondary market for premiums. The Company aims to continue to make this a more consistent source of noninterest income.

●

As a result of the relatively low interest rate environment including a flat yield curve, the Company ishas focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company.

●

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of ~~June 30, 2017~~March 31, 2018, the Company had ~~$2.11~~$2.65 billion of total financial assets in trust (and related) accounts and ~~$954 million~~$1.05 billion of total financial assets in brokerage (and related) accounts. Continued growth in assets under management will help to drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management continues to focus on growing wealth management fee income, expanding market share will continue to be a primary ~~strategy.~~strategy, both through organic growth as well as the acquisition of managed assets. The Company announced in March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The acquisition and subsequent merger of the Bates Companies into RB&T will add approximately $700 million of assets under management.

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

GAAP TO NON-GAAP RECONCILIATIONS

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

●

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

●

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

●

NIM (TEY) (non-GAAP) is reconciled to ~~NIM~~;NIM; and

●

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

●

~~Texas ratio (non-GAAP) is reconciled to nonperforming loans and stockholders’ equity.~~income.

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

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

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

The efficiency ratio ~~and Texas~~is a ratio ~~are both ratios~~ that management utilizes to compare the Company to peers. ~~Both are also~~It is a standard ratio in the banking industry and widely utilized by investors.

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

As of

June 30,

March 31,

December 31,

GAAP TO NON-GAAP RECONCILIATIONS

2017

2017

2016

(dollars in thousands, except per share data)

TCE / TA RATIO

Stockholders' equity (GAAP)
$ 305,083 $ 295,840 $ 286,041
Less: Intangible assets
20,030 20,261 22,522
TCE (non-GAAP)
$ 285,053 $ 275,579 $ 263,519

Total assets (GAAP)
$ 3,457,187 $ 3,381,013 $ 3,301,944
Less: Intangible assets
20,030 20,261 22,522
TA (non-GAAP)
$ 3,437,157 $ 3,360,752 $ 3,279,422

TCE / TA ratio (non-GAAP)
8.29 % 8.20 % 8.04 %

Table of Contents

For the Quarter Ended

For the Six Months Ended

June 30,

March 31,

December 31,

June 30,

June 30,

CORE NET INCOME

2017

2017

2016

2017

2016

Net income (GAAP)
$ 8,766 $ 9,185 $ 8,529 $ 17,951 $ 13,050

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

Income:

Securities gains, net
$ 25 $ - $ (23 ) $ 25 $ 245
Total nonrecurring income (non-GAAP)
$ 25 $ - $ (23 ) $ 25 $ 497

Expense:

Losses on debt extinguishment
$ - $ - $ 232 $ - $ 54
Acquisition costs
- - 26 - 231
Total nonrecurring expense (non-GAAP)
$ - $ - $ 258 $ - $ 285

Core net income (non-GAAP)
$ 8,741 $ 9,185 $ 8,810 $ 17,926 $ 13,090

CORE EPS

Core net income (non-GAAP) (from above)
$ 8,741 $ 9,185 $ 8,810 $ 17,926 $ 13,090

Weighted average common shares outstanding
13,170,283 13,133,382 13,087,592 13,151,833 12,064,349
Weighted average common and common equivalent shares outstanding
13,516,592 13,488,417 13,323,883 13,502,505 12,235,212

Core EPS (non-GAAP):

Basic
$ 0.66 $ 0.70 $ 0.67 $ 1.36 $ 1.09
Diluted
$ 0.65 $ 0.68 $ 0.66 $ 1.33 $ 1.07

CORE ROAA

Core net income (non-GAAP) (from above)
$ 8,741 $ 9,185 $ 8,810 $ 17,926 $ 13,090

Average Assets
$ 3,378,195 $ 3,274,713 $ 3,277,814 $ 3,326,454 $ 2,621,514

Core ROAA (annualized) (non-GAAP)
1.04 % 1.12 % 1.08 % 1.08 % 1.00 %

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

	As of
	March 31,			December 31,			September 30,			June 30,			March 31,
GAAP TO NON-GAAP RECONCILIATIONS	2018			2017			2017			2017			2017
	(dollars in thousands, except per share data)
TCE / TA RATIO

Stockholders' equity (GAAP)	$	360,428		$	353,287		$	313,039		$	305,083		$	295,840
Less: Intangible assets		37,108			37,413			19,800			20,030			20,261
TCE (non-GAAP)	$	323,320		$	315,874		$	293,239		$	285,053		$	275,579

Total assets (GAAP)	$	4,026,314		$	3,982,665		$	3,550,463		$	3,457,187		$	3,381,013
Less: Intangible assets		37,108			37,413			19,800			20,030			20,261
TA (non-GAAP)	$	3,989,206		$	3,945,252		$	3,530,663		$	3,437,157		$	3,360,752

TCE / TA ratio (non-GAAP)		8.10	%		8.01	%		8.31	%		8.29	%		8.20	%

	For the Quarter Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
CORE NET INCOME	2018			2017			2017			2017			2017

Net income (GAAP)	$	10,550		$	9,902		$	7,854		$	8,766		$	9,185

Less nonrecurring items (post-tax) (*):
Income:
Securities gains, net	$	-		$	(41	)	$	(41	)	$	25		$	-
Total nonrecurring income (non-GAAP)	$	-		$	(41	)	$	(41	)	$	25		$	-

Expense:
Acquisition costs	$	73		$	430		$	265		$	-		$	-
Post-acquisition compensation, transition and integration costs		-			2,462			340			-			-
Total nonrecurring expense (non-GAAP)	$	73		$	2,892		$	605		$	-		$	-


Adjustment of tax expense related to the Tax Act	$	-		$	2,919		$	-		$	-		$	-

Core net income (non-GAAP)	$	10,623		$	9,916		$	8,500		$	8,741		$	9,185


CORE EPS

Core net income (non-GAAP) (from above)	$	10,623		$	9,916		$	8,500		$	8,741		$	9,185

Weighted average common shares outstanding		13,888,661			13,845,497			13,151,350			13,170,283			13,133,382
Weighted average common and common equivalent shares outstanding		14,205,584			14,193,191			13,507,955			13,532,324			13,488,417

Core EPS (non-GAAP):
Basic	$	0.76		$	0.72		$	0.65		$	0.66		$	0.70
Diluted	$	0.75		$	0.70		$	0.63		$	0.65		$	0.68


CORE ROAA

Core net income (non-GAAP) (from above)	$	10,623		$	9,916		$	8,500		$	8,741		$	9,185

Average Assets	$	3,994,691		$	3,923,337		$	3,503,148		$	3,378,195		$	3,274,713

Core ROAA (annualized) (non-GAAP)		1.06	%		1.01	%		0.97	%		1.03	%		1.12	%

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

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

	For the Quarter Ended									For the Six Months Ended						For the Quarter Ended
	June 30,			March 31,			December 31,			June 30,			June 30,			March 31,			December 31,			September 30,				June 30,			March 31,
GAAP TO NON-GAAP RECONCILIATIONS (CONTINUED)	2017			2017			2016			2017			2016			2018			2017			2017				2017			2017
	(dollars in thousands)															(dollars in thousands)
NIM (TEY)
NIM (TEY) *

Net interest income (GAAP)	$	28,047		$	27,669		$	29,280		$	55,716		$	41,606		$	32,403		$	31,793		$	28,556			$	28,047		$	27,669

Plus: Tax equivalent adjustment		2,201			1,950			1,727			4,218			2,706			1,353			2,585			2,311				2,201			1,950

Net interest income - tax equivalent (Non-GAAP)	$	30,248		$	29,619		$	31,007		$	59,934		$	44,312		$	33,756		$	34,378		$	30,867			$	30,248		$	29,619

Average earning assets	$	3,180,779		$	3,076,356		$	3,069,122		$	3,128,569		$	2,470,525		$	3,759,475		$	3,699,193		$	3,303,014			$	3,180,779		$	3,076,356

NIM (GAAP)		3.54	%		3.65	%		3.80	%		3.59	%		3.39	%		3.50	%		3.41	%		3.43	%			3.54	%		3.65	%
NIM (TEY) (Non-GAAP)		3.81	%		3.90	%		4.02	%		3.86	%		3.61	%		3.64	%		3.69	%		3.71	%			3.81	%		3.90	%

EFFICIENCY RATIO

Noninterest expense (GAAP)	$	21,405		$	21,273		$	22,308		$	42,678		$	34,698		$	25,863		$	31,351		$	23,395			$	21,405		$	21,273

Net interest income (GAAP)	$	28,047		$	27,669		$	29,280		$	55,716		$	41,606		$	32,403		$	31,793		$	28,556		#	$	28,047		$	27,669
Noninterest income (GAAP)		6,782			7,284			7,029			14,066			13,585			8,541			9,714			6,702				6,782			7,284
Total income	$	34,829		$	34,953		$	36,309		$	69,782		$	55,191		$	40,944		$	41,507		$	35,258			$	34,829		$	34,953

Efficiency ratio (noninterest expense/total income) (Non-GAAP)		61.46	%		60.86	%		61.44	%		61.16	%		62.87	%		63.17	%		75.53	%		66.35	%			61.46	%		60.86	%

TEXAS RATIO

Nonaccrual loans/leases	$	13,217		$	14,205		$	13,919
Accruing loans/leases past due 90 days or more		424			955			967
TDRs - accruing		6,915			6,229			6,347
OREO		5,174			5,625			5,523
NPLs (excluding other repossessed assets)	$	25,730		$	27,014		$	26,756

Total stockholders' equity (GAAP)	$	305,083		$	295,840		$	286,041

Less: Intangible assets		20,030			20,261			22,522

Plus: Allowance (GAAP)		33,357			32,059			30,757

Tangible equity plus allowance	$	318,410		$	307,638		$	294,276

Texas Ratio (Non-GAAP)		8.08	%		8.78	%		9.09	%

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

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

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

Net ~~interest~~interest income, on a tax equivalent basis, increased ~~35%~~14% to ~~$30.2~~$33.8 million for the quarter ended ~~June 30, 2017,~~March 31, 2018, compared to the same quarter of the prior year. ~~For~~Excluding the ~~six months ended June 30, 2017,~~tax equivalent adjustments, net interest income ~~on a tax equivalent basis,~~ increased ~~35% to $59.9 million, compared to~~17% over the same ~~period of 2016.~~period. Net interest income improved due to several factors:

●

~~The acquisition of CSB, whose strong~~ ~~net interest margin has significantly contributed to the Company’s results.~~

●

T~~he Company’s continued strategy to redeploy funds from the taxable securities portfolio into higher yielding loans and leases.~~

●

O~~rganic~~Organic loan and lease growth has been strong over the past ~~twelve~~12 months ~~as evidenced by average gross loan/lease growth~~pushing loans/leases up to 76% of ~~10% in that period (excluding loans/leases in CSB acquisition).~~

~~A comparison of yields,~~ ~~spread and margin from the second quarter of 2017 to the second quarter of 2016 is as follows (on a tax equivalent basis):~~

●

~~The average yield on interest-earning assets increased 28 basis points.~~total assets;

●

The ~~average cost~~acquisition of ~~interest-bearing liabilities increased 7 basis points.~~Guaranty Bank, whose strong NIM has contributed to the Company’s results; and

●

Th~~e net interest spread increased 21 basis points~~The Company’s continued strategy to redeploy funds from ~~3.39% to 3.60%.~~the lower yielding taxable securities portfolio into higher yielding loans and municipal bonds, especially with the Company’s most recent acquisitions of CSB and Guaranty Bank.

