4

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three months ended March 31, 2019 and 2018



	2019		2018
	(dollars in thousands)

Net income	$	12,918	$	10,550

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		4,144		(5,366)
Less reclassification adjustment for adoption of ASU 2016-01		—		855
		4,144		(4,511)
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		(1,162)		150
Less reclassification adjustment for ineffectiveness and caplet amortization before tax		(157)		(81)
		(1,005)		231

Other comprehensive income (loss), before tax		3,139		(4,280)
Tax expense (benefit)		795		(1,078)
Other comprehensive income (loss), net of tax		2,344		(3,202)

Comprehensive income	$	15,262	$	7,348

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

See Notes to Consolidated Financial Statements (Unaudited)

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

~~Three Months Ended March 31, 2018 and 2017~~

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

6

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

5

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three months ended March 31, 2019 and 2018


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

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


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

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

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

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

(Loss)

Total

Balance December 31, 2017
$ 13,918,168 $ 189,077,550 $ 151,962,661 $ (1,671,250 ) $ 353,287,129
Net income
- - 10,549,961 - 10,549,961
Other comprehensive loss, net of tax
- - - (3,201,540 ) (3,201,540 )
Impact of adoption of ASU 2016-01
- - 666,900 (666,900 ) -
Common cash dividends declared, $0.06 per share
- - (833,730 ) - (833,730 )
Issuance of 2,669 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
2,669 100,262 - - 102,931
Issuance of 13,074 shares of common stock as a result of stock options exercised
13,074 192,522 - - 205,596
Stock-based compensation expense
- 495,493 495,493
Restricted stock awards - 6,860 shares of common stock
6,860 (6,860 ) - - -
Exchange of 3,814 shares of common stock in connection with 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

See Notes to Consolidated Financial Statements (Unaudited)

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

(Loss)

Total

Balance December 31, 2016
$ 13,106,845 $ 156,776,642 $ 118,616,901 $ (2,459,589 ) $ 286,040,799
Net income
- - 9,184,965 - 9,184,965
Other comprehensive income, net of tax
- - - 410,739 410,739
Common cash dividends declared, $0.05 per share
- - (656,574 ) - (656,574 )
Issuance of 3,573 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
3,573 83,091 - - 86,664
Issuance of 44,284 shares of common stock as a result of stock options exercised
44,284 630,290 - - 674,574
Stock-based compensation expense
- 388,753 - - 388,753
Restricted stock awards - 13,289 shares of common stock
13,289 (13,289 ) - - -
Exchange of 6,772 shares of common stock in connection with 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

7

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

6

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three months ended March 31, 2019 and 2018


	2019		2018
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	12,918	$	10,550
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,235		1,021
Provision for loan/lease losses		2,134		2,540
Stock-based compensation expense		722		495
Deferred compensation expense accrued		733		512
Losses (gains) on other real estate owned, net		224		118
Amortization of premiums on securities, net		448		439
Loans originated for sale		(18,034)	��	(12,939)
Proceeds on sales of loans		17,735		13,764
Gains on sales of residential real estate loans		(369)		(101)
Gains on sales of government guaranteed portions of loans		(31)		(358)
Gains on sales of premises and equipment		(47)		—
Amortization of core deposit intangible		532		305
Accretion of acquisition fair value adjustments, net		(1,069)		(699)
Increase in cash value of bank-owned life insurance		(540)		(418)
Decrease (increase) in other assets		1,121		(4,438)
Decrease in other liabilities		(9,110)		(2,888)
Net cash provided by operating activities	$	8,602	$	7,903

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold		24,526		15,692
Net decrease (increase) in interest-bearing deposits at financial institutions		(80,962)		10,714
Proceeds from sales of other real estate owned		202		736
Activity in securities portfolio:
Purchases		(4,079)		(7,100)
Calls, maturities and redemptions		4,510		4,540
Paydowns		10,426		9,085
Activity in restricted investment securities:
Purchases		(3,110)		(4,451)
Redemptions		5,895		1,820
Net increase in loans/leases originated and held for investment		(65,777)		(90,378)
Purchase of premises and equipment		(3,970)		(704)
Proceeds from sales of premises and equipment		117		—
Net cash used in investing activities	$	(112,222)	$	(60,046)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts		217,257		13,377
Net increase (decrease) in short-term borrowings		(12,888)		2,867
Activity in Federal Home Loan Bank advances:
Term advances		5,000		—
Calls and maturities		(15,000)		—
Net change in short-term and overnight advances		(130,365)		24,345
Activity in other borrowings:
Calls, maturities and scheduled principal payments		(1,937)		(1,938)
Prepayments		(21,313)		—
Paydown of revolving line of credit		(9,000)		—
Proceeds from subordinated notes		63,393		—
Payment of cash dividends on common stock		(939)		(693)
Proceeds from issuance of common stock, net		416		309
Net cash provided by financing activities	$	94,624	$	38,267
Net decrease in cash and due from banks		(8,996)		(13,876)

Cash and due from banks, beginning		85,523		75,722
Cash and due from banks, ending	$	76,527	$	61,846

(Continued)

8

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

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)~~

7

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three months ended March 31, 2019 and 2018


	2019		2018
Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest	$	14,146	$	3,655
Income/franchise taxes		(590)		75

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net		2,344		(3,202)
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised		(152)		(178)
Transfers of loans to other real estate owned		158		46
Increase in the fair value of back-to-back interest rate swap assets and liabilities		13,882		103
Dividends payable		942		834
Transfer of equity securities from securities available for sale to other assets at fair value		—		2,614

~~QCR HOLDINGS, INC. AND SUBSIDIARIES~~

See Notes to Consolidated Financial Statements (Unaudited)

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

~~Three Months Ended March 31, 2018 and 2017~~

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)~~

9

8

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, ~~2018~~2019

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, ~~2017,~~ 2018, included in the ~~Company’s~~Company's Annual Report on Form 10-K10‑K filed with the SEC on March ~~12, 2018.~~ 15, 2019. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q10‑Q and Rule 10-10‑01 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~~management's discussion and analysis are due to rounding. The results of the interim period ended March 31, ~~2018~~ 2019 are not necessarily indicative of the results expected for the year ending December 31, ~~2018,~~ 2019, or for any other period.

The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10~~-Q.~~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.~~GAAP: Generally Accepted Accounting Principles
AOCI: Accumulated other comprehensive income (loss)	Guaranty: Guaranty Bankshares, Ltd.
AFS: Available for sale	Guaranty Bank: Guaranty Bank and Trust Company
~~AFS: Available for sale~~ASC: Accounting Standards Codification	HTM: Held to maturity
~~ASC: Accounting Standards Codification~~ASC 805: Business Combination Standard	m2:m2 Lease Funds, LLC
ASU: Accounting Standards Update	NIM: Net interest margin
Bates Companies: Bates Financial Advisors, Inc., Bates	NPA: Nonperforming asset
Financial Services, Inc., Bates Securities, Inc. and	NPL: Nonperforming loan
Bates Financial Group, Inc.	OREO: Other real estate owned
BOLI: Bank-owned life insurance	OTTI: Other-than-temporary impairment
Caps: Interest rate cap derivatives	PCI: Purchased credit impaired
CDI: Core deposit intangible	Provision: Provision for loan/lease losses
Community National: Community National Bancorporation	QCBT: Quad City Bank & Trust Company
CRBT: Cedar Rapids Bank & Trust Company	RB&T: Rockford Bank & Trust Company
CRE: Commercial real estate	ROAA: Return on Average Assets
CSB: Community State Bank	SBA: U.S. Small Business Administration
C&I: Commercial and industrial	SEC: Securities and Exchange Commission
Dodd-Frank Act: Dodd-Frank Wall Street Reform and	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~~	Tax Act: Tax Cuts and Jobs Act of ~~2017~~
amended	TCE: Tangible common equity
FASB: Financial Accounting Standards Board	~~TCE: Tangible common equity~~TDRs: Troubled debt restructurings
FDIC: Federal Deposit Insurance Corporation	~~TDRs: Troubled debt restructurings~~TEY: Tax equivalent yield
FHLB: Federal Home Loan Bank	~~TEY: Tax equivalent yield~~The Company: QCR Holdings, Inc.
FRB: Federal Reserve Bank of Chicago	~~The Company: QCR Holdings, Inc.~~
~~GAAP: Generally Accepted Accounting Principles~~	USDA: U.S. Department of Agriculture

10

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

The acquisition of ~~Guaranty~~the Bates Companies, headquartered in Rockford, Illinois, occurred on October 1, 2018. The merger with Springfield Bancshares, the holding company of SFC Bank, headquartered in ~~Cedar Rapids, Iowa~~Springfield, Missouri, occurred on ~~October 2, 2017~~ ~~and Guaranty Bank was merged into CRBT on~~ ~~December 2, 2017.~~ July 1, 2018. The financial results for the periods since ~~acquisition~~acquisition/merger are included in this report. See Note 2 of to the Company’s Annual Report on Form 10-K10-K for the year ended December 31, ~~2017~~ 2018 for additional information about the ~~acquisition.~~acquisition and merger.

9

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

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

In February 2016, the FASB issued ASU ~~2016~~-2016‑02,Leases. Under ASU ~~2016~~-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~~-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~~-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~~standard was adopted on January 1, 2019 and did not have a significant impact ~~of adoption~~ on the Company’s ~~consolidated financial statements.~~Consolidated Financial Statements.

In June 2016, the FASB issued ASU ~~2016~~-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~~asset's life. For public companies, ASU ~~2016~~-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.~~Company's Consolidated Financial Statements.

10

~~Table of Contents~~

~~Part I~~

~~Item~~ 1

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

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

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

11

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 2 – INVESTMENT SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair				Gross		Gross
	Cost		Gains		(Losses)			Value		Amortized		Unrealized		Unrealized		Fair
March 31, 2018:
										Cost		Gains		(Losses)		Value
										(dollars in thousands)
March 31, 2019:
Securities HTM:
Municipal securities	$	377,534,337	$	2,244,218	$	(5,024,697	)	$	374,753,858	$	394,252	$	13,126	$	(2,056)	$	405,322
Other securities		1,050,000		-		(11,175	)		1,038,825		1,050		—		(1)		1,049
	$	378,584,337	$	2,244,218	$	(5,035,872	)	$	375,792,683	$	395,302	$	13,126	$	(2,057)	$	406,371

Securities AFS:
U.S. govt. sponsored agency securities	$	37,591,155	$	21,236	$	(744,881	)	$	36,867,510	$	36,141	$	89	$	(387)	$	35,843
Residential mortgage-backed and related securities		162,453,605		60,222		(5,224,784	)		157,289,043		163,438		351		(2,097)		161,692
Municipal securities		61,862,665		238,583		(899,444	)		61,201,804		55,585		649		(110)		56,124
Other securities		4,254,716		31,867		-			4,286,583		6,754		74		(40)		6,788
	$	266,162,141	$	351,908	$	(6,869,109	)	$	259,644,940	$	261,918	$	1,163	$	(2,634)	$	260,447

December 31, 2017:
Securities HTM:
Municipal securities	$	378,424,205	$	2,763,718	$	(2,488,119	)	$	378,699,804
Other securities		1,050,000		-		-			1,050,000
	$	379,474,205	$	2,763,718	$	(2,488,119	)	$	379,749,804

Securities AFS:
U.S. govt. sponsored agency securities	$	38,409,157	$	37,344	$	(349,967	)	$	38,096,534
Residential mortgage-backed and related securities		165,459,470		155,363		(2,313,529	)		163,301,304
Municipal securities		66,176,364		660,232		(211,100	)		66,625,496
Other securities		4,014,004		896,384		(25,815	)		4,884,573
	$	274,058,995	$	1,749,323	$	(2,900,411	)	$	272,907,907

11


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

Securities AFS:
U.S. govt. sponsored agency securities	$	37,150	$	39	$	(778)	$	36,411
Residential mortgage-backed and related securities		163,698		182		(4,631)		159,249
Municipal securities		59,069		180		(703)		58,546
Other securities		6,754		100		(4)		6,850
	$	266,671	$	501	$	(6,116)	$	261,056

~~Table of Contents~~

~~Part I~~

~~Item~~ 1

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

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

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

12

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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


	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
March 31, 2019:
Securities HTM:
Municipal securities	$	8,722	$	(6)	$	64,045	$	(2,050)	$	72,767	$	(2,056)
Other securities		—		—		549		(1)		549		(1)
	$	8,722	$	(6)	$	64,594	$	(2,051)	$	73,316	$	(2,057)

Securities AFS:
U.S. govt. sponsored agency securities	$	803	$	(9)	$	29,973	$	(378)	$	30,776	$	(387)
Residential mortgage-backed and related securities		4,160		(43)		129,508		(2,054)		133,668		(2,097)
Municipal securities		—		—		12,804		(110)		12,804		(110)
Other securities		4,214		(40)		—		—		4,214		(40)
	$	9,177	$	(92)	$	172,285	$	(2,542)	$	181,462	$	(2,634)

	Less than 12 Months					12 Months or More					Total
			Gross					Gross					Gross			Less than 12 Months				12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized					Gross				Gross				Gross
	Value		Losses			Value		Losses			Value		Losses			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
March 31, 2018:
																Value		Losses		Value		Losses		Value		Losses
																(dollars in thousands)
December 31, 2018:
Securities HTM:
Municipal securities	$	69,404,232	$	(2,881,032	)	$	59,545,239	$	(2,143,665	)	$	128,949,471	$	(5,024,697	)	$	114,201	$	(2,187)	$	69,412	$	(4,616)	$	183,613	$	(6,803)
Other securities		1,038,825		(11,175	)		-		-			1,038,825		(11,175	)		549		(1)		—		—		549		(1)
	$	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	)

																$	114,750	$	(2,188)	$	69,412	$	(4,616)	$	184,162	$	(6,804)
Securities AFS:
U.S. govt. sponsored agency securities	$	28,576,258	$	(200,022	)	$	3,640,477	$	(149,945	)	$	32,216,735	$	(349,967	)	$	1,565	$	(34)	$	29,605	$	(744)	$	31,170	$	(778)
Residential mortgage-backed and related securities		88,927,779		(871,855	)		57,931,731		(1,441,674	)		146,859,510		(2,313,529	)		12,810		(148)		133,535		(4,483)		146,345		(4,631)
Municipal securities		10,229,337		(41,151	)		9,997,433		(169,949	)		20,226,770		(211,100	)		28,356		(394)		15,932		(309)		44,288		(703)
Other securities		923,535		(25,815	)		-		-			923,535		(25,815	)		4,249		(4)		—		—		4,249		(4)
	$	128,656,909	$	(1,138,843	)	$	71,569,641	$	(1,761,568	)	$	200,226,550	$	(2,900,411	)	$	46,980	$	(580)	$	179,072	$	(5,536)	$	226,052	$	(6,116)

At March 31, ~~2018,~~ 2019, the investment portfolio included ~~604~~606 securities. Of this number, ~~290~~182 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately ~~1.8%~~0.4% of the total amortized cost of the portfolio. Of these ~~290~~182 securities, ~~105~~170 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.

The Company did not recognize OTTI on any investment securities for the three months ended March 31, ~~2018~~ 2019 and ~~2017.~~2018.

13

12

Table of Contents

Part I

Item 1

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

There were no sales of securities for the three months ended March 31, ~~2018~~ 2019 and ~~2017.~~

2018.

The amortized cost and fair value of securities as of March 31, ~~2018~~ 2019 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.


					Amortized Cost		Fair Value
	Amortized Cost		Fair Value		(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,344,356	$	3,345,990	$	2,060	$	2,064
Due after one year through five years		25,163,524		25,191,668		28,228		28,544
Due after five years		350,076,457		347,255,025		365,014		375,763
	$	378,584,337	$	375,792,683
					$	395,302	$	406,371
Securities AFS:
Due in one year or less	$	3,368,633	$	3,381,748	$	1,375	$	1,387
Due after one year through five years		23,949,100		23,738,028		52,247		51,874
Due after five years		76,390,803		75,236,121		44,858		45,494
		103,708,536		102,355,897		98,480		98,755
Residential mortgage-backed and related securities		162,453,605		157,289,043		163,438		161,692
	$	266,162,141	$	259,644,940	$	261,918	$	260,447

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


					Amortized Cost		Fair Value
	Amortized Cost		Fair Value		(dollars in thousands)
Securities HTM:
Municipal securities	$	209,306,946	$	207,262,788	$	205,929	$	209,592


Securities AFS:
U.S. govt. sponsored agency securities		5,048,812		4,947,644		4,999		4,955
Municipal securities		54,016,828		53,258,850		47,809		48,158
Other securities						6,505		6,541
	$	59,065,640	$	58,206,494	$	59,313	$	59,654

13

~~Table of Contents~~

~~Part I~~

~~Item~~ 1

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

As of March 31, ~~2018,~~ 2019, the ~~Company’s~~Company's municipal securities portfolios were comprised of general obligation bonds issued by ~~128~~106 issuers with fair values totaling ~~$101.3~~$86.0 million and revenue bonds issued by ~~148~~161 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling ~~$334.6~~$375.4 million. The Company held investments in general obligation bonds in 2625 states, including six states in which the aggregate fair value exceeded ~~$5.0~~$5.0 million. The Company held investments in revenue bonds in 1619 states, including seven states in which the aggregate fair value exceeded ~~$5.0~~$5.0 million.

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

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

14

March 31, 2018:

U.S. State:

Number of
Issuers

Amortized Cost

Fair Value

Average
Exposure Per
Issuer
(Fair Value)

North Dakota
7 $ 21,627,097 $ 20,756,566 $ 2,965,224
Illinois
20 18,532,776 18,513,766 925,688
Iowa
16 13,878,991 13,830,003 864,375
Texas
17 10,763,333 10,554,430 620,849
Missouri
17 8,314,872 8,323,476 489,616
Ohio
8 7,378,887 7,296,859 912,107
Other
43 22,261,263 22,068,390 513,218
Total general obligation bonds
128 $ 102,757,219 $ 101,343,490 $ 791,746

December 31, 2017:

U.S. State:

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
16 13,881,689 13,969,512 873,095
Texas
17 11,253,775 11,308,848 665,226
Missouri
17 9,243,355 9,308,287 547,546
Ohio
9 8,002,705 7,938,028 882,003
Other
45 24,000,278 24,215,119 538,114
Total general obligation bonds
131 $ 107,337,076 $ 107,978,015 $ 824,260

14

Table of Contents

Part I

Item 1

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

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

March 31, 2018:

U.S. State:

Number of
Issuers

Amortized Cost

Fair Value

Average
Exposure Per
Issuer
(Fair Value)

Missouri
58 $ 108,311,804 $ 108,445,780 $ 1,869,755
Iowa
29 68,370,374 68,236,038 2,352,967
Ohio
10 55,757,914 55,699,375 5,569,938
Indiana
26 49,258,364 48,833,113 1,878,197
Illinois
2 17,205,951 17,373,994 8,686,997
Kansas
6 12,651,338 12,172,961 2,028,827
North Dakota
5 11,220,278 10,644,441 2,128,888
Other
12 13,863,760 13,206,470 1,100,539
Total revenue bonds
148 $ 336,639,783 $ 334,612,172 $ 2,260,893

December 31, 2017:

U.S. State:

Number of
Issuers

Amortized Cost

Fair Value

Average
Exposure Per
Issuer
(Fair Value)

Missouri
56 $ 106,259,015 $ 106,232,837 $ 1,897,015
Iowa
29 68,724,899 69,079,470 2,382,051
Ohio
10 55,766,091 55,820,203 5,582,020
Indiana
26 51,171,818 50,861,336 1,956,205
Illinois
2 17,211,441 17,408,544 8,704,272
Kansas
6 12,873,329 12,877,087 2,146,181
North Dakota
5 11,451,560 11,351,676 2,270,335
Other
11 13,805,340 13,716,132 1,246,921
Total revenue bonds
145 $ 337,263,493 $ 337,347,285 $ 2,326,533

Both general obligation and revenue bonds are diversified across many issuers. As of March 31, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018 the Company ~~did~~ ~~not~~ ~~hold general obligation or~~held revenue bonds of ~~any~~one single issuer, located in Ohio, of which the aggregate book or market value ~~of which~~ exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investment and concentration closely. Of the general obligation and revenue bonds in the ~~Company’s~~Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The ~~Company’s~~Company's municipal securities are owned by each of the ~~four~~five charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of March 31, ~~2018,~~ 2019, all were well within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each ~~charter’s~~charter's total risk-based capital.

As of March 31, ~~2018,~~ 2019, the ~~Company’s~~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.

15

Table of Contents

Part I

Item 1

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

– continued

NOTE 3 – LOANS/LEASES RECEIVABLE

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

	As of March 31,			As of December 31,
	2018			2017
							As of March 31,		As of December 31,
C&I loans*	$	1,201,085,625		$	1,134,516,315
							2019		2018
							(dollars in thousands)

C&I loans *							$	1,479,247	$	1,429,410
CRE loans
Owner-occupied CRE		346,996,627			332,742,477			488,827		500,654
Commercial construction, land development, and other land		171,404,628			186,402,404			267,830		236,787
Other non owner-occupied CRE		839,302,131			784,347,000			1,034,188		1,028,670
		1,357,703,386			1,303,491,882			1,790,845		1,766,111

Direct financing leases **		137,614,465			141,448,232			108,543		117,969
Residential real estate loans ***		254,484,231			258,646,265			288,502		290,759
Installment and other consumer loans		95,911,569			118,610,799			123,087		119,381
		3,046,799,276			2,956,713,493			3,790,224		3,723,630
Plus deferred loan/lease origination costs, net of fees		8,103,163			7,771,907			9,208		9,124
		3,054,902,439			2,964,485,400			3,799,432		3,732,754
Less allowance		(36,532,602	)		(34,355,728	)		(41,164)		(39,847)
	$	3,018,369,837		$	2,930,129,672		$	3,758,268	$	3,692,907


* Direct financing leases:
** Direct financing leases:
Net minimum lease payments to be received	$	152,430,047		$	156,583,887		$	119,914	$	130,371
Estimated unguaranteed residual values of leased assets		929,932			929,932			745		828
Unearned lease/residual income		(15,745,514	)		(16,065,587	)		(12,116)		(13,230)
		137,614,465			141,448,232			108,543		117,969
Plus deferred lease origination costs, net of fees		4,350,767			4,624,027			3,158		3,642
		141,965,232			146,072,259			111,701		121,611
Less allowance		(2,730,301	)		(2,382,098	)		(1,606)		(1,792)
	$	139,234,931		$	143,690,161		$	110,095	$	119,819

* Includes equipment financing agreements outstanding at m2, totaling ~~$78,911,791~~$112.8 million and ~~$66,758,397~~$103.4 million as of March 31, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, respectively.

**Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with ~~management’s~~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 months ended March 31, ~~2018~~ 2019 and ~~2017.~~

2018.

***Includes residential real estate loans held for sale totaling ~~$279,750~~$2.0 million and ~~$645,001~~$1.3 million as of March 31, ~~2018,~~ 2019 and December 31, ~~2017,~~ 2018, respectively.

16

Table of Contents

Part I

Item 1

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

Changes in accretable yield for acquired loans were as follows:


	Three months ended March 31, 2019
	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(667)	$	(9,656)	$	(10,324)
Accretion recognized		348		826		1,174
Balance at the end of the period	$	(319)	$	(8,830)	$	(9,150)


										Three months ended March 31, 2018
										PCI		Performing
	Three months ended March 31, 2018									Loans		Loans		Total
	PCI			Performing						(dollars in thousands)
	Loans			Loans			Total
Balance at the beginning of the period	$	(191,132	)	$	(6,280,075	)	$	(6,471,207	)	$	(191)	$	(6,280)	$	(6,471)
Accretion recognized		34,236			620,532			654,768			34		621		655
Balance at the end of the period	$	(156,896	)	$	(5,659,543	)	$	(5,816,439	)	$	(157)	$	(5,659)	$	(5,816)

Three months ended March 31, 2017

PCI

Performing

Loans

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 classes of loans/leases as of March 31, ~~2018~~ 2019 and December 31, ~~2017~~ 2018 is presented as follows:


																			As of March 31, 2019
																												Accruing Past
	As of March 31, 2018																					30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
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			Past Due			Past Due			More			Loans/Leases			Total
																			(dollars in thousands)

C&I	$	1,197,675,583		$	1,714,614		$	210,724		$	36,162		$	1,448,542		$	1,201,085,625		$	1,466,599		$	1,479		$	7,171		$	—		$	3,998		$	1,479,247
CRE
Owner-Occupied CRE		346,524,727			142,587			-			-			329,313			346,996,627			487,774			238			613			—			202			488,827
Commercial Construction, Land Development, and Other Land		168,928,348			55,561			568,523			-			1,852,196			171,404,628			266,591			699			236			—			304			267,830
Other Non Owner-Occupied CRE		834,328,826			105,223			-			-			4,868,082			839,302,131			1,028,663			299			400			—			4,826			1,034,188
Direct Financing Leases		133,012,415			1,196,302			599,350			-			2,806,398			137,614,465			105,451			1,151			196			—			1,745			108,543
Residential Real Estate		250,956,900			2,304,607			35,457			-			1,187,267			254,484,231			281,729			4,993			100			—			1,680			288,502
Installment and Other Consumer		95,435,771			190,027			13,806			4,778			267,187			95,911,569			121,943			406			26			61			651			123,087
	$	3,026,862,570		$	5,708,921		$	1,427,860		$	40,940		$	12,758,985		$	3,046,799,276		$	3,758,750		$	9,265		$	8,742		$	61		$	13,406		$	3,790,224

As a percentage of total loan/lease portfolio		99.34	%		0.19	%		0.05	%		0.00	%		0.42	%		100.00	%		99.18	%		0.24	%		0.23	%		0.00	%		0.35	%		100.00	%


																			As of December 31, 2018
																												Accruing Past
	As of December 31, 2017																					30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
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			Past Due			Past Due			More			Loans/Leases			Total
																			(dollars in thousands)

C&I	$	1,124,734,486		$	8,306,829		$	243,647		$	-		$	1,231,353		$	1,134,516,315		$	1,423,406		$	930		$	597		$	389		$	4,088		$	1,429,410
CRE
Owner-Occupied CRE		331,868,142			540,435			-			-			333,900			332,742,477			500,138			—			193			107			216			500,654
Commercial Construction, Land Development, and Other Land		181,558,092			-			-			-			4,844,312			186,402,404			234,704			1,764			—			—			319			236,787
Other Non Owner-Occupied CRE		782,526,249			572,877			4,146			-			1,243,728			784,347,000			1,022,664			484			—			—			5,522			1,028,670
Direct Financing Leases		137,708,397			1,305,191			259,600			-			2,175,044			141,448,232			114,078			1,642			488			—			1,761			117,969
Residential Real Estate		253,261,821			3,552,709			393,410			74,519			1,363,806			258,646,265			284,844			3,877			206			89			1,743			290,759
Installment and Other Consumer		117,773,259			517,537			56,760			14,152			249,091			118,610,799			118,343			356			24			47			611			119,381
	$	2,929,430,446		$	14,795,578		$	957,563		$	88,671		$	11,441,234		$	2,956,713,493		$	3,698,177		$	9,053		$	1,508		$	632		$	14,260		$	3,723,630

As a percentage of total loan/lease portfolio		99.08	%		0.50	%		0.03	%		0.00	%		0.39	%		100.00	%		99.32	%		0.24	%		0.04	%		0.02	%		0.38	%		100.00	%

17

Table of Contents

Part I

Item 1

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

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


												As of March 31, 2019
												Accruing Past
	As of March 31, 2018											Due 90 Days or		Nonaccrual						Percentage of
Classes of Loans/Leases	Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases *		Accruing TDRs		Total NPLs		Percentage of Total NPLs			More*		Loans/Leases*		Accruing TDRs		Total NPLs		Total NPLs
												(dollars in thousands)

C&I	$	36,162	$	1,448,542	$	4,714,450	$	6,199,154		34.29	%	$	—	$	3,998	$	551	$	4,549	26.35	%
CRE
Owner-Occupied CRE		-		329,313		107,322		436,635		2.42	%		—		202		104		306	1.77	%
Commercial Construction, Land Development, and Other Land		-		1,852,196		-		1,852,196		10.25	%		—		304		—		304	1.76	%
Other Non Owner-Occupied CRE		-		4,868,082		-		4,868,082		26.93	%		—		4,826		2,984		7,810	45.25	%
Direct Financing Leases		-		2,806,398		169,198		2,975,596		16.46	%		—		1,745		155		1,900	11.01	%
Residential Real Estate		-		1,187,267		271,694		1,458,961		8.07	%		—		1,680		—		1,680	9.73	%
Installment and Other Consumer		4,778		267,187		12,828		284,793		1.58	%		61		651		—		712	4.12	%
	$	40,940	$	12,758,985	$	5,275,492	$	18,075,417		100.00	%	$	61	$	13,406	$	3,794	$	17,261	100.00	%

*Nonaccrual loans/leases included ~~$2,637,483~~$1.5 million of TDRs, including ~~$25,984~~$249 thousand in C&I loans, ~~$1,312,469~~$679 thousand in CRE loans, ~~$1,208,050~~$279 thousand in direct financing leases, ~~$84,555~~$291 thousand in residential real estate loans, and ~~$6,425~~$3 thousand in installment loans.


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

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

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

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

18

Table of Contents

Part I

Item 1

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

Changes in the allowance by portfolio segment for the three months ended March 31, ~~2018~~ 2019 and ~~2017,~~2018, respectively, are presented as follows:


																		Three Months Ended March 31, 2019
																						Direct Financing		Residential Real		Installment and
	Three Months Ended March 31, 2018																	C&I		CRE		Leases		Estate		Other Consumer		Total
	C&I			CRE		Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total			(dollars in thousands)

Balance, beginning	$	14,323,036		$	13,962,688	$	2,382,098		$	2,466,431		$	1,221,475		$	34,355,728		$	16,420	$	17,719	$	1,792	$	2,557	$	1,359	$	39,847
Provisions (credits) charged to expense		808,161			965,383		604,783			(39,337	)		200,849			2,539,839			1,007		534		445		(18)		166		2,134
Loans/leases charged off		(95,499	)		-		(283,887	)		(52,325	)		(4,747	)		(436,458	)		(334)		—		(652)		—		(74)		(1,060)
Recoveries on loans/leases previously charged off		29,547			9,949		27,307			450			6,240			73,493			166		50		21		—		6		243
Balance, ending	$	15,065,245		$	14,938,020	$	2,730,301		$	2,375,219		$	1,423,817		$	36,532,602		$	17,259	$	18,303	$	1,606	$	2,539	$	1,457	$	41,164


																		Three Months Ended March 31, 2018
																						Direct Financing		Residential Real		Installment and
	Three Months Ended March 31, 2017																	C&I		CRE		Leases		Estate		Other Consumer		Total
	C&I			CRE		Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total			(dollars in thousands)

Balance, beginning	$	12,545,110		$	11,670,609	$	3,111,898		$	2,342,344		$	1,087,487		$	30,757,448		$	14,323	$	13,963	$	2,382	$	2,466	$	1,222	$	34,356
Provisions charged to expense		593,359			966,271		505,015			43,520			(3,056	)		2,105,109
Provisions (credits) charged to expense																			808		965		605		(39)		201		2,540
Loans/leases charged off		(218,273	)		-		(658,684	)		(13,623	)		(2,046	)		(892,626	)		(95)		—		(284)		(52)		(5)		(436)
Recoveries on loans/leases previously charged off		33,894			6,386		20,031			3,623			25,285			89,219			30		10		27		—		6		73
Balance, ending	$	12,954,090		$	12,643,266	$	2,978,260		$	2,375,864		$	1,107,670		$	32,059,150		$	15,066	$	14,938	$	2,730	$	2,375	$	1,424	$	36,533

The allowance by impairment evaluation and by portfolio segment as of March 31, ~~2018~~ 2019 and December 31, ~~2017~~ 2018 is presented as follows:


																			As of March 31, 2019
																									Direct Financing			Residential Real			Installment and
	As of March 31, 2018																		C&I			CRE			Leases			Estate			Other Consumer			Total
	C&I			CRE			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total			(dollars in thousands)

Allowance for impaired loans/leases	$	567,321		$	1,670,897		$	628,379		$	248,592		$	112,177		$	3,227,366		$	841		$	2,113		$	142		$	236		$	107		$	3,439
Allowance for nonimpaired loans/leases		14,497,924			13,267,123			2,101,922			2,126,627			1,311,640			33,305,236			16,418			16,190			1,464			2,303			1,350			37,725
	$	15,065,245		$	14,938,020		$	2,730,301		$	2,375,219		$	1,423,817		$	36,532,602		$	17,259		$	18,303		$	1,606		$	2,539		$	1,457		$	41,164


Impaired loans/leases	$	6,010,688		$	7,094,483		$	2,975,596		$	1,556,817		$	281,197		$	17,918,781		$	4,301		$	10,155		$	2,185		$	1,693		$	925		$	19,259
Nonimpaired loans/leases		1,195,074,937			1,350,608,903			134,638,869			252,927,414			95,630,372			3,028,880,495			1,474,946			1,780,690			106,358			286,809			122,162			3,770,965
	$	1,201,085,625		$	1,357,703,386		$	137,614,465		$	254,484,231		$	95,911,569		$	3,046,799,276
																			$	1,479,247		$	1,790,845		$	108,543		$	288,502		$	123,087		$	3,790,224

Allowance as a percentage of impaired loans/leases		9.44	%		23.55	%		21.12	%		15.97	%		39.89	%		18.01	%		19.55	%		20.81	%		6.50	%		13.94	%		11.57	%		17.86	%
Allowance as a percentage of nonimpaired loans/leases		1.21	%		0.98	%		1.56	%		0.84	%		1.37	%		1.10	%		1.11	%		0.91	%		1.38	%		0.80	%		1.11	%		1.00	%
Total allowance as a percentage of total loans/leases		1.25	%		1.10	%		1.98	%		0.93	%		1.48	%		1.20	%		1.17	%		1.02	%		1.48	%		0.88	%		1.18	%		1.08	%


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

Allowance for impaired loans/leases	$	715,627		$	1,429,460		$	504,469		$	355,167		$	38,596		$	3,043,319		$	973		$	2,124		$	194		$	257		$	111		$	3,659
Allowance for nonimpaired loans/leases		13,607,409			12,533,228			1,877,629			2,111,264			1,182,879			31,312,409			15,447			15,595			1,598			2,300			1,248			36,188
	$	14,323,036		$	13,962,688		$	2,382,098		$	2,466,431		$	1,221,475		$	34,355,728		$	16,420		$	17,719		$	1,792		$	2,557		$	1,359		$	39,847

Impaired loans/leases	$	6,248,209		$	6,529,262		$	3,669,492		$	1,704,846		$	202,354		$	18,354,163		$	4,499		$	10,447		$	2,249		$	2,110		$	898		$	20,203
Nonimpaired loans/leases		1,128,268,106			1,296,962,620			137,778,740			256,941,419			118,408,445			2,938,359,330			1,424,911			1,755,664			115,720			288,649			118,483			3,703,427
	$	1,134,516,315		$	1,303,491,882		$	141,448,232		$	258,646,265		$	118,610,799		$	2,956,713,493		$	1,429,410		$	1,766,111		$	117,969		$	290,759		$	119,381		$	3,723,630

Allowance as a percentage of impaired loans/leases		11.45	%		21.89	%		13.75	%		20.83	%		19.07	%		16.58	%		21.62	%		20.33	%		8.63	%		12.18	%		12.38	%		18.11	%
Allowance as a percentage of nonimpaired loans/leases		1.21	%		0.97	%		1.36	%		0.82	%		1.00	%		1.07	%		1.08	%		0.89	%		1.38	%		0.80	%		1.05	%		0.98	%
Total allowance as a percentage of total loans/leases		1.26	%		1.07	%		1.68	%		0.95	%		1.03	%		1.16	%		1.15	%		1.00	%		1.52	%		0.88	%		1.14	%		1.07	%

19

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~-continued~~ – 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 three months ended March 31, 2019 are presented as follows:



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

Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	2,256	$	2,300	$	—	$	2,124	$	23	$	23
CRE
Owner-Occupied CRE		104		104		—		106		6		6
Commercial Construction, Land Development, and Other Land		500		500		—		503		7		7
Other Non Owner-Occupied CRE		1,675		1,675		—		1,687		22		22
Direct Financing Leases		1,948		1,948		—		2,011		11		11
Residential Real Estate		705		779		—		713		—		—
Installment and Other Consumer		778		778		—		770		3		3
	$	7,966	$	8,084	$	—	$	7,914	$	72	$	72

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	2,045	$	2,045	$	841	$	1,946	$	9	$	9
CRE
Owner-Occupied CRE		289		646		33		297		—		—
Commercial Construction, Land Development, and Other Land		144		144		28		146		—		—
Other Non Owner-Occupied CRE		7,443		7,443		2,052		7,510		48		48
Direct Financing Leases		237		237		142		206		—		—
Residential Real Estate		988		988		236		915		1		1
Installment and Other Consumer		147		147		107		137		—		—
	$	11,293	$	11,650	$	3,439	$	11,157	$	58	$	58

Total Impaired Loans/Leases:
C&I	$	4,301	$	4,345	$	841	$	4,070	$	32	$	32
CRE
Owner-Occupied CRE		393		750		33		403		6		6
Commercial Construction, Land Development, and Other Land		644		644		28		649		7		7
Other Non Owner-Occupied CRE		9,118		9,118		2,052		9,197		70		70
Direct Financing Leases		2,185		2,185		142		2,217		11		11
Residential Real Estate		1,693		1,767		236		1,628		1		1
Installment and Other Consumer		925		925		107		907		3		3
	$	19,259	$	19,734	$	3,439	$	19,071	$	130	$	130

20

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 March 31, 2018 are presented as follows:


											Interest Income
							Average				Recognized for
	Recorded		Unpaid Principal		Related		Recorded		Interest Income		Cash Payments
Classes of Loans/Leases	Investment		Balance		Allowance		Investment		Recognized		Received
	(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	5,039	$	5,053	$	—	$	5,298	$	75	$	75
CRE
Owner-Occupied CRE		289		289		—		289		6		6
Commercial Construction, Land Development, and Other Land		—		—		—		—		—		—
Other Non Owner-Occupied CRE		1,227		1,227		—		1,236		—		—
Direct Financing Leases		1,928		1,928		—		2,356		6		6
Residential Real Estate		912		987		—		884		—		—
Installment and Other Consumer		141		141		—		120		—		—
	$	9,536	$	9,625	$	—	$	10,183	$	87	$	87

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	958	$	958	$	567	$	825	$	2	$	2
CRE
Owner-Occupied CRE		148		148		44		150		—		—
Commercial Construction, Land Development, and Other Land		5,430		5,430		1,627		5,137		—		—
Other Non Owner-Occupied CRE		—		—		—		—		—		—
Direct Financing Leases		1,048		1,048		628		963		—		—
Residential Real Estate		547		570		249		544		3		3
Installment and Other Consumer		140		140		112		128		—		—
	$	8,271	$	8,294	$	3,227	$	7,747	$	5	$	5

Total Impaired Loans/Leases:
C&I	$	5,997	$	6,011	$	567	$	6,123	$	77	$	77
CRE
Owner-Occupied CRE		437		437		44		439		6		6
Commercial Construction, Land Development, and Other Land		5,430		5,430		1,627		5,137		—		—
Other Non Owner-Occupied CRE		1,227		1,227		—		1,236		—		—
Direct Financing Leases		2,976		2,976		628		3,319		6		6
Residential Real Estate		1,459		1,557		249		1,428		3		3
Installment and Other Consumer		281		281		112		248		—		—
	$	17,807	$	17,919	$	3,227	$	17,930	$	92	$	92

21

Classes of Loans/Leases

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
$ 5,038,888 $ 5,053,164 $ - $ 5,297,775 $ 75,406 $ 75,406
CRE

Owner-Occupied CRE
289,261 289,261 - 289,261 5,822 5,822
Commercial Construction, Land Development, and Other Land
- - - - - -
Other Non Owner-Occupied CRE
1,227,579 1,227,579 - 1,235,654 - -
Direct Financing Leases
1,927,663 1,927,663 - 2,355,745 6,291 6,291
Residential Real Estate
911,804 986,583 - 884,441 - -
Installment and Other Consumer
140,857 140,857 - 120,043 - -
$ 9,536,052 $ 9,625,107 $ - $ 10,182,919 $ 87,519 $ 87,519

Impaired Loans/Leases with Specific Allowance Recorded:

C&I
$ 957,524 $ 957,524 $ 567,321 $ 824,536 $ 1,983 $ 1,983
CRE

Owner-Occupied CRE
147,375 147,375 43,875 149,669 - -
Commercial Construction, Land Development, and Other Land
5,430,268 5,430,268 1,627,022 5,137,290 - -
Other Non Owner-Occupied CRE
- - - - - -
Direct Financing Leases
1,047,933 1,047,933 628,379 962,961 - -
Residential Real Estate
547,158 570,234 248,592 544,558 2,934 2,934
Installment and Other Consumer
140,340 140,340 112,177 128,285 83 83
$ 8,270,598 $ 8,293,674 $ 3,227,366 $ 7,747,299 $ 5,000 $ 5,000

Total Impaired Loans/Leases:

C&I
$ 5,996,412 $ 6,010,688 $ 567,321 $ 6,122,311 $ 77,389 $ 77,389
CRE

Owner-Occupied CRE
436,636 436,636 43,875 438,930 5,822 5,822
Commercial Construction, Land Development, and Other Land
5,430,268 5,430,268 1,627,022 5,137,290 - -
Other Non Owner-Occupied CRE
1,227,579 1,227,579 - 1,235,654 - -
Direct Financing Leases
2,975,596 2,975,596 628,379 3,318,706 6,291 6,291
Residential Real Estate
1,458,962 1,556,817 248,592 1,428,999 2,934 2,934
Installment and Other Consumer
281,197 281,197 112,177 248,328 83 83
$ 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’s current estimates.~~

20

Table of Contents

Part I

Item 1

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

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


															Unpaid
													Recorded		Principal		Related
Classes of Loans/Leases	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received		Investment		Balance		Allowance
													(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	835,955	$	846,392	$	-	$	927,387	$	7,352	$	7,352	$	1,846	$	4,540	$	—
CRE
Owner-Occupied CRE		-		-		-		-		-		-		106		106		—
Commercial Construction, Land Development, and Other Land		-		-		-		-		-		-		507		507		—
Other Non Owner-Occupied CRE		1,174,260		1,174,260		-		1,183,813		-		-		1,804		1,804		—
Direct Financing Leases		1,593,104		1,593,104		-		1,868,355		18,895		18,895		1,929		1,929		—
Residential Real Estate		1,147,434		1,222,215		-		1,025,656		1,161		1,161		984		1,058		—
Installment and Other Consumer		175,957		175,957		-		115,846		-		-		762		762		—
	$	4,926,710	$	5,011,928	$	-	$	5,121,057	$	27,408	$	27,408	$	7,938	$	10,706	$	—

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	8,352,499	$	8,356,338	$	1,751,774	$	8,110,658	$	62,666	$	62,666	$	2,653	$	2,653	$	973
CRE
Owner-Occupied CRE		322,148		322,148		57,398		322,148		-		-		304		660		39
Commercial Construction, Land Development, and Other Land		4,349,267		4,349,267		823,061		4,351,542		-		-		149		149		33
Other Non Owner-Occupied CRE		78,386		78,386		7,986		39,193		-		-		7,577		7,577		2,052
Direct Financing Leases		1,488,964		1,488,964		795,840		1,300,811		-		-		320		320		194
Residential Real Estate		633,340		633,340		274,566		636,134		4,240		4,240		1,126		1,126		257
Installment and Other Consumer		48,770		48,770		37,932		49,563		112		112		136		136		111
	$	15,273,374	$	15,277,213	$	3,748,557	$	14,810,049	$	67,018	$	67,018	$	12,265	$	12,621	$	3,659

Total Impaired Loans/Leases:
C&I	$	9,188,454	$	9,202,730	$	1,751,774	$	9,038,045	$	70,018	$	70,018	$	4,499	$	7,193	$	973
CRE
Owner-Occupied CRE		322,148		322,148		57,398		322,148		-		-		410		766		39
Commercial Construction, Land Development, and Other Land		4,349,267		4,349,267		823,061		4,351,542		-		-		656		656		33
Other Non Owner-Occupied CRE		1,252,646		1,252,646		7,986		1,223,006		-		-		9,381		9,381		2,052
Direct Financing Leases		3,082,068		3,082,068		795,840		3,169,166		18,895		18,895		2,249		2,249		194
Residential Real Estate		1,780,774		1,855,555		274,566		1,661,790		5,401		5,401		2,110		2,184		257
Installment and Other Consumer		224,727		224,727		37,932		165,409		112		112		898		898		111
	$	20,200,084	$	20,289,141	$	3,748,557	$	19,931,106	$	94,426	$	94,426	$	20,203	$	23,327	$	3,659

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

21

~~Table of Contents~~

~~Part I~~

~~Item~~ 1

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

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

Classes of Loans/Leases

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Impaired Loans/Leases with No Specific Allowance Recorded:

C&I
$ 1,634,269 $ 1,644,706 $ -
CRE

Owner-Occupied CRE
289,261 289,261 -
Commercial Construction, Land Development, and Other Land
- - -
Other Non Owner-Occupied CRE
1,171,565 1,171,565 -
Direct Financing Leases
2,944,540 2,944,540 -
Residential Real Estate
943,388 1,018,167 -
Installment and Other Consumer
134,245 134,245 -
$ 7,117,268 $ 7,202,484 $ -

Impaired Loans/Leases with Specific Allowance Recorded:

C&I
$ 4,613,940 $ 4,617,879 $ 715,627
CRE

Owner-Occupied CRE
151,962 151,962 48,462
Commercial Construction, Land Development, and Other Land
4,844,312 4,844,312 1,379,235
Other Non Owner-Occupied CRE
72,163 72,163 1,763
Direct Financing Leases
724,953 724,953 504,469
Residential Real Estate
761,458 761,458 355,167
Installment and Other Consumer
68,109 68,109 38,596
$ 11,236,897 $ 11,240,836 $ 3,043,319

Total Impaired Loans/Leases:

C&I
$ 6,248,209 $ 6,262,585 $ 715,627
CRE

Owner-Occupied CRE
441,222 441,222 48,462
Commercial Construction, Land Development, and Other Land
4,844,312 4,844,312 1,379,235
Other Non Owner-Occupied CRE
1,243,728 1,243,728 1,763
Direct Financing Leases
3,669,492 3,669,492 504,469
Residential Real Estate
1,704,846 1,779,625 355,167
Installment and Other Consumer
202,354 202,354 38,596
$ 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’s current estimates.~~

22

~~Table of Contents~~

~~Part I~~

~~Item~~ 1

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

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

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

22

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

2018:

~~As of March 31, 2018~~

~~CRE~~

~~Non Owner-Occupied~~

~~Internally Assigned Risk Rating~~

~~C&I~~

~~Owner-Occupied~~

~~CRE~~

~~Commercial~~

~~Construction,~~

~~Land~~

~~Development,~~

~~and Other Land~~

~~Other CRE~~

~~Total~~

~~As a % of~~

~~Total~~

~~Pass (Ratings 1 through 5)~~

$

~~1,079,132,775~~

$

~~337,628,357~~

$

~~166,752,090~~

$

~~813,622,461~~

$

~~2,397,135,683~~

~~96.66~~

%

~~Special Mention (Rating 6)~~

~~20,327,365~~

~~5,576,201~~

~~1,780,000~~

~~15,242,642~~

~~42,926,208~~

~~1.73~~

%

~~Substandard (Rating 7)~~

~~22,713,694~~

~~3,792,069~~

��

~~2,872,538~~

~~10,437,028~~

~~39,815,329~~

~~1.61~~

%

~~Doubtful (Rating 8)~~

-

$

~~1,122,173,834~~

$

~~346,996,627~~

$

~~171,404,628~~

$

~~839,302,131~~

$

~~2,479,877,220~~

~~100.00~~

%


	As of March 31, 2019
			CRE
					Non-Owner Occupied
					Commercial
					Construction,
					Land
			Owner-Occupied		Development,						As a % of
Internally Assigned Risk Rating	C&I		CRE		and Other Land		Other CRE		Total		Total
	(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,333,088	$	481,630	$	263,078	$	1,011,063	$	3,088,859	97.83	%
Special Mention (Rating 6)		17,813		4,721		65		2,170		24,769	0.78	%
Substandard (Rating 7)		15,578		2,476		4,687		20,955		43,696	1.38	%
Doubtful (Rating 8)		—		—		—		—		—	—	%
	$	1,366,479	$	488,827	$	267,830	$	1,034,188	$	3,157,324	100.00	%


														As of March 31, 2019
	As of March 31, 2018															Direct Financing		Residential Real		Installment and				As a % of
Delinquency Status *	C&I		Direct Financing Leases		Residential Real Estate		Installment and Other Consumer		Total		As a % of Total			C&I		Leases		Estate		Other Consumer		Total		Total
														(dollars in thousands)

Performing	$	77,987,539	$	134,638,869	$	253,025,270	$	95,626,776	$	561,278,454		99.00	%	$	112,371	$	106,642	$	286,822	$	122,374	$	628,209	99.26	%
Nonperforming		924,252		2,975,596		1,458,961		284,793		5,643,602		1.00	%		397		1,901		1,680		713		4,691	0.74	%
	$	78,911,791	$	137,614,465	$	254,484,231	$	95,911,569	$	566,922,056		100.00	%	$	112,768	$	108,543	$	288,502	$	123,087	$	632,900	100.00	%


														As of December 31, 2018
																CRE
																		Non-Owner Occupied
																		Commercial
	As of December 31, 2017																	Construction,
			CRE															Land
					Non Owner-Occupied											Owner-Occupied		Development,						As a % of
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		CRE		and Other Land		Other CRE		Total		Total
														(dollars in thousands)

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


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

Performing	$	65,847,177	$	137,778,740	$	256,935,448	$	118,333,529	$	578,894,894		98.88	%	$	102,713	$	116,097	$	288,827	$	118,714	$	626,351	99.18	%
Nonperforming		911,220		3,669,492		1,710,818		277,270		6,568,800		1.12	%		691		1,872		1,932		667		5,162	0.82	%
	$	66,758,397	$	141,448,232	$	258,646,266	$	118,610,799	$	585,463,694		100.00	%	$	103,404	$	117,969	$	290,759	$	119,381	$	631,513	100.00	%

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

23

Table of Contents

Part I

Item 1

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

As of March 31, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, TDRs totaled ~~$7,912,975~~$5.3 million and ~~$9,394,967,~~$6.5 million, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three months ended March 31, ~~2018~~ 2019 and ~~2017.~~2018. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

For the three months ended March 31, 2019

Pre-

Post-

Modification

Number of

Recorded

Specific

Classes of Loans/Leases

Loans / Leases

Investment

Allowance

(dollars in thousands)

CONCESSION - Significant Payment Delay

Direct Financing Leases

4

122,126

—

4

$

122,126

$

122,126

$

—


																	For the three months ended March 31, 2018
																		Pre-		Post-
																		Modification		Modification
	For the three months ended March 31, 2018								For the three months ended March 31, 2017								Number of	Recorded		Recorded		Specific
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		Loans/Leases	Investment		Investment		Allowance
																	(dollars in thousands)
CONCESSION - Significant Payment Delay
C&I		-	$	-	$	-	$	-		2	$	133,689	$	133,689	$	-
Residential Real Estate		1		46,320		46,320		-		-		-		-		-	1	$	46	$	46	$	—
Direct Financing Leases		2		47,524		47,524		-		8		669,861		669,861		-	2		48		48		—
		3	$	93,844	$	93,844	$	-		10	$	803,550	$	803,550	$	-	3	$	94	$	94	$	—

CONCESSION - Extension of Maturity
Direct Financing Leases		-	$	-	$	-	$	-		1	$	6,263	$	6,263	$	-
		-	$	-	$	-	$	-		1	$	6,263	$	6,263	$	-

TOTAL		3	$	93,844	$	93,844	$	-		11	$	809,813	$	809,813	$	-

Of the ~~TDRs reported above,~~ loans restructured during the three months ended March 31, 2019, none were on nonaccrual. Of the loans restructured during the three months ended March 31, 2018, one with a post-modification recorded balance of ~~$46,320~~$46 thousand was on ~~nonaccrual as of~~ ~~March 31, 2018.~~ ~~Of the TDRs reported above,~~ ~~none~~ ~~were on nonaccrual as of~~ ~~March 31, 2017.~~

nonaccrual.

For the three months ended March 31, ~~2018,~~ ~~eight~~2019, none of the ~~Company’s~~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.

For the three months ended March 31, 2018, eight of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. Three of these TDRs were related to one customer whose loans were restructured in the second quarter of 2017 with pre-modification balances totaling ~~$78~~$78 thousand and the other TDRs related to ~~other customers~~another customer whose loans were restructured in the second and third quarters of 2017 with pre-modification balances totaling ~~$378~~$378 thousand.

Not included in the table above, the Company had two TDRs that were restructured and charged off for the three months ended March 31, 2019, totaling $56 thousand. The Company had two TDRs that were restructured and charged off for the three months ended March 31, 2018, totaling $95 thousand.

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

24

Table of Contents

Part I

Item 1

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

NOTE 4 – DERIVATIVES

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


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

1-month FHLB Advance	6/3/2014	6/5/2019	Other Assets	$	15,000	0.94	%	$	56	$		117
1-month FHLB Advance	6/5/2014	6/5/2021	Other Assets		15,000	1.44	%		241			342
				$	30,000			$	297	$		459

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


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

QCR Holdings Statutory Trust II	9/30/2018	9/30/2028	Other Liabilities	$	10,000	5.44	%	5.85	%	$	(557)	$	(298)
QCR Holdings Statutory Trust III	9/30/2018	9/30/2028	Other Liabilities		8,000	5.44	%	5.85	%		(445)		(239)
QCR Holdings Statutory Trust V	7/7/2018	7/7/2028	Other Liabilities		10,000	4.34	%	4.54	%		(540)		(288)
Community National Statutory Trust II	9/20/2018	9/20/2028	Other Liabilities		3,000	4.80	%	5.17	%		(166)		(89)
Community National Statutory Trust III	9/15//2018	9/15/2028	Other Liabilities		3,500	4.36	%	4.75	%		(194)		(104)
Guaranty Bankshares Statutory Trust I	9/15/2018	9/15/2028	Other Liabilities		4,500	4.36	%	4.75	%		(249)		(133)
				$	39,000	4.89	%	5.24	%	$	(2,151)	$	(1,151)

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

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

The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third party financial institution. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.


		March 31, 2019				December 31, 2018
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	490,780	$	36,078	$	445,022	$	22,196
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	490,780	$	36,078	$	445,022	$	22,196

Swap fee income totaled $3.2 million and $959 thousand for the three months ended March 31, 2019 and 2018, respectively. Swap fee income totaled $10.8 million for the year ended December 31, 2018.

25

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 5 – SUBORDINATED NOTES

On February 12, 2019, the Company completed an underwritten public offering of $65.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on February 15, 2029. Net proceeds, after deducting the underwriting discount and estimated expenses, were $63.4 million. The subordinated notes, which qualify as Tier 2 capital for the Company, are at a fixed rate of 5.375% per year until but excluding February 15, 2024. On this date, the interest rate will change to an annual floating rate equal to three-month LIBOR plus 282 basis points until the maturity date. The interest on the subordinated notes are payable semi-annually, commencing on August 15, 2019 during the five year fixed term and thereafter quarterly, commencing on February 15, 2024. The subordinated notes have an optional redemption at par in whole or in part on any interest payment date on or after February 15, 2024. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks. Unamortized debt issuance costs related to the subordinated notes totaled $1.6 million at March 31, 2019.

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

NOTE 46 - EARNINGS PER SHARE

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


					Three months ended
	Three months ended				March 31,
	March 31,					2019		2018
	2018		2017		(dollars in thousands, except share data)

Net income	$	10,549,961	$	9,184,965	$	12,918	$	10,550


Basic EPS	$	0.76	$	0.70	$	0.82	$	0.76
Diluted EPS	$	0.74	$	0.68	$	0.81	$	0.74

Weighted average common shares outstanding		13,888,661		13,133,382		15,693,345		13,888,661
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan		316,923		355,035
Weighted average common shares issuable upon exercise of stock options and
under the employee stock purchase plan						229,595		316,923
Weighted average common and common equivalent shares outstanding		14,205,584		13,488,417		15,922,940		14,205,584

The increase in weighted average common shares outstanding when comparing the three months ended March 31, 2019 to March 31, 2018 to ~~March 31, 2017~~ was primarily due to the common stock issuance as a result of the merger with Springfield Banshares as discussed in Note 2 ~~to the Consolidated Financial Statements included in~~ of the Company’s Annual Report on Form 10-K10-K for the year ended December 31, ~~2017.~~2018.

26

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 57 – 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.

25

~~Table of Contents~~

~~Part I~~

~~Item~~ 1

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

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

2018:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant						Fair Value Measurements at Reporting Date Using
			in Active		Other		Significant				Quoted Prices		Significant
			Markets for		Observable		Unobservable				in Active		Other		Significant
			Identical Assets		Inputs		Inputs				Markets for		Observable		Unobservable
	Fair Value		(Level 1)		(Level 2)		(Level 3)				Identical Assets		Inputs		Inputs
									Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2018:
									(dollars in thousands)
March 31, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	36,867,510	$	-	$	36,867,510	$	-	$	35,843	$	—	$	35,843	$	—
Residential mortgage-backed and related securities		157,289,043		-		157,289,043		-		161,692		—		161,692		—
Municipal securities		61,201,804		-		61,201,804		-		56,124		—		56,124		—
Other securities		4,286,583		-		4,286,583		-		6,788		—		6,788		—
Interest rate caps		657,178		-		657,178		-		297		—		297		—
Interest rate swaps - assets		4,500,318		-		4,500,318		-		36,078		—		36,078		—
Total assets measured at fair value	$	264,802,436	$	-	$	264,802,436	$	-	$	296,822	$	—	$	296,822	$	—

Interest rate swaps - liabilities	$	4,500,318	$	-	$	4,500,318	$	-	$	38,229	$	—	$	38,229	$	—
Total liabilities measured at fair value	$	4,500,318	$	-	$	4,500,318	$	-	$	38,229	$	—	$	38,229	$	—


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

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

There were no transfers of assets or liabilities between Levels 1,2, and 3 of the fair value hierarchy for the three months ended March 31, ~~2018~~ 2019 or ~~2017.~~

A small portion of the securities 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).~~

26

~~Table of Contents~~

~~Part I~~

~~Item~~ 1

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

2018.

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

27

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

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

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

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 March 31, ~~2018~~ 2019 and December 31, ~~2017:~~

2018:

			Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3				Fair Value Measurements at Reporting Date Using
March 31, 2018:
											Quoted Prices		Significant
											in Active		Other		Significant
											Markets for		Observable		Unobservable
											Identical Assets		Inputs		Inputs
									Fair Value		Level 1		Level 2		Level 3
									(dollars in thousands)
March 31, 2019:
Impaired loans/leases	$	5,564,760	$	-	$	-	$	5,564,760	$	8,665	$	—	$	—	$	8,665
OREO		13,770,025		-		-		13,770,025		9,838		—		—		9,838
	$	19,334,785	$	-	$	-	$	19,334,785	$	18,503	$	—	$	—	$	18,503

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

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

28

27

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Part I

Item 1

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

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

Quantitative Information about Level Fair Value Measurements

Fair Value

March 31,

December 31,

Quantitative Information about Level Fair Value Measurements

2019

2018

Valuation Technique

Unobservable Input

Range

Fair Value
March 31, 2018

Fair Value
December 31, 2017

Valuation Technique

Unobservable Input

Range

(dollars in thousands)

Impaired loans/leases

$

5,564,760

$

8,972,337

Appraisal of collateral

Appraisal adjustments

-10.00%

to

-30.00%

$

8,665

$

9,657

Appraisal of collateral

Appraisal adjustments

(10.00)

%

to

(30.00)

%

OREO

13,770,025

14,642,973

Appraisal of collateral

Appraisal adjustments

0.00%

to

-35.00%

9,838

10,128

Appraisal of collateral

Appraisal adjustments

0.00

%

to

(35.00)

%

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

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three months ended March 31, ~~2018~~ 2019 and ~~2017.~~

2018.

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

Fair Value

As of March 31, 2018

As of December 31, 2017

Hierarchy

Carrying

Estimated

Carrying

Estimated

Level

Value

Fair Value

Value

Fair Value

Cash and due from banks
Level 1
$ 61,845,988 $ 61,845,988 $ 75,721,663 $ 75,721,663
Federal funds sold
Level 2
14,505,000 14,505,000 30,197,000 30,197,000
Interest-bearing deposits at financial institutions
Level 2
45,051,555 45,051,555 55,765,012 55,765,012
Investment securities:

HTM
Level 2
378,584,337 375,792,683 379,474,205 379,749,804
AFS
See Previous Table
259,644,940 259,644,940 272,907,907 272,907,907
Loans/leases receivable, net
Level 3
5,152,556 5,564,760 8,307,719 8,972,337
Loans/leases receivable, net
Level 2
3,013,217,281 2,948,650,000 2,921,821,953 2,892,963,000
Interest rate caps
Level 2
657,178 657,178 506,700 506,700
Interest rate swaps - assets
Level 2
4,500,318 4,500,318 4,397,238 4,397,238
Deposits:

Nonmaturity deposits
Level 2
2,603,999,039 2,603,999,039 2,670,583,178 2,670,583,178
Time deposits
Level 2
676,002,453 670,297,000 596,071,878 591,772,000
Short-term borrowings
Level 2
16,859,753 16,859,753 13,993,122 13,993,122
FHLB advances
Level 2
216,345,000 216,397,000 192,000,000 192,115,000
Other borrowings
Level 2
64,062,500 64,583,000 66,000,000 66,520,000
Junior subordinated debentures
Level 2
37,534,402 29,318,931 37,486,487 29,253,624
Interest rate swaps - liabilities
Level 2
4,500,318 4,500,318 4,397,238 4,397,238

28

~~Table of Contents~~


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

Cash and due from banks	Level 1	$	76,527	$	76,527	$	85,523	$	85,523
Federal funds sold	Level 2		1,872		1,872		26,398		26,398
Interest-bearing deposits at financial institutions	Level 2		214,160		214,160		133,198		133,198
Investment securities:
HTM	Level 2		395,302		406,371		401,913		400,771
AFS	See Previous Table		260,447		260,447		261,056		261,056
Loans/leases receivable, net	Level 3		8,023		8,665		8,942		9,657
Loans/leases receivable, net	Level 2		3,750,245		3,711,945		3,683,965		3,639,329
Interest rate caps	Level 2		297		297		459		459
Interest rate swaps - assets	Level 2		36,078		36,078		22,196		22,196
Deposits:
Nonmaturity deposits	Level 2		3,159,581		3,159,581		3,002,327		3,002,327
Time deposits	Level 2		1,034,639		1,025,570		974,704		968,906
Short-term borrowings	Level 2		15,886		15,886		28,774		28,774
FHLB advances	Level 2		126,180		126,273		266,492		265,926
Other borrowings	Level 2		35,000		35,954		67,250		67,770
Subordinated notes	Level 2		68,215		68,379		4,782		4,933
Junior subordinated debentures	Level 2		37,713		30,366		37,670		29,992
Interest rate swaps - liabilities	Level 2		38,229		38,229		23,347		23,347

~~Part I~~

~~Item~~ 1

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

NOTE 68 – 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~~Company's internal organization, focusing on the financial information that the ~~Company’s~~Company's operating decision-makers routinely use to make decisions about operating matters.

29

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The ~~Company’s~~Company's primary segment, Commercial Banking, is geographically divided by markets into the secondary segments comprised of the ~~four~~five subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, SFC Bank 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’s~~Company's Wealth Management segment represents the trust and asset management and investment management and advisory services offered at the ~~Company’s~~ ~~four~~Company's five subsidiary banks and the Bates Companies in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts, custodial services, and investments managed. No assets of the subsidiary banks have been allocated to the Wealth Management segment.

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

Selected financial information on the ~~Company’s~~Company's business segments is presented as follows as of and for the three months ended March 31, ~~2018~~ 2019 and ~~2017.~~

2018.

Commercial Banking

Wealth

Intercompany

Consolidated

QCBT

CRBT

CSB

RB&T

Management

All Other

Eliminations

Total

Three Months Ended March 31, 2018

Total revenue
$ 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
12,120,302 10,835,848 6,743,947 3,465,154 - (762,333 ) - 32,402,918
Provision
1,120,409 601,828 575,602 242,000 - - - 2,539,839
Net income
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 15,223,179 9,888,225 - - - - 28,334,092
Core deposit intangible
- 3,566,728 5,207,674 - - - - 8,774,402
Total assets
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 March 31, 2017

Total revenue
$ 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
11,301,482 6,974,047 7,026,508 2,968,074 - (601,228 ) - 27,668,883
Provision
931,109 250,000 774,000 150,000 - - - 2,105,109
Net income
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 - 9,888,225 - - - - 13,110,913
Core deposit intangible
- 1,222,019 5,928,327 - - - - 7,150,346
Total assets
1,442,952,197 929,111,309 608,431,003 398,454,864 - 377,316,912 (375,253,667 ) 3,381,012,618

29

~~Table of Contents~~


	Commercial Banking										Wealth				Intercompany		Consolidated
	QCBT		CRBT		CSB		SFC Bank		RB&T		Management		All other		Eliminations		Total
	(dollars in thousands)
Three Months Ended March 31, 2019
Total revenue	$	18,544	$	19,244	$	9,270	$	7,288	$	5,596	$	4,229	$	14,582	$	(14,658)	$	64,095
Net interest income		12,139		10,407		6,966		5,227		3,428		—		(1,259)		—		36,908
Provision		1,020		425		150		500		39		—		—		—		2,134
Net income (loss)		4,185		5,100		2,157		1,653		517		1,158		12,598		(14,450)		12,918
Goodwill		3,223		14,980		9,888		45,975		—		—		3,806		—		77,872
Intangibles		—		3,061		4,501		7,501		—		—		1,855		—		16,918
Total assets		1,660,374		1,446,637		785,076		638,542		513,045		—		624,420		(601,432)		5,066,662

Three Months Ended March 31, 2018
Total revenue	$	15,808	$	15,997	$	8,163	$	—	$	4,998	$	3,189	$	12,533	$	(12,600)	$	48,087
Net interest income		12,120		10,836		6,744		—		3,465		—		(762)		—		32,403
Provision		1,120		602		576		—		242		—		—		—		2,540
Net income (loss)		4,458		4,617		1,869		—		741		771		10,514		(12,420)		10,550
Goodwill		3,223		15,223		9,888		—		—		—		—		—		28,334
Intangibles		—		3,567		5,207		—		—		—		—		—		8,774
Total assets		1,526,829		1,331,209		696,979		—		468,112		—		447,592		(444,407)		4,026,314

~~Part I~~

~~Item~~ 1

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

NOTE 79 – 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 March 31, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary ~~banks’~~banks' actual capital amounts and ratios as of March 31, ~~2018~~ 2019 and

30

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

December 31, ~~2017~~ 2018 are presented in the following table (dollars in thousands). As of March 31, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, each of the subsidiary banks met the requirements to be “well capitalized”.

											For Capital					To Be Well
											Adequacy Purposes					Capitalized Under														For Capital					To Be Well
						For Capital					With Capital					Prompt Corrective														Adequacy Purposes					Capitalized Under
	Actual					Adequacy Purposes					Conservation Buffer*					Action Provisions									For Capital					With Capital					Prompt Corrective
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Actual				Adequacy Purposes					Conservation Buffer*					Action Provisions
As of March 31, 2018:
																					Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2019:
Company:
Total risk-based capital	$	395,160		11.25	%	$	281,109	>	8.00	%	$	346,994	>	9.875	%	$	351,386	>	10.00	%	$	538,030	12.26	%	$	351,173	>	8.00	%	$	460,914	>	10.50	%	$	438,966	>	10.00	%
Tier 1 risk-based capital		358,627		10.21	%		210,832	>	6.00			276,717	>	7.875			281,109	>	8.00			433,453	9.87	%		263,379	>	6.00			373,121	>	8.50			351,173	>	8.00
Tier 1 leverage		358,627		9.08	%		157,993	>	4.00			157,993	>	4.000			197,491	>	5.00			433,453	8.90	%		194,905	>	4.00			194,905	>	4.00			243,632	>	5.00
Common equity Tier 1		321,093		9.14	%		158,124	>	4.50			224,009	>	6.375			228,401	>	6.50			395,740	9.02	%		197,535	>	4.50			307,276	>	7.00			295,328	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	160,996		12.32	%	$	104,544	>	8.00	%	$	129,047	>	9.875	%	$	130,680	>	10.00	%	$	166,864	11.59	%	$	115,131	>	8.00	%	$	151,110	>	10.50	%	$	143,914	>	10.00	%
Tier 1 risk-based capital		147,618		11.30	%		78,408	>	6.00			102,911	>	7.875			104,544	>	8.00			153,375	10.66	%		86,349	>	6.00			122,327	>	8.50			115,131	>	8.00
Tier 1 leverage		147,618		9.63	%		61,343	>	4.00			61,343	>	4.000			76,678	>	5.00			153,375	9.21	%		66,621	>	4.00			66,621	>	4.00			83,277	>	5.00
Common equity Tier 1		147,618		11.30	%		58,806	>	4.50			83,309	>	6.375			84,942	>	6.50			153,375	10.66	%		64,761	>	4.50			100,740	>	7.00			93,544	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	142,034		11.96	%	$	94,998	>	8.00	%	$	117,264	>	9.875	%	$	118,748	>	10.00	%	$	152,230	11.59	%	$	105,103	>	8.00	%	$	137,947	>	10.50	%	$	131,379	>	10.00	%
Tier 1 risk-based capital		129,507		10.91	%		71,249	>	6.00			93,514	>	7.875			94,998	>	8.00			139,406	10.61	%		78,827	>	6.00			111,672	>	8.50			105,103	>	8.00
Tier 1 leverage		129,507		9.87	%		52,483	>	4.00			52,483	>	4.000			65,603	>	5.00			139,406	10.03	%		55,617	>	4.00			55,617	>	4.00			69,521	>	5.00
Common equity Tier 1		129,507		10.91	%		53,437	>	4.50			75,702	>	6.375			77,186	>	6.50			139,406	10.61	%		59,120	>	4.50			91,965	>	7.00			85,396	>	6.50
Community State Bank:
Total risk-based capital	$	67,996		11.39	%	$	47,738	>	8.00	%	$	58,926	>	9.875	%	$	59,672	>	10.00	%	$	82,640	12.23	%	$	54,069	>	8.00	%	$	70,966	>	10.50	%	$	67,587	>	10.00	%
Tier 1 risk-based capital		63,105		10.58	%		35,803	>	6.00			46,992	>	7.875			47,738	>	8.00			76,329	11.29	%		40,552	>	6.00			57,449	>	8.50			54,069	>	8.00
Tier 1 leverage		63,105		9.35	%		27,010	>	4.00			27,010	>	4.000			33,763	>	5.00			76,329	9.97	%		30,630	>	4.00			30,630	>	4.00			38,287	>	5.00
Common equity Tier 1		63,105		10.58	%		26,853	>	4.50			38,041	>	6.375			38,787	>	6.50			76,329	11.29	%		30,414	>	4.50			47,311	>	7.00			43,931	>	6.50
Springfield First Community Bank:
Total risk-based capital																					$	62,958	13.04	%	$	38,639	>	8.00	%	$	50,713	>	10.50	%	$	48,298	>	10.00	%
Tier 1 risk-based capital																						56,666	11.73	%		28,979	>	6.00			41,053	>	8.50			38,639	>	8.00
Tier 1 leverage																						56,666	10.36	%		21,883	>	4.00			21,883	>	4.00			27,353	>	5.00
Common equity Tier 1																						56,666	11.73	%		21,734	>	4.50			33,809	>	7.00			31,394	>	6.50
Rockford Bank & Trust:
Total risk-based capital	$	46,567		11.07	%	$	33,644	>	8.00	%	$	41,530	>	9.875	%	$	42,055	>	10.00	%	$	51,286	10.93	%	$	37,530	>	8.00	%	$	49,259	>	10.50	%	$	46,913	>	10.00	%
Tier 1 risk-based capital		41,305		9.82	%		25,233	>	6.00			33,119	>	7.875			33,644	>	8.00			45,408	9.68	%		28,148	>	6.00			39,876	>	8.50			37,530	>	8.00
Tier 1 leverage		41,305		8.93	%		18,498	>	4.00			18,498	>	4.000			23,123	>	5.00			45,408	8.84	%		20,544	>	4.00		��	20,544	>	4.00			25,681	>	5.00
Common equity Tier 1		41,305		9.82	%		18,925	>	4.50			26,810	>	6.375			27,336	>	6.50			45,408	9.68	%		21,111	>	4.50			32,839	>	7.00			30,494	>	6.50

30

~~Table of Contents~~


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

~~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).

* March 31,

~~Table of Contents~~

~~Part I~~

~~Item~~ 1

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

~~NOTE~~ 8 ~~– REVENUE RECOGNITION~~

~~As of~~ ~~January 1, 2018,~~ 2019 minimums reflect the ~~Company adopted ASU~~ ~~2014~~-09 ~~using~~fully phased-in ratios (including 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.capital conservation buffer).

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

31

32

Table of Contents

Part I

Item 1

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

2~~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.~~

33

~~Table of Contents~~

~~Part I~~

~~Item~~ 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION~~INTRODUCTION~~

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending March 31, ~~2018.~~2019. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. The page locations and specific sections and notes that are referred to are presented in the table of contents.

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

GENERAL~~GENERAL~~

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

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

●·

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

●·

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

●·

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

●·

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

·

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

EXECUTIVE OVERVIEW

The Company reported net income of $12.9 million and diluted EPS of $0.81 for the quarter ended March 31, 2019. By comparison, for the quarter ended December 31, 2018, the Company reported net income of $13.3 million and diluted EPS of $0.84. For the quarter ended March 31, 2018, the Company reported net income of $10.5 million, and diluted EPS of $0.74.

32

34

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

~~EXECUTIVE OVERVIEW~~

The Company reported net income of $10.5 million and diluted EPS of $0.74 for the quarter ended March 31, 2018. By comparison, for the quarter ended December 31, 2017, the Company reported net income of $9.9 million and diluted EPS of $0.70. For the quarter ended March 31, 2017, the Company reported net income of $9.2 million and diluted EPS of $0.68.

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

●

~~Annualized net interest~~·

Net income ~~growth~~ of ~~7.5%;~~$12.9 million, or $0.81 per diluted share;

●·

Adjusted net income (non-GAAP) of $13.0 million, or $0.82 per diluted share;

·

Annualized loan and lease growth of ~~12.2% ;~~7.1% for the quarter;

●·

Annualized ~~wealth management revenue~~deposit growth of ~~10.8%;~~21.8% for the quarter;

●

~~Swap fee~~·

Noninterest income ~~and gains on~~of $12.0 million for the ~~sale of government guaranteed loans of $1.3 million;~~quarter; and

●

~~A definitive agreement to enter~~·

Nonperforming assets down $1.6 million, or 5.6%, from the ~~Springfield, Missouri market by merging with Springfield Bancshares.~~prior quarter.

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


	For the three months ended
	March 31, 2019		December 31, 2018		March 31, 2018
	(dollars in thousands)

Net income	$	12,918	$	13,316	$	10,550

Diluted earnings per common share	$	0.81	$	0.84	$	0.74

Weighted average common and common equivalent shares outstanding		15,922,940		15,898,591		14,205,584

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 three months ended~~from March 31, 2018 ~~and~~to December 31, ~~2017 to~~2018 and March 31, ~~2017~~2019 was primarily due to the common stock issued as a result of the merger with Springfield Bancshares as further described in Note 2 to ~~Guaranty as consideration~~the Company’s Annual Report on Form 10-K for the ~~acquisition of Guaranty Bank.~~

year ended December 31, 2018.

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


	For the three months ended
	March 31, 2019		December 31, 2018		March 31, 2018
	(dollars in thousands)

Net interest income	$	36,908	$	39,595	$	32,403
Provision expense		2,134		1,612		2,540
Noninterest income		11,993		15,278		8,541
Noninterest expense		32,435		36,410		25,863
Federal and state income tax expense		1,414		3,535		1,991
Net income	$	12,918	$	13,316	$	10,550

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

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

·

Net interest income in the first quarter of 2019 was down 7% compared to the fourth quarter of 2018. The decrease was primarily due to a $1.5 million decline in acquisition accretion, net, quarter over quarter, as well as an increase in deposit and borrowing costs along with strong deposit growth. Net interest income increased 14% compared to the first quarter of 2018. This increase was primarily due to strong loan growth and the addition of SFC Bank.

33

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

●

Net interest income in the first quarter of 2018 was up 2% compared to the fourth quarter of 2017 and up 17% compared to the first quarter of 2017 due to strong loan and lease growth and the acquisition of Guaranty Bank.·

●

Provision expense in the first quarter of ~~2018~~2019 increased ~~13%~~32% compared to the fourth quarter of ~~2017 and 21% from~~2018. The increase was primarily due to a lower than normal provision in the ~~same period~~fourth quarter of ~~2017 and~~2018 as a result of a more favorable outcome than expected on a large credit that was ~~attributable~~partially charged off. Provision expense decreased 16% compared to ~~both strong loan growth and accounting~~the first quarter of 2018. See the Provision for ~~acquired loans. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance.~~Loan Lease Losses section of this report for additional details.

●·

Noninterest income in the first quarter of ~~2018~~2019 decreased ~~12%~~22% compared to the fourth quarter of ~~2017,~~2018 primarily due to lower swap fee income. Noninterest income in the first quarter of ~~2018~~2019 increased ~~17%~~40% from the ~~first quarter~~same period of ~~2017, which~~2018. This increase was primarily attributable to higher swap fee income as well as solid growth in wealth management fee ~~income.~~income and the addition of SFC Bank.

●·

Noninterest expense decreased ~~18%~~11% from the fourth quarter of ~~2017. The~~2018. In the fourth quarter of ~~2017 included $4.4~~2018, there was $1.4 million of ~~non-recurring~~post-acquisition compensation, transition and integration cost as compared to $134 thousand in the first quarter of 2019. Also, the fourth quarter of 2018 had $2.5 million in net costs ~~related~~and losses on operations of other real estate as compared to $298 thousand in the ~~acquisition~~first quarter of ~~Guaranty Bank and a core processor termination fee related to CSB.~~2019. Noninterest expense increased ~~22%~~25% from the first quarter of ~~2017~~2018 primarily due to the ~~acquisition~~addition of ~~Guaranty~~SFC Bank.

●·

Federal and state income tax expense in the first quarter of ~~2018 increased significantly~~2019 decreased 60% compared to the fourth quarter of ~~2017. The fourth quarter of 2017 included a one-time tax benefit of $2.9 million as a result of the Tax Act.~~2018. Federal and state income tax expense in the first quarter of ~~2018~~2019 decreased ~~17%~~29% compared to the ~~first~~same quarter of ~~2017 primarily due to a lower federal tax rate.~~2018. See the ~~Income Taxes~~“Income Taxes” section of this report for additional ~~details.~~details on these decreases.

LONG-TERM FINANCIAL GOALS

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

●

~~Improve balance sheet efficiency by maintaining~~·

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

●·

Improve profitability (measured by NIM and ROAA);

●·

Improve 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~~·

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

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

●

~~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~~between $8 million and $12 million annually; and

●·

Grow wealth management ~~segment~~ net income by 10% annually.

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

For the Quarter Ending
Goal Key Metric Target**
March 31, 2018
December 31, 2017
March 31, 2017
Balance sheet efficiency
Gross loans and leases to total assets
73 - 78%
76%
74%
72%

NIM(TEY)(non-GAAP)*
> 3.65%
3.64%
3.69%
3.90%
Profitability
ROAA
> 1.10%
1.06%
1.01%
1.12%

Core ROAA (non-GAAP)*

1.06%
1.01%
1.12%

NPAs to total assets
< 0.75%
0.77%
0.81%
0.81%
Asset quality
Net charge-offs to average loans and leases***
< 0.25% annually
0.05%
0.19%
0.13%
Reliance on wholesale funding
Wholesale funding to total assets****
< 15%
14%
10%
9%
Funding mix
Noninterest bearing deposits as a percentage of total assets
> 30%
19%
20%
23%
Consistent, high quality noninterest income revenue streams
Gains on sales of government guaranteed portions of loans and swap fee income***
> $4 million annually
$5.3 million
$4.3 million
$4.3 million

Grow wealth management segment net income***
> 10% annually
37%
35%
25%

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


			For the Quarter Ending
Goal	Key Metric	Target **	March 31, 2019			December 31, 2018			March 31, 2018
Balance sheet efficiency	Gross loans and leases to total assets	73% - 78%		75	%		75	%		76	%
	NIM TEY (non-GAAP)*	> 3.35%		3.40	%		3.63	%		3.64	%
Profitability	ROAA	> 1.10%		1.04	%		1.10	%		1.06	%
	Adjusted ROAA (non-GAAP)*	> 1.10%		1.05	%		1.20	%		1.06	%
Asset quality	NPAs to total assets	< 0.75%		0.52	%		0.56	%		0.77	%
	Net charge-offs to average loans and leases***	< 0.25% annually		0.09	%		0.13	%		0.05	%
Reliance on wholesale funding	Wholesale funding to total assets****	< 15%		12	%		14	%		14	%
Consistent, high quality noninterest income revenue streams	Gains on sales of government guaranteed portions of loans and swap fee income***	$8-12 million annually	$	12.9	million	$	11.2	million	$	5.3	million
	Grow wealth management net income***	> 10% annually		50	%		32	%		37	%

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

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

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

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

STRATEGIC DEVELOPMENTS

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

●·

The Company grew loans and leases in the first ~~three months~~quarter of ~~2018~~2019 by ~~12.2%~~7.1% 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~~Company's loans and leases to ~~asset~~assets ratio within the targeted range of ~~73-78%~~73‑78%.

●·

The Company has participated, and intends to continue to participate, as an acquirer 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~~Company's efficiency ratio. The Company announced in March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The Company announced in April 2018 the signing of a definitive agreement to acquire Springfield Bancshares. See Note 9 to the Consolidated Financial Statements for additional details about these strategic transactions.

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

●·

The Company has continued to focus on lowering the NPAs to total assets ratio. This ratio decreased by ~~four~~4 basis points to ~~0.77%, as~~0.52% compared to the fourth quarter ~~2017.~~2018. The Company remains committed to improving asset quality ratios in ~~2018~~2019 and beyond.

●·

Management has continued to focus on reducing the ~~Company’s~~Company's reliance on wholesale funding. Wholesale funding ~~increased~~as a percentage of total assets decreased 2% in the first quarter ~~2018~~of 2019 due to the strong ~~loan and lease~~core deposit growth which outpaced the Company’s ~~deposit~~loan growth. ~~All increases to wholesale funding were short-term in nature.~~ Management continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.

●·

Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the three states currently served – Iowa, Illinois and Wisconsin – and to expand into the Missouri market. The Company acts as the correspondent bank for 196 downstream banks with average total noninterest bearing deposits of $170.4 million and average total interest bearing deposits of $286.1 million during the first three months of 2019. By comparison, the Company acted as the correspondent bank for 192 downstream banks with average total

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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 correspondents of $320.7 million during the first quarter of 2017.~~ This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

●

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

●·

As a result of the relatively low interest rate environment including a flat yield curve, the Company has focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as ~~the circumstances are~~ appropriate for the ~~borrower~~borrowers and the Company. Swap fee income totaled $3.2 million for the three months ended March 31, 2019 as compared to $959 thousand for the three months ended March 31, 2018.

●·

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of March 31, ~~2018,~~2019, the Company had ~~$2.65~~$2.92 billion of total financial assets in trust (and related) accounts and ~~$1.05~~$1.70 billion of total financial assets in brokerage (and related) accounts. Continued growth in assets under management will help drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management continues to focus on growing wealth management fee income, expanding market share will continue to be a primary strategy, both through organic growth as well as 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~~“adjusted net income”, ~~“core net income attributable to QCR Holdings, Inc. common stockholders”, “core~~“adjusted EPS”, ~~“core~~“adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, and “efficiency ratio”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:

●·

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

●

~~Core~~·

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

●·

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

●·

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

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

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

performance.

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

In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate a great deal, making comparions difficult.

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.

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


	As of
GAAP TO NON-GAAP	March 31,			December 31,			March 31,
RECONCILIATIONS	2019			2018			2018
		(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	488,407		$	473,138		$	360,428
Less: Intangible assets		94,790			95,282			37,108
TCE (non-GAAP)	$	393,617		$	377,856		$	323,320

Total assets (GAAP)	$	5,066,662		$	4,949,710		$	4,026,314
Less: Intangible assets		94,790			95,282			37,108
TA (non-GAAP)	$	4,971,872		$	4,854,428		$	3,989,206

TCE/TA ratio (non-GAAP)		7.92	%		7.78	%		8.10	%


	For the Quarter Ended
	March 31,			December 31,			March 31,
	2019			2018			2018
ADJUSTED NET INCOME
Net income (GAAP)	$	12,918		$	13,316		$	10,550
Less nonrecurring items (post-tax) (*):
Expense:
Acquisition costs	$	—		$	29		$	73
Post-acquisition compensation, transition and integration costs		106			1,127			—
Total nonrecurring expense (non-GAAP)	$	106		$	1,156		$	73


Adjusted net income (non-GAAP)	$	13,024		$	14,472		$	10,623

ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	13,024		$	14,472		$	10,623

Weighted average common shares outstanding		15,693,345			15,641,401			13,888,661
Weighted average common and common equivalent shares outstanding		15,922,940			15,898,591			14,205,584

Adjusted EPS (non-GAAP):
Basic	$	0.83		$	0.93		$	0.76
Diluted	$	0.82		$	0.91		$	0.75

ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	13,024		$	14,472		$	10,623

Average Assets	$	4,968,502		$	4,842,232		$	3,994,691

Adjusted ROAA (annualized) (non-GAAP)		1.05	%		1.20	%		1.06	%

ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	36,908		$	39,593		$	32,403
Plus: Taxequivalent adjustment		1,794			1,751			1,353
Net interest income - taxequivalent (non-GAAP)	$	38,702		$	41,344		$	33,756
Less: Accquisition accounting net accretion		1,069			2,609			699
Adjusted net interest income		37,633			38,735			33,057

Average earning assets	$	4,612,553		$	4,513,277		$	3,759,475

NIM (GAAP)		3.25	%		3.48	%		3.50	%
NIM (TEY) (non-GAAP)		3.40	%		3.63	%		3.64	%
Adjusted NIM (TEY) (non-GAAP)		3.31	%		3.40	%		3.57	%

EFFICIENCY RATIO
Noninterest expense (GAAP)	$	32,435		$	36,410		$	25,863

Net interest income (GAAP)	$	36,908		$	39,593		$	32,403
Noninterest income (GAAP)		11,993			15,279			8,541
Total income	$	48,901		$	54,872		$	40,944

Efficiency ratio (noninterest expense/total income) (non-GAAP)		66.33	%		66.35	%		63.17	%

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

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As of

March 31,

December 31,

September 30,

June 30,

March 31,

GAAP TO NON-GAAP RECONCILIATIONS

2018

2017

2017

2017

2017

(dollars in thousands, except per share data)

TCE / TA RATIO

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

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

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

For the Quarter Ended

March 31,

December 31,

September 30,

June 30,

March 31,

CORE NET INCOME

2018

2017

2017

2017

2017

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

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

Income:

Securities gains, net
$ - $ (41 ) $ (41 ) $ 25 $ -
Total nonrecurring income (non-GAAP)
$ - $ (41 ) $ (41 ) $ 25 $ -

Expense:

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

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

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

CORE EPS

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

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

Core EPS (non-GAAP):

Basic
$ 0.76 $ 0.72 $ 0.65 $ 0.66 $ 0.70
Diluted
$ 0.75 $ 0.70 $ 0.63 $ 0.65 $ 0.68

CORE ROAA

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

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

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

*

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

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

For the Quarter Ended

March 31,

December 31,

September 30,

June 30,

March 31,

GAAP TO NON-GAAP RECONCILIATIONS (CONTINUED)

2018

2017

2017

2017

2017

(dollars in thousands)

NIM (TEY) *

Net interest income (GAAP)
$ 32,403 $ 31,793 $ 28,556 $ 28,047 $ 27,669

Plus: Tax equivalent adjustment
1,353 2,585 2,311 2,201 1,950

Net interest income - tax equivalent (Non-GAAP)
$ 33,756 $ 34,378 $ 30,867 $ 30,248 $ 29,619

Average earning assets
$ 3,759,475 $ 3,699,193 $ 3,303,014 $ 3,180,779 $ 3,076,356

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

EFFICIENCY RATIO

Noninterest expense (GAAP)
$ 25,863 $ 31,351 $ 23,395 $ 21,405 $ 21,273

Net interest income (GAAP)
$ 32,403 $ 31,793 $ 28,556
#
$ 28,047 $ 27,669
Noninterest income (GAAP)
8,541 9,714 6,702 6,782 7,284
Total income
$ 40,944 $ 41,507 $ 35,258 $ 34,829 $ 34,953

Efficiency ratio (noninterest expense/total income) (Non-GAAP)
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 income, on a tax equivalent basis, increased ~~14%~~15% to ~~$33.8~~$38.7 million for the quarter ended March 31, ~~2018,~~2019, compared to the same quarter of the prior year. Excluding the tax equivalent adjustments, net interest income increased ~~17%~~14% over the same ~~period.~~period of the prior year. Net interest income improved due to ~~several~~two main factors:

●

~~Organic~~·

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

·

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

●

~~The acquisition of Guaranty Bank, whose strong NIM has 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 municipal bonds, especially with the Company’s most recent acquisitions of CSB and Guaranty Bank.

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

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

Tax Equivalent Basis

GAAP

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:

●

~~Floating rate loans and securities repricing with recent rate hikes,~~

●

~~Growing certain niches (loans and securities) that tend to have higher spreads, and~~

●

~~Improved pricing on C&I and CRE term loans.~~


	Tax Equivalent Basis						GAAP
	For the Quarter Ended						For the Quarter Ended
	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
	2019		2018		2018		2019		2018		2018
Average Yield on Interest-Earning Assets	4.74	%	4.79	%	4.41	%	4.58	%	4.63	%	4.27	%
Average Cost of Interest-Bearing Liabilities	1.72	%	1.49	%	1.03	%	1.72	%	1.49	%	1.03	%
Net Interest Spread	3.02	%	3.30	%	3.38	%	2.86	%	3.14	%	3.24	%
NIM	3.40	%	3.63	%	3.64	%	3.25	%	3.48	%	3.50	%
NIM Excluding Acquisition Accounting Net Accretion	3.31	%	3.40	%	3.57	%	3.15	%	3.25	%	3.42	%

Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, ~~it’s~~it's important to understand the impact of acquisition accounting net accretion when comparing periods. The acquisition 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. A comparison of acquisition accounting net accretion included in NIM is as follows:


	For the Quarter Ended
	March 31,		December 31,		March 31,
	2019		2018		2018
	dollars in thousands

Acquisition Accounting Net Accretion in NIM	1,069	$	2,609	$	699

NIM on a tax equivalent basis was down 23 basis points on a linked quarter basis. Excluding acquisition accounting net accretion, NIM was down 9 basis points on a linked quarter basis. This margin compression was primarily due to the following:

·

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

·

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

·

Excess liquidity due to strong deposit growth; and

·

The impact of the issuance of $65 million of subordinated notes during the first quarter.

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

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

The ~~Company’s~~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 March 31,
	2019								2018
				Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	15,736		$	93		2.40	%	$	19,703		$	56		1.15	%
Interest-bearing deposits at financial institutions		155,463			923		2.41	%		49,531			197		1.61	%
Investment securities (1)		660,454			6,096		3.74	%		649,035			5,839		3.65	%
Restricted investment securities		21,285			307		5.85	%		21,830			234		4.35	%
Gross loans/leases receivable (1) (2) (3)		3,759,615			46,477		5.01	%		3,019,376			34,573		4.64	%
Total interest earning assets		4,612,553			53,896		4.74	%		3,759,475			40,899		4.41	%

Noninterest-earning assets:
Cash and due from banks		78,631								67,224
Premises and equipment		76,523								63,394
Less allowance		(40,461)								(35,136)
Other		241,256								139,734
Total assets	$	4,968,502							$	3,994,691

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	2,288,109			7,174		1.27	%	$	1,828,228			3,019		0.67	%
Time deposits		1,012,459			5,305		2.12	%		616,661			1,862		1.22	%
Short-term borrowings		14,377			71		2.00	%		17,271			33		0.77	%
FHLB advances		147,355			903		2.49	%		236,689			1,064		1.82	%
Other borrowings		43,701			605		5.61	%		64,680			718		4.50	%
Subordinated notes		38,637			564		5.92	%		—			—		—	%
Junior subordinated debentures		37,686			572		6.16	%		37,510			447		4.83	%
Total interest-bearing liabilities		3,582,324			15,194		1.72	%		2,801,039			7,143		1.03	%

Noninterest-bearing demand deposits		810,300								794,673
Other noninterest-bearing liabilities		93,455								42,454
Total liabilities		4,486,079								3,638,166

Stockholders' equity		482,423								356,525
Total liabilities and stockholders' equity	$	4,968,502							$	3,994,691
Net interest income				$	38,702							$	33,756
Net interest spread							3.02	%							3.38	%
Net interest margin							3.25	%							3.50	%
Net interest margin (TEY)(Non-GAAP)							3.40	%							3.64	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.31	%							3.57	%
Ratio of average interest-earning assets to average interest-bearing liabilities		128.76	%							134.22	%

For the three months ended March 31,

2018

2017

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
$ 19,703 $ 56 1.15 % $ 11,092 $ 15 0.55 %
Interest-bearing deposits at financial institutions
49,531 197 1.61 % 92,551 199 0.87 %
Investment securities (1)
649,035 5,839 3.65 % 560,455 5,158 3.73 %
Restricted investment securities
21,830 234 4.35 % 13,871 130 3.80 %
Gross loans/leases receivable (1) (2) (3)
3,019,376 34,573 4.64 % 2,398,387 27,793 4.70 %

Total interest earning assets
$ 3,759,475 $ 40,899 4.41 % $ 3,076,356 $ 33,295 4.39 %

Noninterest-earning assets:

Cash and due from banks
$ 67,224 $ 65,291
Premises and equipment
63,394 60,977
Less allowance
(35,136 ) (31,498 )
Other
139,734 103,587

Total assets
$ 3,994,691 $ 3,274,713

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:

Interest-bearing deposits
$ 1,828,228 3,019 0.67 % $ 1,407,645 1,140 0.33 %
Time deposits
616,661 1,862 1.22 % 511,119 1,093 0.87 %
Short-term borrowings
17,271 33 0.77 % 25,188 24 0.39 %
FHLB advances
236,689 1,064 1.82 % 114,356 403 1.43 %
Other borrowings
64,680 718 4.50 % 74,761 683 3.71 %
Junior subordinated debentures
37,510 447 4.83 % 33,497 333 4.03 %

Total interest-bearing liabilities
$ 2,801,039 $ 7,143 1.03 % $ 2,166,566 $ 3,676 0.69 %

Noninterest-bearing demand deposits
$ 794,673 $ 773,245
Other noninterest-bearing liabilities
42,454 43,996
Total liabilities
$ 3,638,166 $ 2,983,807

Stockholders' equity
356,525 290,906

Total liabilities and stockholders' equity
$ 3,994,691 $ 3,274,713

Net interest income
$ 33,756 $ 29,619

Net interest spread
3.38 % 3.70 %

Net interest margin
3.64 % 3.90 %

Ratio of average interest-earning assets to average interest-bearing liabilities
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%~~21% tax ~~rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.~~rate.

(2)

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

(3)

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

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Analysis of Changes of Interest Income/Interest Expense

For the three months ended March 31, 2019



	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period		Rate		Volume
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	37	$	109	$	(72)
Interest-bearing deposits at financial institutions		726		136		590
Investment securities (2)		257		153		104
Restricted investment securities		73		113		(40)
Gross loans/leases receivable (2) (3)		11,904		2,918		8,986
Total change in interest income		12,997		3,429		9,568

INTEREST EXPENSE
Interest-bearing deposits		4,155		3,246		909
Time deposits		3,443		1,838		1,605
Short-term borrowings		38		74		(36)
Federal Home Loan Bank advances		(161)		1,518		(1,679)
Other borrowings		(113)		768		(881)
Subordinated notes		564		—		564
Junior subordinated debentures		125		123		2
Total change in interest expense		8,051		7,567		484

Total change in net interest income	$	4,946	$	(4,138)	$	9,084

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

~~For the three months ended March 31, 2018~~(1)

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%~~21% tax ~~rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.~~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.~~

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

CRITICAL ACCOUNTING POLICIES

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

~~ALLOWANCE FOR LOAN AND LEASE LOSSES~~

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

GOODWILL

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

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ALLOWANCE FOR LOAN AND LEASE LOSSES

The ~~Company’s~~Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. ~~Quantitative factors include~~A more detailed discussion of this critical accounting policy can be found in 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.Company's Annual Report on Form 10‑K for the year ended December 31, 2018.

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

Although management believes the level of the allowance as of 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.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income increased ~~26%~~32%, comparing the first quarter of ~~2018~~2019 to the same period of ~~2017.~~2018. This increase was primarily the result of the addition of SFC Bank, strong organic loan growth, and improved pricing with the ~~acquisition of Guaranty Bank.~~

rising rate environment.

Overall, the ~~Company’s~~Company's average earning assets increased ~~22%~~23%, comparing the first quarter of ~~2018~~2019 to the first quarter of ~~2017.~~2018. During the same time period, average gross loans and leases increased ~~26%~~25%, while average investment securities increased ~~16% with a portion being private placement tax-exempt municipal securities.~~2%. These increases were ~~also~~ the result of the ~~acquisition~~addition of ~~Guaranty Bank.~~

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

SFC Bank and strong organic loan growth.

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

INTEREST EXPENSE

Interest expense for the first quarter of ~~2018~~2019 increased ~~94%~~113% from the first quarter of ~~2017.~~2018. The ~~acquisition~~addition of ~~Guaranty~~SFC Bank primarily contributed to this ~~increase.~~increase as the Company added over $439 million in deposits. Additionally, as the Company has ~~rate sensitive deposits with select major customers that have repriced with~~grown organically at a significant pace over the ~~increase in certain market interest rates. With strong~~past several years, the loan growth ~~outpacing deposit growth~~has been funded in ~~the first quarter~~larger part by bigger depositor relationships with higher rate sensitivity, many of ~~2018, short-term borrowings increased and~~which have pricing tied to a certain index. As a result, the cost of these funds ~~have~~is higher than the rest of the Company’s core deposit portfolio, and the cost rises at a higher rate (beta) as market interest rates rise (which has been the case over the past several quarters). The beta on the balance of the Company’s core deposit portfolio has performed well and is much lower than the beta on relationships with pricing tied to a certain index. Additionally, the cost of funds on the Company’s short-term wholesale funds has increased with the rising rate environment.

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

PROVISION FOR LOAN/LEASE LOSSES

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

The ~~Company’s~~Company's provision totaled ~~$2.5~~$2.1 million for the first quarter of ~~2018,~~2019, which was ~~an increase~~a decrease of ~~$435~~$405 thousand or ~~21%~~16% from the same quarter of the prior ~~year. The increase from~~year, primarily attributable to lower loan growth in the first quarter of ~~2017 to the first quarter of 2018 was primarily attributable to loan growth and the~~2019 than 2018.

In accordance with GAAP for business combination accounting, ~~for the~~acquired loans ~~acquired through the acquisitions of CSB and Guaranty Bank.~~are recorded at fair value; therefore, no allowance is associated with such loans at acquisition. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance through provision. This provision, when coupled with net

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charge-offs of ~~$363 thousand~~$1.1 million for the first three months of ~~2018,~~2019, increased the ~~Company’s~~Company's allowance to ~~$36.5~~$41.1 million at March 31, ~~2018.~~2019. As of March 31, ~~2018,~~2019, the ~~Company’s~~Company's allowance to total loans/leases was ~~1.20%~~1.08%, which ~~has increased~~was up from ~~1.16%~~1.07% at December 31, ~~2017~~2018 and ~~decreased~~down from ~~1.32%~~1.20% at March 31, ~~2017.~~

~~In accordance with GAAP for business combination accounting, acquired loans are recorded at fair value; therefore, no allowance is associated with such loans at acquisition.~~2018. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($~~7.3~~10.4 million and ~~$8.0~~$7.3 million at March 31, ~~2018~~2019 and March 31, ~~2017,~~2018, 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 1.20% to 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’s~~Company's allowance can be found in the “Financial Condition” section of this ~~report.~~Report.

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

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three months ended March 31, ~~2018~~2019 and ~~2017.~~2018.

Three Months Ended

March 31,
2018

March 31,
2017

$ Change

% Change

Trust department fees
$ 2,237,081 $ 1,740,207 $ 496,874 28.6
%
Investment advisory and management fees
952,344 961,599 (9,255 ) (1.0 )
Deposit service fees
1,531,453 1,316,390 215,063 16.3
Gains on sales of residential real estate loans, net
100,815 96,323 4,492 4.7
Gains on sales of government guaranteed portions of loans, net
358,434 950,641 (592,207 ) (62.3 )
Swap fee income
958,694 113,520 845,174 744.5
Earnings on bank-owned life insurance
417,987 469,687 (51,700 ) (11.0 )
Debit card fees
766,108 702,801 63,307 9.0
Correspondent banking fees
264,827 245,189 19,638 8.0
Other
953,706 687,397 266,309 38.7
Total noninterest income
$ 8,541,449 $ 7,283,754 $ 1,257,695 17.3
%


	Three Months Ended
	March 31,		March 31,
	2019		2018		$ Change		% Change
	(dollars in thousands)

Trust department fees	$	2,493	$	2,237	$	256	11.4	%
Investment advisory and management fees		1,736		952		784	82.4
Deposit service fees		1,554		1,531		23	1.5
Gains on sales of residential real estate loans, net		369		101		268	265.3
Gains on sales of government guaranteed portions of loans, net		31		358		(327)	(91.3)
Swap fee income		3,198		959		2,239	233.5
Earnings on bank-owned life insurance		540		418		122	29.2
Debit card fees		792		766		26	3.4
Correspondent banking fees		216		265		(49)	(18.5)
Other		1,064		954		110	11.5
Total noninterest income	$	11,993	$	8,541	$	3,452	40.4	%

In recent years, the Company has been successful in expanding its wealth management ~~customer~~client base. Trust department fees continue to be a significant contributor to noninterest ~~income and, due to favorable market conditions~~income. Assets under management increased $167.6 million in ~~early 2018 coupled~~the first quarter of 2019 with 70 new client relationships. With strong growth in assets under management, trust department fees increased ~~29%~~11%, comparing the first quarter of ~~2018~~2019 to the same period of the prior year. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. ~~Additionally, the Company started offering trust operations services to correspondent banks.~~

Investment advisory and management fees ~~decreased 1%~~increased 82%, comparing the first quarter of ~~2018~~2019 to the same period of the prior year.

In October 2018, the Company acquired the Bates Companies which increased the assets under management by approximately $704 million as of closing. Management has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the ~~Company’s~~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. 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.

Deposit service fees expanded ~~16%~~2% comparing the first quarter of ~~2018~~2019 to the same period of the prior year. ~~This increase was primarily the result of the growth in deposits due to the acquisition of Guaranty Bank. Additionally, the~~The Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, increased 265% when comparing the first quarter of 2019 to the same period of the prior year. The increase was due to the addition of SFC Bank which recognized $284 thousand of gains on sales of residential real estate in the first quarter of 2019. Overall, refinancing activity has slowed, as many of the

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Gains on sales of residential real estate loans increased 5% when comparing the first quarter of 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’sCompany's existing and prospective customers have already executed a refinancing. Therefore, this area has generally become a smaller contributor to overall noninterest income.

The ~~Company’s~~Company's gains on the sale of government-guaranteed portions of loans for the first quarter of ~~2018~~2019 decreased ~~62%~~91% compared to the first quarter of ~~2017.~~2018. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. ~~As one of its core strategies, the~~The Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. ~~In the past several years, the Company’s portfolio of government-guaranteed loans has grown as a direct result of the Company’s strong expertise in SBA and USDA lending.~~ In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the ~~Company’s~~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,~~Recently, competitors have been offering SBA loan candidates traditional financing without the guarantee and the Company ~~may execute on this strategy, which may delay the gains on sales of some loans~~is not willing to ~~achieve better pricing.~~

relax its structure for those lending opportunities.

As a result of the ~~continued relatively low~~ interest rate environment, ~~including a flat yield curve,~~ the Company was able to execute numerous interest rate swaps on select commercial loans, ~~over the past several years.~~including tax credit project loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the ~~borrower~~borrowers and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income totaled $3.2 million for the first quarter of 2019, compared to $959 thousand for the first quarter of ~~2018, compared to $114 thousand for the first quarter of 2017.~~2018. Future levels of swap fee income are ~~also~~somewhat dependent upon prevailing interest rates.

Earnings on BOLI ~~decreased 11%~~increased 29% comparing the first quarter of ~~2018~~2019 to the first quarter of ~~2017.~~2018. There were no purchases of BOLI within the last 12 months. Notably, a ~~small~~ portion of the ~~Company’s~~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.~~and can lead to volatility in earnings. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 9%3% comparing the first quarter of ~~2018~~2019 to the first quarter of the prior year. This increase was primarily related to the ~~acquisition of Guaranty Bank in the fourth quarter of 2017.~~recent acquisitions. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a retail deposit product with a higher interest rate that incentivizes debit card ~~activity, which has been taken advantage of by the Company's customers.~~

activity.

Correspondent banking fees ~~increased 8%~~decreased 19% comparing the first quarter of ~~2018~~2019 to the first quarter of the prior 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 deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately ~~192~~200 banks in Iowa, Illinois and Wisconsin.

Other noninterest income increased 12% comparing the first quarter of 2019 to the first quarter of the prior year. This increase was primarily due to loan related fee income and equity investment income.

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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 EXPENSE

The following tables set forth the various categories of noninterest expense for the three months ended March 31, ~~2018~~2019 and ~~2017.~~2018.

Three Months Ended

March 31,
2018

March 31,
2017

$ Change

% Change

Salaries and employee benefits
$ 15,977,975 $ 13,307,331 $ 2,670,644 20.1
%
Occupancy and equipment expense
3,065,811 2,502,219 563,592 22.5
Professional and data processing fees
2,707,716 2,083,392 624,324 30.0
Acquisition costs
92,539 5,630 86,909 1,543.7
FDIC insurance, other insurance and regulatory fees
756,211 621,242 134,969 21.7
Loan/lease expense
290,747 293,538 (2,791 ) (1.0 )
Net cost of operations of other real estate
131,742 14,230 117,512 825.8
Advertising and marketing
693,239 609,431 83,808 13.8
Bank service charges
440,571 423,901 16,670 3.9
Correspondent banking expense
204,754 198,351 6,403 3.2
CDI amortization expense
304,551 230,867 73,684 31.9
Other
1,197,641 982,985 214,656 21.8
Total noninterest expense
$ 25,863,497 $ 21,273,117 $ 4,590,380 21.6
%


	Three Months Ended
	March 31,		March 31,
	2019		2018		$ Change		% Change
	(dollars in thousands)

Salaries and employee benefits	$	20,879	$	15,978	$	4,901	30.7	%
Occupancy and equipment expense		3,694		3,066		628	20.5
Professional and data processing fees		2,750		2,708		42	1.6
Acquisition costs		—		93		(93)	(100.0)
Post-acquisition compensation, transition and integration costs		134		—		134	100.0
FDIC insurance, other insurance and regulatory fees		964		756		208	27.5
Loan/lease expense		214		291		(77)	(26.5)
Net cost and gains/losses on operations of other real estate		298		132		166	125.8
Advertising and marketing		785		693		92	13.3
Bank service charges		483		440		43	9.8
Correspondent banking expense		204		204		—	—
CDI amortization expense		532		305		227	74.4
Other		1,498		1,197		301	25.1
Total noninterest expense	$	32,435	$	25,863	$	6,572	25.4	%

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

throughout 2019.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the first quarter of ~~2017~~2019 to the first quarter of 2018 by ~~20%~~31%. This increase was primarily related to ~~new hires, merit increases and~~ the addition of SFC Bank employees, new hires and merit increases. Over the ~~Guaranty Bank employees. New~~past year, the Company has added several producers to bolster growth prospects. And, to help support recent and expected growth, the Company is adding to operational infrastructure and investing in additional staffing both at the corporate level and at some of the bank charters. Some of these hires ~~throughout 2017 included roles~~are opportunistic, as the Company takes advantage of talent availability in ~~Information Technology, Accounting, Internal Audit, Trust and Commercial Banking.~~

the marketplace as a result of ongoing industry consolidation.

Occupancy and equipment expense increased ~~23%~~21%, comparing the first quarter of ~~2018~~2019 to the same period of the prior year. The increased expense was ~~mostly~~ due tohigher information technology service contract costs, increases in repairs and maintenance costs and the ~~addition~~additions of ~~Guaranty Bank.~~

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SFC Bank and the Bates Companies.

Professional and data processing fees increased ~~30%~~2%, comparing the first quarter of ~~2018~~2019 to the same period in ~~2017.~~2018. This increased expense was ~~partially~~mostly due to the ~~addition of Guaranty Bank. Additionally, legal~~recent mergers/acquisitions. Legal expense ~~was also~~continues to be elevated due to a legal matter at RB&T where two employees have been charged with wrongdoing in connection with an SBA loan application. The Company anticipates these legal expenses will continue ~~to increase~~ until the court proceedings are completed, which the Company expects to beoccur in ~~late 2018.~~early 2020. Neither RB&T nor the Company have been charged in the case. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing one-time costs and driving recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.

There were no acquisition costs in the first quarter of 2019. Acquisition costs totaled $93 ~~thousand and $6~~ thousand for the first quarter of ~~2018~~2018. These costs were comprised primarily of legal, accounting and ~~2017, respectively.~~investment banking costs related to the mergers/acquisitions.

Post-acquisition costs totaled $134 thousand for the first quarter of 2019. These costs were comprised primarily of personnel costs, IT integration, and data conversion costs related to mergers/acquisitions.

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FDIC insurance, other insurance and regulatory fee expense increased ~~22%~~28%, comparing the first quarter of ~~2018~~2019 to the first quarter of ~~2017.~~2018. The increase in expense was due to the ~~acquisition~~addition of ~~Guaranty Bank.~~

SFC Bank and organic asset growth.

Loan/lease expense decreased ~~1%,~~27% when comparing the first quarter of ~~2018~~2019 to the same quarter of ~~2017.~~2018. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost ofand gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net cost ~~from~~of operations of other real estate totaled $298 thousand for the first quarter of 2019, compared to $132 thousand for the first quarter of ~~2018, compared to net costs of operations of $14 thousand for the~~2018. The first quarter of ~~2017.~~

2019 amount included the write-down of two OREO properties totaling $224 thousand.

Advertising and marketing expense increased ~~14%~~13%, comparing the first quarter of ~~2018~~2019 to the first quarter of ~~2017.~~2018. The increase in expense was primarily due to the addition of ~~Guaranty~~SFC Bank.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to ~~QCBT’s~~QCBT's correspondent banking customer portfolio, increased 4%10% from the first quarter of ~~2017~~2018 to the first quarter of ~~2018. The increase was due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio.~~2019. As transactions volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

Correspondent banking expense ~~increased 3%~~was flat when comparing the first quarter of ~~2018~~2019 to the first quarter of ~~2017 due to both increases in volume and in the number of correspondent banking clients.~~2018. These are direct costs incurred to provide services to ~~QCBT’s~~QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

CDI amortization expense increased ~~32%~~74% when comparing the first quarter of ~~2018~~2019 to the first quarter of ~~2017.~~2018. The increase was due to the ~~acquisition~~addition of ~~Guaranty~~SFC Bank.

Other noninterest expense was up ~~22%~~25% when comparing the first quarter of ~~2018~~2019 to the first quarter of ~~2017.~~2018. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management. A portion of this increase is related to the addition of ~~Guaranty~~SFC Bank.

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

INCOME TAXES

In the first quarter of ~~2018,~~2019, the Company incurred income tax expense of ~~$2.0~~$1.4 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 months ended March 31, ~~2018~~2019 and ~~2017.~~2018.

In the first quarter of 2019, the Company incurred income tax expense of $1.4 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 months ended March 31, 2019 and 2018.
													For the Three Months Ended March 31,
	For the Three Months Ended March 31,												2019				2018
	2018						2017								% of				% of
				% of						% of					Pretax				Pretax
				Pretax						Pretax			Amount		Income		Amount		Income
	Amount			Income			Amount			Income			(dollars in thousands)

Computed "expected" tax expense	$	2,633,669			21.0	%	$	4,051,044			35.0	%	$	3,010	21.0	%	$	2,634	21.0	%
Tax exempt income, net		(943,101	)		(7.5	)		(1,305,427	)		(11.3	)		(1,107)	(7.7)			(943)	(7.5)
Bank-owned life insurance		(87,777	)		(0.7	)		(164,391	)		(1.4	)		(113)	(0.8)			(88)	(0.7)
State income taxes, net of federal benefit, current year		551,468			4.4			408,325			3.5			649	4.5			551	4.4
Tax credits														(39)	(0.3)			—	—
True-up adjustment to year-end provision														(715)	(5.0)			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(132,361	)		(1.1	)		(533,322	)		(4.6	)		(100)	(0.7)			(132)	(1.1)
Other		(30,828	)		(0.2	)		(66,783	)		(0.6	)		(171)	(1.2)			(31)	(0.2)
Federal and state income tax expense	$	1,991,070			15.9	%	$	2,389,446			20.6	%	$	1,414	9.9	%	$	1,991	15.9	%

The effective tax rate for the quarter ended March 31, ~~2018~~2019 was ~~15.9%~~9.9%, which was a ~~4.7%~~6% decrease from the effective tax rate of ~~20.6%~~15.9% for the quarter ended March 31, ~~2017. The Tax Act was enacted on December 22, 2017 and was effective January 1, 2018 reducing the federal corporate tax rate from 35% to 21%.~~

~~FINANCIAL CONDITION~~

~~Following is a table that represents the major categories of~~2018. During the Company’s ~~balance sheet.~~year-end tax preparation process, the

45

As of

March 31, 2018

December 31, 2017

March 31, 2017

(dollars in thousands)

Amount

%

Amount

%

Amount

%

Cash and due from banks
$ 61,846 2 % $ 75,722 2 % $ 56,326 2 %
Federal funds sold and interest-bearing deposits
59,557 1 % 85,962 2 % 173,219 5 %
Securities
638,229 16 % 652,382 16 % 557,646 16 %
Net loans/leases
3,018,370 75 % 2,930,130 74 % 2,403,791 71 %
Other assets
248,312 6 % 238,469 6 % 190,031 6 %
Total assets
$ 4,026,314 100 % $ 3,982,665 100 % $ 3,381,013 100 %

Total deposits
$ 3,280,001 82 % $ 3,266,655 82 % $ 2,805,931 83 %
Total borrowings
334,802 8 % 309,480 8 % 231,534 7 %
Other liabilities
51,083 1 % 53,243 1 % 47,708 1 %
Total stockholders' equity
360,428 9 % 353,287 9 % 295,840 9 %
Total liabilities and stockholders' equity
$ 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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Company identified a one-time true-up adjustment for $715 thousand. Excluding this, the Company’s effective tax rate was approximately 15.0%.

FINANCIAL CONDITION

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


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

		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits		$	292,559	6	%	$	245,119	5	%	$	121,403	3	%
Securities			655,749	13	%		662,969	13	%		638,229	16	%
Net loans/leases			3,758,268	74	%		3,692,907	75	%		3,018,370	75	%
Other assets			360,086	7	%		348,715	7	%		248,312	6	%
Total assets		$	5,066,662	100	%	$	4,949,710	100	%	$	4,026,314	100	%

Total deposits		$	4,194,220	83	%	$	3,977,031	80	%	$	3,280,001	82	%
Total borrowings			282,994	5	%		404,968	8	%		334,802	8	%
Other liabilities			101,041	2	%		94,573	2	%		51,083	1	%
Total stockholders' equity			488,407	10	%		473,138	10	%		360,428	9	%
Total liabilities and stockholders' equity		$	5,066,662	100	%	$	4,949,710	100	%	$	4,026,314	100	%

During the first quarter of 2019, the Company's total assets increased $117 million, or 2.4%, to a total of $5.1 billion. The Company grew its net loan/lease portfolio $65 million, which was primarily funded by an increase in core deposit growth. Deposits grew $217 million in the first quarter of 2019, while borrowings decreased $122 million in the first quarter of 2019.

INVESTMENT SECURITIES

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

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

As of

March 31, 2018

December 31, 2017

March 31, 2017

Amount

%

Amount

%

Amount

%

(dollars in thousands)

U.S. govt. sponsored agency securities
$ 36,868 6 % $ 38,097 6 % $ 47,556 9 %
Municipal securities
438,736 69 % 445,049 68 % 356,776 64 %
Residential mortgage-backed and related securities
157,289 25 % 163,301 25 % 147,504 26 %
Other securities
5,336 1 % 5,935 1 % 5,810 1 %
$ 638,229 100 % $ 652,382 100 % $ 557,646 100 %

Securities as a % of Total Assets
15.85 % 16.38 % 16.49 %
Net Unrealized Losses as a % of Amortized Cost
(1.01 )% (0.13 )% (0.79 )%
Duration (in years)
6.9 7.0 6.1
Quarterly Yield on Investment Securities (TEY)
3.65 % 3.82 % 3.73 %
Quarterly Yield on Investment Securities (GAAP)
3.03 % 2.77 % 2.74 %


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

U.S. govt. sponsored agency securities	$	35,843		5	%	$	36,411		5	%	$	36,868		6	%
Municipal securities		450,376		69	%		459,409		70	%		438,736		68	%
Residential mortgage-backed and related securities		161,692		25	%		159,249		24	%		157,289		25	%
Other securities		7,838		1	%		7,900		1	%		5,336		1	%
	$	655,749		100	%	$	662,969		100	%	$	638,229		100	%

Securities as a % of Total Assets		12.94	%				13.39	%				15.85	%
Net Unrealized Gains (Losses) as a % of Amortized Cost		1.46	%				(1.01)	%				(1.01)	%
Duration (in years)		6.6					6.8					6.9
Yield on investment securities (tax equivalent)		3.74	%				3.58	%				3.65	%
Quarterly Yield on Investment Securities (GAAP)		3.18	%				2.85	%				3.03	%

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

The duration of the securities portfolio shortened modestly with the TEY on the portfolio ~~decreasing 17~~increasing 16 bps in the first ~~quarter~~three months of ~~2018;~~2019; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 2633 basis points.

The Company has not invested in ~~private~~non-agency commercial or residential 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~~Company's investment securities.

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LOANS/LEASES~~LOANS/LEASES~~

Total loans/leases grew ~~12.2%~~7.1% on an annualized basis during the first quarter of ~~2018.~~2019. The mix of the loan/lease types within the ~~Company’s~~Company's loan/lease portfolio is presented in the following table.

As of

March 31, 2018

December 31, 2017

March 31, 2017

Amount

%

Amount

%

Amount

%

(dollars in thousands)

C&I loans
$ 1,201,087 39 % $ 1,134,516 38 % $ 851,578 35 %
CRE loans
1,357,703 45 % 1,303,492 44 % 1,106,842 46 %
Direct financing leases
137,614 5 % 141,448 5 % 159,368 7 %
Residential real estate loans
254,484 8 % 258,646 9 % 231,326 9 %
Installment and other consumer loans
95,912 3 % 118,611 4 % 78,771 3 %

Total loans/leases
$ 3,046,800 100 % $ 2,956,713 100 % $ 2,427,885 100 %

Plus deferred loan/lease origination costs, net of fees
8,103 7,773 7,965
Less allowance
(36,533 ) (34,356 ) (32,059 )

Net loans/leases
$ 3,018,370 $ 2,930,130 $ 2,403,791


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

C&I loans	$	1,479,247	39	%	$	1,429,410	38	%	$	1,201,087	39	%
CRE loans		1,790,845	47	%		1,766,111	48	%		1,357,703	45	%
Direct financing leases		108,543	3	%		117,969	3	%		137,614	5	%
Residential real estate loans		288,502	8	%		290,759	8	%		254,484	8	%
Installment and other consumer loans		123,087	3	%		119,381	3	%		95,912	3	%
Total loans/leases	$	3,790,224	100	%	$	3,723,630	100	%	$	3,046,800	100	%
Plus deferred loan/lease origination costs, net of fees		9,208				9,124				8,103
Less allowance		(41,164)				(39,847)				(36,533)
Net loans/leases	$	3,758,268			$	3,692,907			$	3,018,370

As CRE loans have historically been the ~~Company’s~~Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the ~~Company’s~~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

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risk. As of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, approximately ~~26%~~27% and 28% 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 ~~$66.6~~$50 million induring the current quarter.

A syndicated loan is a commercial loan provided by a group of lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. The nationally syndicated loans invested in by the Company consist of fully funded, highly liquid term loans for which there is a liquid secondary market. As of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, the amount of nationally syndicated loans totaled ~~$39.9~~$50.7 million and ~~$51.2~~$40.8 million, respectively.

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

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


																As of March 31,				As of December 31,				As of March 31,
	As of March 31,					As of December 31,					As of March 31,					2019				2018				2018
	2018					2017					2017					Amount		%		Amount		%		Amount		%
	Amount		%			Amount		%			Amount		%			(dollars in thousands)
	(dollars in thousands)
Lessors of Nonresidential Buildings	$	435,919		32	%	$	388,648		30	%	$	327,077		30	%	$	613,024	34	%	$	612,327	34	%	$	435,919	32	%
Lessors of Residential Buildings		221,978		16	%		199,047		15	%		147,335		13	%		355,850	20	%		346,270	19	%		221,978	16	%
Hotels		70,887		5	%		70,447		5	%		37,998		4	%		81,107	5	%		81,345	5	%		70,887	5	%
Nonresidential Property Managers		56,572		4	%		51,621		4	%		57,112		5	%		65,736	4	%		69,885	4	%		56,572	4	%
New Housing For-Sale Builders		52,951		4	%		61,480		5	%		57,733		5	%		47,276	3	%		47,598	3	%		52,951	4	%
Land Subdivision		45,356		3	%		44,192		3	%		47,254		4	%		46,042	3	%		48,378	3	%		45,356	3	%
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	%		581,810	31	%		560,308	32	%		474,040	36	%

Total CRE Loans	$	1,357,703		100	%	$	1,303,492		100	%	$	1,106,842		100	%	$	1,790,845	100	%	$	1,766,111	100	%	$	1,357,703	100	%

* “Other” consists of all other industries. None of these had concentrations greater than ~~$27.2~~$37.0 million, or approximately 2%2.1% of total CRE loans in the most recent period presented.

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

●·

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

●·

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

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


																As of March 31,				As of December 31,				As of March 31,
	As of March 31,					As of December 31,					As of March 31,					2019				2018				2018
	2018					2017					2017					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	%	$	43,489	19	%	$	40,588	18	%	$	28,219	13	%
Manufacturing - General																	16,952	7	%		16,760	7	%		16,624	7	%
Construction - General		18,067		8	%		18,705		9	%		17,914		9	%		16,295	7	%		17,236	8	%		18,067	8	%
Manufacturing - General		16,624		7	%		16,571		8	%		18,067		9	%
Food Processing Equipment		13,270		6	%		12,965		6	%		14,102		7	%		15,622	7	%		15,334	7	%		13,270	6	%
Marine - Travelifts		12,843		6	%		10,802		5	%		8,132		4	%		11,819	5	%		12,370	5	%		12,843	6	%
Trailers																	9,603	4	%		9,842	4	%		9,161	4	%
Computer Hardware		10,694		5	%		11,340		5	%		10,094		5	%		8,350	4	%		9,166	4	%		10,694	5	%
Trailers		9,161		4	%		8,983		4	%		9,465		5	%
Manufacturing - CNC		7,239		3	%		6,742		3	%		6,812		3	%		6,702	3	%		6,616	3	%		7,239	3	%
Restaurant		6,844		3	%		7,107		3	%		7,841		4	%
Crane																	5,749	3	%		5,726	3	%		5,044	2	%
Other *		100,693		45	%		102,094		47	%		101,375		49	%		93,775	41	%		95,008	41	%		102,493	46	%

Total m2 loans and leases	$	223,654		100	%	$	215,236		100	%	$	208,459		100	%	$	228,356	100	%	$	228,646	100	%	$	223,654	100	%

* ~~“Other”~~“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~~Company's loan and lease portfolio.

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 are presented as follows:

Three Months Ended

March 31, 2018

March 31, 2017

(dollars in thousands)

Balance, beginning
$ 34,356 $ 30,757
Provisions charged to expense
2,540 2,105
Loans/leases charged off
(436 ) (893 )
Recoveries on loans/leases previously charged off
73 90
Balance, ending
$ 36,533 $ 32,059


	Three Months Ended
	March 31, 2019		March 31, 2018
	(dollars in thousands)

Balance, beginning	$	39,847	$	34,356
Provisions charged to expense		2,134		2,540
Loans/leases charged off		(1,060)		(436)
Recoveries on loans/leases previously charged off		243		73
Balance, ending	$	41,164	$	36,533

The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, ~~past~~historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, ~~governmental~~government guarantees and other factors that, in ~~management’s~~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~~quarterly with specific detailed reviews completed on all ~~loans~~credits risk-rated ~~worse~~less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the ~~Company’s~~Company's Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2017,~~2018, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the ~~loan review~~credit administration staff and reported to management and the board of directors.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

As of

Internally Assigned Risk Rating *

March 31, 2018

December 31, 2017

March 31, 2017

(dollars in thousands)

Special Mention (Rating 6)
$ 42,926 $ 31,024 $ 22,841
Substandard (Rating 7)
39,815 43,435 50,810
Doubtful (Rating 8)
- 271 -
$ 82,741 $ 74,730 $ 73,651

Criticized Loans **
$ 82,741 $ 74,730 $ 73,651
Classified Loans ***
$ 39,815 $ 43,706 $ 50,810

Criticized Loans as a % of Total Loans/Leases
2.79 % 2.52 % 3.02 %
Classified Loans as a % of Total Loans/Leases
1.34 % 1.47 % 2.09 %


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

Special Mention (Rating 6)	$	24,769		$	42,058		$	42,926
Substandard (Rating 7)		43,696			28,593			39,815
Doubtful (Rating 8)		—			—			—
	$	68,465		$	70,651		$	82,741

Criticized Loans **	$	68,465		$	70,651		$	82,741
Classified Loans ***	$	43,696		$	28,593		$	39,815

Criticized Loans as a % of Total Loans/Leases		1.80	%		1.89	%		2.79	%
Classified Loans as a % of Total Loans/Leases		1.16	%		0.77	%		1.34	%

* 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 ~~decrease~~53% increase in classified loans ~~during~~from December 31, 2018 to March 31, 2019. The increase was due to one C&I loan relationship and one CRE loan relationship that were downgraded from a rating of special mention to substandard in the first ~~three months~~quarter of ~~2018.~~2019. Criticized loans ~~increased 11%~~decreased 3% during the same ~~period due to one large credit that was added in the third quarter 2017.~~period. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

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

As of

March 31, 2018

December 31, 2017

March 31, 2017

Allowance / Gross Loans/Leases
1.20 % 1.16 % 1.32 %
Allowance / NPLs *
202.11 % 184.28 % 149.89 %

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


	As of
	March 31, 2019		December 31, 2018		March 31, 2018
Allowance / Gross Loans/Leases	1.08	%	1.07	%	1.20	%
Allowance / NPLs	238.48	%	214.80	%	202.11	%

Although management believes that the allowance at March 31, ~~2018~~2019 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the ~~Company’s~~Company's loan/lease portfolio.

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

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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, loans acquired through the acquisitions of CSB and Guaranty Bank are recorded at fair value; therefore, no allowance is associated with the acquired loans at acquisition. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount ($7.3 million and $8.0 million at 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 1.20% to 1.43% as of March 31, 2018 and increases from 1.32% to 1.64% as of March 31, 2017.. This elimination of the allowance associated with acquired loans also resulted in a decrease of the allowance to NPLs ratio, as 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.~~

NONPERFORMING ASSETS

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


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

Nonaccrual loans/leases (1) (2)	$	13,406		$	14,260		$	12,759
Accruing loans/leases past due 90 days or more (3)		61			632			41
TDRs - accruing		3,794			3,659			5,276
Total NPLs		17,261			18,551			18,076
OREO		9,110			9,378			12,750
Other repossessed assets		—			8			200
Total NPAs	$	26,371		$	27,937		$	31,026

NPLs to total loans/leases		0.45	%		0.50	%		0.59	%
NPAs to total loans/leases plus repossessed property		0.69	%		0.75	%		1.01	%
NPAs to total assets		0.52	%		0.56	%		0.77	%

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 $1.5 million at March 31, 2019, $2.3 million at December 31, 2018, and $2.6 million at March 31, ~~2018, $2.3 million~~2018.

(3)

Includes TDRs of $0 thousand at March 31, 2019, $496 thousand at December 31, ~~2017,~~2018, and ~~$2.4 million~~$0 at March 31, ~~2017.~~2018.

.

NPAs at March 31, ~~2018~~2019 were ~~$31.0~~$26.4 million, ~~which was~~ down ~~$1.3~~$1.6 million from December 31, ~~2017~~2018 and ~~up $3.7~~down $4.7 million from March 31, ~~2017. This increase from prior year was due to the addition of one large credit that was added in the third quarter 2017.~~

2018.

The ratio of NPAs to total assets was 0.52% at March 31, 2019, down from 0.56% at December 31, 2018 and down from 0.77% at March 31, ~~2018, which was down from 0.81% at both December 31, 2017 and March 31, 2017.~~

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

2018.

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

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

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

DEPOSITS~~DEPOSITS~~

Deposits increased ~~$13.3~~$217.2 million during the first quarter of ~~2018.~~2019, primarily due to growth in correspondent bank deposits and growth in large customers’ balances. The table below presents the composition of the ~~Company’s~~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 %


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

Noninterest bearing demand deposits	$	821,599	20	%	$	791,102	20	%	$	784,815	24	%
Interest bearing demand deposits		2,334,474	55	%		2,204,205	55	%		1,789,019	55	%
Time deposits		719,286	17	%		704,903	18	%		496,644	15	%
Brokered deposits		318,861	8	%		276,821	7	%		209,523	6	%
	$	4,194,220	100	%	$	3,977,031	100	%	$	3,280,001	100	%

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

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

51

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

BORROWINGS~~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~~Company's short-term borrowings.

As of

March 31, 2018

December 31, 2017

March 31, 2017

(dollars in thousands)

Overnight repurchase agreements with customers
$ 3,820 $ 7,003 $ 7,170
Federal funds purchased
13,040 6,990 12,300
$ 16,860 $ 13,993 $ 19,470


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

Overnight repurchase agreements	$	3,056	$	2,084	$	3,820
Federal funds purchased		12,830		26,690		13,040
	$	15,886	$	28,774	$	16,860

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

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

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

As of

March 31, 2018

December 31, 2017

March 31, 2017

(dollars in thousands)

Term FHLB advances
$ 56,600 $ 56,600 $ 59,000
Overnight FHLB advances
159,745 135,400 47,550
$ 216,345 $ 192,000 $ 106,550


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

Term FHLB advances	$	66,380	$	76,327	$	56,600
Overnight FHLB advances		59,800		190,165		159,745
	$	126,180	$	266,492	$	216,345

Term FHLB advances ~~remained the same~~decreased $9.9 million in the current quarter, as incompared to the prior quarter. Overnight FHLB advances ~~have increased~~decreased by ~~$24.3~~$130.4 million ~~due to the strong loan and lease growth, which outpaced the Company’s deposit growth~~ in the first quarter of ~~2018.~~

2019 due to strong deposit growth.

The ~~table below presents the composition~~Company has other borrowings which are wholesale structured repurchase agreements totaling $35.0 milion as of ~~the Company’s other borrowings.~~

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~~March 31, 2019, December 31, 2018 and March 31, 2018. The wholesale structured ~~repos which~~repurchase agreements are utilized as an alternative funding source to FHLB advances and customer deposits. ~~Structured repos~~Wholesale structured repurchase agreements are collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.

59

~~Table~~The Company has subordinated notes totaling $68.2 million as of ~~Contents~~

~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

~~As described in~~March 31, 2019 and $4.8 million as of December 31, 2018. There were no outstanding subordinated notes as of March 31, 2018. See Note 115 to the Company’s Consolidated Financial Statements ~~included in~~for additional information regarding our subordinated notes and the ~~Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company has outstanding~~repayment of our term notes and ~~an available revolving line of credit. As of March 31, 2018, the term debt had been paid down to $29.1 million, as scheduled. The term notes and~~our revolving line of credit ~~were used to help fund~~during the ~~CSB and Guaranty Bank acquisitions. As of both~~quarter ended 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 (4.82% at March 31, 2018).

2019.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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~~Company's combined wholesale funding portfolio.

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 %


	March 31, 2019				December 31, 2018
			Weighted				Weighted
			Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate
	(dollars in thousands)
Year ending December 31:
2019	$	393,464	2.38	%	$	510,735	2.35	%
2020		67,557	2.35			48,557	2.31
2021		15,050	2.31			15,050	2.31
2022		3,970	2.00			3,970	2.00
Total Wholesale Funding	$	480,041	2.37	%	$	578,312	2.35	%

During the first three months of ~~2018,~~2019, wholesale funding decreased $98.3 million. FHLB overnight advances and term advances decreased $130.4 million and $10 million in the first quarter of 2019, respectively. Brokered deposits increased ~~$128.0 million. Year-to-date,~~$42.1 million in the ~~Company has repaid $25.4 million~~first quarter 2019 as some of ~~term borrowings at maturity. However, this~~the banks rotated some overnight advances to short-term brokered deposits as the latter was ~~more than offset by growth in short-term borrowings used to temporarily fund strong earning asset growth.~~cheaper.

STOCKHOLDERS' EQUITY~~STOCKHOLDERS’ EQUITY~~

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


	As of									As of
	March 31, 2018			December 31, 2017			March 31, 2017			March 31, 2019			December 31, 2018			March 31, 2018
	Amount			Amount			Amount			(dollars in thousands)
	(dollars in thousands)
Common stock	$	13,937		$	13,918		$	13,161		$	15,755		$	15,718		$	13,937
Additional paid in capital		189,685			189,078			157,582			271,673			270,761			189,685
Retained earnings		162,346			151,962			127,145			204,179			192,203			162,346
AOCI (loss)		(5,540	)		(1,671	)		(2,048	)		(3,200)			(5,544)			(5,540)
Total stockholders' equity	$	360,428		$	353,287		$	295,840		$	488,407		$	473,138		$	360,428

TCE* / TA		8.10	%		8.01	%		8.20	%
TCE / TA ratio (non-GAAP)											7.92	%		7.78	%		8.10	%

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for ~~customers’~~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 ~~$136.5~~$249.8 million during the first quarter of ~~2018~~2019 and ~~$164.0~~$159.7 million during the full year of ~~2017.~~2018. The ~~Company’s~~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).~~

portfolio.

At March 31, 2019, the subsidiary banks had 32 lines of credit totaling $363.8 million, of which $1.8 million was secured and $362.0 million was unsecured. At March 31, 2019, the full $363.8 million was available.

At December 31, 2018, the subsidiary banks had 33 lines of credit totaling ~~$372.2~~$363.7 million, of which ~~$3.2~~$1.7 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~~$362.0 million was unsecured. At December 31, ~~2017,~~2018, $343.7 million of the ~~full $375.0~~$363.7 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, ~~2018.~~2019. At March 31, ~~2018,~~2019, the full $10.0 million was available.

As of March 31, ~~2018,~~2019, the Company had ~~$417.5~~$456.5 million in average correspondent banking deposits spread over ~~192~~196 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.

Investing activities used cash of ~~$60.0~~$112.2 million during the first three months of ~~2018,~~2019, compared to ~~$102.6~~$60.0 million for the same period of ~~2017.~~2018. The net decrease in federal funds sold was ~~$15.7~~$24.5 million for the first three months of ~~2018,~~2019, compared to a net decrease of ~~$6.5~~$15.7 million for the same period of ~~2017.~~2018. The net ~~decrease~~increase in interest-bearing deposits at financial institutions was ~~$10.7~~$81.0 million for the first three months of ~~2018,~~2019, compared to a net ~~increase~~decrease of ~~$93.5~~$10.7 million for the same period of ~~2017.~~2018. Proceeds from calls, maturities, and paydowns of securities were ~~$13.64~~$14.9 million for the first three months of ~~2018,~~2019, compared to ~~$25.9~~$13.6 million for the same period of ~~2017.~~2018. Purchases of securities used cash of ~~$7.1~~$4.1 million for the first three months of ~~2018,~~2019, compared to ~~$12.1~~$7.1 million for the same period of ~~2017.~~2018. The net increase in loans/leases used cash of ~~$90.4~~$65.8 million for the first three months of ~~2018~~2019 compared to ~~$29.2~~$90.4 million for the same period of ~~2017.~~

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~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

2018.

Financing activities provided cash of ~~$38.3~~$94.6 million for the first three months of ~~2018,~~2019, compared to ~~$77.5~~$38.3 million for same period of ~~2017.~~2018. Net increases in deposits totaled ~~$13.4~~$217.3 million for the first three months of ~~2018,~~2019, compared to ~~$136.7~~$13.4 million for the same period of ~~2017.~~2018. During the first three months of ~~2018,~~2019, the ~~Company’s~~Company's short-term borrowings ~~increased~~decreased $12.9 million, compared to an increase of $2.9 ~~million, while they decreased $20.5~~ million for the same period of ~~2017.~~2018. In the first three months of 2019, the Company decreased short-term and overnight FHLB advances by $130.4 million. Maturities and principal payments on FHLB term advances totaled $15.0 million and on other borrowings totaled $32.3 million in the first three months of 2019. During the first three months of 2019, proceeds from subordinated notes were $63.4 million. In the first three months of 2018, the Company increased FHLB advances by $24.3 million short-term and overnight advances, while borrowing maturities and principal payments on borrowings totaled $1.9 million. ~~In the first three months~~

54

Table of ~~2017, the Company reduced FHLB advances and borrowings by $39.0 million through a mixture of maturities, prepayments, and debt retirement.~~Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Total cash provided by operating activities was ~~$7.0~~$8.6 million for the first three months of ~~2018,~~2019, compared to ~~$10.8~~$7.9 million for the same period of ~~2017.~~

2018.

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

securities and, most recently, subordinated notes.

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


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

QCR Holdings Statutory Trust II	February 2004	$	10,310	$	10,310	2.85% over 3-month LIBOR	5.44	%	5.65	%
QCR Holdings Statutory Trust III	February 2004		8,248		8,248	2.85% over 3-month LIBOR	5.44	%	5.65	%
QCR Holdings Statutory Trust V	February 2006		10,310		10,310	1.55% over 3-month LIBOR	4.34	%	3.99	%
Community National Statutory Trust II	September 2004		3,093		3,093	2.17% over 3-month LIBOR	4.80	%	4.96	%
Community National Statutory Trust III	March 2007		3,609		3,609	1.75% over 3-month LIBOR	4.36	%	4.54	%
Guaranty Bankshares Statutory Trust I	May 2005		4,640		4,640	1.75% over 3-month LIBOR	4.36	%	4.54	%
		$	40,210	$	40,210	Weighted Average Rate	4.89%	%	4.94	%

Name
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
5.16% 4.54%
QCR Holdings Statutory Trust III
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
3.27% 2.91%
Community National Statutory Trust II
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
3.87% 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%
$ 40,210,000 $ 40,210,000
Weighted Average Rate
4.35% 3.82%

As described in Note 4 to the Consolidated Financial Statements, on June 21, 2018 the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities. The ~~Company assumed the~~floating rate trust preferred securities ~~originally issued by Community National~~are tied to 3-month LIBOR, and the interest rate swaps utilize 3-month LIBOR, so the hedge is effective. The interest rate swaps are designated as a cash flow hedge in ~~connection~~accordance with ~~its acquisition in May 2013. The Company assumed~~ASC 815. See Note 4 for the ~~trust preferred securities originally issued by Guaranty in connection with~~notional amount swapped and 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. As of March 31, 2018, the remaining discount was $2.7 million.

related effective fixed rates.

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. Refer to Note 79 of the Consolidated Financial Statements for additional information regarding regulatory capital.

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~~Part I~~

~~Item 2~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

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

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the ~~Company’s~~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.

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Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The ~~Company’s~~Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. ~~The factors~~Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and Item 1A of Part II of this report. In addition to the risk factors described in that section, there are other factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

●·

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

●·

Changes in the interest rate environment.

●·

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

●·

The impact of cybersecurity risks.

●·

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

●·

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

●·

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

●·

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

●·

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

·

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

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, 2018.

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Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

In an attempt to manage the ~~Company’s~~Company's exposure to changes in interest rates, management monitors the ~~Company’s~~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~~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’~~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~~Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

In adjusting the ~~Company’s~~Company's asset/liability position, the board of directors and management attempt to manage the ~~Company’s~~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~~Company's interest rate risk position somewhat in order to increase its net interest margin. The ~~Company’s~~Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the ~~Company’s~~Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300, ~~400,~~ and ~~500~~400 basis point upward shifts; and a 100 and 200 basis point downward ~~shift~~shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.

The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 and 200 basis point downward ~~shift.~~shifts. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve.

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~~Part I~~

~~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 (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous ~~shift~~shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis.

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

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Table of Contents

Part I

Item 3

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

NET INTEREST INCOME EXPOSURE in YEAR 1

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%


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

100 basis point downward shift	(10.0)	%	0.6	%	0.7	%	0.3	%
200 basis point upward shift	(10.0)	%	(2.1)	%	(2.7)	%	(3.7)	%
300 basis point upward shock	(25.0)	%	(6.2)	%	(9.0)	%	(8.4)	%

The simulation is well within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at March 31, ~~2018~~2019 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario ~~didn’t~~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’s~~Company's interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the ~~Company’s~~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~~Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the ~~Company’s~~Company's disclosure controls and procedures (as defined in Rule ~~13a-15(e)~~13a‑15(e) and ~~15d-15(e)~~15d‑15(e) promulgated under the Exchange Act of 1934) as of March 31, ~~2018.~~2019. Based on that evaluation, the ~~Company’s~~Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the ~~Company’s~~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~~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~~Company's internal control over financial reporting.

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Table of Contents

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

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

Item 1A Risk Factors

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

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

60

~~Item 1~~

~~Legal Proceedings~~

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

~~Item 1A~~

~~Risk Factors~~

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

~~Item 2~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~None~~

~~Item 3~~

~~Defaults Upon Senior Securities~~

~~None~~

~~Item 4~~

~~Mine Safety Disclosures~~

~~Not applicable~~

~~Item 5~~

~~Other Information~~

~~None~~

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~~Table of Contents~~

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION ~~- continued~~

Item 6 Exhibits


3.1	Bylaws of QCR Holdings, Inc., as amended and restated (incorporated by reference to Exhibit 3.1 to the Company’s 8-K filed with the SEC on February 19, 2019).

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


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


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


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


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

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Table of Contents

SIGNATURES~~SIGNATURES~~

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

QCR HOLDINGS, INC.

(Registrant)


Date	May 9, ~~2018~~ 2019		/s/ Douglas M. Hultquist
			Douglas M. Hultquist, President
			Chief Executive Officer



Date	May 9, ~~2018~~ 2019		/s/ Todd A. Gipple
			Todd A. Gipple, