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 September 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 [ ]

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~~-212b-2 of the Exchange Act).

~~Yes~~

Yes [ ] No [ X ] ~~No [ ]~~

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of ~~November 2, 2017,~~May 1, 2018, the Registrant had outstanding ~~13,888,923~~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 ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017

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

		~~Consolidated Statements of Income~~
		~~For the Nine Months Ended September 30, 2017 and 2016~~	5

		Consolidated Statements of Comprehensive Income
		For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~		65

		Consolidated Statements of Changes in Stockholders' Equity
		For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~		76

		Consolidated Statements of Cash Flows
		For the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~		97

		Notes to Consolidated Financial Statements

		Note 1. Summary of Significant Accounting Policies		9
		Note 2. Investment Securities		11
		Note 2. ~~Investment Securities~~3. Loans/Leases Receivable	13
		~~Note 3.~~ ~~Loans/Leases Receivable~~	18 16
		Note 4. Earnings Per Share		2825
		Note 5. Fair Value		2825
		Note 6. Business Segment Information		29
		Note 7. Regulatory Capital Requirements		30
		Note 8. Revenue Recognition		32
		Note 7. ~~Regulatory Capital Requirements~~9. Acquisitions		33
		~~Note 8.~~ ~~Subsequent Event - Acquisition of Guaranty Bank and Trust Company~~	35


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

		Introduction		3634
		General		3634
		Executive Overview		3735
		Long-Term Financial Goals		3936
		Strategic Developments		4037
		GAAP to Non-GAAP Reconciliations		4139
		Net Interest Income (Tax Equivalent Basis)		4341
		Critical Accounting Policies		4945
		Results of Operations		45
		Interest Income		5045
		Interest Expense		5046
		Provision for Loan/Lease Losses		5146
		Noninterest Income		5247
		Noninterest Expense		5549
		Income Taxes		5751

Table of Contents

		Financial Condition	5751
		Investment Securities	5852
		Loans/Leases	5953
		Allowance for Estimated Losses on Loans/Leases	6255
		Nonperforming Assets	6457
		Deposits	6558
		Borrowings	6559
		Stockholders' Equity	6760
		Liquidity and Capital Resources	6861
		Special Note Concerning Forward-Looking Statements	7063

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	7164

	Item 4	Controls and Procedures	7366

Part II	OTHER INFORMATION

	Item 1	Legal Proceedings	7467

	Item 1A	Risk Factors	7467

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	7467

	Item 3	Defaults upon Senior Securities	7467

	Item 4	Mine Safety Disclosures	7467

	Item 5	Other Information	7467

	Item 6	Exhibits	7568

Signatures			7669

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

~~Throughout the Notes to the Consolidated Financial Statements and Management's Discussion and~~~~Analysis of Financial Condition and Results of Operations, 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 September 30, 2017 and December 31, 2016~~

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2018 and December 31, 2017

	September 30,			December 31,			March 31,			December 31,
	2017			2016			2018			2017
ASSETS
Cash and due from banks	$	56,274,561		$	70,569,993		$	61,845,988		$	75,721,663
Federal funds sold		20,568,000			22,257,000			14,505,000			30,197,000
Interest-bearing deposits at financial institutions		41,221,383			63,948,925			45,051,555			55,765,012

Securities held to maturity, at amortized cost		323,981,227			322,909,056			378,584,337			379,474,205
Securities available for sale, at fair value		259,954,422			251,113,139			259,644,940			272,907,907
Total securities		583,935,649			574,022,195			638,229,277			652,382,112

Loans receivable held for sale		290,320			1,135,500			279,750			645,001
Loans/leases receivable held for investment		2,676,464,491			2,404,351,485			3,054,622,689			2,963,840,399
Gross loans/leases receivable		2,676,754,811			2,405,486,985			3,054,902,439			2,964,485,400
Less allowance for estimated losses on loans/leases		(34,982,341	)		(30,757,448	)		(36,532,602	)		(34,355,728	)
Net loans/leases receivable		2,641,772,470			2,374,729,537			3,018,369,837			2,930,129,672

Bank-owned life insurance		58,614,100			57,257,051			59,477,481			59,059,494
Premises and equipment, net		61,877,754			60,643,508			63,564,277			62,838,255
Restricted investment securities		18,585,400			14,997,025			22,413,075			19,782,525
Other real estate owned, net		5,134,845			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		6,688,613			7,381,213			8,774,402			9,078,953
Other assets		42,679,406			37,503,284			52,999,407			45,817,687
Total assets	$	3,550,463,094		$	3,301,943,748		$	4,026,314,414		$	3,982,664,773

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	715,537,518		$	797,415,090		$	784,815,082		$	789,547,696
Interest-bearing		2,178,730,964			1,871,846,183			2,495,186,410			2,477,107,360
Total deposits		2,894,268,482			2,669,261,273			3,280,001,492			3,266,655,056

Short-term borrowings		16,010,805			39,971,387			16,859,753			13,993,122
Federal Home Loan Bank advances		169,055,000			137,500,000			216,345,000			192,000,000
Other borrowings		77,500,000			80,000,000			64,062,500			66,000,000
Junior subordinated debentures		33,578,744			33,480,202			37,534,402			37,486,487
Other liabilities		47,011,435			55,690,087			51,083,350			53,242,979
Total liabilities		3,237,424,466			3,015,902,949			3,665,886,497			3,629,377,644

STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; shares authorized 250,000 September 2017 and December 2016 - No shares issued or outstanding		-			-
Common stock, $1 par value; shares authorized 20,000,000 September 2017 - 13,201,959 shares issued and outstanding December 2016 - 13,106,845 shares issued and outstanding		13,201,959			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		158,459,072			156,776,642			189,684,858			189,077,550
Retained earnings		142,450,131			118,616,901			162,345,792			151,962,661
Accumulated other comprehensive (loss):
Accumulated other comprehensive loss:
Securities available for sale		(250,107	)		(1,527,433	)		(4,917,148	)		(866,223	)
Interest rate cap derivatives		(822,427	)		(932,156	)		(622,542	)		(805,027	)
Total stockholders' equity		313,038,628			286,040,799			360,427,917			353,287,129
Total liabilities and stockholders' equity	$	3,550,463,094		$	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 September 30,~~

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31,

	2017			2016		2018		2017
Interest and dividend income:
Loans/leases, including fees	$	29,245,320		$	23,001,107	$	34,213,732	$	27,211,417
Securities:
Taxable		1,367,212			1,057,204		1,555,884		1,142,235
Nontaxable		2,862,208			2,510,169		3,289,002		2,647,722
Interest-bearing deposits at financial institutions		141,331			103,216		197,003		198,652
Restricted investment securities		172,776			132,047		234,344		130,430
Federal funds sold		52,018			12,992		56,331		14,643
Total interest and dividend income		33,840,865			26,816,735		39,546,296		31,345,099

Interest expense:
Deposits		3,556,189			1,472,031		4,881,149		2,232,756
Short-term borrowings		33,248			12,541		32,913		23,960
Federal Home Loan Bank advances		607,751			420,570		1,064,113		403,469
Other borrowings		724,854			974,634		718,176		683,208
Junior subordinated debentures		362,475			306,182		447,027		332,823
Total interest expense		5,284,517			3,185,958		7,143,378		3,676,216
Net interest income		28,556,348			23,630,777		32,402,918		27,668,883

Provision for loan/lease losses		2,086,436			1,607,986		2,539,839		2,105,109
Net interest income after provision for loan/lease losses		26,469,912			22,022,791		29,863,079		25,563,774

Noninterest income:
Trust department fees		1,721,401			1,518,600		2,237,081		1,740,207
Investment advisory and management fees		968,452			765,977		952,344		961,599
Deposit service fees		1,522,461			1,150,869		1,531,453		1,316,390
Gains on sales of residential real estate loans, net		98,409			144,105		100,815		96,323
Gains on sales of government guaranteed portions of loans, net		91,974			218,785		358,434		950,641
Swap fee income		194,256			333,772		958,694		113,520
Securities gains (losses), net		(63,588	)		4,251,773
Earnings on bank-owned life insurance		428,002			450,251		417,987		469,687
Debit card fees		754,803			475,182		766,108		702,801
Correspondent banking fees		239,060			253,823		264,827		245,189
Other		746,073			860,264		953,706		687,397
Total noninterest income		6,701,303			10,423,401		8,541,449		7,283,754

Noninterest expense:
Salaries and employee benefits		13,423,943			11,202,460		15,977,975		13,307,331
Occupancy and equipment expense		2,516,274			2,086,331		3,065,811		2,502,219
Professional and data processing fees		2,950,839			1,931,329		2,707,716		2,083,392
Acquisition costs		407,997			1,036,904		92,539		5,630
Post-acquisition transition and integration costs		522,740			1,009,132
FDIC insurance, other insurance and regulatory fees		690,894			582,835		756,211		621,242
Loan/lease expense		257,540			102,678		290,747		293,538
Net cost of (income from) operations of other real estate		(160,640	)		133,055
Net cost of operations of other real estate							131,742		14,230
Advertising and marketing		669,923			547,768		693,239		609,431
Bank service charges		460,153			415,401		440,571		423,901
Losses on debt extinguishment, net		-			4,137,310
Correspondent banking expense		204,189			205,998		204,754		198,351
CDI amortization							304,551		230,867
Other		1,451,895			1,089,282		1,197,641		982,985
Total noninterest expense		23,395,747			24,480,483		25,863,497		21,273,117
Net income before income taxes		9,775,468			7,965,709		12,541,031		11,574,411
Federal and state income tax expense		1,921,533			1,858,208		1,991,070		2,389,446
Net income	$	7,853,935		$	6,107,501	$	10,549,961	$	9,184,965

Basic earnings per common share	$	0.60		$	0.47	$	0.76	$	0.70
Diluted earnings per common share	$	0.58		$	0.46	$	0.74	$	0.68

Weighted average common shares outstanding		13,151,350			13,066,777		13,888,661		13,133,382
Weighted average common and common equivalent shares outstanding		13,507,955			13,269,703		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 INCOME (UNAUDITED)~~

~~Nine Months Ended September 30,~~

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended March 31, 2018 and 2017

2017

2016

Interest and dividend income:

Loans/leases, including fees
$ 84,571,466 $ 62,939,656
Securities:

Taxable
3,770,022 3,605,948
Nontaxable
8,198,173 7,028,387
Interest-bearing deposits at financial institutions
559,697 225,775
Restricted investment securities
435,096 396,157
Federal funds sold
104,778 36,155
Total interest and dividend income
97,639,232 74,232,078

Interest expense:

Deposits
8,779,548 4,106,227
Short-term borrowings
76,365 73,672
Federal Home Loan Bank advances
1,365,433 1,278,207
Other borrowings
2,103,731 2,624,154
Junior subordinated debentures
1,042,227 912,706
Total interest expense
13,367,304 8,994,966
Net interest income
84,271,928 65,237,112

Provision for loan/lease losses
6,214,538 4,878,821
Net interest income after provision for loan/lease losses
78,057,390 60,358,291

Noninterest income:

Trust department fees
5,153,609 4,606,590
Investment advisory and management fees
2,798,886 2,117,100
Deposit service fees
4,297,210 3,028,758
Gains on sales of residential real estate loans, net
307,360 288,904
Gains on sales of government guaranteed portions of loans, net
1,129,668 2,701,203
Swap fee income
635,353 1,358,312
Securities gains (losses), net
(25,124 ) 4,628,283
Earnings on bank-owned life insurance
1,357,049 1,324,380
Debit card fees
2,201,125 1,126,581
Correspondent banking fees
684,306 800,892
Other
2,228,133 2,027,272
Total noninterest income
20,767,575 24,008,275

Noninterest expense:

Salaries and employee benefits
39,662,218 32,920,840
Occupancy and equipment expense
7,716,829 5,797,875
Professional and data processing fees
7,374,930 4,921,064
Acquisition costs
407,997 1,363,987
Post-acquisition transition and integration costs
522,740 1,037,018
FDIC insurance, other insurance and regulatory fees
1,957,413 1,866,804
Loan/lease expense
811,362 419,846
Net cost of (income from) operations of other real estate
(118,453 ) 513,149
Advertising and marketing
1,846,942 1,367,478
Bank service charges
1,331,499 1,246,682
Losses on debt extinguishment, net
- 4,220,507
Correspondent banking expense
604,233 564,763
Other
3,955,783 2,938,721
Total noninterest expense
66,073,493 59,178,734
Net income before income taxes
32,751,472 25,187,832
Federal and state income tax expense
6,946,555 6,030,375
Net income
$ 25,804,917 $ 19,157,457

Basic earnings per common share
$ 1.96 $ 1.55
Diluted earnings per common share
$ 1.91 $ 1.52

Weighted average common shares outstanding
13,151,672 12,398,491
Weighted average common and common equivalent shares outstanding
13,509,566 12,580,042

Cash dividends declared per common share
$ 0.15 $ 0.12

	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 (UNAUDITED)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2018 and 2017

Three Months Ended September 30,

2017

2016

Net income
$ 7,853,935 $ 6,107,501

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:

Unrealized holding gains arising during the period before tax
289,086 3,682,514
Less reclassification adjustment for gains (losses) included in net income before tax
(63,588 ) 4,251,773
352,674 (569,259 )
Unrealized gains (losses) on interest rate cap derivatives:

Unrealized holding losses arising during the period before tax
(8,446 ) (49,573 )
Less reclassification adjustment for ineffectiveness and caplet amortization before tax
(95,361 ) (33,246 )
86,915 (16,327 )

Other comprehensive income (loss), before tax
439,589 (585,586 )
Tax expense (benefit)
165,012 (224,402 )
Other comprehensive income (loss), net of tax
274,577 (361,184 )

Comprehensive income
$ 8,128,512 $ 5,746,317

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

Nine Months Ended September 30,

2017

2016

Net income
$ 25,804,917 $ 19,157,457

Other comprehensive income:

Unrealized gains (losses) on securities available for sale:

Unrealized holding gains arising during the period before tax
2,057,586 10,628,032
Less reclassification adjustment for gains (losses) included in net income before tax
(25,124 ) 4,628,283
2,082,710 5,999,749
Unrealized gains (losses) on interest rate cap derivatives:

Unrealized holding losses arising during the period before tax
(186,000 ) (634,791 )
Less reclassification adjustment for ineffectiveness and caplet amortization before tax
(354,813 ) (82,281 )
168,813 (552,510 )

Other comprehensive income, before tax
2,251,523 5,447,239
Tax expense
864,468 2,102,379
Other comprehensive income, net of tax
1,387,055 3,344,860

Comprehensive income
$ 27,191,972 $ 22,502,317

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 and Nine Months Ended September 30, 2017 and 2016~~

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31, 2018 and 2017

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
Net income
- - 7,853,935 - 7,853,935
Other comprehensive loss, net of tax
- - - 274,577 274,577
Common cash dividends declared, $0.05 per share
- - (658,110 ) - (658,110 )
Proceeds from issuance of 2,319 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
2,319 88,052 - - 90,371
Proceeds from issuance of 19,906 shares of common stock as a result of stock options exercised
19,906 73,915 - - 93,821
Stock compensation expense
- 300,599 - - 300,599
Restricted stock awards - 4,500 shares of common stock
4,500 (4,500 ) - - -
Balance September 30, 2017
$ 13,201,959 $ 158,459,072 $ 142,450,131 $ (1,072,534 ) $ 313,038,628

	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	10,549,961		$	9,184,965
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,020,975			896,952
Provision for loan/lease losses		2,539,839			2,105,109
Stock-based compensation expense		495,493			388,753
Deferred compensation expense accrued		511,502			404,723
Losses on other real estate owned, net		118,159			-
Amortization of premiums on securities, net		438,641			347,178
Loans originated for sale		(12,939,466	)		(21,416,325	)
Proceeds on sales of loans		13,763,966			22,547,789
Gains on sales of residential real estate loans		(100,815	)		(96,323	)
Gains on sales of government guaranteed portions of loans		(358,434	)		(950,641	)
Amortization of core deposit intangible		304,551			230,867
Accretion of acquisition fair value adjustments, net		(732,689	)		(1,915,001	)
Increase in cash value of bank-owned life insurance		(417,987	)		(469,687	)
Decrease (increase) in other assets		(4,403,592	)		5,427,798
Decrease in other liabilities		(2,886,830	)		(5,852,341	)
Net cash provided by operating activities	$	7,903,274		$	10,833,816

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold		15,692,000			6,459,000
Net decrease (increase) in interest-bearing deposits at financial institutions		10,713,457			(93,471,781	)
Proceeds from sales of other real estate owned		736,370			34,191
Activity in securities portfolio:
Purchases		(7,100,109	)		(12,138,040	)
Calls, maturities and redemptions		4,540,000			17,385,968
Paydowns		9,085,377			8,486,628
Activity in restricted investment securities:
Purchases		(4,450,550	)		(7,600	)
Redemptions		1,820,000			1,315,500
Net increase in loans/leases originated and held for investment		(90,378,382	)		(29,236,438	)
Purchase of premises and equipment		(704,413	)		(1,396,902	)
Net cash used in investing activities	$	(60,046,250	)	$	(102,569,474	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		13,377,517			136,704,261
Net increase (decrease) in short-term borrowings		2,866,631			(20,501,291	)
Activity in Federal Home Loan Bank advances:
Calls and maturities		-			(4,000,000	)
Net change in short-term and overnight advances		24,345,000			(26,950,000	)
Activity in other borrowings:
Calls, maturities and scheduled principal payments		(1,937,500	)		(8,000,000	)
Payment of cash dividends on common stock		(692,874	)		(522,574	)
Proceeds from issuance of common stock, net		308,527			761,238
Net cash provided by financing activities	$	38,267,301		$	77,491,634
Net decrease in cash and due from banks		(13,875,675	)		(14,244,024	)
Cash and due from banks, beginning		75,721,663			70,569,993
Cash and due from banks, ending	$	61,845,988		$	56,325,969

(Continued)

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

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

~~Three and Nine Months Ended September 30, 2017 and 2016~~

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three Months Ended March 31, 2018 and 2017

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
Tax benefit of nonqualified stock options exercised
- -
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 restricted stock vested, net
(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 loss, net of tax
- - - 1,180,633 1,180,633
Common cash dividends declared, $0.04 per share
- - (520,701 ) - (520,701 )
Proceeds from 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
Net income
- - 6,107,501 - 6,107,501
Other comprehensive loss, net of tax
- - - (361,184 ) (361,184 )
Common cash dividends declared, $0.04 per share
- - (521,384 ) - (521,384 )
Proceeds from issuance of 4,085 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
4,085 85,217 - - 89,302
Proceeds from issuance of 14,692 shares of common stock as a result of stock options exercised
14,692 173,890 - - 188,582
Stock compensation expense
- 190,211 - - 190,211
Tax benefit of nonqualified stock options exercised
- 72,694 - - 72,694
Exchange of 838 shares of common stock in connection with stock options exercised
(838 ) (25,115 ) - - (25,953 )
Balance September 30, 2016
$ 13,075,307 $ 155,950,678 $ 110,610,144 $ 1,221,031 $ 280,857,160

	2018			2017
Supplemental disclosure of cash flow information, cash payments for:
Interest	$	3,654,713		$	3,747,218
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	$	(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	$	(177,923	)	$	(290,290	)
Transfers of loans to other real estate owned	$	46,244		$	136,450
Dividends payable	$	833,730		$	656,574
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

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

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

~~Nine Months Ended September 30, 2017 and 2016~~

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES

Net income
$ 25,804,917 $ 19,157,457
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation
2,810,971 2,422,257
Provision for loan/lease losses
6,214,538 4,878,821
Stock-based compensation expense
857,666 760,541
Deferred compensation expense accrued
1,098,741 910,439
Losses (gains) on other real estate owned, net
(154,743 ) 130,280
Amortization of premiums on securities, net
1,330,946 968,553
Securities losses (gains), net
25,124 (4,628,283 )
Loans originated for sale
(40,423,117 ) (57,160,485 )
Proceeds on sales of loans
42,705,325 59,838,717
Gains on sales of residential real estate loans
(307,360 ) (288,904 )
Gains on sales of government guaranteed portions of loans
(1,129,668 ) (2,701,203 )
Losses on debt extinguishment, net
- 4,220,507
Amortization of core deposit intangible
692,600 210,469
Accretion of acquisition fair value adjustments, net
(4,063,435 ) (690,379 )
Increase in cash value of bank-owned life insurance
(1,357,049 ) (1,324,380 )
Decrease (increase) in other assets
1,666,921 (2,480,461 )
Increase (decrease) in other liabilities
(8,610,333 ) 1,614,477
Net cash provided by operating activities
$ 27,162,044 $ 25,838,423

CASH FLOWS FROM INVESTING ACTIVITIES

Net decrease (increase) in federal funds sold
1,689,000 (474,000 )
Net decrease (increase) in interest-bearing deposits at financial institutions
22,727,542 (23,981,295 )
Proceeds from sales of other real estate owned
829,213 1,913,775
Activity in securities portfolio:

Purchases
(103,509,208 ) (111,622,489 )
Calls, maturities and redemptions
40,435,714 109,421,584
Paydowns
30,123,674 21,939,878
Sales
21,969,870 87,772,898
Activity in restricted investment securities:

Purchases
(3,788,275 ) (25,700 )
Redemptions
199,900 1,375,100
Net increase in loans/leases originated and held for investment
(269,891,345 ) (144,605,204 )
Purchase of premises and equipment
(4,045,217 ) (3,871,166 )
Net cash paid for Community State Bank acquisition
- (69,905,355 )
Cash prepaid for Guaranty Bank acquisition
(7,803,420 ) -
Net cash used in investing activities
$ (271,062,552 ) $ (132,061,974 )

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in deposit accounts
225,109,315 227,918,002
Net decrease in short-term borrowings
(23,960,582 ) (84,647,299 )
Activity in Federal Home Loan Bank advances:

Term advances
1,600,000 -
Calls and maturities
(6,000,000 ) (19,000,000 )
Net change in short-term and overnight advances
35,955,000 1,300,000
Prepayments
- (10,524,197 )
Activity in other borrowings:

Proceeds from other borrowings
7,000,000 35,000,000
Calls, maturities and scheduled principal payments
(9,500,000 ) -
Prepayments
- (50,320,407 )
Retirement of junior subordinated debentures
- (3,955,000 )
Payment of cash dividends on common stock
(1,836,150 ) (1,460,157 )
Net proceeds from the common stock offering, 1,215,000 shares issued
- 29,828,916
Proceeds from issuance of common stock, net
1,237,492 1,554,506
Net cash provided by financing activities
$ 229,605,075 $ 125,694,364
Net increase (decrease) in cash and due from banks
(14,295,433 ) 19,470,813
Cash and due from banks, beginning
70,569,993 41,742,321
Cash and due from banks, ending
$ 56,274,560 $ 61,213,134

~~(Continued)~~

~~Table of Contents~~

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

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

~~Nine Months Ended September 30, 2017 and 2016~~

2017

2016

Supplemental disclosure of cash flow information, cash payments for:

Interest
$ 13,140,273 $ 9,081,850
Income/franchise taxes
$ 10,881,610 $ 9,487,002

Supplemental schedule of noncash investing activities:

Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net
$ 1,387,055 $ 3,344,860
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised
$ (317,614 ) $ (477,387 )
Tax benefit of nonqualified stock options exercised
$ N/A $ 183,060
Transfers of loans to other real estate owned
$ 286,212 $ 51,000
Due from broker for sales of securities
$ - $ 32,078,011
Due to broker for purchases of securities
$ 1,300,000 $ 15,190,000
Due to counterparties for prepayment of FHLB advances and other borrowings
$ - $ (24,575,903 )
Dividends payable
$ 658,110 $ 521,384
Tax basis adjustment related to the acquisition of noncontrolling interest in m2 Lease Funds
$ - $ 2,132,415
Increase in the fair value of interest rate swap assets and liabilities
$ 264,721 $ 6,341,738

Supplemental disclosure of cash flow information for Community State Bank acquisition:

Fair value of assets acquired:

Cash and due from banks *
$ - $ 10,094,645
Federal funds sold
- 698,000
Interest-bearing deposits at financial institutions
- 14,730,157
Securities
- 102,640,029
Loans/leases receivable held for investment, net
- 419,029,277
Premises and equipment, net
- 20,684,880
Core deposit intangible
- 6,352,653
Restricted investment securities
- 1,512,900
Other real estate owned
- 650,000
Other assets
- 4,763,224
Total assets acquired
$ - $ 581,155,765

Fair value of liabilities assumed:

Deposits
$ - $ 486,298,262
FHLB advances
- 20,368,877
Other liabilities
- 4,897,564
Total liabilities assumed
$ - $ 511,564,703
Net assets acquired
$ - $ 69,591,062

Consideration paid:

Cash paid *
$ - $ 80,000,000
Total consideration paid
$ - $ 80,000,000

Goodwill
$ - $ 10,408,938

* Net cash paid at closing totaled $69,905,355

~~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)

~~September~~ ~~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 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 ~~September 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 Bankshares, Ltd.
AOCI: Accumulated other comprehensive income (loss)	Guaranty Bank: Guaranty Bank and Trust Company
	~~AOCI: Accumulated other comprehensive income (loss)~~AFS: Available for sale		HTM: Held to maturity
ASC: Accounting Standards Codification	~~AFS: Available for sale~~		m2:m2 Lease Funds, LLC
	~~ASC:~~ASU: Accounting Standards ~~Codification~~Update		NIM: Net interest margin
	~~ASU: Accounting Standards Update~~Bates Companies: Bates Financial Advisors, Inc., Bates		NPA: Nonperforming asset
	~~BOLI: Bank-owned life insurance~~ Financial Services, Inc., Bates Securities, Inc. and		NPL: Nonperforming loan
	~~Caps: Interest rate cap derivatives~~ Bates Financial Group, Inc.		OREO: Other real estate owned
	~~Community National: Community National Bancorporation~~BOLI: Bank-owned life insurance		OTTI: Other-than-temporary impairment
	~~CRBT: Cedar Rapids Bank & Trust Company~~Caps: Interest rate cap derivatives		PCI: Purchased credit impaired
	~~CRE: Commercial real estate~~CDI: Core deposit intangible		Provision: Provision for loan/lease losses
	~~CSB:~~ Community ~~State Bank~~National: Community National Bancorporation		QCBT: Quad City Bank & Trust Company
	~~C&I: Commercial and industrial~~CRBT: Cedar Rapids Bank & Trust Company		RB&T: Rockford Bank & Trust Company
	~~Dodd-Frank Act: Dodd-Frank Wall Street Reform and~~ CRE: Commercial real estate		ROAA: Return on Average Assets
	~~Consumer Protection Act~~CSB: Community State Bank		SBA: U.S. Small Business Administration
	~~EPS: Earnings per share~~C&I: Commercial and industrial		SEC: Securities and Exchange Commission
Dodd-Frank Act: Dodd-Frank Wall Street Reform and	SFC Bank: Springfield First Community Bank
Consumer Protection Act	Springfield Bancshares: Springfield Bancshares, Inc.
EPS: Earnings per share	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 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~~Guaranty Bank, headquartered in Cedar Rapids, Iowa occurred on ~~August 31, 2016; therefore, the~~October 2, 2017 and Guaranty Bank was merged into CRBT on December 2, 2017. The financial results ~~of CSB~~ for the periods since acquisition are included in this report.

On October 2, 2017, the Company announced the completion of its previously announced acquisition of Guaranty Bank, headquartered in Cedar Rapids, Iowa, from Guaranty. The financial results of Guaranty Bank are not included in this report because the closing was effective October 1, 2017. 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 acquisition.

119

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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; 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–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 $191 thousand of reduced income tax in the third quarter of 2017 and $814 thousand of reduced income tax expense in the first nine months of 2017.

1210

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 ~~September 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
September 30, 2017:
March 31, 2018:
Securities HTM:
Municipal securities	$	322,931,227	$	2,084,997	$	(2,629,646	)	$	322,386,578	$	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
	$	323,981,227	$	2,084,997	$	(2,629,646	)	$	323,436,578	$	378,584,337	$	2,244,218	$	(5,035,872	)	$	375,792,683

Securities AFS:
U.S. govt. sponsored agency securities	$	39,340,306	$	129,768	$	(129,906	)	$	39,340,168	$	37,591,155	$	21,236	$	(744,881	)	$	36,867,510
Residential mortgage-backed and related securities		160,329,128		266,806		(1,627,425	)		158,968,509		162,453,605		60,222		(5,224,784	)		157,289,043
Municipal securities		56,621,412		435,356		(293,708	)		56,763,060		61,862,665		238,583		(899,444	)		61,201,804
Other securities		4,077,128		826,135		(20,578	)		4,882,685		4,254,716		31,867		-			4,286,583
	$	260,367,974	$	1,658,065	$	(2,071,617	)	$	259,954,422	$	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

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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 ~~September 30, 2017~~ March 31, 2018 and December 31, ~~2016,~~ 2017, are summarized as follows:

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
			Gross					Gross					Gross					Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
September 30, 2017:
March 31, 2018:
Securities HTM:
Municipal securities	$	17,779,999	$	(254,147	)	$	68,663,362	$	(2,375,499	)	$	86,443,361	$	(2,629,646	)	$	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	$	23,607,646	$	(129,906	)	$	-	$	-		$	23,607,646	$	(129,906	)	$	28,576,258	$	(200,022	)	$	3,640,477	$	(149,945	)	$	32,216,735	$	(349,967	)
Residential mortgage-backed and related securities		111,996,030		(1,255,971	)		12,648,688		(371,454	)		124,644,718		(1,627,425	)		88,927,779		(871,855	)		57,931,731		(1,441,674	)		146,859,510		(2,313,529	)
Municipal securities		18,776,501		(169,253	)		12,872,616		(124,455	)		31,649,117		(293,708	)		10,229,337		(41,151	)		9,997,433		(169,949	)		20,226,770		(211,100	)
Other securities		928,772		(20,578	)		-		-			928,772		(20,578	)		923,535		(25,815	)		-		-			923,535		(25,815	)
	$	155,308,949	$	(1,575,708	)	$	25,521,304	$	(495,909	)	$	180,830,253	$	(2,071,617	)	$	128,656,909	$	(1,138,843	)	$	71,569,641	$	(1,761,568	)	$	200,226,550	$	(2,900,411	)

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 ~~September 30, 2017,~~ March 31, 2018, the investment portfolio included ~~567~~604 securities. Of this number, ~~203~~290 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~0.8%~~1.8% of the total amortized cost of the portfolio. Of these ~~203~~290 securities, 80105 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 September 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 nine~~ months ended ~~September 30, 2017~~ March 31, 2018 and ~~2016.~~ 2017.

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

~~All~~There were no sales of securities for the three ~~and~~ ~~nine~~ months ended ~~September 30, 2017~~ March 31, 2018 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

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Proceeds from sales of securities*
$ 8,415,795 $ 58,775,764 $ 21,969,870 $ 119,850,909
Pre-tax gross gains from sales of securities
6,312 4,281,828 65,880 4,815,373
Pre-tax gross losses from sales of securities
(69,900 ) (30,055 ) (91,004 ) (187,090 )

~~Proceeds from sales of securities for the nine months ended September 30, 2016 includes $32.1 million receivable from the broker for the sale of securities~~

The amortized cost and ~~fai~~rfair value of securities as of ~~September 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	$	2,940,492	$	2,940,378	$	3,344,356	$	3,345,990
Due after one year through five years		18,268,264		18,374,059		25,163,524		25,191,668
Due after five years		302,772,471		302,122,141		350,076,457		347,255,025
	$	323,981,227	$	323,436,578	$	378,584,337	$	375,792,683

Securities AFS:
Due in one year or less	$	3,135,008	$	3,143,223	$	3,368,633	$	3,381,748
Due after one year through five years		26,545,903		26,712,930		23,949,100		23,738,028
Due after five years		66,280,807		66,247,075		76,390,803		75,236,121
		95,961,718		96,103,228		103,708,536		102,355,897
Residential mortgage-backed and related securities		160,329,128		158,968,509		162,453,605		157,289,043
Other securities		4,077,128		4,882,685
	$	260,367,974	$	259,954,422	$	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	$	170,900,193	$	171,633,005	$	209,306,946	$	207,262,788


Securities AFS:
U.S. govt. sponsored agency securities		5,048,652		5,033,292		5,048,812		4,947,644
Municipal securities		45,727,004		45,640,630		54,016,828		53,258,850
	$	50,775,656	$	50,673,922	$	59,065,640	$	58,206,494

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of ~~September 30, 2017,~~ March 31, 2018, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by ~~119~~128 issuers with fair values totaling ~~$100.4~~$101.3 million and revenue bonds issued by ~~132~~148 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$278.7~~$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 1416 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 1216 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:

September 30, 2017:
March 31, 2018:
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	$	21,625,068	$	21,593,895	$	3,084,842		7	$	21,627,097	$	20,756,566	$	2,965,224
Illinois		21		18,319,644		18,501,854		881,041		20		18,532,776		18,513,766		925,688
Iowa		21		17,990,978		17,993,895		856,852		16		13,878,991		13,830,003		864,375
Texas										17		10,763,333		10,554,430		620,849
Missouri		16		8,956,396		8,983,511		561,469		17		8,314,872		8,323,476		489,616
Ohio		9		8,289,069		8,180,432		908,937		8		7,378,887		7,296,859		912,107
Texas		10		6,609,101		6,543,660		654,366
Other		35		18,520,725		18,626,763		532,193		43		22,261,263		22,068,390		513,218
Total general obligation bonds		119	$	100,310,981	$	100,424,010	$	843,899		128	$	102,757,219	$	101,343,490	$	791,746

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

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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:

September 30, 2017:
March 31, 2018:
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		55	$	107,274,712	$	107,108,520	$	1,947,428		58	$	108,311,804	$	108,445,780	$	1,869,755
Iowa		28		62,468,124		62,615,875		2,236,281		29		68,370,374		68,236,038		2,352,967
Ohio										10		55,757,914		55,699,375		5,569,938
Indiana		23		50,080,705		49,560,095		2,154,787		26		49,258,364		48,833,113		1,878,197
Ohio		5		19,674,376		19,523,478		3,904,696
Illinois										2		17,205,951		17,373,994		8,686,997
Kansas		6		12,877,308		12,879,871		2,146,645		6		12,651,338		12,172,961		2,028,827
North Dakota		5		11,496,420		11,471,544		2,294,309		5		11,220,278		10,644,441		2,128,888
Other		10		15,370,013		15,566,245		1,556,625		12		13,863,760		13,206,470		1,100,539
Total revenue bonds		132	$	279,241,658	$	278,725,628	$	2,111,558		148	$	336,639,783	$	334,612,172	$	2,260,893

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 ~~September 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 ~~September 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 ~~September 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.

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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 ~~September 30, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 is presented as follows:

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

C&I loans***	$	1,034,530,786		$	827,637,263
C&I loans*							$	1,201,085,625		$	1,134,516,315
CRE loans
Owner-occupied CRE		327,144,766			332,387,621			346,996,627			332,742,477
Commercial construction, land development, and other land		168,992,704			165,149,491			171,404,628			186,402,404
Other non owner-occupied CRE		661,718,193			595,921,748			839,302,131			784,347,000
								1,357,703,386			1,303,491,882
Direct financing leases *		147,062,893			165,419,360
Residential real estate loans **		239,957,916			229,233,104

Direct financing leases **								137,614,465			141,448,232
Residential real estate loans ***								254,484,231			258,646,265
Installment and other consumer loans		89,605,855			81,665,695			95,911,569			118,610,799
		2,669,013,113			2,397,414,282			3,046,799,276			2,956,713,493
Plus deferred loan/lease origination costs, net of fees		7,741,698			8,072,703			8,103,163			7,771,907
		2,676,754,811			2,405,486,985			3,054,902,439			2,964,485,400
Less allowance		(34,982,341	)		(30,757,448	)		(36,532,602	)		(34,355,728	)
							$	3,018,369,837		$	2,930,129,672
	$	2,641,772,470		$	2,374,729,537

* Direct financing leases:
Net minimum lease payments to be received	$	162,728,461		$	184,274,802		$	152,430,047		$	156,583,887
Estimated unguaranteed residual values of leased assets		1,085,154			1,085,154			929,932			929,932
Unearned lease/residual income		(16,750,722	)		(19,940,596	)		(15,745,514	)		(16,065,587	)
		147,062,893			165,419,360			137,614,465			141,448,232
Plus deferred lease origination costs, net of fees		4,800,719			5,881,778			4,350,767			4,624,027
		151,863,612			171,301,138			141,965,232			146,072,259
Less allowance		(2,652,758	)		(3,111,898	)		(2,730,301	)		(2,382,098	)
	$	149,210,854		$	168,189,240		$	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.

**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 nine~~ months ended ~~September 30, 2017~~ March 31, 2018 and ~~2016.~~2017.

***Includes residential real estate loans h~~eld~~held for sale totaling ~~$290,320~~$279,750 and ~~$1,135,500~~$645,001 as of ~~September 30, 2017,~~ March 31, 2018, and December 31, ~~2016, respectively.~~

*** Includes equipment financing agreements outstanding at ~~m2 totaling $60,981,381 and $38,668,209 as of September 30,~~ 2017, ~~and December 31, 2016,~~ respectively.

1816

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 September 30, 2017

Nine months ended September 30, 2017

PCI

Performing

PCI

Performing

Loans

Loans

Total

Loans

Loans

Total

Balance at the beginning of the period
$ (83,860 ) $ (5,325,471 ) $ (5,409,331 ) $ (194,306 ) $ (9,115,614 ) $ (9,309,920 )
Accretion recognized
25,158 658,547 683,705 135,604 4,448,690 4,584,294
Balance at the end of the period
$ (58,702 ) $ (4,666,924 ) $ (4,725,626 ) $ (58,702 ) $ (4,666,924 ) $ (4,725,626 )

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 September 30, 2016

Nine months ended September 30, 2016

PCI

Performing

PCI

Performing

Loans

Loans

Total

Loans

Loans

Total

Balance at the beginning of the period
$ - $ - $ - $ - $ - $ -
Discount added at acquisition
(277,579 ) (11,916,009 ) (12,193,588 ) (277,579 ) (11,916,009 ) (12,193,588 )
Accretion recognized
29,317 366,293 395,610 29,317 366,293 395,610
Balance at the end of the period
$ (248,262 ) $ (11,549,716 ) $ (11,797,978 ) $ (248,262 ) $ (11,549,716 ) $ (11,797,978 )

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 ~~September 30, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 is presented as follows:

	As of September 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	$	1,031,800,612		$	1,149,469		$	-		$	12,892		$	1,567,813		$	1,034,530,786		$	1,197,675,583		$	1,714,614		$	210,724		$	36,162		$	1,448,542		$	1,201,085,625
CRE
Owner-Occupied CRE		326,879,997			109,749			-			-			155,020			327,144,766			346,524,727			142,587			-			-			329,313			346,996,627
Commercial Construction, Land Development, and Other Land		164,647,962			-			-			-			4,344,742			168,992,704			168,928,348			55,561			568,523			-			1,852,196			171,404,628
Other Non Owner-Occupied CRE		650,410,884			325,464			-			-			10,981,845			661,718,193			834,328,826			105,223			-			-			4,868,082			839,302,131
Direct Financing Leases		142,413,187			1,558,490			852,844			-			2,238,372			147,062,893			133,012,415			1,196,302			599,350			-			2,806,398			137,614,465
Residential Real Estate		237,860,369			116,095			755,919			307,676			917,857			239,957,916			250,956,900			2,304,607			35,457			-			1,187,267			254,484,231
Installment and Other Consumer		89,153,013			73,731			39,311			102,312			237,488			89,605,855			95,435,771			190,027			13,806			4,778			267,187			95,911,569
	$	2,643,166,024		$	3,332,998		$	1,648,074		$	422,880		$	20,443,137		$	2,669,013,113		$	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		99.03	%		0.12	%		0.06	%		0.02	%		0.77	%		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	%

1917

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NPLs by classes of loans/leases as of ~~September 30, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 are presented as follows:

	As of September 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	$	12,892	$	1,567,813	$	5,298,358	$	6,879,063		24.19	%	$	36,162	$	1,448,542	$	4,714,450	$	6,199,154		34.29	%
CRE
Owner-Occupied CRE		-		155,020		-		155,020		0.55	%		-		329,313		107,322		436,635		2.42	%
Commercial Construction, Land Development, and Other Land		-		4,344,742		-		4,344,742		15.28	%		-		1,852,196		-		1,852,196		10.25	%
Other Non Owner-Occupied CRE		-		10,981,845		-		10,981,845		38.63	%		-		4,868,082		-		4,868,082		26.93	%
Direct Financing Leases		-		2,238,372		1,899,707		4,138,079		14.56	%		-		2,806,398		169,198		2,975,596		16.46	%
Residential Real Estate		307,676		917,857		349,538		1,575,071		5.54	%		-		1,187,267		271,694		1,458,961		8.07	%
Installment and Other Consumer		102,312		237,488		15,218		355,018		1.25	%		4,778		267,187		12,828		284,793		1.58	%
	$	422,880	$	20,443,137	$	7,562,821	$	28,428,838		100.00	%	$	40,940	$	12,758,985	$	5,275,492	$	18,075,417		100.00	%

*Nonaccrual loans/leases included ~~$2,291,666~~$2,637,483 of TDRs, including ~~$258,598~~$25,984 in C&I loans, ~~$1,198,439~~$1,312,469 in CRE loans, ~~$607,882~~$1,208,050 in direct financing leases, ~~$177,606 in construction loans, $40,405~~$84,555 in residential real estate loans, and ~~$8,736~~$6,425 in installment loans.

As of December 31, 2016

Classes of Loans/Leases

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 %
CRE

Owner-Occupied CRE
- 332,148 - 332,148 1.56 %
Commercial Construction, Land Development, and Other Land
- 4,353,819 - 4,353,819 20.51 %
Other Non Owner-Occupied CRE
- 1,436,149 - 1,436,149 6.77 %
Direct Financing Leases
215,225 2,446,181 1,008,244 3,669,650 17.28 %
Residential Real Estate
294,854 1,075,639 585,541 1,956,034 9.21 %
Installment and Other Consumer
110,501 87,344 18,746 216,591 1.02 %
$ 966,814 $ 13,919,066 $ 6,346,528 $ 21,232,408 100.00 %

As of December 31, 2017

Classes of Loans/Leases

Accruing Past

Due 90 Days or

Nonaccrual

Loans/Leases **

Accruing
TDRs

Total

NPLs

Percentage of

Total NPLs

C&I

1,231,353

5,224,182

6,455,535

34.63

CRE

Owner-Occupied CRE

333,900

107,322

441,222

2.37

Commercial Construction, Land Development, and Other Land

4,844,312

25.99

Other Non Owner-Occupied CRE

1,243,728

6.67

Direct Financing Leases

2,175,044

1,494,448

3,669,492

19.68

Residential Real Estate

74,519

1,363,806

272,493

1,710,818

9.18

Installment and Other Consumer

14,152

249,091

14,027

277,270

1.49

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.

2018

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Changes in the allowance by portfolio segment for the three ~~and nine~~ months ended ~~September 30, 2017~~ March 31, 2018 and ~~2016,~~2017, respectively, are presented as follows:

Three Months Ended March 31, 2018

C&I

CRE

Direct Financing

Leases

Residential Real

Estate

Installment and

Other Consumer

Total

Balance, beginning

14,323,036

13,962,688

2,382,098

2,466,431

1,221,475

34,355,728

Provisions (credits) charged to expense

808,161

965,383

604,783

(39,337

)

200,849

2,539,839

Loans/leases charged off

(95,499

)

(283,887

)

(52,325

)

(4,747

)

(436,458

)

Recoveries on loans/leases previously charged off

29,547

9,949

27,307

450

6,240

73,493

Balance, ending

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

Three Months Ended September 30, 2017

C&I

CRE

Direct Financing
Leases

Residential Real
Estate

Installment and
Other Consumer

Total

Balance, beginning
$ 14,207,733 $ 12,999,233 $ 2,638,301 $ 2,430,454 $ 1,080,911 $ 33,356,632
Provisions (credits) charged to expense
469,977 1,349,393 179,190 (11,654 ) 99,530 2,086,436
Loans/leases charged off
(338,361 ) - (268,669 ) (25,822 ) (16,872 ) (649,724 )
Recoveries on loans/leases previously charged off
63,366 10,748 103,936 6,000 4,947 188,997
Balance, ending
$ 14,402,715 $ 14,359,374 $ 2,652,758 $ 2,398,978 $ 1,168,516 $ 34,982,341

Three Months Ended September 30, 2016

C&I

CRE

Direct Financing
Leases

Residential Real
Estate

Installment and
Other Consumer

Total

Balance, beginning
$ 10,724,506 $ 10,987,062 $ 3,226,194 $ 2,014,987 $ 1,144,741 $ 28,097,490
Provisions charged to expense
859,031 8,962 641,435 79,221 19,337 1,607,986
Loans/leases charged off
(96,330 ) - (847,668 ) (38,554 ) (4,530 ) (987,082 )
Recoveries on loans/leases previously charged off
70,759 6,500 22,001 - 9,181 108,441
Balance, ending
$ 11,557,966 $ 11,002,524 $ 3,041,962 $ 2,055,654 $ 1,168,729 $ 28,826,835

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

Nine Months Ended September 30, 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
2,345,121 2,655,521 981,877 148,017 84,002 6,214,538
Loans/leases charged off
(630,704 ) (10,375 ) (1,611,432 ) (101,006 ) (40,436 ) (2,393,953 )
Recoveries on loans/leases previously charged off
143,188 43,619 170,415 9,623 37,463 404,308
Balance, ending
$ 14,402,715 $ 14,359,374 $ 2,652,758 $ 2,398,978 $ 1,168,516 $ 34,982,341

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

Nine Months Ended September 30, 2016

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
Provisions (credits) charged to expense
1,357,262 1,644,008 1,580,677 336,865 (39,991 ) 4,878,821
Loans/leases charged off
(388,879 ) (23,101 ) (1,983,322 ) (72,261 ) (22,018 ) (2,489,581 )
Recoveries on loans/leases previously charged off
105,503 6,500 49,519 900 134,267 296,689
Balance, ending
$ 11,557,966 $ 11,002,524 $ 3,041,962 $ 2,055,654 $ 1,168,729 $ 28,826,835

As of December 31, 2017

C&I

CRE

Direct Financing

Leases

Residential Real

Estate

Installment and

Other Consumer

Total

Allowance for impaired loans/leases

715,627

1,429,460

504,469

355,167

38,596

3,043,319

Allowance for nonimpaired loans/leases

13,607,409

12,533,228

1,877,629

2,111,264

1,182,879

31,312,409

14,323,036

13,962,688

2,382,098

2,466,431

1,221,475

34,355,728

Impaired loans/leases

6,248,209

6,529,262

3,669,492

1,704,846

202,354

18,354,163

Nonimpaired loans/leases

1,128,268,106

1,296,962,620

137,778,740

256,941,419

118,408,445

2,938,359,330

1,134,516,315

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

11.45

21.89

13.75

20.83

19.07

16.58

Allowance as a percentage of nonimpaired loans/leases

1.21

0.97

1.36

0.82

1.00

1.07

Total allowance as a percentage of total loans/leases

1.26

1.07

1.68

0.95

1.03

1.16

2119

Table of Contents

Part I

Item 1

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

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

As of September 30, 2017

C&I

CRE

Direct Financing
Leases

Residential Real
Estate

Installment and
Other Consumer

Total

Allowance for impaired loans/leases
$ 1,062,424 $ 2,374,308 $ 652,775 $ 261,097 $ 24,487 $ 4,375,091
Allowance for nonimpaired loans/leases
13,340,291 11,985,066 1,999,983 2,137,881 1,144,029 30,607,250
$ 14,402,715 $ 14,359,374 $ 2,652,758 $ 2,398,978 $ 1,168,516 $ 34,982,341

Impaired loans/leases
$ 6,567,909 $ 15,588,929 $ 3,952,190 $ 1,328,160 $ 191,941 $ 27,629,129
Nonimpaired loans/leases
1,027,962,877 1,142,266,734 143,110,703 238,629,756 89,413,914 2,641,383,984
$ 1,034,530,786 $ 1,157,855,663 $ 147,062,893 $ 239,957,916 $ 89,605,855 $ 2,669,013,113

Allowance as a percentage of impaired loans/leases
16.18 % 15.23 % 16.52 % 19.66 % 12.76 % 15.84 %
Allowance as a percentage of nonimpaired loans/leases
1.30 % 1.05 % 1.40 % 0.90 % 1.28 % 1.16 %
Total allowance as a percentage of total loans/leases
1.39 % 1.24 % 1.80 % 1.00 % 1.30 % 1.31 %

As of December 31, 2016

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
Allowance for nonimpaired loans/leases
10,773,573 10,976,690 2,262,979 2,053,232 1,048,006 27,114,480
$ 12,545,110 $ 11,670,609 $ 3,111,898 $ 2,342,344 $ 1,087,487 $ 30,757,448

Impaired loans/leases
$ 8,936,451 $ 6,112,114 $ 3,256,264 $ 1,661,180 $ 106,090 $ 20,072,099
Nonimpaired loans/leases
818,700,812 1,087,346,746 162,163,096 227,571,924 81,559,605 2,377,342,183
$ 827,637,263 $ 1,093,458,860 $ 165,419,360 $ 229,233,104 $ 81,665,695 $ 2,397,414,282

Allowance as a percentage of impaired loans/leases
19.82 % 11.35 % 26.07 % 17.40 % 37.21 % 18.15 %
Allowance as a percentage of nonimpaired loans/leases
1.32 % 1.01 % 1.40 % 0.90 % 1.28 % 1.14 %
Total allowance as a percentage of total loans/leases
1.52 % 1.07 % 1.88 % 1.02 % 1.33 % 1.28 %
22
~~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 ~~nine~~three months ended ~~September 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	$	1,414,985	$	1,425,422	$	-	$	1,129,388	$	42,567	$	42,567	$	5,038,888	$	5,053,164	$	-	$	5,297,775	$	75,406	$	75,406
CRE
Owner-Occupied CRE		107,322		107,322		-		26,831		6,783		6,783		289,261		289,261		-		289,261		5,822		5,822
Commercial Construction, Land Development, and Other Land		-		-		-		-		-		-		-		-		-		-		-		-
Other Non Owner-Occupied CRE		1,198,439		1,198,439		-		1,178,032		-		-		1,227,579		1,227,579		-		1,235,654		-		-
Direct Financing Leases		2,971,485		2,971,485		-		2,708,433		97,603		97,603		1,927,663		1,927,663		-		2,355,745		6,291		6,291
Residential Real Estate		711,098		785,877		-		619,466		1,161		1,161		911,804		986,583		-		884,441		-		-
Installment and Other Consumer		137,704		137,704		-		124,530		-		-		140,857		140,857		-		120,043		-		-
	$	6,541,033	$	6,626,249	$	-	$	5,786,680	$	148,114	$	148,114	$	9,536,052	$	9,625,107	$	-	$	10,182,919	$	87,519	$	87,519

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	5,152,924	$	5,156,763	$	1,062,424	$	4,994,557	$	150,848	$	150,848	$	957,524	$	957,524	$	567,321	$	824,536	$	1,983	$	1,983
CRE
Owner-Occupied CRE		155,020		155,020		51,520		238,584		-		-		147,375		147,375		43,875		149,669		-		-
Commercial Construction, Land Development, and Other Land		4,344,742		4,344,742		818,536		4,348,711		-		-		5,430,268		5,430,268		1,627,022		5,137,290		-		-
Other Non Owner-Occupied CRE		9,783,406		9,783,406		1,504,252		2,464,981		-		-		-		-		-		-		-		-
Direct Financing Leases		980,705		980,705		652,775		736,537		-		-		1,047,933		1,047,933		628,379		962,961		-		-
Residential Real Estate		617,062		617,062		261,097		496,243		12,830		12,830		547,158		570,234		248,592		544,558		2,934		2,934
Installment and Other Consumer		54,237		54,237		24,487		33,162		317		317		140,340		140,340		112,177		128,285		83		83
	$	21,088,096	$	21,091,935	$	4,375,091	$	13,312,775	$	163,995	$	163,995	$	8,270,598	$	8,293,674	$	3,227,366	$	7,747,299	$	5,000	$	5,000

Total Impaired Loans/Leases:
C&I	$	6,567,909	$	6,582,185	$	1,062,424	$	6,123,945	$	193,415	$	193,415	$	5,996,412	$	6,010,688	$	567,321	$	6,122,311	$	77,389	$	77,389
CRE
Owner-Occupied CRE		262,342		262,342		51,520		265,415		6,783		6,783		436,636		436,636		43,875		438,930		5,822		5,822
Commercial Construction, Land Development, and Other Land		4,344,742		4,344,742		818,536		4,348,711		-		-		5,430,268		5,430,268		1,627,022		5,137,290		-		-
Other Non Owner-Occupied CRE		10,981,845		10,981,845		1,504,252		3,643,013		-		-		1,227,579		1,227,579		-		1,235,654		-		-
Direct Financing Leases		3,952,190		3,952,190		652,775		3,444,970		97,603		97,603		2,975,596		2,975,596		628,379		3,318,706		6,291		6,291
Residential Real Estate		1,328,160		1,402,939		261,097		1,115,709		13,991		13,991		1,458,962		1,556,817		248,592		1,428,999		2,934		2,934
Installment and Other Consumer		191,941		191,941		24,487		157,692		317		317		281,197		281,197		112,177		248,328		83		83
	$	27,629,129	$	27,718,184	$	4,375,091	$	19,099,455	$	312,109	$	312,109	$	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.

2320

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended ~~September 30,~~March 31, 2017 ~~and 2016, respectively,~~ are presented as follows:

Three Months Ended September 30, 2017

Three Months Ended September 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

Impaired Loans/Leases with No Specific Allowance Recorded:

C&I
$ 1,301,977 $ 25,816 $ 25,816 $ 1,677,527 $ 3,301 $ 3,301
CRE

Owner-Occupied CRE
53,661 6,783 6,783 767,032 - -
Commercial Construction, Land Development, and Other Land
- - - - - -
Other Non Owner-Occupied CRE
1,173,629 - - 1,969,034 - -
Direct Financing Leases
2,820,518 39,759 39,759 2,008,095 21,095 21,095
Residential Real Estate
690,791 - - 1,481,340 941 941
Installment and Other Consumer
139,533 - - 322,738 - -
$ 6,180,109 $ 72,358 $ 72,358 $ 8,225,766 $ 25,337 $ 25,337

Impaired Loans/Leases with Specific Allowance Recorded:

C&I
$ 5,157,671 $ 53,127 $ 53,127 $ 4,188,621 $ - $ -
CRE

Owner-Occupied CRE
155,020 - - 363,911 - -
Commercial Construction, Land Development, and Other Land
4,345,880 - - 187,831 - -
Other Non Owner-Occupied CRE
4,929,960 - - 135,141 - -
Direct Financing Leases
893,042 - - 793,769 - -
Residential Real Estate
550,476 5,601 5,601 807,827 1,503 1,503
Installment and Other Consumer
48,164 99 99 160,301 1,458 1,458
$ 16,080,213 $ 58,827 $ 58,827 $ 6,637,401 $ 2,961 $ 2,961

Total Impaired Loans/Leases:

C&I
$ 6,459,648 $ 78,943 $ 78,943 $ 5,866,148 $ 3,301 $ 3,301
CRE

Owner-Occupied CRE
208,681 6,783 6,783 1,130,943 - -
Commercial Construction, Land Development, and Other Land
4,345,880 - - 187,831 - -
Other Non Owner-Occupied CRE
6,103,589 - - 2,104,175 - -
Direct Financing Leases
3,713,560 39,759 39,759 2,801,864 21,095 21,095
Residential Real Estate
1,241,267 5,601 5,601 2,289,167 2,444 2,444
Installment and Other Consumer
187,697 99 99 483,039 1,458 1,458
$ 22,260,322 $ 131,185 $ 131,185 $ 14,863,167 $ 28,298 $ 28,298

Classes of Loans/Leases

Recorded

Investment

Unpaid Principal

Balance

Allowance

Average

Recorded

Investment

Interest Income

Recognized

Interest Income

Recognized for

Cash Payments

Received

Impaired Loans/Leases with No Specific Allowance Recorded:

C&I

835,955

846,392

927,387

7,352

CRE

Owner-Occupied CRE

Commercial Construction, Land Development, and Other Land

Other Non Owner-Occupied CRE

1,174,260

1,183,813

Direct Financing Leases

1,593,104

1,868,355

18,895

Residential Real Estate

1,147,434

1,222,215

1,025,656

1,161

Installment and Other Consumer

175,957

115,846

4,926,710

5,011,928

5,121,057

27,408

Impaired Loans/Leases with Specific Allowance Recorded:

C&I

8,352,499

8,356,338

1,751,774

8,110,658

62,666

CRE

Owner-Occupied CRE

322,148

57,398

322,148

Commercial Construction, Land Development, and Other Land

4,349,267

823,061

4,351,542

Other Non Owner-Occupied CRE

78,386

7,986

39,193

Direct Financing Leases

1,488,964

795,840

1,300,811

Residential Real Estate

633,340

274,566

636,134

4,240

Installment and Other Consumer

48,770

37,932

49,563

112

15,273,374

15,277,213

3,748,557

14,810,049

67,018

Total Impaired Loans/Leases:

C&I

9,188,454

9,202,730

1,751,774

9,038,045

70,018

CRE

Owner-Occupied CRE

322,148

57,398

322,148

Commercial Construction, Land Development, and Other Land

4,349,267

823,061

4,351,542

Other Non Owner-Occupied CRE

1,252,646

7,986

1,223,006

Direct Financing Leases

3,082,068

795,840

3,169,166

18,895

Residential Real Estate

1,780,774

1,855,555

274,566

1,661,790

5,401

Installment and Other Consumer

224,727

37,932

165,409

112

20,200,084

20,289,141

3,748,557

19,931,106

94,426

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

2421

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		4,353,817		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		1,566,143		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		4,353,817		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		3,256,264		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.

2522

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 ~~September 30, 2017~~ March 31, 2018 and December 31, ~~2016:~~2017:

As of September 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)
$ 1,000,751,792 $ 313,179,076 $ 161,772,865 $ 639,045,018 $ 2,114,748,751 96.45 %
Special Mention (Rating 6)
9,694,041 9,155,153 2,167,999 6,297,895 27,315,088 1.25 %
Substandard (Rating 7)
24,084,953 4,810,537 5,051,840 16,375,280 50,322,610 2.30 %
Doubtful (Rating 8)
- - - - - -
$ 1,034,530,786 $ 327,144,766 $ 168,992,704 $ 661,718,193 $ 2,192,386,449 100.00 %

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 September 30, 2017											As of March 31, 2018
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	$	142,924,814	$	238,382,845	$	89,250,837	$	470,558,496		98.73	%	$	77,987,539	$	134,638,869	$	253,025,270	$	95,626,776	$	561,278,454		99.00	%
Nonperforming		4,138,079		1,575,071		355,018		6,068,168		1.27	%		924,252		2,975,596		1,458,961		284,793		5,643,602		1.00	%
	$	147,062,893	$	239,957,916	$	89,605,855	$	476,626,664		100.00	%	$	78,911,791	$	137,614,465	$	254,484,231	$	95,911,569	$	566,922,056		100.00	%

	As of December 31, 2016													As of December 31, 2017
			CRE													CRE
					Non Owner-Occupied													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			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	%	$	1,031,963,703	$	318,293,608	$	179,142,839	$	767,119,909	$	2,296,520,059		96.85	%
Special Mention (Rating 6)		6,305,772		7,559,380		1,780,000		4,437,122		20,082,274		1.05	%		10,944,924		8,230,060		1,780,000		10,068,870		31,023,854		1.31	%
Substandard (Rating 7)		24,763,040		10,380,369		5,261,026		8,630,578		49,035,013		2.55	%		24,578,731		6,218,809		5,479,565		7,158,221		43,435,326		1.83	%
Doubtful (Rating 8)		-		210		-		-		210		0.00	%		270,559		-		-		-		270,559		0.01	%
	$	827,637,263	$	332,387,621	$	165,149,491	$	595,921,748	$	1,921,096,123		100.00	%	$	1,067,757,917	$	332,742,477	$	186,402,404	$	784,347,000	$	2,371,249,799		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.

2623

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of ~~September 30, 2017~~ March 31, 2018 and December 31, ~~2016,~~ 2017, TDRs totaled ~~$9,854,487~~$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 nine~~ months ended ~~September 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 September 30, 2017

For the three months ended September 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 - Significant Payment Delay

C&I
4 $ 620,452 $ 620,452 $ - - $ - $ - $ -
Direct Financing Leases
4 416,597 416,597 - 2 461,643 461,643 -
8 $ 1,037,049 $ 1,037,049 $ - 2 $ 461,643 $ 461,643 $ -

TOTAL
8 $ 1,037,049 $ 1,037,049 $ - 2 $ 461,643 $ 461,643 $ -

	For the nine months ended September 30, 2017								For the nine months ended September 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		2		104,382		104,382		-		4		410,653		410,653		-		2		47,524		47,524		-		8		669,861		669,861		-
		2	$	104,382	$	104,382	$	-		5	$	462,939	$	462,939	$	-		3	$	93,844	$	93,844	$	-		10	$	803,550	$	803,550	$	-

CONCESSION - Significant Payment Delay
C&I		7	$	801,650	$	801,650	$	-		1	$	62,140	$	62,140	$	-
CONCESSION - Extension of Maturity
Direct Financing Leases		27		1,889,000		1,889,000		-		6		771,672		771,672		-		-	$	-	$	-	$	-		1	$	6,263	$	6,263	$	-
		34	$	2,690,650	$	2,690,650	$	-		7	$	833,812	$	833,812	$	-		-	$	-	$	-	$	-		1	$	6,263	$	6,263	$	-

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

TOTAL		36	$	2,795,032	$	2,795,032	$	-		13	$	2,530,491	$	2,530,491	$	-		3	$	93,844	$	93,844	$	-		11	$	809,813	$	809,813	$	-

Of the TDRs reported above, ~~three~~one with a post-modification recorded balance of ~~$139,241~~$46,320 was on nonaccrual as of March 31, 2018. Of the TDRs reported above, none were on nonaccrual as of ~~September 30,~~March 31, 2017. Two with a post-modification recorded balance of $1,384,680 were on nonaccrual as of September 30, 2016. Not included in the table above, the Company had one TDR that was restructured and charged off in 2016, totaling $236,545.

For the three ~~and nine~~ months ended ~~September 30, 2017, four~~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. ~~Two~~Three of these TDRs were related to one customer whose loans were restructured in the second quarter of 2017 with pre-modification balances totaling ~~$112~~$78 thousand and the other ~~two~~ TDRs related to ~~another customer~~other customers whose loans were restructured in the ~~fourth quarter~~second and third quarters of ~~2016~~2017 with pre-modification balances totaling ~~$195~~$378 thousand.

For the three ~~and nine~~ months ended ~~September 30, 2016, none~~March 31, 2017, two of the Company’s TDRs ~~had~~ redefaulted within 12 months subsequent to ~~restructure.~~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 thousand.

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NOTE 4 - EARNINGS PER SHARE

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

Three months ended

Nine months ended

September 30,

September 30,

2017

2016

2017

2016

Net income
$ 7,853,935 $ 6,107,501 $ 25,804,917 $ 19,157,457

Basic EPS
$ 0.60 $ 0.47 $ 1.96 $ 1.55
Diluted EPS
$ 0.58 $ 0.46 $ 1.91 $ 1.52

Weighted average common shares outstanding*
13,151,350 13,066,777 13,151,672 12,398,491
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan
356,605 202,926 357,894 181,551
Weighted average common and common equivalent shares outstanding
13,507,955 13,269,703 13,509,566 12,580,042

	Three months ended
	March 31,
	2018		2017

Net income	$	10,549,961	$	9,184,965

Basic EPS	$	0.76	$	0.70
Diluted EPS	$	0.74	$	0.68

Weighted average common shares outstanding		13,888,661		13,133,382
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan		316,923		355,035
Weighted average common and common equivalent shares outstanding		14,205,584		13,488,417

The increase in weighted average common shares outstanding when comparing the ~~nine~~three months ended ~~September 30,~~March 31, 2018 to March 31, 2017 ~~to September 30, 2016~~ 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.

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Assets and liabilities measured at fair value on a recurring basis comprise the following at ~~September 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)

September 30, 2017:
March 31, 2018:
Securities AFS:
U.S. govt. sponsored agency securities	$	39,340,168	$	-	$	39,340,168	$	-	$	36,867,510	$	-	$	36,867,510	$	-
Residential mortgage-backed and related securities		158,968,509		-		158,968,509		-		157,289,043		-		157,289,043		-
Municipal securities		56,763,060		-		56,763,060		-		61,201,804		-		61,201,804		-
Other securities		4,882,685		1,017		4,881,668		-		4,286,583		-		4,286,583		-
Interest rate caps		390,527		-		390,527		-		657,178		-		657,178		-
Interest rate swaps - assets		2,603,002		-		2,603,002		-		4,500,318		-		4,500,318		-
Total assets measured at fair value	$	262,947,951	$	1,017	$	262,946,934	$	-	$	264,802,436	$	-	$	264,802,436	$	-

Interest rate swaps - liabilities	$	2,603,002	$	-	$	2,603,002	$	-	$	4,500,318	$	-	$	4,500,318	$	-
Total liabilities measured at fair value	$	2,603,002	$	-	$	2,603,002	$	-	$	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 nine~~ months ended ~~September 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).

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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 ~~September 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
September 30, 2017:
March 31, 2018:
Impaired loans/leases	$	18,177,320	$	-	$	-	$	18,177,320	$	5,564,760	$	-	$	-	$	5,564,760
OREO		5,545,633		-		-		5,545,633		13,770,025		-		-		13,770,025
	$	23,722,953	$	-	$	-	$	23,722,953	$	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.

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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
September 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

18,177,320

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

5,545,633

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 nine~~ months ended ~~September 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 September 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

56,274,561

70,569,993

Level 1

61,845,988

75,721,663

Federal funds sold

Level 2

20,568,000

22,257,000

Level 2

14,505,000

30,197,000

Interest-bearing deposits at financial institutions

Level 2

41,221,383

63,948,925

Level 2

45,051,555

55,765,012

Investment securities:

HTM

Level 2

323,981,227

323,436,578

322,909,056

320,414,899

Level 2

378,584,337

375,792,683

379,474,205

379,749,804

AFS

See Previous Table

259,954,422

251,113,139

See Previous Table

259,644,940

272,907,907

Loans/leases receivable, net

Level 3

16,830,852

18,177,320

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

2,624,941,618

2,607,041,000

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

390,527

576,527

Level 2

657,178

506,700

Interest rate swaps - assets

Level 2

2,603,002

2,338,281

Level 2

4,500,318

4,397,238

Deposits:

Nonmaturity deposits

Level 2

2,365,493,644

2,188,683,349

Level 2

2,603,999,039

2,670,583,178

Time deposits

Level 2

528,774,838

526,265,000

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

16,010,805

39,971,387

Level 2

16,859,753

13,993,122

FHLB advances

Level 2

169,055,000

169,434,000

137,500,000

138,338,000

Level 2

216,345,000

216,397,000

192,000,000

192,115,000

Other borrowings

Level 2

77,500,000

78,428,000

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

33,578,744

25,349,715

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

2,603,002

2,338,281

Level 2

4,500,318

4,397,238

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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 nine~~ months ended ~~September 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 September 30, 2017
Three Months Ended March 31, 2018
Total revenue	$	11,771,842	$	10,892,025	$	7,678,006	$	4,534,768	$	2,689,853	$	10,028,660		$	(7,052,986	)	$	40,542,168	$	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	$	11,664,970	$	7,903,483	$	6,379,111	$	3,245,346	$	-	$	(636,562	)	$	-		$	28,556,348		12,120,302		10,835,848		6,743,947		3,465,154		-		(762,333	)		-			32,402,918
Provision	$	1,140,436	$	200,000	$	574,000	$	172,000	$	-	$	-		$	-		$	2,086,436		1,120,409		601,828		575,602		242,000		-		-			-			2,539,839
Net income	$	3,929,158	$	3,130,319	$	1,669,209	$	726,926	$	539,091	$	7,853,935		$	(9,994,703	)	$	7,853,935		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	$	-	$	1,122,263	$	5,566,350	$	-	$	-	$	-		$	-		$	6,688,613		-		3,566,728		5,207,674		-		-		-			-			8,774,402
Total assets	$	1,456,251,244	$	1,007,062,151	$	631,963,143	$	445,098,530	$	-	$	395,697,820		$	(385,609,794	)	$	3,550,463,094		1,526,829,646		1,331,208,620		696,978,705		468,112,032		-		447,591,932			(444,406,521	)		4,026,314,414

Three Months Ended September 30, 2016
Three Months Ended March 31, 2017
Total revenue	$	18,026,215	$	10,065,032	$	2,675,741	$	4,232,205	$	2,284,577	$	8,463,636		$	(8,507,270	)	$	37,240,136	$	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	$	11,225,414	$	7,594,557	$	2,191,862	$	3,056,989	$	-	$	(438,045	)	$	-		$	23,630,777		11,301,482		6,974,047		7,026,508		2,968,074		-		(601,228	)		-			27,668,883
Provision	$	1,137,986	$	-	$	270,000	$	200,000	$	-	$	-		$	-		$	1,607,986		931,109		250,000		774,000		150,000		-		-			-			2,105,109
Net income	$	3,596,469	$	3,286,724	$	188,608	$	944,781	$	398,859	$	6,107,492		$	(8,415,432	)	$	6,107,501		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	$	-	$	10,408,938	$	-	$	-	$	-		$	-		$	13,631,626		3,222,688		-		9,888,225		-		-		-			-			13,110,913
Core deposit intangible	$	-	$	1,321,775	$	6,291,818	$	-	$	-	$	-		$	-		$	7,613,593		-		1,222,019		5,928,327		-		-		-			-			7,150,346
Total assets	$	1,407,733,009	$	887,592,695	$	580,210,270	$	393,191,774	$	-	$	368,990,749		$	(356,732,388	)	$	3,280,986,109		1,442,952,197		929,111,309		608,431,003		398,454,864		-		377,316,912			(375,253,667	)		3,381,012,618

Nine Months Ended September 30, 2017
Total revenue	$	39,517,823	$	31,428,339	$	23,981,019	$	12,723,998	$	7,952,495	$	30,086,617		$	(27,283,484	)	$	118,406,807
Net interest income	$	34,381,270	$	22,107,955	$	20,326,439	$	9,308,932	$	-	$	(1,852,668	)	$	-		$	84,271,928
Provision	$	2,624,538	$	750,000	$	2,209,000	$	631,000	$	-	$	-		$	-		$	6,214,538
Net income	$	11,657,941	$	8,893,461	$	5,484,383	$	2,406,337	$	1,554,618	$	25,804,917		$	(29,996,740	)	$	25,804,917
Goodwill	$	3,222,688	$	-	$	9,888,225	$	-	$	-	$	-		$	-		$	13,110,913
Core deposit intangible	$	-	$	1,122,263	$	5,566,350	$	-	$	-	$	-		$	-		$	6,688,613
Total assets	$	1,456,251,244	$	1,007,062,151	$	631,963,143	$	445,098,530	$	-	$	395,697,820		$	(385,609,794	)	$	3,550,463,094

Nine Months Ended September 30, 2016
Total revenue	$	45,706,061	$	31,342,345	$	2,675,741	$	11,945,081	$	6,723,690	$	23,567,906		$	(23,720,471	)	$	98,240,353
Net interest income	$	33,394,620	$	21,755,270	$	2,191,862	$	8,914,380	$	-	$	(1,019,020	)	$	-		$	65,237,112
Provision	$	3,108,821	$	700,000	$	270,000	$	800,000	$	-	$	-		$	-		$	4,878,821
Net income	$	10,326,508	$	9,366,441	$	188,608	$	2,334,735	$	1,232,831	$	19,157,447		$	(23,449,113	)	$	19,157,457
Goodwill	$	3,222,688	$	-	$	10,408,938	$	-	$	-	$	-		$	-		$	13,631,626
Core deposit intangible	$	-	$	1,321,775	$	6,291,818	$	-	$	-	$	-		$	-		$	7,613,593
Total assets	$	1,407,733,009	$	887,592,695	$	580,210,270	$	393,191,774	$	-	$	368,990,749		$	(356,732,388	)	$	3,280,986,109

3229

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 ~~September 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 ~~September 30, 2017~~ March 31, 2018 and December 31, ~~2016~~ 2017 are ~~also~~ presented in the following table (dollars in thousands). As of ~~September 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 September 30, 2017:
As of March 31, 2018:
Company:
Total risk-based capital	$	356,559		11.49	%	$	248,360	>	8.00	%	$	287,166	>	9.250	%	$	310,450	>	10.00	%	$	395,160		11.25	%	$	281,109	>	8.00	%	$	346,994	>	9.875	%	$	351,386	>	10.00	%
Tier 1 risk-based capital		321,213		10.35	%		186,270	>	6.00			225,076	>	7.250			248,360	>	8.00			358,627		10.21	%		210,832	>	6.00			276,717	>	7.875			281,109	>	8.00
Tier 1 leverage		321,213		9.23	%		139,146	>	4.00			139,146	>	4.000			173,932	>	5.00			358,627		9.08	%		157,993	>	4.00			157,993	>	4.000			197,491	>	5.00
Common equity Tier 1		289,612		9.33	%		139,703	>	4.50			178,509	>	5.750			201,793	>	6.50			321,093		9.14	%		158,124	>	4.50			224,009	>	6.375			228,401	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	152,635		12.25	%	$	99,693	>	8.00	%	$	115,270	>	9.250	%	$	124,616	>	10.00	%	$	160,996		12.32	%	$	104,544	>	8.00	%	$	129,047	>	9.875	%	$	130,680	>	10.00	%
Tier 1 risk-based capital		138,453		11.11	%		74,770	>	6.00			90,347	>	7.250			99,693	>	8.00			147,618		11.30	%		78,408	>	6.00			102,911	>	7.875			104,544	>	8.00
Tier 1 leverage		138,453		9.40	%		58,913	>	4.00			58,913	>	4.000			73,642	>	5.00			147,618		9.63	%		61,343	>	4.00			61,343	>	4.000			76,678	>	5.00
Common equity Tier 1		138,453		11.11	%		56,077	>	4.50			71,654	>	5.750			81,001	>	6.50			147,618		11.30	%		58,806	>	4.50			83,309	>	6.375			84,942	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	114,234		12.16	%	$	75,150	>	8.00	%	$	86,893	>	9.250	%	$	93,938	>	10.00	%	$	142,034		11.96	%	$	94,998	>	8.00	%	$	117,264	>	9.875	%	$	118,748	>	10.00	%
Tier 1 risk-based capital		102,545		10.92	%		56,363	>	6.00			68,105	>	7.250			75,150	>	8.00			129,507		10.91	%		71,249	>	6.00			93,514	>	7.875			94,998	>	8.00
Tier 1 leverage		102,545		10.27	%		39,950	>	4.00			39,950	>	4.000			49,938	>	5.00			129,507		9.87	%		52,483	>	4.00			52,483	>	4.000			65,603	>	5.00
Common equity Tier 1		102,545		10.92	%		42,272	>	4.50			54,014	>	5.750			61,060	>	6.50			129,507		10.91	%		53,437	>	4.50			75,702	>	6.375			77,186	>	6.50
Community State Bank:
Total risk-based capital	$	67,071		12.83	%	$	41,837	>	8.00	%	$	48,374	>	9.250	%	$	52,296	>	10.00	%	$	67,996		11.39	%	$	47,738	>	8.00	%	$	58,926	>	9.875	%	$	59,672	>	10.00	%
Tier 1 risk-based capital		63,356		12.11	%		31,378	>	6.00			37,915	>	7.250			41,837	>	8.00			63,105		10.58	%		35,803	>	6.00			46,992	>	7.875			47,738	>	8.00
Tier 1 leverage		63,356		10.14	%		24,991	>	4.00			24,991	>	4.000			31,239	>	5.00			63,105		9.35	%		27,010	>	4.00			27,010	>	4.000			33,763	>	5.00
Common equity Tier 1		63,356		12.11	%		23,533	>	4.50			30,070	>	5.750			33,992	>	6.50			63,105		10.58	%		26,853	>	4.50			38,041	>	6.375			38,787	>	6.50
Rockford Bank & Trust:
Total risk-based capital	$	45,031		11.48	%	$	31,394	>	8.00	%	$	36,299	>	9.250	%	$	39,243	>	10.00	%	$	46,567		11.07	%	$	33,644	>	8.00	%	$	41,530	>	9.875	%	$	42,055	>	10.00	%
Tier 1 risk-based capital		40,120		10.22	%		23,546	>	6.00			28,451	>	7.250			31,394	>	8.00			41,305		9.82	%		25,233	>	6.00			33,119	>	7.875			33,644	>	8.00
Tier 1 leverage		40,120		9.26	%		17,328	>	4.00			17,328	>	4.000			21,660	>	5.00			41,305		8.93	%		18,498	>	4.00			18,498	>	4.000			23,123	>	5.00
Common equity Tier 1		40,120		10.22	%		17,659	>	4.50			22,564	>	5.750			25,508	>	6.50			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

Adequacy Purposes

Capitalized Under

For Capital

With Capital

Prompt Corrective

Actual

Adequacy Purposes

Conservation Buffer*

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2017:

Company:

Total risk-based capital

383,282

11.15

275,090

8.00

318,073

9.25

343,862

10.00

Tier 1 risk-based capital

348,530

10.14

206,317

6.00

249,300

7.25

275,090

8.00

Tier 1 leverage

348,530

8.98

155,256

4.00

155,256

4.00

194,070

5.00

Common equity Tier 1

313,012

9.10

154,738

4.50

197,721

5.75

223,510

6.50

Quad City Bank & Trust:

Total risk-based capital

160,112

12.35

103,711

8.00

119,916

9.25

129,639

10.00

Tier 1 risk-based capital

147,472

11.38

77,783

6.00

93,988

7.25

103,711

8.00

Tier 1 leverage

147,472

9.52

61,985

4.00

61,985

4.00

77,481

5.00

Common equity Tier 1

147,472

11.38

58,337

4.50

74,542

5.75

84,265

6.50

Cedar Rapids Bank & Trust:

Total risk-based capital

138,492

11.88

93,272

8.00

107,846

9.25

116,590

10.00

Tier 1 risk-based capital

126,601

10.86

69,954

6.00

84,528

7.25

93,272

8.00

Tier 1 leverage

126,601

11.68

43,348

4.00

43,348

4.00

54,185

5.00

Common equity Tier 1

126,601

10.86

52,465

4.50

67,039

5.75

75,783

6.50

Community State Bank:

Total risk-based capital

66,271

11.71

45,293

8.00

52,370

9.25

56,616

10.00

Tier 1 risk-based capital

61,941

10.94

33,970

6.00

41,047

7.25

45,293

8.00

Tier 1 leverage

61,941

9.77

25,354

4.00

25,354

4.00

31,693

5.00

Common equity Tier 1

61,941

10.94

25,477

4.50

32,554

5.75

36,801

6.50

Rockford Bank & Trust:

Total risk-based capital

45,684

11.28

32,413

8.00

37,477

9.25

40,516

10.00

Tier 1 risk-based capital

40,615

10.02

24,310

6.00

29,374

7.25

32,413

8.00

Tier 1 leverage

40,615

8.94

18,177

4.00

18,177

4.00

22,721

5.00

Common equity Tier 1

40,615

10.02

18,232

4.50

23,297

5.75

26,335

6.50

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 8 – 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.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 9 –ACQUISITIONS

BATES COMPANIES

On 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 purchase 100% of the outstanding common stock of Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri. The Company will continue to operate SFC Bank, retaining its separate charter and brand within the Springfield, Missouri market. SFC Bank has one banking location and approximately $563.2 million in assets and $446.5 million in deposits as of March 31, 2018.

In the acquisition, the stockholders of Springfield Bancshares will receive 0.3060 shares of the Company’s common stock and $1.50 in cash in exchange for each common share of Springfield Bancshares held. Based upon the closing price of the Company’s common stock as of April 16, 2018, the transaction is valued at approximately $86.7 million.

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 third quarter of 2018.

Table of Contents

Part I

Item 12

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

For Capital

To Be Well

Adequacy Purposes

Capitalized Under

For Capital

With Capital

Prompt Corrective

Actual

Adequacy Purposes

Conservation Buffer*

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2016:

Company:

Total risk-based capital
$ 327,440 11.56 % $ 226,587
>
8.00 % $ 244,289
>
8.625 % $ 283,233
>
10.00 %
Tier 1 risk-based capital
296,366 10.46 % 169,940
>
6.00 187,642
>
6.625 226,587
>
8.00
Tier 1 leverage
296,366 9.10 % 130,229
>
4.00 130,229
>
4.000 162,787
>
5.00
Common equity Tier 1
266,419 9.41 % 127,455
>
4.50 145,157
>
5.125 184,102
>
6.50
Quad City Bank & Trust:

Total risk-based capital
$ 142,990 12.27 % $ 93,212
>
8.00 % $ 100,494
>
8.625 % $ 116,515
>
10.00 %
Tier 1 risk-based capital
129,524 11.12 % 69,909
>
6.00 77,191
>
6.625 93,212
>
8.00
Tier 1 leverage
129,524 9.18 % 56,445
>
4.00 56,445
>
4.000 70,556
>
5.00
Common equity Tier 1
129,524 11.12 % 52,432
>
4.50 59,714
>
5.125 75,735
>
6.50
Cedar Rapids Bank & Trust:

Total risk-based capital
$ 106,791 12.82 % $ 66,623
>
8.00 % $ 71,828
>
8.625 % $ 83,279
>
10.00 %
Tier 1 risk-based capital
96,369 11.57 % 49,968
>
6.00 55,173
>
6.625 66,623
>
8.00
Tier 1 leverage
96,369 10.69 % 36,061
>
4.00 36,061
>
4.000 45,076
>
5.00
Common equity Tier 1
96,369 11.57 % 37,476
>
4.50 42,681
>
5.125 54,132
>
6.50
Community State Bank:

Total risk-based capital
$ 68,216 13.81 % $ 39,521
>
8.00 % $ 42,609
>
8.625 % $ 49,402
>
10.00 %
Tier 1 risk-based capital
66,746 13.51 % 29,641
>
6.00 32,729
>
6.625 39,522
>
8.00
Tier 1 leverage
66,746 11.75 % 22,726
>
4.00 22,726
>
4.000 28,408
>
5.00
Common equity Tier 1
66,746 13.51 % 22,231
>
4.50 25,319
>
5.125 32,111
>
6.50
Rockford Bank & Trust:

Total risk-based capital
$ 42,007 12.26 % $ 27,410
>
8.00 % $ 29,551
>
8.625 % $ 34,262
>
10.00 %
Tier 1 risk-based capital
37,716 11.01 % 20,558
>
6.00 22,699
>
6.625 27,410
>
8.00
Tier 1 leverage
37,716 9.57 % 15,772
>
4.00 15,772
>
4.000 19,716
>
5.00
Common equity Tier 1
37,716 11.01 % 15,418
>
4.50 17,759
>
5.125 22,270
>
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).~~

~~Table of Contents~~

~~Part I~~

~~Item 1~~

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

~~NOTE~~ ~~8 – SUBSEQUENT EVENT - ACQUISITION OF GUARANTY BANK AND TRUST COMPANY~~

On October 2, 2017 the Company announced the completion of its previously announced acquisition of Guaranty Bank, headquartered in Cedar Rapids, Iowa, from Guaranty, on October 1, 2017. Guaranty Bank is an Iowa-chartered bank that operates five banking locations throughout the Cedar Rapids metropolitan area.

~~In the acquisition, the Company acquire~~d 100% of Guaranty Bank’s outstanding common stock and purchased certain assets and assumed certain liabilities of Guaranty for aggregate consideration consisting of 79% QCR Holdings common stock (678,670 shares) and 21% cash ($7.8 million). On September 29, 2017, the last trading date before the closing, the Company’s common stock closed at $45.50, resulting in stock consideration valued at $30.9 million and total consideration paid by the Company of $38.7 million.

~~To help fund the cash portion of the purchase price~~, on September 27, 2017, the Company executed a $7.0 million four-year term note with principal and interest due quarterly. Interest is calculated at the effective LIBOR rate plus 3.00% per annum (4.34% at September 30, 2017). The first principal payment of $437,500 is due in the first quarter of 2018. The collateral on the borrowing is the original stock certificates and stock powers of all subsidiaries. This note is included within other borrowings on the September 30, 2017 Consolidated Balance Sheet. The remaining cash consideration paid to Guaranty came from operating cash.

~~As of the acquisition date, Guaranty Bank had assets with a book value of $257.2 million, loans with a book value of $19~~6.1 million, and deposits with a book value of $212.3 million. The Company is in the process of determining the fair value of the individual assets and liabilities purchased/assumed. The Company expects core deposit intangible to be in the range of approximately $2.5-4.5 million. The remaininig fair value adjustments, including goodwill, are still in-process.

~~In the fourth quarter of 2017~~, the Company intends to merge Guaranty Bank with and into CRBT, with CRBT as the surviving bank. As part of the merger, the Guaranty Bank branches located at 302 3rd Avenue SE, Cedar Rapids, Iowa and 1819 42nd Street NE, Cedar Rapids, Iowa , will permanently close. The three remaining Guaranty Bank branches will become banking offices of CRBT. Until the banks are merged, the Company will own and operate Guaranty Bank as a separate bank subsidiary.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT~~’SMANAGEMENT’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 nine~~ months ending ~~September 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.

●

~~The financial results of Guaranty Bank are not included in this report because the acquisition occurred on October 1, 2017.~~

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

EXECUTIVE OVERVIEW

TheThe Company reported net income of ~~$7.9~~$10.5 million and diluted EPS of ~~$0.58~~$0.74 for the quarter ended ~~September 30, 2017.~~March 31, 2018. By comparison, for the quarter ended ~~June 30,~~December 31, 2017, the Company reported net income of ~~$8.8~~$9.9 million and diluted EPS of ~~$0.65.~~$0.70. For the quarter ended ~~September 30, 2016, the Company reported net income of $6.1 million and diluted EPS of $0.46.~~

~~For the~~ ~~nine months ended September 30,~~March 31, 2017, the Company reported net income of ~~$25.8~~$9.2 million and diluted EPS of ~~$1.91. By comparison, for the nine months ended September 30, 2016, the Company reported net income of $19.2 million, and diluted EPS of $1.52.~~$0.68.

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

●

~~Net~~Annualized net interest ~~margin (excluding acquisition accounting net accretion) improved three basis points when comparing the third quarter~~income growth of ~~2017 to the second quarter of 2017;~~7.5%;

●

Annualized loan and lease growth of ~~19% for the second consecutive quarter;~~12.2% ;

●

~~Noninterest expense~~Annualized wealth management revenue growth ~~primarily due to increased salaries~~of 10.8%;

●

Swap fee income and ~~employee benefits, as well as inflated legal expense;~~gains on the sale of government guaranteed loans of $1.3 million; and

●

~~NPAs increased in third quarter primarily due~~A definitive agreement to enter the ~~addition of one large non owner-occupied CRE relationship.~~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 nine months ended

September 30, 2017

June 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Net income
$ 7,853,935 $ 8,766,017 $ 6,107,501 $ 25,804,917 $ 19,157,457

Diluted earnings per common share
$ 0.58 $ 0.65 $ 0.46 $ 1.91 $ 1.52

Weighted average common and common equivalent shares outstanding*
13,507,955 13,532,324 13,269,703 13,509,566 12,580,042

	For the three months ended
	March 31, 2018		December 31, 2017		March 31, 2017

Net income	$	10,549,961	$	9,901,590	$	9,184,965

Diluted earnings per common share	$	0.74	$	0.70	$	0.68


Weighted average common and common equivalent shares outstanding		14,205,584		14,193,191		13,488,417

The increase in weighted average common shares outstanding when comparing the ~~first nine~~three months ended ~~September 30,~~March 31, 2018 and December 31, 2017 to ~~September 30, 2016~~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.~~

~~Table~~acquisition of ~~Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ ~~– continued~~Guaranty Bank.

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

	For the three months ended
	March 31, 2018		December 31, 2017			March 31, 2017

Net interest income	$	32,402,918	$	31,793,353		$	27,668,883
Provision expense		2,539,839		2,255,381			2,105,109
Noninterest income		8,541,449		9,714,717			7,283,754
Noninterest expense		25,863,497		31,351,204			21,273,117
Federal and state income tax expense (benefit)		1,991,070		(2,000,105	)		2,389,446
Net income	$	10,549,961	$	9,901,590		$	9,184,965

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For the three months ended

For the nine months ended

September 30, 2017

June 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Net interest income
$ 28,556,348 $ 28,046,697 $ 23,630,777 $ 84,271,928 $ 65,237,112
Provision expense
2,086,436 2,022,993 1,607,986 6,214,538 4,878,821
Noninterest income
6,701,303 6,782,518 10,423,401 20,767,575 24,008,275
Noninterest expense
23,395,747 21,404,629 24,480,483 66,073,493 59,178,734
Federal and state income tax expense
1,921,533 2,635,576 1,858,208 6,946,555 6,030,375
Net income
$ 7,853,935 $ 8,766,017 $ 6,107,501 $ 25,804,917 $ 19,157,457

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 ~~third~~first quarter of ~~2017~~2018 was up 2% compared to the ~~second~~fourth quarter of 2017 and up ~~21%~~17% compared to the ~~third~~first quarter of ~~2016. Net interest income increased 29% when comparing the first nine 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.

●

Provision expense in the ~~third~~first quarter of ~~2017~~2018 increased 3%13% compared to the ~~second~~fourth quarter of 2017 and ~~30%~~21% from the same period of ~~2016. The increase from the third quarter of 2016 to the third 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.

●

Noninterest income in the ~~third~~first quarter of ~~2017~~2018 decreased 1%12% compared to the ~~second~~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 ~~third~~first quarter of ~~2017 decreased 36%~~2018 increased 17% from the ~~third~~first quarter of ~~2016~~2017, which was primarily attributable to ~~$4 million~~higher swap fee income, as well as solid growth in ~~gains on the sale of securities associated with a balance sheet restructuring strategy executed in the third quarter of 2016.~~wealth management fee income.

●

Noninterest expense ~~increased 9%~~decreased 18% from the ~~second~~fourth quarter of 2017. The fourth quarter of 2017 ~~which was primarily due to~~included $4.4 million of non-recurring costs related to the acquisition of Guaranty Bank ~~post-acquisition transition~~ and ~~integration costs, increased salaries and employee benefits expense and inflated professional and data processing expense (primarily legal expense).~~a core processor termination fee related to CSB. Noninterest expense ~~decreased 4%~~increased 22% from the ~~third~~first quarter of ~~2016~~2017 primarily due to ~~$4 million losses on debt extinguishment due to~~ the ~~balance sheet restructuring strategy executed in the third quarter~~acquisition of ~~2016.~~Guaranty Bank.

●

Federal and state income tax expense in the ~~third~~first quarter of 2018 increased significantly compared to the fourth quarter of 2017. The fourth quarter of 2017 ~~decreased 27% compared to~~included a one-time tax benefit of $2.9 million as a result of the ~~second quarter of 2017.~~Tax Act. Federal and state income tax expense in the ~~third~~first quarter of 2018 decreased 17% compared to the first quarter of 2017 ~~increased 3% compared~~primarily due to ~~the third quarter of 2016.~~a lower federal tax rate. See the Income Taxes section of this report for additional details.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

LONG-TERM FINANCIAL GOALS

As previously stated, the Company has established certain financial goals by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these goals, there is no assurance that they will be met. Moreover, the ~~Company~~’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 73 – 78%;

●

Improve profitability (measured by NIM and ROAA);

●

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;

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●

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

●

Continue to focus on generating gains on sales 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.

Goal	Key Metric	Target**	For the Quarter Ending
			September 30, 2017	June 30, 2017	September 30,
			September 30, 2017	June 30, 2017				For the Quarter Ending
Goal	Key Metric	Target**	September 30, 2017	June 30, 2017	2016	Key Metric	Target**	March 31, 2018	December 31, 2017	March 31, 2017
			September 30, 2017	June 30, 2017	72%	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	NIM(TEY)(non-GAAP)*	> 3.85%	3.71%	3.81%	3.71%	ROAA	> 1.10%	1.06%	1.01%	1.12%
	ROAA	> 1.10%	0.90%	1.04%	0.85%
	Core ROAA (non-GAAP)*	> 1.10%	0.97%	1.03%	1.05%
Asset quality	NPAs to total assets	< 0.75%	0.95%	0.75%	0.69%
Asset quality						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	0.11%	0.13%	0.15%	Net charge-offs to average loans and leases***	< 0.25% annually	0.05%	0.19%	0.13%
Asset quality	Wholesale funding to total assets****	< 15%	12%	10%	13%	Wholesale funding to total assets****	< 15%	14%	10%	9%
Funding mix	Noninterest bearing deposits as a percentage of total assets	> 30%	20%	22%	23%	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	td.4 million	$3.0 million	$5.4 million	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
Consistent, high quality noninterest income revenue streams	Grow wealth management segment net income***	> 10% annually	24%	22%	(3%)
						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 to total assets is calculated by dividing total borrowings and brokered deposits by total assets.

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~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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 first ~~nine~~three months of ~~2017~~2018 by ~~15%~~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 targeted range of 73-78%.

●

The Company has participated, and intends to continue to participate, in a prudent manner as an acquirer in the consolidation taking place in our markets to continue to grow EPS, further boost ROAA and improve the Company’s efficiency ratio. 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. On October 1, 2017, the Company completed the acquisition of Guaranty Bank. See Note 8~~9 to the Consolidated Financial Statements for additional ~~details.~~details about these strategic transactions.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

●

The Company ~~continues~~has continued to focus on lowering the NPAs to total assets ratio. This ratio ~~increased~~decreased by 20four basis points to ~~0.95%~~0.77%, as compared to the ~~second~~fourth quarter ~~2017, due to the addition of one large non owner-occupied CRE relationship.~~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. Wholesale funding increased in the ~~third~~first quarter ~~2017~~2018 due to the strong loan and lease growth ~~in the second and third quarters of 2017~~ which ~~has~~ outpaced the Company’s deposit growth. All increases to wholesale funding were short-term in nature. Management continues to ~~evaluate opportunities for reduction~~prioritize core deposit growth through a variety of strategies including growth 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 192 downstream banks with average total noninterest bearing deposits of $220.9 million and average total interest bearing deposits of $206.1 million during the first quarter of 2018. The Company acted as the correspondent bank for 183 downstream banks with average total noninterest bearing deposits of ~~$287.4~~correspondents of $320.7 million during the ~~third~~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.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

●

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of ~~September 30, 2017~~March 31, 2018, the Company had ~~$2.41~~$2.65 billion of total financial assets in trust (and related) accounts and ~~$955.7 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.

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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)”, and “efficiency ratio”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:

●

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

●

Core 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;

●

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

●

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

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

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 is a ratio that management utilizes to compare the Company to peers. 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.

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	As of									As of
	September 30,			June 30,			December 31,			March 31,			December 31,			September 30,			June 30,			March 31,
GAAP TO NON-GAAP RECONCILIATIONS	2017			2017			2016			2018			2017			2017			2017			2017
	(dollars in thousands, except per share data)									(dollars in thousands, except per share data)
TCE / TA RATIO

Stockholders' equity (GAAP)	$	313,039		$	305,083		$	286,041		$	360,428		$	353,287		$	313,039		$	305,083		$	295,840
Less: Intangible assets		19,800			20,030			22,522			37,108			37,413			19,800			20,030			20,261
TCE (non-GAAP)	$	293,239		$	285,053		$	263,519		$	323,320		$	315,874		$	293,239		$	285,053		$	275,579

Total assets (GAAP)	$	3,550,463		$	3,457,187		$	3,301,944		$	4,026,314		$	3,982,665		$	3,550,463		$	3,457,187		$	3,381,013
Less: Intangible assets		19,800			20,030			22,522			37,108			37,413			19,800			20,030			20,261
TA (non-GAAP)	$	3,530,663		$	3,437,157		$	3,279,422		$	3,989,206		$	3,945,252		$	3,530,663		$	3,437,157		$	3,360,752

TCE / TA ratio (non-GAAP)		8.31	%		8.29	%		8.04	%		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	%

For the Quarter Ended

For the Nine Months Ended

September 30,

June 30,

December 31,

September 30,

September 30,

CORE NET INCOME

2017

2017

2016

2017

2016

Net income (GAAP)
$ 7,854 $ 8,766 $ 8,529 $ 25,805 $ 19,157

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

Income:

Securities gains, net
$ (41 ) $ 25 $ (23 ) $ (16 ) $ 3,009
Total nonrecurring income (non-GAAP)
$ (41 ) $ 25 $ (23 ) $ (16 ) $ 3,009

Expense:

Losses on debt extinguishment
$ - $ - $ 232 $ - $ 2,743
Acquisition costs
265 - - 265 887
Post-acquisition transition and integration costs
340 - 26 340 850
Total nonrecurring expense (non-GAAP)
$ 605 $ - $ 258 $ 605 $ 4,480

Core net income (non-GAAP)
$ 8,500 $ 8,741 $ 8,810 $ 26,426 $ 20,628

CORE EPS

Core net income (non-GAAP) (from above)
$ 8,500 $ 8,741 $ 8,810 $ 26,426 $ 20,628

Weighted average common shares outstanding
13,151,591 13,170,283 13,087,592 13,151,752 12,398,491
Weighted average common and common equivalent shares outstanding
13,508,277 13,532,324 13,323,883 13,509,673 12,580,042

Core EPS (non-GAAP):

Basic
$ 0.65 $ 0.66 $ 0.67 $ 2.01 $ 1.66
Diluted
$ 0.63 $ 0.65 $ 0.66 $ 1.96 $ 1.64

CORE ROAA

Core net income (non-GAAP) (from above)
$ 8,500 $ 8,741 $ 8,810 $ 26,426 $ 20,628

Average Assets
$ 3,503,148 $ 3,378,195 $ 3,277,814 $ 3,385,352 $ 2,702,992

Core ROAA (annualized) (non-GAAP)
0.97 % 1.03 % 1.08 % 1.04 % 1.02 %

* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 35%.
*
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.

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	For the Quarter Ended									For the Nine Months Ended						For the Quarter Ended
	September 30,			June 30,			December 31,			September 30,			September 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)	$	28,556		$	28,047		$	29,280		$	84,272		$	65,237		$	32,403		$	31,793		$	28,556			$	28,047		$	27,669

Plus: Tax equivalent adjustment		2,311			2,201			1,727			6,632			4,294			1,353			2,585			2,311				2,201			1,950

Net interest income - tax equivalent (Non-GAAP)	$	30,867		$	30,248		$	31,007		$	90,904		$	69,531		$	33,756		$	34,378		$	30,867			$	30,248		$	29,619

Average earning assets	$	3,303,014		$	3,180,779		$	3,069,122		$	3,186,716		$	2,548,070		$	3,759,475		$	3,699,193		$	3,303,014			$	3,180,779		$	3,076,356

NIM (GAAP)		3.43	%		3.54	%		3.80	%		3.54	%		3.42	%		3.50	%		3.41	%		3.43	%			3.54	%		3.65	%
NIM (TEY) (Non-GAAP)		3.71	%		3.81	%		4.02	%		3.81	%		3.65	%		3.64	%		3.69	%		3.71	%			3.81	%		3.90	%

EFFICIENCY RATIO

Noninterest expense (GAAP)	$	23,395		$	21,405		$	22,308		$	66,073		$	59,179		$	25,863		$	31,351		$	23,395			$	21,405		$	21,273

Net interest income (GAAP)	$	28,556		$	28,047		$	29,280		$	84,272		$	65,237		$	32,403		$	31,793		$	28,556		#	$	28,047		$	27,669
Noninterest income (GAAP)		6,702			6,782			7,029			20,768			24,008			8,541			9,714			6,702				6,782			7,284
Total income	$	35,258		$	34,829		$	36,309		$	105,040		$	89,245		$	40,944		$	41,507		$	35,258			$	34,829		$	34,953

Efficiency ratio (noninterest expense/total income) (Non-GAAP)		66.35	%		61.46	%		61.44	%		62.90	%		66.31	%		63.17	%		75.53	%		66.35	%			61.46	%		60.86	%

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

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

As part of the Tax Act, the Company’s federal income tax rate was 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 ~~22%~~14% to ~~$30.9~~$33.8 million for the quarter ended ~~September 30, 2017,~~March 31, 2018, compared to the same quarter of the prior year. ~~For~~Excluding the ~~nine months ended September 30, 2017,~~tax equivalent adjustments, net interest income ~~on a tax equivalent basis,~~ increased ~~31% to $90.9 million, compared to~~17% over the same ~~period of 2016.~~period. Net interest income improved due to several factors:

●

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

●

The acquisition of ~~CSB,~~Guaranty Bank, whose strong ~~net interest margin~~NIM has ~~significantly~~ contributed to the Company’s results; and

●

The Company’s continued strategy to redeploy funds from the lower yielding taxable securities portfolio into higher yielding loans and ~~leases;~~municipal bonds, especially with the Company’s most recent acquisitions of CSB and

●

~~Organic loan and lease growth has been strong over the past twelve months, as evidenced by average gross loan/lease growth of 29% in that period.~~

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

●

~~The average yield on interest-earning assets increased 16 basis points.~~

●

~~The average cost of interest-bearing liabilities increased 18 basis points.~~

●

~~The net interest spread decreased 2 basis points from 3.49% to 3.47%.~~

●

~~NIM remained flat at 3.71% for both periods.~~ Guaranty Bank.

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Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

A comparison of yields, spread and margin ~~from the~~ ~~first nine months of 2017 to the first nine months 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 25 basis points.~~Floating rate loans and securities repricing with recent rate hikes,

●

~~The average cost of interest-bearing liabilities increased 9 basis points.~~Growing certain niches (loans and securities) that tend to have higher spreads, and

●

~~The net interest spread increased 16 basis points from 3.43% to 3.59%.~~

●

~~NIM improved 16 basis points from 3.65% to 3.81%.~~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 ~~NIM.~~NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies.

~~The improvement in~~ NIM 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 7~~3-78%, 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.

~~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.

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Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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 September 30,
	2017								2016								For the three months ended March 31,
				Interest		Average						Interest		Average			2018								2017
	Average			Earned		Yield or			Average			Earned		Yield or						Interest		Average						Interest		Average
	Balance			or Paid		Cost			Balance			or Paid		Cost			Average			Earned		Yield or			Average			Earned		Yield or
																	Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)																(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	19,966		$	52		1.03	%	$	17,685		$	13		0.29	%	$	19,703		$	56		1.15	%	$	11,092		$	15		0.55	%
Interest-bearing deposits at financial institutions		42,178			141		1.33	%		67,807			103		0.60	%		49,531			197		1.61	%		92,551			199		0.87	%
Investment securities (1)		593,451			5,808		3.88	%		525,417			4,826		3.65	%		649,035			5,839		3.65	%		560,455			5,158		3.73	%
Restricted investment securities		17,793			173		3.86	%		14,877			132		3.53	%		21,830			234		4.35	%		13,871			130		3.80	%
Gross loans/leases receivable (1) (2) (3)		2,629,626			29,978		4.52	%		2,077,376			23,330		4.47	%		3,019,376			34,573		4.64	%		2,398,387			27,793		4.70	%

Total interest earning assets	$	3,303,014		$	36,152		4.34	%	$	2,703,162		$	28,404		4.18	%	$	3,759,475		$	40,899		4.41	%	$	3,076,356		$	33,295		4.39	%

Noninterest-earning assets:
Cash and due from banks	$	64,272							$	52,678							$	67,224							$	65,291
Premises and equipment		61,585								42,986								63,394								60,977
Less allowance		(34,086	)							(30,927	)							(35,136	)							(31,498	)
Other		108,363								98,048								139,734								103,587

Total assets	$	3,503,148							$	2,865,947							$	3,994,691							$	3,274,713

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	1,613,162			2,230		0.55	%	$	1,116,325			717		0.26	%	$	1,828,228			3,019		0.67	%	$	1,407,645			1,140		0.33	%
Time deposits		530,120			1,326		0.99	%		422,603			755		0.71	%		616,661			1,862		1.22	%		511,119			1,093		0.87	%
Short-term borrowings		16,138			33		0.81	%		30,208			12		0.16	%		17,271			33		0.77	%		25,188			24		0.39	%
FHLB advances		146,556			608		1.65	%		118,564			421		1.41	%		236,689			1,064		1.82	%		114,356			403		1.43	%
Other borrowings		72,617			726		3.97	%		116,856			975		3.32	%		64,680			718		4.50	%		74,761			683		3.71	%
Junior subordinated debentures		33,563			362		4.28	%		33,430			306		3.64	%		37,510			447		4.83	%		33,497			333		4.03	%

Total interest-bearing liabilities	$	2,412,156		$	5,285		0.87	%	$	1,837,986		$	3,186		0.69	%	$	2,801,039		$	7,143		1.03	%	$	2,166,566		$	3,676		0.69	%

Noninterest-bearing demand deposits	$	738,824							$	704,469							$	794,673							$	773,245
Other noninterest-bearing liabilities		42,572								45,123								42,454								43,996
Total liabilities	$	3,193,552							$	2,587,578							$	3,638,166							$	2,983,807

Stockholders' equity		309,596								278,369								356,525								290,906

Total liabilities and stockholders' equity	$	3,503,148							$	2,865,947							$	3,994,691							$	3,274,713

Net interest income				$	30,867							$	25,218							$	33,756							$	29,619

Net interest spread							3.47	%							3.49	%							3.38	%							3.70	%

Net interest margin							3.71	%							3.71	%							3.64	%							3.90	%

Ratio of average interest-earning assets to average interest-bearing liabilities		136.93	%							147.07	%							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.~~

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

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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 three months ended September 30, 2017~~

Inc./(Dec.)

Components

from

of Change (1)

Prior Period

Rate

Volume

2017 vs. 2016

(dollars in thousands)

INTEREST INCOME

Federal funds sold
$ 39 $ 37 $ 2
Interest-bearing deposits at financial institutions
38 264 (226 )
Investment securities (2)
982 320 662
Restricted investment securities
41 13 28
Gross loans/leases receivable (2) (3) (4)
6,648 295 6,353

Total change in interest income
$ 7,748 $ 929 $ 6,819

INTEREST EXPENSE

Interest-bearing deposits
$ 1,513 $ 1,090 $ 423
Time deposits
571 348 223
Short-term borrowings
21 58 (37 )
Federal Home Loan Bank advances
187 77 110
Other borrowings
(249 ) 913 (1,162 )
Junior subordinated debentures
56 55 1

Total change in interest expense
$ 2,099 $ 2,541 $ (442 )

Total change in net interest income
$ 5,649 $ (1,612 ) $ 7,261

Analysis of Changes of Interest Income/Interest Expense

For the three months ended March 31, 2018

	Inc./(Dec.)			Components
	from			of Change (1)
	December 31, 2017			Rate			Volume
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	41		$	24		$	17
Interest-bearing deposits at financial institutions		(2	)		484			(486	)
Investment securities (2)		681			(738	)		1,419
Restricted investment securities		104			21			83
Gross loans/leases receivable (2) (3) (4)		6,780			(2,266	)		9,046

Total change in interest income	$	7,604		$	(2,475	)	$	10,079

INTEREST EXPENSE
Interest-bearing deposits	$	1,879		$	1,459		$	420
Time deposits		769			512			257
Short-term borrowings		9			54			(45	)
Federal Home Loan Bank advances		661			135			526
Other borrowings		35			481			(446	)
Junior subordinated debentures		114			71			43

Total change in interest expense	$	3,467		$	2,712		$	755

Total change in net interest income	$	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.

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Item 2

~~MANAGEMENT~~’S

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

For the nine months ended September 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
$ 16,600 $ 105 0.85 % $ 16,364 $ 36 0.29 %
Interest-bearing deposits at financial institutions
73,655 560 1.02 % 53,063 226 0.57 %
Investment securities (1)
575,884 16,350 3.80 % 527,162 14,084 3.57 %
Restricted investment securities
14,963 435 3.89 % 14,396 396 3.67 %
Gross loans/leases receivable (1) (2) (3)
2,505,614 86,821 4.63 % 1,937,085 63,784 4.40 %

Total interest earning assets
$ 3,186,716 $ 104,271 4.37 % $ 2,548,070 $ 78,526 4.12 %

Noninterest-earning assets:

Cash and due from banks
$ 64,363 $ 49,677
Premises and equipment
61,296 39,637
Less allowance
(32,648 ) (28,480 )
Other
105,625 94,087

Total assets
$ 3,385,352 $ 2,702,992

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:

Interest-bearing deposits
$ 1,528,971 5,205 0.46 % $ 994,476 1,931 0.26 %
Time deposits
522,986 3,575 0.91 % 415,808 2,175 0.70 %
Short-term borrowings
19,754 76 0.51 % 55,623 74 0.18 %
FHLB advances
112,550 1,365 1.62 % 125,319 1,278 1.36 %
Other borrowings
73,126 2,104 3.85 % 106,201 2,624 3.30 %
Junior subordinated debentures
33,530 1,042 4.15 % 33,825 913 3.61 %

Total interest-bearing liabilities
$ 2,290,917 $ 13,367 0.78 % $ 1,731,251 $ 8,995 0.69 %

Noninterest-bearing demand deposits
$ 751,318 $ 675,240
Other noninterest-bearing liabilities
42,660 41,499
Total liabilities
$ 3,084,895 $ 2,447,990

Stockholders' equity
300,457 255,002

Total liabilities and stockholders' equity
$ 3,385,352 $ 2,702,992

Net interest income
$ 90,904 $ 69,531

Net interest spread
3.59 % 3.43 %

Net interest margin
3.81 % 3.65 %

Ratio of average interest-earning assets to average interest-bearing liabilities
139.10 % 147.18 %

~~(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.~~

~~Table of Contents~~

~~Part I~~
~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~Analysis of Changes of Interest Income/Interest Expense~~

~~For the nine months ended September 30, 2017~~

Inc./(Dec.)

Components

from

of Change (1)

Prior Period

Rate

Volume

2017 vs. 2016

(dollars in thousands)

INTEREST INCOME

Federal funds sold
$ 69 $ 68 $ 1
Interest-bearing deposits at financial institutions
334 224 110
Investment securities (2)
2,266 924 1,342
Restricted investment securities
39 23 16
Gross loans/leases receivable (2) (3) (4)
23,037 3,540 19,497

Total change in interest income
$ 25,745 $ 4,779 $ 20,966

INTEREST EXPENSE

Interest-bearing deposits
$ 3,274 $ 1,913 $ 1,361
Time deposits
1,400 762 638
Short-term borrowings
2 97 (95 )
Federal Home Loan Bank advances
87 283 (196 )
Other borrowings
(520 ) 577 (1,097 )
Junior subordinated debentures
129 143 (14 )

Total change in interest expense
$ 4,372 $ 3,775 $ 597

Total change in net interest income
$ 21,373 $ 1,004 $ 20,369

~~(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.~~

~~Table of Contents~~

~~Part I~~
~~Item 2~~

~~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 ~~September 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.

~~Table of Contents~~

~~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 26%, comparing the ~~third~~first quarter of ~~2017~~2018 to the same period of ~~2016 and increased 32%, comparing the first nine months of 2017 to the same period of 2016.~~2017. This increase was primarily the result of ~~the CSB acquisition during the third quarter of 2016, as well as~~ strong organic loan ~~growth.~~growth and the acquisition of Guaranty Bank.

Overall, the ~~Company~~’sCompany’s average earning assets increased 22%, comparing the ~~third~~first quarter of ~~2017~~2018 to the ~~third~~first quarter of ~~2016.~~2017. During the same time period, average gross loans and leases increased ~~27%~~26%, while average investment securities increased 13%. Average earning assets increased 25%, comparing the first nine months of 2017 to the same period of 2016. Average gross loans and leases increased 29% and average investment securities increased 9%, comparing the first nine of 2017 to the same period of 2016.16% with a portion being private placement tax-exempt municipal securities. These increases were also the result of the acquisition of ~~CSB, as well as strong loan growth.~~Guaranty Bank.

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~~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 ~~third~~first quarter of ~~2017~~2018 increased ~~66%~~94% from the ~~third~~first quarter of ~~2016. For the first nine months of 2017, interest expense increased 49% compared to the first nine months of 2016.~~2017. The acquisition of ~~CSB~~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.

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~~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 ~~$2.1~~$2.5 million for the ~~third~~first quarter of ~~2017,~~2018, which was an increase of ~~$478~~$435 thousand or ~~30%~~21% from the same quarter of the prior year. ~~Provision for the first nine months of the year totaled $6.2 million, which was up $1.3 million or 27%, compared to the first nine months of 2016.~~ The increase from the ~~third~~first quarter of ~~2016~~2017 to the ~~third~~first quarter of ~~2017~~2018 was primarily attributable to ~~CSB.~~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.~~allowance through provision. This provision, when coupled with net charge-offs of ~~$2.0 million~~$363 thousand for the first ~~nine~~three months of ~~2017,~~2018, increased the Company’s allowance to ~~$35.0~~$36.5 million at ~~September 30, 2017.~~March 31, 2018. As of ~~September 30, 2017,~~March 31, 2018, the Company’s allowance to total loans/leases was ~~1.31%~~1.20%, which ~~is flat~~has increased from ~~June 30,~~1.16% at December 31, 2017 and updecreased from ~~1.22%~~1.32% at ~~September 30, 2016.~~March 31, 2017.

In accordance with GAAP for business combination accounting, ~~the~~acquired loans ~~acquired through the acquisition of CSB were~~are recorded at 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 ($~~5.6~~7.3 million and $8.0 million at ~~September 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 ~~1.52%.~~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.

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~~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 nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017.

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

Trust department fees	$	1,721,401		$	1,518,600	$	202,801			13.4	%	$	2,237,081	$	1,740,207	$	496,874			28.6	%
Investment advisory and management fees		968,452			765,977		202,475			26.4			952,344		961,599		(9,255	)		(1.0	)
Deposit service fees		1,522,461			1,150,869		371,592			32.3			1,531,453		1,316,390		215,063			16.3
Gains on sales of residential real estate loans, net		98,409			144,105		(45,696	)		(31.7	)		100,815		96,323		4,492			4.7
Gains on sales of government guaranteed portions of loans, net		91,974			218,785		(126,811	)		(58.0	)		358,434		950,641		(592,207	)		(62.3	)
Swap fee income		194,256			333,772		(139,516	)		(41.8	)		958,694		113,520		845,174			744.5
Securities gains (losses), net		(63,588	)		4,251,773		(4,315,361	)		(101.5	)
Earnings on bank-owned life insurance		428,002			450,251		(22,249	)		(4.9	)		417,987		469,687		(51,700	)		(11.0	)
Debit card fees		754,803			475,182		279,621			58.8			766,108		702,801		63,307			9.0
Correspondent banking fees		239,060			253,823		(14,763	)		(5.8	)		264,827		245,189		19,638			8.0
Other		746,073			860,264		(114,191	)		(13.3	)		953,706		687,397		266,309			38.7
Total noninterest income	$	6,701,303		$	10,423,401	$	(3,722,098	)		(35.7	)%	$	8,541,449	$	7,283,754	$	1,257,695			17.3	%


	Nine Months Ended
	September 30, 2017			September 30, 2016		$ Change			% Change

Trust department fees	$	5,153,609		$	4,606,590	$	547,019			11.9	%
Investment advisory and management fees		2,798,886			2,117,100		681,786			32.2
Deposit service fees		4,297,210			3,028,758		1,268,452			41.9
Gains on sales of residential real estate loans		307,360			288,904		18,456			6.4
Gains on sales of government guaranteed portions of loans		1,129,668			2,701,203		(1,571,535	)		(58.2	)
Swap fee income		635,353			1,358,312		(722,959	)		(53.2	)
Securities gains (losses), net		(25,124	)		4,628,283		(4,653,407	)		(100.5	)
Earnings on bank-owned life insurance		1,357,049			1,324,380		32,669			2.5
Debit card fees		2,201,125			1,126,581		1,074,544			95.4
Correspondent banking fees		684,306			800,892		(116,586	)		(14.6	)
Other		2,228,133			2,027,272		200,861			9.9
Total noninterest income	$	20,767,575		$	24,008,275	$	(3,240,700	)		(13.5	)%

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 ~~13%~~29%, comparing the ~~third~~first quarter of ~~2017 to the same period of the prior year. Trust department fees increased 12% when comparing the first nine months 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 26%, comparing the third quarter of 2017 to the same period~~subsequent merger of the ~~prior year and they increased 32% when comparing the first nine months~~Bates Companies into RB&T will add approximately $700 million of ~~2017 to the first nine months of 2016. The acquisition of CSB also contributed to this increase, as it had an established investment advisory and management services department at acquisition.~~

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

Deposit service fees expanded ~~32% comparing the third quarter of 2017 to the same period of the prior year and expanded 42% when~~16% comparing the first ~~nine months~~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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Gains on sales of residential real estate loans ~~decreased 32% when comparing the third quarter of 2017 to the same period of the prior year and~~ increased 6%5% when comparing the first ~~nine months~~quarter of ~~2017~~2018 to the same period of the prior year. 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 ~~third~~first quarter of ~~2017~~2018 decreased ~~58%~~62% compared to the ~~third~~first quarter of ~~2016 and decreased 58% when comparing the first nine months of 2017 to the same period of the prior year.~~2017. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. As one of its core strategies, the 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 can lead to volatility in activity from quarter to quarter. Swap fee income totaled ~~$194 thousand for the third quarter of 2017, compared to $334 thousand for the third quarter of 2016. Swap fee income totaled $635~~$959 thousand for the first ~~nine months~~quarter of ~~2017~~2018, compared to ~~$1.4 million in~~$114 thousand for the first ~~nine months~~quarter of ~~2016.~~2017. Future levels of swap fee income are also dependent upon prevailing interest rates.

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~Securities~~ losses were $64 thousand for the third quarter of 2017, compared to gains of $4.3 million for the third quarter of 2016. Securities losses totaled $25 thousand for the first nine months of 2017, compared to gains of $4.6 million for the first nine months of 2016. In September 2016, the Company sold an equity security and recognized a pre-tax gross gain on the sale of $4 million. The equity security was acquired by the Company at no cost as part of a membership in the invested company in 2002.

Earnings on BOLI decreased ~~5% comparing the third quarter of 2017 to the third quarter of 2016 and increased 3%~~11% comparing the first ~~nine months~~quarter of ~~2017~~2018 to the first ~~nine months~~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 ~~59%~~9% comparing the ~~third~~first quarter of ~~2017~~2018 to the ~~third~~first quarter of the prior ~~year and increased 95% comparing the first nine months of 2017~~year. This increase was primarily related to the ~~first nine months~~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.~~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 6%~~increased 8% comparing the ~~third~~first quarter of ~~2017~~2018 to the ~~third~~first quarter of the prior year and decreased 15% when comparing the first nine months of 2017 to the first nine months 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 ~~183~~192 banks in Iowa, Illinois and Wisconsin.

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~~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 nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017.

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

Salaries and employee benefits	$	13,423,943		$	11,202,460	$	2,221,483			19.8	%	$	15,977,975	$	13,307,331	$	2,670,644			20.1	%
Occupancy and equipment expense		2,516,274			2,086,331		429,943			20.6			3,065,811		2,502,219		563,592			22.5
Professional and data processing fees		2,950,839			1,931,329		1,019,510			52.8			2,707,716		2,083,392		624,324			30.0
Acquisition costs		407,997			1,036,904		(628,907	)		(60.7	)		92,539		5,630		86,909			1,543.7
Post-acquisition transition and integration costs		522,740			1,009,132		(486,392	)		(48.2	)
FDIC insurance, other insurance and regulatory fees		690,894			582,835		108,059			18.5			756,211		621,242		134,969			21.7
Loan/lease expense		257,540			102,678		154,862			150.8			290,747		293,538		(2,791	)		(1.0	)
Net cost of (income from) operations of other real estate		(160,640	)		133,055		(293,695	)		(220.7	)
Net cost of operations of other real estate													131,742		14,230		117,512			825.8
Advertising and marketing		669,923			547,768		122,155			22.3			693,239		609,431		83,808			13.8
Bank service charges		460,153			415,401		44,752			10.8			440,571		423,901		16,670			3.9
Losses on debt extinguishment, net		-			4,137,310		(4,137,310	)		(100.0	)
Correspondent banking expense		204,189			205,998		(1,809	)		(0.9	)		204,754		198,351		6,403			3.2
CDI amortization expense													304,551		230,867		73,684			31.9
Other		1,451,895			1,089,282		362,613			33.3			1,197,641		982,985		214,656			21.8
Total noninterest expense	$	23,395,747		$	24,480,483	$	(1,084,736	)		(4.4	)%	$	25,863,497	$	21,273,117	$	4,590,380			21.6	%


	Nine Months Ended
	September 30, 2017			September 30, 2016		$ Change			% Change

Salaries and employee benefits	$	39,662,218		$	32,920,840	$	6,741,378			20.5	%
Occupancy and equipment expense		7,716,829			5,797,875		1,918,954			33.1
Professional and data processing fees		7,374,930			4,921,064		2,453,866			49.9
Acquisition costs		407,997			1,363,987		(955,990	)		(70.1	)
Post-acquisition transition and integration costs		522,740			1,037,018		(514,278	)		(49.6	)
FDIC insurance, other insurance and regulatory fees		1,957,413			1,866,804		90,609			4.9
Loan/lease expense		811,362			419,846		391,516			93.3
Net cost of (income from) operations of other real estate		(118,453	)		513,149		(631,602	)		(123.1	)
Advertising and marketing		1,846,942			1,367,478		479,464			35.1
Bank service charges		1,331,499			1,246,682		84,817			6.8
Losses on debt extinguishment, net		-			4,220,507		(4,220,507	)		(100.0	)
Correspondent banking expense		604,233			564,763		39,470			7.0
Other		3,955,783			2,938,721		1,017,062			34.6
Total noninterest expense	$	66,073,493		$	59,178,734	$	6,894,759			11.7	%

Management places a strong emphasis on overall cost containment and is committed to ~~improving~~improving the Company’s general efficiency. One-time charges relating to the acquisition of Springfield Bancshares are expected to impact expense in later periods of 2018.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the ~~third~~first quarter ~~of 2016 to the third quarter of 2017 by 20%. This line item also increased 21% when comparing the first nine months~~ of 2017 to the first ~~nine months~~quarter of ~~2016.~~2018 by 20%. This increase was primarily related to new hires, merit increases and the ~~acquisition~~addition of ~~CSB late~~the Guaranty Bank employees. New hires throughout 2017 included roles in ~~the third quarter of 2016.~~

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~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ ~~– continued~~Information Technology, Accounting, Internal Audit, Trust and Commercial Banking.

Occupancy and equipment expense increased ~~21%~~23%, comparing the ~~third~~first quarter of ~~2017 to the same period of the prior year and increased 33% comparing the first nine months of 2017~~2018 to the same period of the prior year. The increased expense was mostly due to the addition of ~~CSB.~~Guaranty Bank.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Professional and data processing feesfees increased ~~53%~~30%, comparing the ~~third~~first quarter of ~~2017~~2018 to the same period in ~~2016 and increased 50% comparing the first nine months of 2017 to the same period in 2016.~~2017. This increased expense was partially due to the addition of ~~CSB. Legal~~Guaranty Bank. Additionally, legal expense ~~for the past quarter~~ was also elevated due to a legal matter ~~in Rockford~~at RB&T where two ~~Bank officers~~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 ~~sometime~~ 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 ~~19%~~22%, comparing the ~~third~~first quarter of ~~2017~~2018 to the ~~third~~first quarter of ~~2016, and increased 5% comparing the first nine months of 2017 to the same period of 2016.~~2017. The increase in expense was due to the acquisition of ~~CSB, partially offset by a decrease in the assessment rate designated by the FDIC.~~Guaranty Bank.

Loan/lease expense ~~increased 151%~~decreased 1%, comparing the ~~third~~first quarter of ~~2017~~2018 to the same quarter of 2016, and increased 93% when comparing the first nine months of 2017 to the same period of 2016. The Company incurred elevated levels of expense in the first nine 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~~or income from~~ operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. ~~Income~~Net cost from operations of other real estate totaled ~~$161~~$132 thousand for the ~~third~~first quarter of ~~2017,~~2018, compared to net costs of operations of ~~$133 thousand for the third quarter of 2016. Income from operations of other real estate totaled $118~~$14 thousand for the first ~~nine months~~quarter of ~~2017, compared to net costs of operations of $513 thousand for~~2017.

Advertising and marketing expense increased 14%, comparing the first ~~nine 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 ~~11%~~4% from the ~~third quarter of 2016 to the third~~first quarter of 2017 ~~and increased 7% from the first nine months of 2016~~ to the first ~~nine months~~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 nine months of 2016, the Company incurred $4.2 thousand of losses on debt extinguishment, net. These losses relate to the prepayment of certain FHLB advances and wholesale structured repurchase agreements. Additionally, the Company recognized gains on extinguishment related to the repurchase of junior subordinated debentures that were acquired at a discount through auction.

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~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

Correspondent banking ex~~pense was down 1% when comparing the third quarter of 2017 to the third quarter of 2016 and up 7%~~expense increased 3% when comparing the first ~~nine 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 ~~33% when comparing the third quarter of 2017 to the third quarter of 2016 and up 35%~~22% when comparing the first ~~nine months~~quarter of ~~2017~~2018 to the ~~same period~~first quarter of ~~2016.~~2017. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management. A ~~large~~ portion of ~~that~~this increase ~~was due to core deposit intangible amortization. Core deposit intangible amortization expense was up $120 thousand when comparing the third quarter of 2017~~is related to the ~~third quarter~~addition of ~~2016 and increased $482 thousand when comparing the first nine months~~Guaranty Bank.

Table of ~~2017 to the same period of 2016. Increases were due to the acquisition of CSB.~~Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INCOME TAXES

In the ~~third~~ first quarter of ~~2017,~~2018, the Company incurred income tax expense of ~~$1.9 million. During the first nine months of the year, the Company incurred income tax expense of $6.9~~$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 nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017.

	For the Three Months Ended September 30,												For the Nine Months Ended September 30,												For the Three Months Ended March 31,
	2017						2016						2017						2016						2018						2017
				% of						% of						% of						% of						% of						% of
				Pretax						Pretax						Pretax						Pretax						Pretax						Pretax
	Amount			Income			Amount			Income			Amount			Income			Amount			Income			Amount			Income			Amount			Income

Computed "expected" tax expense	$	3,421,414			35.0	%	$	2,787,998			35.0	%	$	11,463,015			35.0	%	$	8,815,741			35.0	%	$	2,633,669			21.0	%	$	4,051,044			35.0	%
Tax exempt income, net		(1,479,786	)		(15.1	)		(1,180,470	)		(14.8	)		(4,219,116	)		(12.9	)		(3,135,276	)		(12.5	)		(943,101	)		(7.5	)		(1,305,427	)		(11.3	)
Bank-owned life insurance		(149,802	)		(1.5	)		(157,587	)		(2.0	)		(474,968	)		(1.4	)		(463,532	)		(1.8	)		(87,777	)		(0.7	)		(164,391	)		(1.4	)
State income taxes, net of federal benefit, current year		389,200			4.0			289,287			3.6			1,191,935			3.6			853,325			3.4			551,468			4.4			408,325			3.5
Excess tax benefit on stock options exercised and restricted stock awards vested*		(190,554	)		(1.9	)		-			-			(813,421	)		(2.5	)		-			-
Excess tax benefit on stock options exercised and restricted stock awards vested																										(132,361	)		(1.1	)		(533,322	)		(4.6	)
Other		(68,939	)		(0.8	)		118,980			1.5			(200,890	)		(0.6	)		(39,883	)		(0.2	)		(30,828	)		(0.2	)		(66,783	)		(0.6	)
Federal and state income tax expense	$	1,921,533			19.7	%	$	1,858,208			23.3	%	$	6,946,555			21.2	%	$	6,030,375			23.9	%	$	1,991,070			15.9	%	$	2,389,446			20.6	%

The effective tax rate for the quarter ended ~~September 30, 2017~~March 31, 2018 was ~~19.7%~~15.9% which was a 4.7% decrease from the effective tax rate of ~~23.3%~~20.6% for the quarter ended ~~September 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 nine months ended September 30, 2017 was 21.2%, which was a decrease over the effective tax rate of 23.9% for the nine months ended September 30, 2016. This shift was primarily due~~from 35% to the implementation of ASU 2016-09, which resulted in a tax benefit of $191 thousand for the third quarter of 2017 and $813 thousand for the first nine months of 2017. The effective rate for the three months ended September 30, 2017 was also positively impacted by higher levels of 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
	September 30, 2017					June 30, 2017					December 31, 2016					September 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	$	56,275		2	%	$	77,161		2	%	$	70,570		2	%	$	61,213		2	%	$	61,846		2	%	$	75,722		2	%	$	56,326		2	%
Federal funds sold and interest-bearing deposits		61,789		2	%		72,354		2	%		86,206		3	%		96,047		3	%		59,557		1	%		85,962		2	%		173,219		5	%
Securities		583,936		16	%		593,485		17	%		574,022		19	%		564,930		17	%		638,229		16	%		652,382		16	%		557,646		16	%
Net loans/leases		2,641,772		74	%		2,520,209		73	%		2,374,730		70	%		2,331,774		71	%		3,018,370		75	%		2,930,130		74	%		2,403,791		71	%
Other assets		206,691		6	%		193,978		6	%		196,416		6	%		227,022		7	%		248,312		6	%		238,469		6	%		190,031		6	%
Total assets	$	3,550,463		100	%	$	3,457,187		100	%	$	3,301,944		100	%	$	3,280,986		100	%	$	4,026,314		100	%	$	3,982,665		100	%	$	3,381,013		100	%

Total deposits	$	2,894,268		82	%	$	2,870,234		83	%	$	2,669,261		81	%	$	2,594,913		79	%	$	3,280,001		82	%	$	3,266,655		82	%	$	2,805,931		83	%
Total borrowings		296,145		8	%		230,264		7	%		290,952		9	%		312,104		10	%		334,802		8	%		309,480		8	%		231,534		7	%
Other liabilities		47,011		1	%		51,606		1	%		55,690		2	%		93,112		3	%		51,083		1	%		53,243		1	%		47,708		1	%
Total stockholders' equity		313,039		9	%		305,083		9	%		286,041		8	%		280,857		8	%		360,428		9	%		353,287		9	%		295,840		9	%
Total liabilities and stockholders' equity	$	3,550,463		100	%	$	3,457,187		100	%	$	3,301,944		100	%	$	3,280,986		100	%	$	4,026,314		100	%	$	3,982,665		100	%	$	3,381,013		100	%

During the first quarter of 2018, the Company’s total assets increased $43.6 million, or 1%, to a total of $4.0 billion. Net loans/leases grew $88.2 million. This loan and lease growth was funded by a combination of excess cash, deposits, which increased $13.3 million in the first quarter of 2018, and borrowings, which increased $25.3 million in the first quarter of 2018. Stockholders’ equity increased $7.1 million, or 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

~~During the~~ third quarter of 2017, the Company’s total assets increased $93.3 million, or 3%, to a total of $3.6 billion. Total gross loans and leases grew $123.2 million. This loan and lease growth was funded by deposits, which increased $24.0 million in the third quarter of 2017, and borrowings, which increased $65.9 million in the third quarter of 2017. Stockholders’ equity increased $8.0 million, or 3%, in the current quarter due to net retained income.

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																								As of
	September 30, 2017						June 30, 2017						December 31, 2016						September 30, 2016						March 31, 2018						December 31, 2017						March 31, 2017
	Amount			%			Amount			%			Amount			%			Amount			%			Amount			%			Amount			%			Amount			%
	(dollars in thousands)																								(dollars in thousands)
U.S. govt. sponsored agency securities	$	39,340			7	%	$	41,944			7	%	$	46,084			8	%	$	67,885			12	%	$	36,868			6	%	$	38,097			6	%	$	47,556			9	%
Municipal securities		379,694			65	%		381,254			64	%		374,463			65	%		360,330			64	%		438,736			69	%		445,049			68	%		356,776			64	%
Residential mortgage-backed and related securities		158,969			27	%		164,415			28	%		147,702			26	%		133,173			23	%		157,289			25	%		163,301			25	%		147,504			26	%
Other securities		5,933			1	%		5,872			1	%		5,773			1	%		3,542			1	%		5,336			1	%		5,935			1	%		5,810			1	%
	$	583,936			100	%	$	593,485			100	%	$	574,022			100	%	$	564,930			100	%	$	638,229			100	%	$	652,382			100	%	$	557,646			100	%

Securities as a % of Total Assets		16.45	%					17.17	%					17.38	%					17.22	%					15.85	%					16.38	%					16.49	%
Net Unrealized Gains (Losses) as a % of Amortized Cost		(0.16	)%					(0.33	)%					(0.87	)%					1.53	%
Net Unrealized Losses as a % of Amortized Cost																										(1.01	)%					(0.13	)%					(0.79	)%
Duration (in years)		6.4						6.3						6.0						5.7						6.9						7.0						6.1
Quarterly Yield on investment securities (tax equivalent)		3.88	%					3.76	%					3.56	%					3.65	%
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 32~~decreasing 17 bps ~~over~~in the first ~~nine months~~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.

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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 ~~third~~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
	September 30, 2017						June 30, 2017						December 31, 2016						September 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	$	1,034,531			39	%	$	942,538			37	%	$	827,637			34	%	$	804,308			35	%	$	1,201,087			39	%	$	1,134,516			38	%	$	851,578			35	%
CRE loans		1,157,856			43	%		1,131,906			45	%		1,093,459			46	%		1,070,305			45	%		1,357,703			45	%		1,303,492			44	%		1,106,842			46	%
Direct financing leases		147,063			6	%		153,337			6	%		165,419			7	%		166,924			7	%		137,614			5	%		141,448			5	%		159,368			7	%
Residential real estate loans		239,958			9	%		233,871			9	%		229,233			10	%		229,081			10	%		254,484			8	%		258,646			9	%		231,326			9	%
Installment and other consumer loans		89,605			3	%		84,047			3	%		81,666			3	%		81,918			3	%		95,912			3	%		118,611			4	%		78,771			3	%

Total loans/leases	$	2,669,013			100	%	$	2,545,699			100	%	$	2,397,414			100	%	$	2,352,536			100	%	$	3,046,800			100	%	$	2,956,713			100	%	$	2,427,885			100	%

Plus deferred loan/lease origination costs, net of fees		7,741						7,867						8,073						8,065						8,103						7,773						7,965
Less allowance		(34,982	)					(33,357	)					(30,757	)					(28,827	)					(36,533	)					(34,356	)					(32,059	)

Net loans/leases	$	2,641,772					$	2,520,209					$	2,374,730					$	2,331,774					$	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 ~~September 30, 2017~~March 31, 2018 and ~~June 30,~~December 31, 2017, approximately ~~28%~~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 ~~$92.0~~$66.6 million in the current ~~quarter, or an annualized rate of 39%.~~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 ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the amount of nationally syndicated loans totaled ~~$55.0~~$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 September 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 September 30,

As of June 30,

As of December 31,

As of September 30,

2017

2017

2016

2016

Amount

%

Amount

%

Amount

%

Amount

%

(dollars in thousands)

Lessors of Nonresidential Buildings
$ 345,387 30 % $ 344,747 30 % $ 322,337 30 % $ 308,334 28 %
Lessors of Residential Buildings
159,542 14 % 159,370 14 % 141,321 13 % 136,055 13 %
New Housing For-Sale Builders
56,390 5 % 52,277 5 % 56,711 5 % 42,858 4 %
Nonresidential Property Managers
53,231 5 % 52,947 5 % 70,914 7 % 65,640 6 %
Hotels
42,121 4 % 39,881 4 % 35,006 3 % 24,509 2 %
Land Subdivision
41,795 3 % 46,117 4 % 45,132 4 % 29,569 3 %
Nursing Care Facilities
41,264 3 % 33,607 3 % 34,768 3 % 21,823 2 %
Other *
418,126 36 % 402,960 35 % 387,270 35 % 458,519 42 %

Total CRE Loans
$ 1,157,856 100 % $ 1,131,906 100 % $ 1,093,459 100 % $ 1,087,307 100 %

	As of March 31,					As of December 31,					As of March 31,
	2018					2017					2017
	Amount		%			Amount		%			Amount		%
	(dollars in thousands)
Lessors of Nonresidential Buildings	$	435,919		32	%	$	388,648		30	%	$	327,077		30	%
Lessors of Residential Buildings		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		52,951		4	%		61,480		5	%		57,733		5	%
Land Subdivision		45,356		3	%		44,192		3	%		47,254		4	%
Nursing Care Facilities		38,830		3	%		47,008		4	%		34,611		3	%
Lessors of Other Real Estate Property		31,121		2	%		29,078		2	%		20,989		2	%
Other *		404,089		30	%		411,971		32	%		376,733		34	%

Total CRE Loans	$	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 $~~23.2~~$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.

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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 equipment types ~~with~~inwithin the m2 loan and lease portfolio:

	As of September 30,					As of June 30,					As of December 31,					As of September 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	$	18,807		9	%	$	15,207		7	%	$	16,815		8	%	$	16,840		8	%		18,067		8	%		18,705		9	%		17,914		9	%
Trucks & Vans		18,146		8	%		16,679		8	%		13,806		7	%		12,786		6	%
Manufacturing - General		16,997		8	%		19,092		9	%		17,434		8	%		16,332		8	%		16,624		7	%		16,571		8	%		18,067		9	%
Food Processing Equipment		13,317		6	%		13,754		7	%		14,316		7	%		14,115		7	%		13,270		6	%		12,965		6	%		14,102		7	%
Marine - Travelifts																						12,843		6	%		10,802		5	%		8,132		4	%
Computer Hardware		11,483		5	%		9,821		5	%		10,443		5	%		11,105		5	%		10,694		5	%		11,340		5	%		10,094		5	%
Marine - Travelifts		10,417		5	%		12,497		6	%		8,180		4	%		7,506		4	%
Trailers		9,272		4	%		9,611		5	%		10,003		5	%		10,112		5	%		9,161		4	%		8,983		4	%		9,465		5	%
Manufacturing - CNC																						7,239		3	%		6,742		3	%		6,812		3	%
Restaurant		7,718		4	%		7,238		3	%		7,950		4	%		8,138		4	%		6,844		3	%		7,107		3	%		7,841		4	%
Manufacturing - CNC		6,722		3	%		10,083		5	%		7,164		3	%		7,320		4	%
Other *		102,080		48	%		100,271		45	%		104,934		49	%		102,546		49	%		100,693		45	%		102,094		47	%		101,375		49	%

Total m2 loans and leases	$	214,959		100	%	$	214,253		100	%	$	211,045		100	%	$	206,800		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.

~~Table of Contents~~

~~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 nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ are presented as follows:

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			March 31, 2018			March 31, 2017
	(dollars in thousands)						(dollars in thousands)						(dollars in thousands)
Balance, beginning	$	33,357		$	28,097		$	30,757		$	26,141		$	34,356		$	30,757
Provisions charged to expense		2,086			1,608			6,215			4,879			2,540			2,105
Loans/leases charged off		(650	)		(987	)		(2,394	)		(2,489	)		(436	)		(893	)
Recoveries on loans/leases previously charged off		189			109			404			296			73			90
Balance, ending	$	34,982		$	28,827		$	34,982		$	28,827		$	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 to 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.

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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 *	September 30, 2017			June 30, 2017			December 31, 2016			September 30, 2016			March 31, 2018			December 31, 2017			March 31, 2017
	(dollars in thousands)												(dollars in thousands)
Special Mention (Rating 6)	$	27,315		$	27,737		$	20,082		$	19,572		$	42,926		$	31,024		$	22,841
Substandard (Rating 7)		50,323			45,290			49,035			51,029			39,815			43,435			50,810
Doubtful (Rating 8)		-			-			-			-			-			271			-
	$	77,638		$	73,027		$	69,117		$	70,601		$	82,741		$	74,730		$	73,651


Criticized Loans **	$	77,638		$	73,027		$	69,117		$	70,601		$	82,741		$	74,730		$	73,651
Classified Loans ***	$	50,323		$	45,290		$	49,035		$	51,029		$	39,815		$	43,706		$	50,810


Criticized Loans as a % of Total Loans/Leases		2.90	%		2.86	%		2.87	%		2.99	%		2.79	%		2.52	%		3.02	%
Classified Loans as a % of Total Loans/Leases		1.88	%		1.77	%		2.04	%		2.16	%		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.

The Company experienced a ~~modest increase~~decrease in classified loans during the first ~~nine~~three months of ~~2017.~~2018. Criticized loans increased ~~12%~~11% during the same period due to one large ~~non owner-occupied CRE relationship~~credit that was ~~downgraded~~added in the third quarter of 2017. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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

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

Allowance / Gross Loans/Leases		1.31	%		1.31	%		1.28	%		1.22	%		1.20	%		1.16	%		1.32	%
Allowance / NPLs *		123.05	%		162.27	%		144.85	%		173.78	%		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 ~~September 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

In accordance with GAAP for business combination accounting, ~~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 ($~~5.6~~7.3 million and $8.0 million at ~~September 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 ~~1.52%.~~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.

~~Table of Contents~~

~~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 amount of NPAs and related ratios.

As of September 30,

As of June 30,

As of December 31,

As of September 30,

2017

2017

2016

2016

(dollars in thousands)

Nonaccrual loans/leases (1) (2)
$ 20,443 $ 13,217 $ 13,919 $ 14,371
Accruing loans/leases past due 90 days or more
423 424 967 392
TDRs - accruing
7,563 6,915 6,347 1,825
Total NPLs
28,429 20,556 21,233 16,588
OREO
5,135 5,174 5,523 5,808
Other repossessed assets
120 123 202 353
Total NPAs
$ 33,684 $ 25,853 $ 26,958 $ 22,749

NPLs to total loans/leases
1.06 % 0.80 % 0.88 % 0.70 %
NPAs to total loans/leases plus repossessed property
1.26 % 1.01 % 1.12 % 0.96 %
NPAs to total assets
0.95 % 0.75 % 0.82 % 0.69 %

	As of March 31,			As of December 31,			As of March 31,
	2018			2017			2017
	(dollars in thousands)
Nonaccrual loans/leases (1) (2)	$	12,759		$	11,441		$	14,205
Accruing loans/leases past due 90 days or more		41			89			955
TDRs - accruing		5,276			7,113			6,229
Total NPLs		18,076			18,643			21,389
OREO		12,750			13,558			5,625
Other repossessed assets		200			80			285
Total NPAs	$	31,026		$	32,281		$	27,299

NPLs to total loans/leases		0.59	%		0.63	%		0.88	%
NPAs to total loans/leases plus repossessed property		1.01	%		1.08	%		1.12	%
NPAs to total assets		0.77	%		0.81	%		0.81	%

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of ~~$2.3~~$2.6 million at ~~September 30, 2017, $2.2 million at June 30, 2017,~~March 31, 2018, $2.3 million at December 31, ~~2016,~~2017, and ~~$4.9~~$2.4 million at ~~September 30, 2016.~~March 31, 2017.

NPAs at ~~September 30, 2017~~March 31, 2018 were ~~$33.7~~$31.0 million, which was ~~up $7.8~~down $1.3 million from ~~June 30,~~December 31, 2017 and up ~~$10.9~~$3.7 million from ~~September 30, 2016. These increases were~~March 31, 2017. This increase from prior year was due to the addition of one large ~~non owner-occupied CRE relationship~~credit that was added in the third quarter of 2017.

TheThe ratio of NPAs to total assets was ~~0.95%~~0.77% at ~~September 30, 2017,~~March 31, 2018, which was updown from ~~0.75%~~0.81% at ~~June 30,~~both December 31, 2017 and ~~up from 0.69% at September 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 priority for management.

~~Table of Contents~~

~~Item I~~
~~Part 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

DEPOSITS

Deposits increased ~~$24.0~~$13.3 million during the ~~third~~first quarter of ~~2017.~~2018. The table below presents the composition of the Company’s deposit portfolio.

	As of
	March 31, 2018					December 31, 2017					March 31, 2017
	(dollars in thousands)
	Amount		%			Amount		%			Amount		%
Noninterest bearing demand deposits	$	784,815		24	%	$	789,548		24	%	$	777,150		28	%
Interest bearing demand deposits		1,789,019		55	%		1,855,893		57	%		1,486,047		53	%
Time deposits		496,644		15	%		516,058		16	%		458,170		16	%
Brokered deposits		209,523		6	%		105,156		3	%		84,564		3	%
	$	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.

As of

September 30, 2017

June 30, 2017

December 31, 2016

September 30, 2016

(dollars in thousands)

Amount

%

Amount

%

Amount

%

Amount

%

Noninterest bearing demand deposits
$ 715,537 25 % $ 760,625 27 % $ 797,415 30 % $ 764,615 30 %
Interest bearing demand deposits
1,614,894 55 % 1,526,103 52 % 1,369,226 51 % 1,298,781 50 %
Time deposits
430,270 15 % 478,580 17 % 439,169 17 % 420,470 16 %
Brokered deposits
133,567 5 % 104,926 4 % 63,451 2 % 111,047 4 %
$ 2,894,268 100 % $ 2,870,234 100 % $ 2,669,261 100 % $ 2,594,913 100 %

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~~ ~~nine 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 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

September 30, 2017

June 30, 2017

December 31, 2016

September 30, 2016

(dollars in thousands)

Overnight repurchase agreements with customers
$ 3,671 $ 4,897 $ 8,131 $ 8,265
Federal funds purchased
12,340 13,320 31,840 51,750
$ 16,011 $ 18,217 $ 39,971 $ 60,015

	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

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.~~

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

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.

��

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

	As of
	September 30, 2017		June 30, 2017		December 31, 2016		September 30, 2016
									As of
	(dollars in thousands)								March 31, 2018		December 31, 2017		March 31, 2017
									(dollars in thousands)
Term FHLB advances	$	58,600	$	57,000	$	63,000	$	83,343	$	56,600	$	56,600	$	59,000
Overnight FHLB advances		110,455		49,500		74,500		55,300		159,745		135,400		47,550
	$	169,055	$	106,500	$	137,500	$	138,643	$	216,345	$	192,000	$	106,550

Term FHLB advances ~~increased~~remained the same in the current quarter ~~by $1.6 million.~~as in the prior quarter. Overnight FHLB advances have increased by ~~$61.0~~$24.3 million due to the strong loan and lease growth, ~~in the second and third quarters of 2017~~ which ~~has~~ outpaced the Company’s deposit ~~growth.~~growth in the first quarter of 2018.

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

As of

September 30,
2017

June 30,
2017

December 31,
2016

September 30,
2016

(dollars in thousands)

Wholesale structured repurchase agreements
$ 45,000 $ 45,000 $ 45,000 $ 45,000
Term note
$ 32,500 $ 27,000 $ 30,000 $ 30,000
Revolving line of credit
- - 5,000 5,000
$ 77,500 $ 72,000 $ 80,000 $ 80,000

	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 ~~September 30, 2017,~~March 31, 2018, the term debt had been paid down to ~~$25.5~~$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 ~~September 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 ~~(3.84%~~(4.82% at September 30, 2017). In the third quarter of 2017, the Company entered into a $7.0 million term note with a four-year term and interest calculated at the effective LIBOR rate plus 3.00% per annum (4.34% at September 30, 2017) to fund a portion of the cash consideration for the acquisition of Guaranty. See further discussion in Note 8 to the Consolidated Financial Statements.

~~Table of Contents~~

~~Part I~~
~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~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 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.

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

September 30, 2017

December 31, 2016

Weighted

Weighted

Average

Average

Maturity:

Amount Due

Interest Rate

Amount Due

Interest Rate

Year ending December 31:

(dollar amounts in thousands)

2017
255,486 �� 1.33 % 165,543 0.91 %
2018
48,585 2.31 38,459 2.56
2019
16,950 2.74 16,950 2.65
2020
26,600 2.44 25,000 2.48
Total Wholesale Funding
$ 347,621 1.62 % $ 245,952 1.45 %

	March 31, 2018					December 31, 2017
			Weighted					Weighted
			Average					Average
Maturity:	Amount Due		Interest Rate			Amount Due		Interest Rate
Year ending December 31:	(dollar amounts in thousands)
2018	$	387,594		1.87	%	$	273,677		1.68	%
2019		41,973		2.26			31,950		2.32
2020		30,694		2.42			26,600		2.44
Total Wholesale Funding	$	460,261		1.94	%	$	332,227		1.80	%

During the first ~~nine~~three months of ~~2017,~~2018, wholesale funding increased ~~$101.7~~$128.0 million. Year-to-date, the Company has repaid ~~$6.0~~$25.4 million of term borrowings at 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
	September 30, 2017			June 30, 2017			December 31, 2016			September 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)
Common stock	$	13,202		$	13,175		$	13,107		$	13,075		$	13,937		$	13,918		$	13,161
Additional paid in capital		158,459			158,001			156,777			155,951			189,685			189,078			157,582
Retained earnings		142,450			135,254			118,617			110,610			162,346			151,962			127,145
AOCI (loss)		(1,072	)		(1,347	)		(2,460	)		1,221			(5,540	)		(1,671	)		(2,048	)
Total stockholders' equity	$	313,039		$	305,083		$	286,041		$	280,857		$	360,428		$	353,287		$	295,840

TCE* / TA		8.31	%		8.29	%		8.04	%		7.92	%		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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~~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 ~~$126.4~~$136.5 million during the ~~third~~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 ~~September 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 $375.0 million, of which $3.0 million was secured and $372.0 million was unsecured. At ~~September 30,~~December 31, 2017, the full $375.0 million was ~~available as none was utilized for short-term borrowing needs at QCBT.~~

~~At December 31, 201~~6, the subsidiary banks had 33 lines of credit totaling $381.4 million, of which $34.4 million was secured and $347.0 million was unsecured. At December 31, 2016, $361.4 million was available as $20.0 million was utilized for short-term borrowing needs.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. At ~~September 30, 2017,~~March 31, 2018, the full $10.0 million was available.

As of ~~September 30, 2017,~~March 31, 2018, the Company ~~has $384.1~~had $417.5 million in correspondent banking deposits spread over ~~183~~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 ~~$271.1~~$60.0 million during the first ~~nine~~three months of ~~2017,~~2018, compared to ~~$132.1~~$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 ~~$22.7~~$10.7 million for the first ~~nine~~three months of ~~2017,~~2018, compared to a net increase of ~~$24.0~~$93.5 million for the same period of ~~2016.~~2017. Proceeds from calls, maturities, ~~paydowns,~~ and ~~sales~~paydowns of securities were ~~$92.5~~$13.64 million for the first ~~nine~~three months of ~~2017,~~2018, compared to ~~$219.1~~$25.9 million for the same period of ~~2016.~~2017. Purchases of securities used cash of ~~$103.5~~$7.1 million for the first ~~nine~~three months of ~~2017,~~2018, compared to ~~$111.6~~$12.1 million for the same period of ~~2016.~~2017. The net increase in loans/leases used cash of ~~$269.3~~$90.4 million for the first ~~nine~~three months of ~~2017~~2018 compared to ~~$144.6~~$29.2 million for the same period of ~~2016. In 2017, cash prepaid for the acquisition of Guaranty Bank was $7.8 million. In 2016, the net cash paid for the acquisition of CSB was $69.9 million.~~2017.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Financing activities provided cash of ~~$229.6~~$38.3 million for the first ~~nine~~three months of ~~2017,~~2018, compared to ~~$125.7~~$77.5 million for same period of ~~2016.~~2017. Net increases in deposits totaled ~~$225.1~~$13.4 million for the first ~~nine~~three months of ~~2017,~~2018, compared to ~~$227.9~~$136.7 million for the same period of ~~2016.~~2017. During the first ~~nine~~three months of ~~2017,~~2018, the Company’s short-term borrowings ~~decreased $24.0~~increased $2.9 million, while they decreased ~~$84.6~~$20.5 million for the same period of ~~2016.~~2017. In the first ~~nine~~three months of ~~2017,~~2018, the Company increased FHLB advances ~~and other borrowings~~ by ~~$44.6~~$24.3 million ~~through a mixture of term advances, proceeds from other borrowings and net change in~~ short-term and overnight advances, while borrowing maturities and principal payments on borrowings totaled ~~$15.5~~$1.9 million. In the first ~~nine~~three months of ~~2016,~~2017, the Company reduced FHLB advances and borrowings by ~~$83.8~~$39.0 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. In the first nine months of 2016, the Company received $35.0 million in cash from the proceeds of other borrowings.

Total cash provided by operating activities was ~~$27.2~~$7.0 million for the first ~~nine~~three months of ~~2017,~~2018, compared to ~~$25.8~~$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 ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016.~~2017.

Name	Date Issued	Amount Outstanding September 30, 2017		Amount Outstanding December 31, 2016		Interest Rate	Interest Rate as of September 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		4.19	%		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		4.19	%		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		2.85	%		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		3.50	%		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		3.07	%		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		3.63	%		3.26	%		$	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 ~~September 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 nine months ended September 30, 2017.

The Company filed a registration statement on Form S-4 with the SEC on July 27, 2017which was amended on August 14, 2017. In connection with the acquisition of Guaranty Bank, the Company issued 678,670 shares of common stock on October 1, 2017 pursuant to the S-4.

~~Table of Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

Table of Contents

Part I

Item 2

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.

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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.

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Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 September 30, 2017

As of December 31, 2016

As of December 31, 2015

100 basis point downward shift
-10.0% 0.0% -1.7% -2.1%
200 basis point upward shift
-10.0% -3.4% -1.2% -2.7%
300 basis point upward shock
-25.0% -8.0% -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 ~~September 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.

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Part I

Item 4

CONTROLS AND PROCEDURES

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

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1

Legal Proceedings


		T~~here~~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.~~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.

~~Item1A~~

~~Risk Factors~~

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds


		None

Item 3

Defaults Upon Senior Securities


		None

Item 4

Mine Safety Disclosures


		Not applicable

Item 5

Other Information


		None

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QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION - continued

Item 6 Exhibits


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

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

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

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

101

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

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SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)

Date May 9, 2018	~~November 8, 2017~~	/s/ Douglas M. Hultquist
		Douglas M. Hultquist, President
		Chief Executive Officer



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



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

	Three Months Ended September 30,
	2017			2016
Net income	$	7,853,935		$	6,107,501

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during the period before tax		289,086			3,682,514
Less reclassification adjustment for gains (losses) included in net income before tax		(63,588	)		4,251,773
		352,674			(569,259	)
Unrealized gains (losses) on interest rate cap derivatives:
Unrealized holding losses arising during the period before tax		(8,446	)		(49,573	)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(95,361	)		(33,246	)
		86,915			(16,327	)

Other comprehensive income (loss), before tax		439,589			(585,586	)
Tax expense (benefit)		165,012			(224,402	)
Other comprehensive income (loss), net of tax		274,577			(361,184	)

Comprehensive income	$	8,128,512		$	5,746,317

	Nine Months Ended September 30,
	2017			2016
Net income	$	25,804,917		$	19,157,457

Other comprehensive income:

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during the period before tax		2,057,586			10,628,032
Less reclassification adjustment for gains (losses) included in net income before tax		(25,124	)		4,628,283
		2,082,710			5,999,749
Unrealized gains (losses) on interest rate cap derivatives:
Unrealized holding losses arising during the period before tax		(186,000	)		(634,791	)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(354,813	)		(82,281	)
		168,813			(552,510	)

Other comprehensive income, before tax		2,251,523			5,447,239
Tax expense		864,468			2,102,379
Other comprehensive income, net of tax		1,387,055			3,344,860

Comprehensive income	$	27,191,972		$	22,502,317