●

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~NIM~~ ~~improved 19 basis points from 3.62% to 3.81%.~~

A comparison of yields, spread and margin ~~from the~~ ~~first half of 2017 to the first half of 2016 is as follows (on~~on a tax equivalent ~~basis):~~and GAAP basis is as follows:

	Tax Equivalent Basis									GAAP
	For the Quarter Ended									For the Quarter Ended
	March 31, 2018			December 31, 2017			March 31, 2017			March 31, 2018			December 31, 2017			March 31, 2017

Average Yield on Interest-Earning Assets		4.41	%		4.34	%		4.39	%		4.27	%		4.06	%		4.13	%
Average Cost of Interest-Bearing Liabilities		1.03	%		0.88	%		0.69	%		1.03	%		0.88	%		0.69	%
Net Interest Spread		3.38	%		3.46	%		3.70	%		3.24	%		3.18	%		3.44	%
NIM		3.64	%		3.69	%		3.90	%		3.50	%		3.41	%		3.65	%
NIM Excluding Acquisition Accounting Net Accretion		3.56	%		3.61	%		3.65	%		3.42	%		3.33	%		3.39	%

NIM on a tax equivalent basis was down five basis points on a linked quarter basis. However, excluding the tax equivalent adjustment, NIM expanded nine basis points on the same linked quarter basis. The Company’s expansion of yield on earning assets outpaced the increased cost of funds. The Company’s success in expanded yields on earning assets is the result of the following:

●

~~The average yield on interest-earning assets~~ ~~increased 30 basis points.~~Floating rate loans and securities repricing with recent rate hikes,

●

~~The average cost of interest-bearing liabilities~~ ~~increased 3 basis points.~~Growing certain niches (loans and securities) that tend to have higher spreads, and

●

~~The net interest spread~~ ~~increased 27 basis points from 3.38% to 3.65%.~~

●

~~NIM~~ ~~improved 25 basis points from 3.61% to 3.86%.~~Improved pricing on C&I and CRE term loans.

Acquisition accounting net accretion can fluctuate depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The ~~Company~~’sacquisition accounting net accretion was relatively flat on a linked quarter basis; however, the acquisition accounting net accretion in the first quarter of 2017 was significant and totaled approximately $1.9 million which added 25 basis points to NIM for that quarter. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons.

The Company’s management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and leasing company is the improvement of their ~~net interest margins.~~NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies.

~~The improvement in~~ net interest margin was primarily the result of the acquisition of CSB. CSB’s margin will fluctuate based on the amortization and accretion of purchase accounting adjustments, most notably, the discount accretion on the loan portfolio. This benefit can fluctuate based on prepayments of both PCI and performing loans. As loans prepay, the associated discount is accelerated.

The Company continues to place an emphasis on shifting its balance sheet mix. With a stated goal of maintaining loans/leases as a percentage of assets in a range of 70%-75%, the Company funded its loan/lease growth with a mixture of core deposits and cash from calls/maturities/redemptions in the investment securities portfolio. In 2015 and 2016, cash from called securities and the targeted sales of securities was redeployed into the loan portfolio, resulting in a significant increase in yield, while minimizing any extension of duration. Additionally, the Company recognized net gains on these sales due to the previous rate environment. As rates rise, the Company should also have less market volatility in the investment securities portfolio, as this is a smaller portion of the balance sheet.

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~Although the Company~~’s wholesale borrowings portfolio has declined significantly, there still exists some higher cost legacy borrowings and the Company continues to monitor and evaluate both prepayment and debt restructuring opportunities, as executing on such a strategy could potentially increase NIM at a much quicker pace than holding the debt until maturity.

TheThe 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,

2017

2016

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
$ 18,742 $ 38 0.81 % $ 14,174 $ 11 0.31 %
Interest-bearing deposits at financial institutions
86,236 220 1.02 % 50,747 62 0.49 %
Investment securities (1)
573,747 5,384 3.76 % 505,697 4,573 3.64 %
Restricted investment securities
13,226 132 4.00 % 14,171 134 3.80 %
Gross loans/leases receivable (1) (2) (3)
2,488,828 28,881 4.65 % 1,899,932 20,497 4.34 %
Total interest earning assets
$ 3,180,779 $ 34,655 4.37 % $ 2,484,721 $ 25,277 4.09 %
Noninterest-earning assets:

Cash and due from banks
$ 63,526 $ 50,461
Premises and equipment
61,327 38,178
Less allowance
(32,361 ) (27,811 )
Other
104,924 95,129
Total assets
$ 3,378,195 $ 2,640,678
LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:

Interest-bearing deposits
$ 1,566,106 1,835 0.47 % $ 941,856 600 0.26 %
Time deposits
527,719 1,156 0.88 % 425,216 744 0.70 %
Short-term borrowings
17,936 19 0.42 % 50,122 18 0.14 %
FHLB advances
76,739 354 1.85 % 128,956 416 1.30 %
Other borrowings
72,000 696 3.88 % 100,008 824 3.31 %
Junior subordinated debentures
33,530 347 4.15 % 33,396 302 3.64 %
Total interest-bearing liabilities
$ 2,294,030 $ 4,407 0.77 % $ 1,679,554 $ 2,904 0.70 %
Noninterest-bearing demand deposits
$ 741,886 $ 666,044
Other noninterest-bearing liabilities
41,411 39,689
Total liabilities
$ 3,077,327 $ 2,385,287
Stockholders' equity
300,868 255,391
Total liabilities and stockholders' equity
$ 3,378,195 $ 2,640,678
Net interest income
$ 30,248 $ 22,373
Net interest spread
3.60 % 3.39 %
Net interest margin
3.81 % 3.62 %
Ratio of average interest-earning assets to average interest-bearing liabilities
138.65 % 147.94 %

~~(1)~~ ~~Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% tax rate.~~

~~(2)~~ ~~Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.~~

~~(3)~~ ~~Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.~~

~~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, 2017~~

Inc./(Dec.)

Components

from

of Change (1)

Prior Period

Rate

Volume

2017 vs. 2016

(dollars in thousands)

INTEREST INCOME

Federal funds sold
$ 27 $ 23 $ 4
Interest-bearing deposits at financial institutions
158 96 62
Investment securities (2)
811 167 644
Restricted investment securities
(2 ) 31 (33 )
Gross loans/leases receivable (2) (3) (4)
8,384 1,593 6,791

Total change in interest income
$ 9,378 $ 1,910 $ 7,468

INTEREST EXPENSE

Interest-bearing deposits
$ 1,235 $ 688 $ 547
Time deposits
412 209 203
Short-term borrowings
1 70 (69 )
Federal Home Loan Bank advances
(62 ) 663 (725 )
Other borrowings
(128 ) 652 (780 )
Junior subordinated debentures
45 44 1

Total change in interest expense
$ 1,503 $ 2,326 $ (823 )

Total change in net interest income
$ 7,875 $ (416 ) $ 8,291

~~(1)~~	~~The column "Inc./(Dec.) from Prior Period" is segmented into the changes attributable to variations in volume and the~~ ~~changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.~~
~~(2)~~	~~Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% tax rate.~~
~~(3)~~	~~Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.~~
~~(4)~~	~~Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

	For the six months ended June 30,																For the three months ended March 31,
	2017								2016								2018								2017
				Interest		Average						Interest		Average						Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)																(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	14,917		$	53		0.72	%	$	15,703		$	23		0.29	%	$	19,703		$	56		1.15	%	$	11,092		$	15		0.55	%
Interest-bearing deposits at financial institutions		89,394			418		0.94	%		45,691			123		0.54	%		49,531			197		1.61	%		92,551			199		0.87	%
Investment securities (1)		567,101			10,543		3.75	%		528,034			9,257		3.53	%		649,035			5,839		3.65	%		560,455			5,158		3.73	%
Restricted investment securities		13,549			262		3.90	%		14,156			264		3.75	%		21,830			234		4.35	%		13,871			130		3.80	%
Gross loans/leases receivable (1) (2) (3)		2,443,608			56,741		4.68	%		1,866,941			40,454		4.36	%		3,019,376			34,573		4.64	%		2,398,387			27,793		4.70	%

Total interest earning assets	$	3,128,569		$	68,017		4.38	%	$	2,470,525		$	50,121		4.08	%	$	3,759,475		$	40,899		4.41	%	$	3,076,356		$	33,295		4.39	%

Noninterest-earning assets:
Cash and due from banks	$	64,409							$	48,176							$	67,224							$	65,291
Premises and equipment		61,152								37,963								63,394								60,977
Less allowance		(31,930	)							(27,256	)							(35,136	)							(31,498	)
Other		104,256								92,107								139,734								103,587

Total assets	$	3,326,456							$	2,621,514							$	3,994,691							$	3,274,713

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	1,486,876			2,974		0.40	%	$	933,551			1,214		0.26	%	$	1,828,228			3,019		0.67	%	$	1,407,645			1,140		0.33	%
Time deposits		519,419			2,249		0.87	%		412,410			1,420		0.69	%		616,661			1,862		1.22	%		511,119			1,093		0.87	%
Short-term borrowings		21,562			43		0.40	%		68,331			61		0.18	%		17,271			33		0.77	%		25,188			24		0.39	%
FHLB advances		95,548			758		1.60	%		128,696			858		1.34	%		236,689			1,064		1.82	%		114,356			403		1.43	%
Other borrowings		73,381			1,379		3.79	%		100,873			1,650		3.29	%		64,680			718		4.50	%		74,761			683		3.71	%
Junior subordinated debentures		33,514			680		4.09	%		34,023			606		3.58	%		37,510			447		4.83	%		33,497			333		4.03	%

Total interest-bearing liabilities	$	2,230,300		$	8,083		0.73	%	$	1,677,884		$	5,809		0.70	%	$	2,801,039		$	7,143		1.03	%	$	2,166,566		$	3,676		0.69	%

Noninterest-bearing demand deposits	$	757,566							$	660,625							$	794,673							$	773,245
Other noninterest-bearing liabilities		42,704								39,687								42,454								43,996
Total liabilities	$	3,030,569							$	2,378,195							$	3,638,166							$	2,983,807

Stockholders' equity		295,887								243,319								356,525								290,906

Total liabilities and stockholders' equity	$	3,326,456							$	2,621,514							$	3,994,691							$	3,274,713

Net interest income				$	59,934							$	44,312							$	33,756							$	29,619

Net interest spread							3.65	%							3.38	%							3.38	%							3.70	%

Net interest margin							3.86	%							3.61	%							3.64	%							3.90	%

Ratio of average interest-earning assets to average interest-bearing liabilities		140.28	%							147.24	%							134.22	%							141.99	%

(1)	Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% tax ~~rate.~~rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.
(2)	Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
(3)	Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018

	Inc./(Dec.)			Components
	from			of Change (1)					Inc./(Dec.)			Components
	Prior Period			Rate		Volume			from			of Change (1)
	2017 vs. 2016								December 31, 2017			Rate			Volume
	(dollars in thousands)								(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	30		$	33	$	(3	)	$	41		$	24		$	17
Interest-bearing deposits at financial institutions		295			129		166			(2	)		484			(486	)
Investment securities (2)		1,286			593		693			681			(738	)		1,419
Restricted investment securities		(2	)		21		(23	)		104			21			83
Gross loans/leases receivable (2) (3) (4)		16,287			3,168		13,119			6,780			(2,266	)		9,046

Total change in interest income	$	17,896		$	3,944	$	13,952		$	7,604		$	(2,475	)	$	10,079

INTEREST EXPENSE
Interest-bearing deposits	$	1,760		$	841	$	919		$	1,879		$	1,459		$	420
Time deposits		829			416		413			769			512			257
Short-term borrowings		(18	)		97		(115	)		9			54			(45	)
Federal Home Loan Bank advances		(100	)		338		(438	)		661			135			526
Other borrowings		(271	)		551		(822	)		35			481			(446	)
Junior subordinated debentures		74			100		(26	)		114			71			43

Total change in interest expense	$	2,274		$	2,343	$	(69	)	$	3,467		$	2,712		$	755

Total change in net interest income	$	15,622		$	1,601	$	14,021		$	4,137		$	(5,187	)	$	9,324

(1)

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

(2)

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

(3)

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

(4)

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

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

CRITICAL ACCOUNTING ~~POLIC~~POLICIES~~IES~~

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

ALLOWANCE FOR LOAN AND LEASE LOSSES

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to bebe that related to the ~~allowance.~~allowance for loan and lease losses.

The ~~Company~~’sCompany’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in NPLs, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements.

Qualitative factors include management’s view regarding the general economic environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and complexity of individual credits in relation to loan/lease structures, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology.

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

Although management believes the level of the allowance as of ~~June 30, 2017~~March 31, 2018 was adequate to absorb losses in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

~~OTHER~~–~~THAN~~-~~TEMPORARY IMPAIRMENT~~

~~The Company~~’s assessment of OTTI of its investment securities portfolio is another critical accounting policy due to the level of judgment required by management. Investment securities are evaluated to determine whether declines in fair value below their cost are other-than-temporary.

~~In estimating~~ OTTI losses, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the Company’s lack of intent to sell the security prior to recovery and whether it is not more-likely-than-not that the Company will be required to sell the security prior to recovery. The discussion regarding the Company’s assessment of OTTI should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein.

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income increased ~~36%~~26%, comparing the ~~second~~first quarter of ~~2017~~2018 to the same period of ~~2016 and increased 34%, comparing the first half of 2017 to the same period of 2016. Most of this~~2017. This increase was primarily the result of strong organic loan growth and the ~~CSB~~ acquisition ~~during the third quarter~~ of ~~2016.~~Guaranty Bank.

Overall, the ~~Company~~’sCompany’s average earning assets increased ~~28%~~22%, comparing the ~~second~~first quarter of ~~2017~~2018 to the ~~second~~first quarter of ~~2016.~~2017. During the same time period, average gross loans and leases increased ~~31%~~26%, while average investment securities increased 13%. Average earning assets increased 27%, comparing the first half of 2017 to the same period of 2016. Average gross loans and leases increased 31% and average investment securities increased 7%, comparing the first half of 2017 to the same period of 2016.16% with a portion being private placement tax-exempt municipal securities. These increases were also ~~primarily~~ the result of the acquisition of ~~CSB.~~Guaranty Bank.

Table of Contents

Part I

Item 2

~~Additionally, the Company~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued to diversify its securities portfolio, including increasing its portfolio of tax exempt municipal securities. The large majority of these are privately placed debt issuances by municipalities located in the Midwest and require a thorough underwriting process before investment. Execution of this strategy has led to increased interest income on a tax equivalent basis over the past several years. Management understands that this strategy has extended the duration of its securities portfolio and continually evaluates the combined benefit of increased interest income and reduced effective income tax rate and the impact on interest rate risk.

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

INTEREST EXPENSE

Interest expense for the ~~second~~first quarter of ~~2017~~2018 increased ~~52%~~94% from the ~~second~~first quarter of ~~2016. For the first six months of 2017, interest expense increased 39% compared to the first six months of 2016.~~2017. The acquisition of ~~CSB primarily~~Guaranty Bank contributed to this increase. Additionally, the Company has rate sensitive deposits with select major customers that have repriced with the increase in certain market interest rates.

~~Management has placed a~~ With strong ~~focus on reducing~~loan growth outpacing deposit growth in the ~~reliance on~~ ~~long-term wholesale funding as it tends to be higher in~~first quarter of 2018, short-term borrowings increased and the cost ~~than deposits. Several balance sheet restructuring strategies were executed in 2016. Refer to Notes 10 and 11~~ of these funds have increased with the ~~Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional details.~~rising rate environment.

The ~~Company~~’sCompany’s management intends to continue to shift the mix of funding from wholesale funds to 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.

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

PROVISION FOR LOAN/LEASE LOSSES

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

The ~~Company~~’sCompany’s provision totaled ~~$2.0~~$2.5 million for the ~~second~~first quarter of ~~2017,~~2018, which was an increase of ~~$825~~$435 thousand or ~~69%~~21% from the same quarter of the prior year. ~~Provision for~~The increase from the first ~~half~~quarter of ~~the year totaled $4.1 million, which was up $857 thousand, or 26%, compared~~2017 to the first ~~half~~quarter of ~~2016.~~2018 was primarily attributable to loan growth and the accounting for the loans acquired through the acquisitions of CSB and Guaranty Bank. 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 ~~$1.5 million~~$363 thousand for the first ~~six~~three months of ~~2017,~~2018, increased the Company’s allowance to ~~$33.4~~$36.5 million at ~~June 30, 2017.~~March 31, 2018. As of ~~June 30, 2017,~~March 31, 2018, the Company’s allowance to total loans/leases was ~~1.31%~~1.20%, which ~~was down~~has increased from 1.16% at December 31, 2017 and decreased from 1.32% at March 31, ~~2017 and down from 1.46% at June 30, 2016, respectively.~~2017.

In accordance with GAAP for business combination accounting, ~~the~~acquired loans ~~acquired through the acquisition of CSB were~~are recorded at ~~market~~fair value; therefore, ~~there was~~ no allowance is associated with ~~CSB’s~~such loans at acquisition. Management continues to evaluate the allowance needed on ~~the~~ acquired ~~CSB~~ loans factoring in the net remaining discount ($~~6.3~~7.3 million and $8.0 million at ~~June 30, 2017)~~March 31, 2018 and March 31, 2017, respectively). When factoring this remaining discount into the Company’s allowance to total loans and leases calculation, the Company’s allowance as a percentage of total loans and leases increases from ~~1.31%~~1.20% to ~~1.55%.~~1.43% as of March 31, 2018 and increases from 1.32% to 1.64% as of March 31, 2017.

A more detailed discussion of the ~~Company~~’sCompany’s allowance can be found in the “Financial Condition” section of this report.

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~NONINTEREST~~NONINTEREST INCOME

The following ~~table~~stables set forth the various categories of noninterest income for the three ~~and six~~ months ended ~~June 30, 2017~~March 31, 2018 and ~~2016.~~2017.

	Three Months Ended										Three Months Ended
	June 30, 2017		June 30, 2016		$ Change			% Change			March 31, 2018		March 31, 2017		$ Change			% Change

Trust department fees	$	1,692,001	$	1,512,083	$	179,918			11.9	%	$	2,237,081	$	1,740,207	$	496,874			28.6	%
Investment advisory and management fees		868,835		692,738		176,097			25.4			952,344		961,599		(9,255	)		(1.0	)
Deposit service fees		1,458,359		946,810		511,549			54.0			1,531,453		1,316,390		215,063			16.3
Gains on sales of residential real estate loans		112,628		84,413		28,215			33.4
Gains on sales of government guaranteed portions of loans		87,053		1,603,890		(1,516,837	)		(94.6	)
Gains on sales of residential real estate loans, net												100,815		96,323		4,492			4.7
Gains on sales of government guaranteed portions of loans, net												358,434		950,641		(592,207	)		(62.3	)
Swap fee income		327,577		167,582		159,995			95.5			958,694		113,520		845,174			744.5
Securities gains, net		38,464		18,030		20,434			113.3
Earnings on bank-owned life insurance		459,359		480,520		(21,161	)		(4.4	)		417,987		469,687		(51,700	)		(11.0	)
Debit card fees		743,521		343,748		399,773			116.3			766,108		702,801		63,307			9.0
Correspondent banking fees		200,057		244,939		(44,882	)		(18.3	)		264,827		245,189		19,638			8.0
Other		794,664		667,648		127,016			19.0			953,706		687,397		266,309			38.7
Total noninterest income	$	6,782,518	$	6,762,401	$	20,117			0.3	%	$	8,541,449	$	7,283,754	$	1,257,695			17.3	%

Six Months Ended

June 30, 2017

June 30, 2016

$ Change

% Change

Trust department fees
$ 3,432,208 $ 3,087,990 $ 344,218 11.1
%
Investment advisory and management fees
1,830,434 1,351,123 479,311 35.5
Deposit service fees
2,774,749 1,877,889 896,860 47.8
Gains on sales of residential real estate loans
208,951 144,799 64,152 44.3
Gains on sales of government guaranteed portions of loans
1,037,694 2,482,418 (1,444,724 ) (58.2 )
Swap fee income
441,097 1,024,540 (583,443 ) (56.9 )
Securities gains, net
38,464 376,510 (338,046 ) (89.8 )
Earnings on bank-owned life insurance
929,046 874,129 54,917 6.3
Debit card fees
1,446,322 651,399 794,923 122.0
Correspondent banking fees
445,246 547,069 (101,823 ) (18.6 )
Other
1,482,061 1,167,008 315,053 27.0
Total noninterest income
$ 14,066,272 $ 13,584,874 $ 481,398 3.5
%

In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income and, due to favorable market conditions in early ~~2017~~2018 coupled with strong growth in assets under management, trust department fees increased ~~12%~~29%, comparing the ~~second~~first quarter of ~~2017 to the same period of the prior year. Trust department fees increased 11% when comparing the first half of 2017~~2018 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~~fully-managed trusts. Additionally, the Company ~~recently~~ started offering trust operations services to correspondent banks. Investment advisory and management fees decreased 1%, comparing the first quarter of 2018 to the same period of the prior year.

Management has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company’s Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Similar to trust department fees, these fees are largely determined based on the value of the investments managed. ~~And, similar~~The Company announced in March 2018 the signing of definitive agreements to acquire and merge the ~~trust department, the Company has had some success in expanding its customer base. Due to this growth~~Bates Companies into RB&T. The acquisition and ~~favorable market conditions in 2017, investment advisory and management fees increased 25%, comparing the second quarter of 2017 to the same period~~subsequent merger of the ~~prior year and they increased 36% when comparing the first half~~Bates Companies into RB&T will add approximately $700 million of ~~2017 to the first half of 2016. The acquisition of CSB also contributed to this increase, as it had an established investment advisory and management services department at acquisition.~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ ~~– continued~~assets under management.

Deposit service fees expanded ~~54% comparing the second quarter of 2017 to the same period of the prior year and expanded 48% when~~16% comparing the first ~~half~~quarter of ~~2017~~2018 to the same period of the prior year. This increase was primarily the result of the growth in deposits due to the acquisition of ~~CSB.~~Guaranty Bank. Additionally, the Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Gains on sales of residential real estate loans increased ~~33%~~5% when comparing the ~~second~~first quarter of ~~2017~~2018 to the same period of the prior ~~year and increased 44% when comparing the first half of 2017 to the same period of the prior~~ year. ~~The increase was primarily attributable to the acquisition of CSB.~~ Overall, with the continued low interest rate environment, refinancing activity has slowed, as many of the Company’s existing and prospective customers have already executed a refinancing. Therefore, this area has generally become a smaller contributor to overall noninterest income.

The ~~Company~~’sCompany’s gains on the sale of government-guaranteed portions of loans for the ~~second~~first quarter of ~~2017~~2018 decreased ~~95%~~62% compared to the ~~second~~first quarter of ~~2016 and decreased 58% when comparing the first half of 2017 to the same period of the prior year.~~2017. Given the nature of these gains, large fluctuations can ~~happen~~occur from quarter-to-quarter and year-to-year. As one of its core strategies, the Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. ~~The~~In the past several years, the Company’s portfolio of government-guaranteed loans has grown as a direct result of the Company’s strong expertise in SBA and USDA lending. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company’s portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. Lastly, a strategy for improved pricing is packaging loans together for sale. From time to time, the Company may execute on this strategy, which may delay the gains on sales of some loans to achieve better pricing.

As a result of the continued relatively low interest rate environment including a flat yield curve, the Company was able to execute numerous interest rate swaps on select commercial loans over the past ~~two~~several years. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. ~~A good~~An optimal interest rate swap candidate must be of a certain size and sophistication which ~~leads~~can lead to volatility in activity from quarter to quarter. Swap fee income totaled ~~$328 thousand for the second quarter of 2017, compared to $168 thousand for the second quarter of 2016. Swap fee income totaled $441~~$959 thousand for the first ~~half~~quarter of ~~2017~~2018, compared to ~~$1.0 million in~~$114 thousand for the first ~~half~~quarter of ~~2016.~~2017. Future levels of swap fee income are also dependent upon prevailing interest rates.

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~Securities gains were $38 thousand for the second~~ quarter of 2017. Securities gains were $18 thousand for the second quarter of 2016. Securities gains totaled $38 thousand for the first six months of 2017, compared to $377 thousand for the first six months of 2016. The Company took advantage of market opportunities by selling low-yielding investments and using the proceeds to purchase higher-yielding bonds with a moderate duration extension and to fund loan and lease growth.

Earnings on BOLI decreased ~~4% comparing the second quarter of 2017 to the second quarter of 2016 and increased 6%~~11% comparing the first ~~half~~quarter of ~~2017~~2018 to the first ~~half~~quarter of ~~2016.~~2017. There were no purchases of BOLI within the last ~~twelve~~12 months. Notably, a small portion of the Company’s BOLI is variable rate whereby the returns are determined by the performance of the equity market. Equity market performance accounted for the majority of the volatility. 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 ~~116%~~9% comparing the ~~second~~first quarter of ~~2017~~2018 to the ~~second~~first quarter of the prior ~~year and increased 122% comparing the first half of 2017~~year. This increase was primarily related to the ~~first half~~acquisition of ~~2016. The primary reason for~~Guaranty Bank in the ~~increase was the addition~~fourth quarter of ~~CSB. CSB has a large retail customer base and, therefore generates significant interchange revenue. Additionally, these~~2017. 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.~~activity, which has been taken advantage of by the Company's customers.

Correspondent banking fees ~~decreased 18%~~increased 8% comparing the ~~second~~first quarter of ~~2017~~2018 to the ~~second~~first quarter of the prior year and decreased 19% when comparing the first half of 2017 to the first half of 2016. As interest rates rise, the correspondent bank deposit accounts receive a higher earnings credit, which then reduces the direct fees that the Company receives.year. 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 ~~noninterest bearing~~ deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately ~~181~~192 banks in Iowa, Illinois and Wisconsin.

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Other noninterest income increased 39% comparing the first quarter of 2018 to the first quarter of the prior year. The primary reason for the increase was gain on disposal of leased assets which totaled $106 thousand in the first quarter of 2018 as compared to $2 thousand in the first quarter of 2017.

~~NONINTEREST~~NONINTEREST EXPENSE

The following ~~table~~stables set forth the various categories of noninterest expense for the three ~~and six~~ months ended ~~June 30, 2017~~March 31, 2018 and ~~2016.~~2017.

Three Months Ended

June 30, 2017

June 30, 2016

$ Change

% Change

Salaries and employee benefits
$ 12,930,944 10,917,473 $ 2,013,471 18.4
%
Occupancy and equipment expense
2,698,336 1,884,556 813,780 43.2
Professional and data processing fees
2,340,699 1,542,322 798,377 51.8
Acquisition costs
- 354,969 (354,969 ) (100.0 )
FDIC insurance, other insurance and regulatory fees
645,277 649,604 (4,327 ) (0.7 )
Loan/lease expense
260,284 154,349 105,935 68.6
Net cost of operations of other real estate
27,957 277,911 (249,954 ) (89.9 )
Advertising and marketing
567,588 433,451 134,137 30.9
Bank service charges
447,445 415,350 32,095 7.7
Correspondent banking expense
201,693 181,776 19,917 11.0
Other
1,284,406 931,992 352,414 37.8
Total noninterest expense
$ 21,404,629 $ 17,743,753 $ 3,660,876 20.6
%

	Six Months Ended										Three Months Ended
	June 30, 2017		June 30, 2016		$ Change			% Change			March 31, 2018		March 31, 2017		$ Change			% Change

Salaries and employee benefits	$	26,238,275	$	21,718,380	$	4,519,895			20.8	%	$	15,977,975	$	13,307,331	$	2,670,644			20.1	%
Occupancy and equipment expense		5,200,555		3,711,544		1,489,011			40.1			3,065,811		2,502,219		563,592			22.5
Professional and data processing fees		4,424,091		2,989,735		1,434,356			48.0			2,707,716		2,083,392		624,324			30.0
Acquisition costs		-		354,969		(354,969	)		(100.0	)		92,539		5,630		86,909			1,543.7
FDIC insurance, other insurance and regulatory fees		1,266,519		1,283,969		(17,450	)		(1.4	)		756,211		621,242		134,969			21.7
Loan/lease expense		553,822		317,168		236,654			74.6			290,747		293,538		(2,791	)		(1.0	)
Net cost of operations of other real estate		42,187		380,094		(337,907	)		(88.9	)		131,742		14,230		117,512			825.8
Advertising and marketing		1,177,019		819,710		357,309			43.6			693,239		609,431		83,808			13.8
Bank service charges		871,346		831,281		40,065			4.8			440,571		423,901		16,670			3.9
Losses on debt extinguishment, net		-		83,197		(83,197	)		(100.0	)
Correspondent banking expense		400,044		358,765		41,279			11.5			204,754		198,351		6,403			3.2
CDI amortization expense												304,551		230,867		73,684			31.9
Other		2,503,888		1,849,439		654,449			35.4			1,197,641		982,985		214,656			21.8
Total noninterest expense	$	42,677,746	$	34,698,251	$	7,979,495			23.0	%	$	25,863,497	$	21,273,117	$	4,590,380			21.6	%

Management places a strong emphasis on overall cost containment and is committed to ~~improving~~improving the Company’s general efficiency. Most expenses were higher in the second quarter of 2017 compared to 2016 as a result of acquiring CSB as the Company’s fourth bank charter in the third quarter of 2016. Noninterest expense, excluding CSB, decreased 3.8% comparing the second quarter of 2017One-time charges relating to the ~~same period~~acquisition of ~~the prior year and decreased 2.4% comparing the first half~~Springfield Bancshares are expected to impact expense in later periods of ~~2017 to the first half of 2016.~~2018.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the ~~second~~first quarter ~~of 2016 to the second quarter of 2017 by 18%. This line item also increased 21% when comparing the first half~~ of 2017 to the first ~~half~~quarter of ~~2016.~~2018 by 20%. This increase was primarily related to new hires, merit increases and the ~~acquisition~~addition of ~~CSB.~~the Guaranty Bank employees. New hires throughout 2017 included roles in Information Technology, Accounting, Internal Audit, Trust and Commercial Banking.

Occupancy and equipment expense increased ~~43%~~23%, comparing the ~~second~~first quarter of ~~2017 to the same period of the prior year and increased 40% comparing the first half of 2017~~2018 to the same period of the prior year. The increased expense was mostly due to the addition of ~~CSB.~~Guaranty Bank.

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Professional and data processing feesfees increased ~~52%~~30%, comparing the ~~second~~first quarter of ~~2017~~2018 to the same period in ~~2016 and increased 48% comparing the first half of 2017 to the same period in 2016.~~2017. This increased expense was ~~primarily~~partially due to the addition of ~~CSB.~~Guaranty Bank. Additionally, legal expense was also elevated due to a legal matter at RB&T where two employees have been charged with wrongdoing in connection with an SBA loan application. The Company anticipates these legal expenses will continue to increase until the court proceedings are completed, which the Company expects to be in late 2018. Neither RB&T nor the Company have been charged in the case. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing ~~such~~ one-time costs and driving recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.

Acquisition costs totaled $93 thousand and $6 thousand for the first quarter of 2018 and 2017, respectively.

FDIC insurance, other insurance and ~~other insurance~~regulatory fee expense increased 22%, comparing the first quarter of 2018 to the first quarter of 2017. The increase in expense was due to the acquisition of Guaranty Bank.

Loan/lease expense decreased 1%, comparing the ~~second~~first quarter of 2017 to the second quarter of 2016, and decreased 1% comparing the first half of 2017 to the same period of 2016. The decrease in expense was due to a decrease in the assessment rate designated by the FDIC partially offset by the acquisition of CSB.

~~Loan/lease expense increased 69%, comparing the second quarter of 2017~~2018 to the same quarter of 2016, and increased 75% when comparing the first half of 2017 to the same period of 2016. The Company incurred elevated levels of expense in the first six months of 2017 for certain existing NPLs in connection with the work-out of these loans.2017. 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 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 ~~costs of~~cost from operations of other real estate totaled ~~$28~~$132 thousand for the ~~second~~first quarter of ~~2017,~~2018, compared to ~~$278 thousand for the second quarter of 2016. Net~~net costs of operations of ~~other real estate totaled $42~~$14 thousand for the first ~~six months~~quarter of ~~2017, compared to $380 thousand for~~2017.

Advertising and marketing expense increased 14%, comparing the first ~~six months~~quarter of ~~2016. Occupancy rates for one~~2018 to the first quarter of 2017. The increase in expense was primarily due to the ~~OREO properties managed by the Company have improved over the past year, increasing cash flow from that property and reducing net operating costs.~~addition of Guaranty Bank.

Bank service charges,, a large portion of which includes indirect costs incurred to provide services to QCBT’s correspondent banking customer portfolio, increased 8%4% from the ~~second quarter of 2016 to the second~~first quarter of 2017 ~~and increased 5% from the first half of 2016~~ to the first ~~half~~quarter of ~~2017.~~2018. The increase was due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio. As transactions volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

~~In the~~ first half of 2016, the Company incurred $83 thousand of losses on debt extinguishment, net. This amount included $1.3 million of losses related to the prepayment of certain FHLB advances and wholesale structured repurchase agreements, as well as a $1.2 million gain recognized through the repurchase of trust preferred securities, at a discount.

Correspondent banking ex~~pense was up 11% when comparing the second quarter of 2017 to the second quarter of 2016 and up 12%~~expense increased 3% when comparing the first ~~six months~~quarter of ~~2017~~2018 to the ~~same period~~first quarter of ~~2016~~2017 due to both increases in volume and in the number of correspondent banking clients. These are direct costs incurred to provide services to QCBT’s correspondent banking customer portfolio, including safekeeping and cash management services.

CDI amortization expense increased 32% when comparing the first quarter of 2018 to the first quarter of 2017. The increase was due to the acquisition of Guaranty Bank.

Other noninterest expense was up 22% when comparing the first quarter of 2018 to the first quarter of 2017. 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 Guaranty Bank.

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INCOME TAXES

In the ~~second~~first quarter of ~~2017,~~2018, the Company incurred income tax expense of ~~$2.6 million. During the first half of the year, the Company incurred income tax expense of $5.0~~$2.0 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, 2017~~March 31, 2018 and ~~2016.~~2017.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2017

2016

2017

2016

% of

% of

% of

% of

Pretax

Pretax

Pretax

Pretax

Amount

Income

Amount

Income

Amount

Income

Amount

Income

Computed "expected" tax expense
$ 3,990,557 35.0 % $ 3,090,364 35.0 % $ 8,041,601 35.0 % $ 6,027,743 35.0 %
Tax exempt interest income
(1,433,903 ) (12.6 ) (988,488 ) (11.2 ) (2,739,330 ) (11.9 ) (1,954,806 ) (11.4 )
Bank-owned life insurance
(160,775 ) (1.4 ) (168,182 ) (1.9 ) (325,166 ) (1.4 ) (305,945 ) (1.8 )
State income taxes, net of federal benefit, current year
394,410 3.5 297,130 3.4 802,735 3.5 564,038 3.3
Excess tax benefit on stock options exercised and restricted stock awards vested *
(89,545 ) (0.8 ) - - (622,867 ) (2.7 ) - -
Other
(65,168 ) (0.6 ) (77,680 ) (0.9 ) (131,951 ) (0.6 ) (158,863 ) (0.9 )
Federal and state income tax expense
$ 2,635,576 23.1 % $ 2,153,144 24.4 % $ 5,025,022 21.9 % $ 4,172,167 24.2 %

* As a result of the implementation of ASU 2016-09 effective January 1, 2017, the excess tax benefit on stock options exercised and restricted stock awards vested is now recorded as an adjustment to income tax expense in the income statement. ~~Previously, the excess tax benefit was recorded as an adjustment to equity.~~

	For the Three Months Ended March 31,
	2018						2017
				% of						% of
				Pretax						Pretax
	Amount			Income			Amount			Income

Computed "expected" tax expense	$	2,633,669			21.0	%	$	4,051,044			35.0	%
Tax exempt income, net		(943,101	)		(7.5	)		(1,305,427	)		(11.3	)
Bank-owned life insurance		(87,777	)		(0.7	)		(164,391	)		(1.4	)
State income taxes, net of federal benefit, current year		551,468			4.4			408,325			3.5
Excess tax benefit on stock options exercised and restricted stock awards vested		(132,361	)		(1.1	)		(533,322	)		(4.6	)
Other		(30,828	)		(0.2	)		(66,783	)		(0.6	)
Federal and state income tax expense	$	1,991,070			15.9	%	$	2,389,446			20.6	%

The effective tax rate for the quarter ended ~~June 30, 2017~~March 31, 2018 was ~~23.1%~~15.9% which was a 4.7% decrease from the effective tax rate of ~~24.4%~~20.6% for the quarter ended ~~June 30, 2016.~~March 31, 2017. The Tax Act was enacted on December 22, 2017 and was effective January 1, 2018 reducing the federal corporate tax rate ~~for the six months ended June 30, 2017 was 21.9%, which was a decrease over the effective tax rate of 24.2% for the six months ended June 30, 2016. This shift was primarily due~~from 35% to the implementation of ASU 2016-09, which resulted in a tax benefit of $90 thousand for the second quarter of 2017 and $623 thousand for the first six months of 2017. The effective rate for the three months ended June 30, 2017 was also impacted by higher tax exempt interest income.21%.

FINANCIAL CONDITION

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

	As of																				As of
	June 30, 2017					March 31, 2017					December 31, 2016					June 30, 2016					March 31, 2018					December 31, 2017					March 31, 2017
	(dollars in thousands)																				(dollars in thousands)
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Cash and due from banks	$	77,161		2	%	$	56,326		2	%	$	70,570		2	%	$	49,581		2	%	$	61,846		2	%	$	75,722		2	%	$	56,326		2	%
Federal funds sold and interest-bearing deposits		72,354		2	%		173,219		5	%		86,206		3	%		68,432		3	%		59,557		1	%		85,962		2	%		173,219		5	%
Securities		593,485		17	%		557,646		16	%		574,022		19	%		510,959		19	%		638,229		16	%		652,382		16	%		557,646		16	%
Net loans/leases		2,520,209		73	%		2,403,791		71	%		2,374,730		70	%		1,894,676		71	%		3,018,370		75	%		2,930,130		74	%		2,403,791		71	%
Other assets		193,978		6	%		190,031		6	%		196,416		6	%		159,786		6	%		248,312		6	%		238,469		6	%		190,031		6	%
Total assets	$	3,457,187		100	%	$	3,381,013		100	%	$	3,301,944		100	%	$	2,683,434		100	%	$	4,026,314		100	%	$	3,982,665		100	%	$	3,381,013		100	%

Total deposits	$	2,870,234		83	%	$	2,805,931		83	%	$	2,669,261		74	%	$	1,973,594		74	%	$	3,280,001		82	%	$	3,266,655		82	%	$	2,805,931		83	%
Total borrowings		230,264		7	%		231,534		7	%		290,952		14	%		381,875		14	%		334,802		8	%		309,480		8	%		231,534		7	%
Other liabilities		51,606		1	%		47,708		1	%		55,690		2	%		52,848		2	%		51,083		1	%		53,243		1	%		47,708		1	%
Total stockholders' equity		305,083		9	%		295,840		9	%		286,041		10	%		275,117		10	%		360,428		9	%		353,287		9	%		295,840		9	%
Total liabilities and stockholders' equity	$	3,457,187		100	%	$	3,381,013		100	%	$	3,301,944		100	%	$	2,683,434		100	%	$	4,026,314		100	%	$	3,982,665		100	%	$	3,381,013		100	%

During the ~~second~~first quarter of ~~2017,~~2018, the Company’s total assets increased ~~$76.2~~$43.6 million, or 2%1%, to a total of ~~$3.5~~$4.0 billion. ~~Total gross loans and~~ Net loans/leases grew ~~$117.7~~$88.2 million. This loan and lease growth was funded by a combination of excess cash, deposits, which increased ~~$64.3~~$13.3 million in ~~the second quarter of 2017, and excess cash from strong deposit growth from~~ the first quarter of ~~2017~~2018, and borrowings, which increased $25.3 million in the first quarter of 2018. Stockholders’ equity increased ~~$9.2~~$7.1 million, or 3%2%, in the current quarter due to net retained income.

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Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INVESTMENT SECURITIES

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

Following is a breakdown of the ~~Company~~’sCompany’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, 2017						March 31, 2017						December 31, 2016						June 30, 2016
	Amount			%			Amount			%			Amount			%			Amount			%			As of
																									March 31, 2018						December 31, 2017						March 31, 2017
	(dollars in thousands)																								Amount			%			Amount			%			Amount			%
																									(dollars in thousands)
U.S. govt. sponsored agency securities	$	41,944			7	%	$	47,556			9	%	$	46,084			8	%	$	88,321			17	%	$	36,868			6	%	$	38,097			6	%	$	47,556			9	%
Municipal securities		381,254			64	%		356,776			64	%		374,463			65	%		302,689			59	%		438,736			69	%		445,049			68	%		356,776			64	%
Residential mortgage-backed and related securities		164,415			28	%		147,504			26	%		147,702			26	%		116,765			23	%		157,289			25	%		163,301			25	%		147,504			26	%
Other securities		5,872			1	%		5,810			1	%		5,773			1	%		3,184			1	%		5,336			1	%		5,935			1	%		5,810			1	%
	$	593,485			100	%	$	557,646			100	%	$	574,022			100	%	$	510,959			100	%	$	638,229			100	%	$	652,382			100	%	$	557,646			100	%

Securities as a % of total assets		17.17	%					16.49	%					17.38	%					19.04	%
Net unrealized gains (losses) as a % of amortized cost		(0.33	)%					(0.79	)%					(0.87	)%					1.95	%
Securities as a % of Total Assets																										15.85	%					16.38	%					16.49	%
Net Unrealized Losses as a % of Amortized Cost																										(1.01	)%					(0.13	)%					(0.79	)%
Duration (in years)		6.3						6.1						6.0						5.1						6.9						7.0						6.1
Yield on investment securities (tax equivalent)		3.76	%					3.73	%					3.56	%					3.64	%
Quarterly Yield on Investment Securities (TEY)																										3.65	%					3.82	%					3.73	%
Quarterly Yield on Investment Securities (GAAP)																										3.03	%					2.77	%					2.74	%

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.

TheThe duration of the securities portfolio ~~extended~~shortened modestly with the TEY on the portfolio ~~improving 20~~decreasing 17 bps ~~over~~in the first ~~half~~quarter of ~~2017.~~2018; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 26 basis points.

The Company has not invested in private mortgage-backed securities or pooled trust preferred securities. Additionally, the Company has not invested in the types of securities subject to the Volcker Rule (a provision of the Dodd-Frank Act).

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

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LOANS/LEASES

Total loans/leases grew ~~19.2%~~12.2% on an annualized basis during the ~~second~~first quarter of ~~2017.~~2018. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.

	As of
	June 30, 2017						March 31, 2017						December 31, 2016						June 30, 2016
	Amount			%			Amount			%			Amount			%			Amount			%			As of
																									March 31, 2018						December 31, 2017						March 31, 2017
	(dollars in thousands)																								Amount			%			Amount			%			Amount			%
																									(dollars in thousands)
C&I loans	$	942,538			37	%	$	851,578			35	%	$	827,637			34	%	$	706,261			37	%	$	1,201,087			39	%	$	1,134,516			38	%	$	851,578			35	%
CRE loans		1,131,906			45	%		1,106,842			46	%		1,093,459			46	%		784,379			41	%		1,357,703			45	%		1,303,492			44	%		1,106,842			46	%
Direct financing leases		153,337			6	%		159,368			7	%		165,419			7	%		169,928			9	%		137,614			5	%		141,448			5	%		159,368			7	%
Residential real estate loans		233,871			9	%		231,326			9	%		229,233			10	%		180,482			9	%		254,484			8	%		258,646			9	%		231,326			9	%
Installment and other consumer loans		84,047			3	%		78,771			3	%		81,666			3	%		73,658			4	%		95,912			3	%		118,611			4	%		78,771			3	%

Total loans/leases	$	2,545,699			100	%	$	2,427,885			100	%	$	2,397,414			100	%	$	1,914,708			100	%	$	3,046,800			100	%	$	2,956,713			100	%	$	2,427,885			100	%

Plus deferred loan/lease origination costs, net of fees		7,867						7,965						8,073						8,065						8,103						7,773						7,965
Less allowance		(33,357	)					(32,059	)					(30,757	)					(28,097	)					(36,533	)					(34,356	)					(32,059	)

Net loans/leases	$	2,520,209					$	2,403,791					$	2,374,730					$	1,894,676					$	3,018,370					$	2,930,130					$	2,403,791

As CRE loans have historically been the Company’s largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’s CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of ~~June 30, 2017 and~~ March 31, 2018 and December 31, 2017, ~~respectively,~~ approximately ~~28% and 29%~~26% of the CRE loan portfolio was owner-occupied.

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 ~~$91.0~~$66.6 million in the current ~~quarter, or an annualized rate of 43%.~~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, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the amount of nationally syndicated loans totaled ~~$44.3~~$39.9 million and ~~$46.5~~$51.2 million, respectively.

The Company also has several loans that are syndicated to borrowers in our existing markets or purchased from peer banks that we have a relationship with. These loans were immaterial as of June 30, 2017 and December 31, 2016.

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Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Following is a listing of significant industries within the ~~Company~~’sCompany’s CRE loan portfolio:

	As of June 30,					As of March 31,					As of December 31,					As of June 30,
	2017					2017					2016					2016
	Amount		%			Amount		%			Amount		%			Amount		%			As of March 31,					As of December 31,					As of March 31,
																					2018					2017					2017
						(dollars in thousands)															Amount		%			Amount		%			Amount		%
																					(dollars in thousands)
Lessors of Nonresidential Buildings	$	344,747		30	%	$	327,077		30	%	$	322,337		30	%	$	285,522		36	%	$	435,919		32	%	$	388,648		30	%	$	327,077		30	%
Lessors of Residential Buildings		159,370		14	%		147,335		13	%		141,321		13	%		104,395		13	%		221,978		16	%		199,047		15	%		147,335		13	%
Hotels																						70,887		5	%		70,447		5	%		37,998		4	%
Nonresidential Property Managers																						56,572		4	%		51,621		4	%		57,112		5	%
New Housing For-Sale Builders		52,277		5	%		57,733		5	%		56,711		5	%		5,430		1	%		52,951		4	%		61,480		5	%		57,733		5	%
Nonresidential Property Managers		52,947		5	%		57,112		5	%		70,914		7	%		17,517		2	%
Land Subdivision		46,117		4	%		47,254		4	%		45,132		4	%		18,034		2	%		45,356		3	%		44,192		3	%		47,254		4	%
Hotels		39,881		4	%		37,998		4	%		35,006		3	%		19,804		3	%
Nursing Care Facilities		33,607		3	%		34,611		3	%		34,768		3	%		15,070		2	%		38,830		3	%		47,008		4	%		34,611		3	%
New Multifamily Housing Construction		26,583		2	%		26,915		2	%		24,146		2	%		11,671		2	%
Lessors of Other Real Estate Property		20,932		2	%		20,989		2	%		25,664		2	%		21,803		3	%		31,121		2	%		29,078		2	%		20,989		2	%
Other *		355,445		31	%		349,818		32	%		337,460		31	%		285,133		36	%		404,089		30	%		411,971		32	%		376,733		34	%

Total CRE Loans	$	1,131,906		100	%	$	1,106,842		100	%	$	1,093,459		100	%	$	784,379		100	%	$	1,357,703		100	%	$	1,303,492		100	%	$	1,106,842		100	%

* “Other” consists of all other industries. None of these had concentrations greater than $~~22.6~~$27.2 million, or approximately 2% of total CRE loans in the most recent period presented.

The Company’s residential real estate loan portfolio ~~consists of~~includes the following:

●

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

●

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

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

Table of Contents

Part I

Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Following is a listing of significant equipment types ~~with~~inwithin the m2 loan and lease portfolio:

	As of June 30,					As of March 31,					As of December 31,					As of June 30,					As of March 31,					As of December 31,					As of March 31,
	2017					2017					2016					2016					2018					2017					2017
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
																					(dollars in thousands)
	(dollars in thousands)

Trucks, Vans and Vocational Vehicles																					$	28,219		13	%	$	19,927		9	%	$	14,657		7	%
Construction - General																						18,067		8	%		18,705		9	%		17,914		9	%
Manufacturing - General	$	19,092		9	%	$	18,067		9	%	$	17,434		8	%	$	16,918		8	%		16,624		7	%		16,571		8	%		18,067		9	%
Trucks & Vans		16,679		8	%		14,657		7	%		13,806		7	%		12,897		6	%
Construction - General		15,207		7	%		17,914		9	%		16,815		8	%		17,116		8	%
Food Processing Equipment		13,754		7	%		14,102		7	%		14,316		7	%		14,241		7	%		13,270		6	%		12,965		6	%		14,102		7	%
Marine - Travelifts		12,497		6	%		8,132		4	%		8,180		4	%		7,601		4	%		12,843		6	%		10,802		5	%		8,132		4	%
Manufacturing - CNC		10,083		5	%		6,812		3	%		7,164		3	%		7,974		4	%
Computer Hardware		9,821		5	%		10,094		5	%		10,443		5	%		10,529		5	%		10,694		5	%		11,340		5	%		10,094		5	%
Trailers		9,611		5	%		9,465		5	%		10,003		5	%		10,300		5	%		9,161		4	%		8,983		4	%		9,465		5	%
Manufacturing - CNC																						7,239		3	%		6,742		3	%		6,812		3	%
Restaurant		7,238		3	%		7,841		4	%		7,950		4	%		8,053		4	%		6,844		3	%		7,107		3	%		7,841		4	%
Furniture		6,305		3	%		6,259		3	%	$	6,945		3	%	$	3,313		2	%
Other		93,966		42	%		95,116		46	%		97,989		46	%		96,941		47	%
Other *																						100,693		45	%		102,094		47	%		101,375		49	%

Total m2 loans and leases		214,253		100	%		208,459		100	%		211,045		100	%		205,883		100	%	$	223,654		100	%	$	215,236		100	%	$	208,459		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.

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ are presented as follows:

Three Months Ended

Six Months Ended

June 30, 2017

June 30, 2016

June 30, 2017

June 30, 2016

(dollars in thousands)

(dollars in thousands)

Balance, beginning
$ 32,059 $ 27,395 $ 30,757 $ 26,141
Provisions charged to expense
2,023 1,198 4,128 3,271
Loans/leases charged off
(851 ) (634 ) (1,743 ) (1,502 )
Recoveries on loans/leases previously charged off
126 138 215 187
Balance, ending
$ 33,357 $ 28,097 $ 33,357 $ 28,097

	Three Months Ended
	March 31, 2018			March 31, 2017
	(dollars in thousands)
Balance, beginning	$	34,356		$	30,757
Provisions charged to expense		2,540			2,105
Loans/leases charged off		(436	)		(893	)
Recoveries on loans/leases previously charged off		73			90
Balance, ending	$	36,533		$	32,059

The allowance was determined based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmental 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 monthly with specific detailed reviews completed on all loans risk-rated worse than “fair quality”, as described in Note 1 ofto the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the loan review staff and reported to management and the board of directors.

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

	As of												As of
Internally Assigned Risk Rating *	June 30, 2017			March 31, 2017			December 31, 2016			June 30, 2016			March 31, 2018			December 31, 2017			March 31, 2017

	(dollars in thousands)
													(dollars in thousands)
Special Mention (Rating 6)	$	27,737		$	22,841		$	20,082		$	16,231		$	42,926		$	31,024		$	22,841
Substandard (Rating 7)		45,290			50,810			49,035			44,636			39,815			43,435			50,810
Doubtful (Rating 8)		-			-			-			-			-			271			-
	$	73,027		$	73,651		$	69,117		$	60,867		$	82,741		$	74,730		$	73,651


Criticized Loans **	$	73,027		$	73,651		$	69,117		$	60,867		$	82,741		$	74,730		$	73,651
Classified Loans ***	$	45,290		$	50,810		$	49,035		$	44,636		$	39,815		$	43,706		$	50,810


Criticized Loans as a % of Total Loans/Leases		2.86	%		3.02	%		2.87	%		3.17	%		2.79	%		2.52	%		3.02	%
Classified Loans as a % of Total Loans/Leases		1.77	%		2.09	%		2.04	%		2.32	%		1.34	%		1.47	%		2.09	%

* 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.

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

The Company experienced ~~a modest increase in criticized loans and~~ a decrease in classified loans during the first ~~half~~three months of ~~2017; as shown below, these changes did not translate~~2018. Criticized loans increased 11% during the same period due to ~~increased NPLs.~~one large credit that was added in the third quarter 2017. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

The following table summarizes the trend in the allowance as a percentage of gross loans/leases and as a percentage of NPLs.

	As of												As of
	June 30, 2017			March 31, 2017			December 31, 2016			June 30, 2016			March 31, 2018			December 31, 2017			March 31, 2017

Allowance / Gross Loans/Leases		1.31	%		1.32	%		1.28	%		1.46	%		1.20	%		1.16	%		1.32	%

Allowance / NPLs *		162.27	%		149.89	%		144.85	%		223.42	%		202.11	%		184.28	%		149.89	%

*NPLs consist of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing TDRs.

Although management ~~believe~~sbelieves that the allowance at ~~June 30, 2017~~March 31, 2018 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.

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, ~~the~~ loans acquired through the ~~acquisition~~acquisitions of CSB ~~were~~and Guaranty Bank are recorded at ~~market~~fair value; therefore, ~~there was~~ no allowance is associated with ~~CSB’s~~the acquired loans at acquisition. Management continues to evaluate the allowance needed on the acquired ~~CSB~~ loans factoring in the net remaining discount ($~~6.3~~7.3 million and $8.0 million at ~~June 30, 2017)~~March 31, 2018 and March 31, 2017, respectively). When factoring this remaining discount into the Company’s allowance to total loans and leases calculation, the Company’s allowance as a percentage of total loans and leases increases from ~~1.31%~~1.20% to ~~1.55%.~~1.43% as of March 31, 2018 and increases from 1.32% to 1.64% as of March 31, 2017.. This elimination of ~~CSB’s~~the allowance associated with acquired loans also resulted in a decrease of the allowance to NPLs ratio, as ~~CSB’s~~the acquired NPLs no longer have an allowance allocated to them and instead, have a loan discount that is separate from the allowance.

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

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

N~~ONPERFORMING~~NONPERFORMING ASSETS

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

	As of June 30,			As of March 31,			As of December 31,			As of June 30,
	2017			2017			2016			2016
													As of March 31,			As of December 31,			As of March 31,
	(dollars in thousands)												2018			2017			2017
													(dollars in thousands)
Nonaccrual loans/leases (1) (2)	$	13,217		$	14,205		$	13,919		$	10,737		$	12,759		$	11,441		$	14,205
Accruing loans/leases past due 90 days or more		424			955			967			86			41			89			955
TDRs - accruing		6,915			6,229			6,347			1,753			5,276			7,113			6,229
Total NPLs		20,556			21,389			21,233			12,576			18,076			18,643			21,389
OREO		5,174			5,625			5,523			6,179			12,750			13,558			5,625
Other repossessed assets		123			285			202			154			200			80			285
Total NPAs	$	25,853		$	27,299		$	26,958		$	18,909		$	31,026		$	32,281		$	27,299

NPLs to total loans/leases		0.80	%		0.88	%		0.88	%		0.65	%		0.59	%		0.63	%		0.88	%
NPAs to total loans/leases plus repossessed property		1.01	%		1.12	%		1.12	%		0.98	%		1.01	%		1.08	%		1.12	%
NPAs to total assets		0.75	%		0.81	%		0.82	%		0.70	%		0.77	%		0.81	%		0.81	%
Texas ratio (3)		8.08	%		8.78	%		9.09	%		6.28	%

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of ~~$2.2~~$2.6 million at ~~June 30,~~March 31, 2018, $2.3 million at December 31, 2017, and $2.4 million at March 31, ~~2017, $2.3 million at December 31, 2016, and $2.4 million at June 30, 2016.~~

~~(3)~~

~~Texas Ratio = Nonperforming Assets (excluding Other Repossessed Assets) / Tangible Equity plus~~ ~~Allowance. Texas Ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations for more information.~~2017.

NPAs at ~~June 30, 2017~~March 31, 2018 were ~~$25.9~~$31.0 million, which ~~were~~was down $1.3 million from ~~March~~December 31, 2017 and up ~~$6.9~~$3.7 million from ~~June 30, 2016.~~March 31, 2017. This increase from prior year was due to the ~~result~~addition of ~~two~~one large ~~credits~~credit that was added in the ~~fourth~~third quarter ~~of 2016.~~2017.

TheThe ratio of NPAs to total assets was ~~0.75%~~0.77% at ~~June 30, 2017,~~March 31, 2018, which was down from 0.81% at ~~March~~both December 31, 2017 and ~~up from 0.70% at June 30, 2016.~~March 31, 2017.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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

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

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

DEPOSITS

Deposits increased ~~$64.3~~$13.3 million during the ~~second~~first quarter of ~~2017.~~2018. The table below presents the composition of the Company’s deposit portfolio.

	As of
	June 30, 2017					March 31, 2017					December 31, 2016					June 30, 2016
																					As of
	(dollars in thousands)																				March 31, 2018					December 31, 2017					March 31, 2017
																					(dollars in thousands)
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Noninterest bearing demand deposits	$	760,625		27	%	$	777,150		28	%	$	797,415		30	%	$	615,764		31	%	$	784,815		24	%	$	789,548		24	%	$	777,150		28	%
Interest bearing demand deposits		1,526,103		52	%		1,486,047		53	%		1,369,226		51	%		918,036		47	%		1,789,019		55	%		1,855,893		57	%		1,486,047		53	%
Time deposits		478,580		17	%		458,170		16	%		439,169		17	%		337,584		17	%		496,644		15	%		516,058		16	%		458,170		16	%
Brokered deposits		104,926		4	%		84,564		3	%		63,451		2	%		102,210		5	%		209,523		6	%		105,156		3	%		84,564		3	%
	$	2,870,234		100	%	$	2,805,931		100	%	$	2,669,261		100	%	$	1,973,594		100	%	$	3,280,001		100	%	$	3,266,655		100	%	$	2,805,931		100	%

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

The Company experienced seasonal declines in commercial deposits with several large deposit customers in the first quarter 2018. To offset this, the Company accessed short-term brokered deposits, which drove the majority of the linked quarter increase in that category. The Company believes this situation is temporary and expects those deposits to return in the second quarter.

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

~~Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity.~~ Management will continue to focus on growing its ~~noninterest bearing~~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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

BORROWINGS

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

	As of
	March 31, 2018		December 31, 2017		March 31, 2017
	(dollars in thousands)
Overnight repurchase agreements with customers	$	3,820	$	7,003	$	7,170
Federal funds purchased		13,040		6,990		12,300
	$	16,860	$	13,993	$	19,470

As of

June 30, 2017

March 31, 2017

December 31, 2016

June 30, 2016

(dollars in thousands)

Overnight repurchase agreements with customers
$ 4,897 $ 7,170 $ 8,131 $ 21,441
Federal funds purchased
13,320 12,300 31,840 30,120
$ 18,217 $ 19,470 $ 39,971 $ 51,561

The ~~Company is~~ ~~nearing~~Company’s federal funds purchased fluctuates based on the ~~completion~~short-term funding needs of a process to transition its overnight repurchase agreements with customers into a comparable interest bearing demand deposit product that offers full FDIC insurance. This transition has freed up securities that were previously pledged as collateral to the overnight repurchase agreements with customers and has enhanced the Company’s ~~ability to further rotate its earning assets from securities to loans.~~

subsidiary banks.

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

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

	As of
	March 31, 2018		December 31, 2017		March 31, 2017
	(dollars in thousands)
Term FHLB advances	$	56,600	$	56,600	$	59,000
Overnight FHLB advances		159,745		135,400		47,550
	$	216,345	$	192,000	$	106,550

As of

June 30, 2017

March 31, 2017

December 31, 2016

June 30, 2016

(dollars in thousands)

Term FHLB advances
$ 57,000 $ 59,000 $ 63,000 $ 78,000
Overnight FHLB advances
49,500 47,550 74,500 118,900
$ 106,500 $ 106,550 $ 137,500 $ 196,900

Term FHLB advances ~~decreased~~remained the same in the current quarter ~~due to a small maturity of $2.0 million.~~as in the prior quarter. Overnight FHLB advances have increased by ~~$2.0 million.~~$24.3 million due to the strong loan and lease growth, which outpaced the Company’s deposit growth in the first quarter of 2018.

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

As of

June 30, 2017

March 31, 2017

December 31, 2016

June 30, 2016

(dollars in thousands)

Wholesale structured repurchase agreements
$ 45,000 $ 45,000 $ 45,000 $ 100,000
Term note
27,000 27,000 30,000 -
Revolving line of credit
- - 5,000 -
$ 72,000 $ 72,000 $ 80,000 $ 100,000

	As of
	March 31, 2018		December 31, 2017		March 31, 2017
	(dollars in thousands)
Wholesale structured repurchase agreements	$	35,000	$	35,000	$	45,000
Term notes		29,063		31,000		27,000
	$	64,063	$	66,000	$	72,000

Other borrowings include structured repos which are utilized as an alternative funding source to FHLB advances and customer deposits. Structured repos are collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

As described in Note 11 ofto the ~~Company~~’sConsolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, the Company has outstanding term notes and an ~~outstanding five-year term note and~~available revolving line of credit. As of ~~June 30, 2017,~~March 31, 2018, the term debt had been paid down to ~~$27.0~~$29.1 million, as scheduled. ~~Also, in the first quarter of 2017, the Company paid off the full outstanding amount of the revolving line of credit.~~ The term ~~note~~notes and revolving line of credit were used to help fund the ~~acquisition of CSB.~~CSB and Guaranty Bank acquisitions. As of ~~June 30,~~both March 31, 2018 and December 31, 2017, the full $10.0 million line of credit was available. If the line of credit is used, interest is calculated at the effective LIBOR rate plus 2.50% per annum ~~(3.66%~~(4.82% at June 30, 2017). In addition, a $7.0 million term note commitment with a four-year term was executed with interest calculated at the effective LIBOR rate plus 3.00% per annum (4.16% at June 30, 2017) to fund a portion of the cash consideration.. This $7.0 million term note commitment may be drawn upon closing of the acquisition of Guaranty Bank in late third quarter or early fourth quarter of 2017.

~~The Company executed several balance sheet restructuring strategies in 2016. Refer to Note 11 of the Annual Report on Form 10-K~~ ~~for the year ended December~~March 31, ~~2016 for addition information regarding these prepayments.~~2018).

It is ~~management~~’smanagement’s intention ~~to continue~~ to reduce its reliance on wholesale funding, including FHLB advances, structured repos, 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.

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

The table below presents the maturity schedule including weighted average interest cost for the Company’s combined wholesale funding portfolio.

	June 30, 2017				December 31, 2016				March 31, 2018					December 31, 2017
			Weighted				Weighted				Weighted					Weighted
			Average				Average				Average					Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate		Amount Due		Interest Rate			Amount Due		Interest Rate

	(dollars in thousands)
Year ending December 31:									(dollar amounts in thousands)
2017		176,017	1.16	%		165,543	0.91	%
2018		38,459	2.56			38,459	2.56		$	387,594		1.87	%	$	273,677		1.68	%
2019		16,950	2.72			16,950	2.65			41,973		2.26			31,950		2.32
2020		25,000	2.48			25,000	2.48			30,694		2.42			26,600		2.44
Total Wholesale Funding	$	256,426	1.60	%	$	245,952	1.45	%	$	460,261		1.94	%	$	332,227		1.80	%

During the first ~~six~~three months of ~~2017,~~2018, wholesale funding ~~modestly~~ increased ~~$10.5~~$128.0 million. Year-to-date, the Company has repaid $6$25.4 million of term borrowings at ~~maturity, however~~maturity. However, this was more than offset by growth in short-term borrowings used to temporarily fund strong earning asset growth.

~~STOCKHOLDERS~~’STOCKHOLDERS’ EQUITY

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

	As of
	June 30, 2017			March 31, 2017			December 31, 2016			June 30, 2016			As of
													March 31, 2018			December 31, 2017			March 31, 2017
	(dollars in thousands)												Amount			Amount			Amount
													(dollars in thousands)
Common stock	$	13,175		$	13,161		$	13,107		$	13,057		$	13,937		$	13,918		$	13,161
Additional paid in capital		158,001			157,582			156,777			155,454			189,685			189,078			157,582
Retained earnings		135,254			127,145			118,617			105,024			162,346			151,962			127,145
AOCI (loss)		(1,347	)		(2,048	)		(2,460	)		1,582			(5,540	)		(1,671	)		(2,048	)
Total stockholders' equity	$	305,083		$	295,840		$	286,041		$	275,117		$	360,428		$	353,287		$	295,840

TCE* / TA		8.29	%		8.20	%		8.04	%		10.10	%		8.10	%		8.01	%		8.20	%

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

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Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for ~~customers~~’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 ~~$168.5~~$136.5 million during the ~~second~~first quarter of ~~2017~~2018 and ~~$139.5~~$164.0 million during the full year of ~~2016.~~2017. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

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

At ~~June 30,~~March 31, 2018, the subsidiary banks had 33 lines of credit totaling $372.2 million, of which $3.2 million was secured and $369.0 million was unsecured. At March 31, 2018, the full $372.2 million was available.

At December 31, 2017, the subsidiary banks had 34 lines of credit totaling ~~$365.0~~$375.0 million, of which $3.0 million was secured and ~~$362.0 million was unsecured. At June 30, 2017, $359.1 million was available as $5.9 million was utilized for short-term borrowing needs at QCBT.~~

~~At December 31, 2016, the subsidiary banks had 33 lines of credit totaling $381.4 million, of which $34.4 million was secured and $347.0~~$372.0 million was unsecured. At December 31, ~~2016, $361.4~~2017, the full $375.0 million was ~~available as $20.0 million was utilized for short-term borrowing needs at QCBT.~~available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, ~~2018~~2018. At ~~June 30, 2017,~~March 31, 2018, the full $10.0 million was available.

As of ~~June 30, 2017,~~March 31, 2018, the Company ~~has $427.7~~had $417.5 million in correspondent banking deposits spread over ~~181~~192 relationships. While the Company believes that these funds are ~~very~~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 ~~$157.1~~$60.0 million during the first ~~six~~three months of ~~2017,~~2018, compared to ~~$67.2~~$102.6 million for the same period of ~~2016.~~2017. The net decrease in federal funds sold was $15.7 million for the first three months of 2018, compared to a net decrease of $6.5 million for the same period of 2017. The net decrease in interest-bearing deposits at financial institutions was ~~$10.8~~$10.7 million for the first ~~six~~three months of ~~2017,~~2018, compared to a net increase of ~~$11.2~~$93.5 million for the same period of ~~2016.~~2017. Proceeds from calls, maturities, ~~paydowns,~~ and ~~sales~~paydowns of securities were ~~$68.2~~$13.64 million for the first ~~six~~three months of ~~2017,~~2018, compared to ~~$171.1~~$25.9 million for the same period of ~~2016.~~2017. Purchases of securities used cash of ~~$89.8~~$7.1 million for the first ~~six~~three months of ~~2017,~~2018, compared to ~~$97.1~~$12.1 million for the same period of ~~2016.~~2017. The net increase in loans/leases used cash of ~~$146.4~~$90.4 million for the first ~~six~~three months of ~~2017~~2018 compared to ~~$125.0~~$29.2 million for the same period of ~~2016.~~2017.

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Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Financing activities provided cash of ~~$140.2~~$38.3 million for the first ~~six~~three months of ~~2017,~~2018, compared to ~~$60.3~~$77.5 million for same period of ~~2016.~~2017. Net increases in deposits totaled ~~$201.0~~$13.4 million for the first ~~six~~three months of ~~2017,~~2018, compared to ~~$92.9~~$136.7 million for the same period of ~~2016.~~2017. During the first ~~six~~three months of ~~2017,~~2018, the Company’s short-term borrowings ~~decreased $21.8~~increased $2.9 million, while they decreased ~~$93.1~~$20.5 million for the same period of ~~2016.~~2017. In the first ~~six~~three months of 2018, the Company increased FHLB advances by $24.3 million short-term and overnight advances, while borrowing maturities and principal payments on borrowings totaled $1.9 million. In the first three months of 2017, the Company reduced FHLB advances and ~~other~~ borrowings by $39.0 ~~million through a mixture of maturities, scheduled payments and the net change in short-term borrowings. In the first six months of 2016, the Company reduced FHLB advances and borrowings by $25.2~~ million through a mixture of maturities, prepayments, and debt retirement. ~~In the same period, the Company received $29.8 million of proceeds from the common stock offering of 1.2 million shares of common stock.~~

Total cash provided by operating activities was $~~23.6~~$7.0 million for the first ~~six~~three months of ~~2017,~~2018, compared to ~~$14.8~~$10.8 million for the same period of ~~2016.~~2017.

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.

The following table presents the details of the trust preferred securities outstanding as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016.~~2017.

Name	Date Issued	Amount Outstanding June 30, 2017		Amount Outstanding December 31, 2016		Interest Rate	Interest Rate as of June 30, 2017		Interest Rate as of December 31, 2016		Date Issued	Amount Outstanding March 31, 2018		Amount Outstanding December 31, 2017		Interest Rate	Interest Rate as of March 31, 2018		Interest Rate as of December 31, 2017

QCR Holdings Statutory Trust II	February 2004	$	10,310,000	$	10,310,000	2.85% over 3-month LIBOR		4.15%		3.85%	February 2004	$	10,310,000	$	10,310,000	2.85% over 3-month LIBOR		5.16%		4.54%
QCR Holdings Statutory Trust III	February 2004		8,248,000		8,248,000	2.85% over 3-month LIBOR		4.15%		3.85%	February 2004		8,248,000		8,248,000	2.85% over 3-month LIBOR		5.16%		4.54%
QCR Holdings Statutory Trust V	February 2006		10,310,000		10,310,000	1.55% over 3-month LIBOR		2.71%		2.43%	February 2006		10,310,000		10,310,000	1.55% over 3-month LIBOR		3.27%		2.91%
Community National Statutory Trust II	September 2004		3,093,000		3,093,000	2.17% over 3-month LIBOR		3.44%		3.17%	September 2004		3,093,000		3,093,000	2.17% over 3-month LIBOR		4.37%		3.80%
Community National Statutory Trust III	March 2007		3,609,000		3,609,000	1.75% over 3-month LIBOR		3.00%		2.71%	March 2007		3,609,000		3,609,000	1.75% over 3-month LIBOR		3.87%		3.32%
Guaranty Bankshares Statutory Trust I											May 2005		4,640,000		4,640,000	1.75% over 3-month LIBOR		3.87%		3.34%
		$	35,570,000	$	35,570,000	Weighted Average Rate		3.55%		3.265		$	40,210,000	$	40,210,000	Weighted Average Rate		4.35%		3.82%

The Company assumed the trust preferred securities originally issued by Community National in connection with its acquisition in May 2013. The Company assumed the trust preferred securities originally issued by Guaranty in connection with the acquisition in October 2017. As a result of acquisition accounting, the liabilities were recorded at fair value upon acquisition with the resulting discount being accreted as interest expense on a level yield basis over the expected term. ~~The original discount totaled $2.6 million.~~ As of ~~June 30, 2017,~~March 31, 2018, the remaining discount was ~~$2.0~~$2.7 million.

The Company filed a universal shelf registration statement on Form S-3 with the SEC on October 27, 2016, as amended on January 11, 2017. Declared effective by the SEC on January 31, 2017, the registration statement allows the Company to offer and sell various types of securities, including common stock, preferred stock, debt securities and/or warrants, from time to time up to an aggregate amount of $100 million. The Company utilized $30.1 million of its $100 million previous shelf registration filing through the offer and sale of its common stock in the second quarter of 2016 to help fund the acquisition of CSB. This Form S-3 filing replenished the amount available to the previous level of $100 million. The specific terms and prices of any securities offered pursuant to the registration statement will be determined at the time of any future offering and described in a separate prospectus supplement, which would be filed with the SEC at the time of the particular offering, if any. There were no securities issued under this shelf registration statement during the six months ended June 30, 2017.

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~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

~~Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995.~~

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~~’sCompany’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors ~~which~~that could have a material adverse effect on the ~~Company’s~~ operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” ~~sections~~section included under Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 and Item 1A of Part II of this report. In addition to the risk factors described in that section, there are other factors that ~~may impact any public company, including the Company, which~~ could have a material adverse effect on the ~~Company’s~~ operations and future prospects of the Company and its subsidiaries. ~~One should~~These additional factors include, but are not ~~consider~~limited to, the ~~risk factors to be a complete discussion of risks, uncertainties and assumptions.~~following:

●

The strength of the local and national economy.

●

Changes in the interest rate environment.

●

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

●

The impact of cybersecurity risks.

●

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

●

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

●

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

●

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

●

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

T~~hese~~

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

Table of Contents

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~~’sCompany’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~~’sCompany’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~~’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~~’sCompany’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~~’sCompany’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 300, 400, and 500 basis point upward shifts; and a 100 basis point downward shift 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 basis point downward shift. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve.

Table of Contents

Part I

Item 3

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

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

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

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
INTEREST RATE SCENARIO
POLICY LIMIT
As of June 30,
2017
As of December 31,
2016
As of December 31,
2015

100 basis point downward shift
-10.0%
-0.8%
-1.7%
-2.1%
200 basis point upward shift
-10.0%
-2.4%
-1.2%
-2.7%
300 basis point upward shock
-25.0%
-5.5%
-1.4%
-7.1%

			NET INTEREST INCOME EXPOSURE in YEAR 1
INTEREST RATE SCENARIO	POLICY LIMIT		As of March 31, 2018		As of December 31, 2017		As of December 31, 2016

100 basis point downward shift		-10.0%		0.3%		0.3%		-1.7%
200 basis point upward shift		-10.0%		-3.5%		-3.7%		-1.2%
300 basis point upward shock		-25.0%		-8.6%		-8.4%		-1.4%

The simulation is well within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at ~~June 30, 2017~~March 31, 2018 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn’t have a specific policy limit).

In 2014, the Company executed two interest rate cap transactions, each with a notional value of $15.0 million, for a total of $30.0 million. The interest rate caps purchased essentially set a ceiling to the interest rate paid on the $30.0 million of short-term FHLB advances that are being hedged, minimizing the interest rate risk associated with rising interest rates. The Company will continue to analyze and evaluate similar transactions as an alternative and cost effective way to mitigate interest rate risk.

Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the ~~Company~~’sCompany’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.

Table of Contents

Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of ~~June 30, 2017.~~March 31, 2018. 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.

Table of Contents

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1

Legal Proceedings

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

Item 1A

Risk Factors

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.
There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

~~None~~

None

Item 3

Defaults Upon Senior Securities

None

Item 4

Mine Safety Disclosures

Not applicable

Item 5

Other Information

~~None~~

None

Table of Contents

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION - continued

Item 6Exhibits

~~Exhibits~~

~~2.1~~	Purchase and Assumption Agreement, dated June 8, 2017, between QCR Holdings, Inc. and Guaranty Bankshares, Ltd. (incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed with the SEC on June 8, 2017.

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

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

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

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

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016;~~2017; (ii) Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30, 2017~~March 31, 2018 and ~~June 30, 2016;~~March 31, 2017; (iii) Consolidated Statements of Comprehensive Income for the three ~~and six~~ months ended ~~June 30, 2017~~March 31, 2018 and ~~June 30, 2016;~~March 31, 2017; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three ~~and six~~ months ended ~~June 30, 2017~~March 31, 2018 and ~~June 30, 2016;~~March 31, 2017; (v) Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 and ~~June 30, 2016;~~March 31, 2017; and (vi) Notes to the Consolidated Financial Statements.

Table of Contents

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 May 9, 2018

~~Date~~	~~August 8, 2017~~	/s/ Douglas M. Hultquist
		Douglas M. Hultquist, President
		Chief Executive Officer



Date May 9, 2018
~~Date~~	~~August 8, 2017~~	/s/ Todd A. Gipple
		Todd A. Gipple, Executive Vice President
		Chief Operating Officer
		Chief Financial Officer


Date May 9, 2018
~~Date~~	~~August 8, 2017~~	/s/ Elizabeth A. Grabin
		Elizabeth A. Grabin, First Vice President
		Director of Financial Reporting
		Principal Accounting Officer

	Three Months Ended June 30,
	2017			2016
Net income	$	8,766,017		$	6,676,467

Other comprehensive income:

Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period before tax		1,170,310			2,081,800
Less reclassification adjustment for gains included in net income before tax		38,464			18,030
		1,131,846			2,063,770
Unrealized losses on interest rate cap derivatives:
Unrealized holding losses arising during the period before tax		(132,352	)		(159,691	)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(136,639	)		20,154
		4,287			(179,845	)

Other comprehensive income, before tax		1,136,133			1,883,925
Tax expense		434,394			703,292
Other comprehensive income, net of tax		701,739			1,180,633

Comprehensive income	$	9,467,756		$	7,857,100

	Six Months Ended June 30,
	2017			2016
Net income	$	17,950,982		$	13,049,956

Other comprehensive income:

Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period before tax		1,768,500			6,945,518
Less reclassification adjustment for gains included in net income before tax		38,464			376,510
		1,730,036			6,569,008
Unrealized losses on interest rate cap derivatives:
Unrealized holding losses arising during the period before tax		(177,554	)		(549,627	)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(259,452	)		35,591
		81,898			(585,218	)

Other comprehensive income, before tax		1,811,934			5,983,790
Tax expense		699,456			2,277,746
Other comprehensive income, net of tax		1,112,478			3,706,044

Comprehensive income	$	19,063,460		$	16,756,000

	For the six months ended June 30, 2017								For the six months ended June 30, 2016
Classes of Loans/Leases	Number of Loans / Leases		Pre- Modification Recorded Investment		Post-Modification Recorded Investment		Specific Allowance		Number of Loans / Leases		Pre- Modification Recorded Investment		Post-Modification Recorded Investment		Specific Allowance

CONCESSION - Extension of Maturity
C&I		-	$	-	$	-	$	-		1	$	52,286	$	52,286	$	-
Direct Financing Leases		2		104,382		104,382		-		4		410,653		410,653		-
		2	$	104,382	$	104,382	$	-		5	$	462,939	$	462,939	$	-

CONCESSION - Significant Payment Delay
C&I		3	$	181,198	$	181,198	$	-		1	$	62,140	$	62,140	$	-
Direct Financing Leases		23		1,472,403		1,472,403		-		5		540,631		540,631		-
		26	$	1,653,601	$	1,653,601	$	-		6	$	602,771	$	602,771	$	-

CONCESSION - Interest Rate Adjusted Below Market
CRE - Other		-	$	-	$	-	$	-		1	$	1,233,740	$	1,233,740	$	-
		-	$	-	$	-	$	-		1		1,233,740		1,233,740		-

TOTAL		28	$	1,757,983	$	1,757,983	$	-		12	$	2,299,450	$	2,299,450	$	-

	For the three months ended June 30,
	2017								2016
				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	$	18,742		$	38		0.81	%	$	14,174		$	11		0.31	%
Interest-bearing deposits at financial institutions		86,236			220		1.02	%		50,747			62		0.49	%
Investment securities (1)		573,747			5,384		3.76	%		505,697			4,573		3.64	%
Restricted investment securities		13,226			132		4.00	%		14,171			134		3.80	%
Gross loans/leases receivable (1) (2) (3)		2,488,828			28,881		4.65	%		1,899,932			20,497		4.34	%
Total interest earning assets	$	3,180,779		$	34,655		4.37	%	$	2,484,721		$	25,277		4.09	%
Noninterest-earning assets:
Cash and due from banks	$	63,526							$	50,461
Premises and equipment		61,327								38,178
Less allowance		(32,361	)							(27,811	)
Other		104,924								95,129
Total assets	$	3,378,195							$	2,640,678
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	1,566,106			1,835		0.47	%	$	941,856			600		0.26	%
Time deposits		527,719			1,156		0.88	%		425,216			744		0.70	%
Short-term borrowings		17,936			19		0.42	%		50,122			18		0.14	%
FHLB advances		76,739			354		1.85	%		128,956			416		1.30	%
Other borrowings		72,000			696		3.88	%		100,008			824		3.31	%
Junior subordinated debentures		33,530			347		4.15	%		33,396			302		3.64	%
Total interest-bearing liabilities	$	2,294,030		$	4,407		0.77	%	$	1,679,554		$	2,904		0.70	%
Noninterest-bearing demand deposits	$	741,886							$	666,044
Other noninterest-bearing liabilities		41,411								39,689
Total liabilities	$	3,077,327							$	2,385,287
Stockholders' equity		300,868								255,391
Total liabilities and stockholders' equity	$	3,378,195							$	2,640,678
Net interest income				$	30,248							$	22,373
Net interest spread							3.60	%							3.39	%
Net interest margin							3.81	%							3.62	%
Ratio of average interest-earning assets to average interest-bearing liabilities		138.65	%							147.94	%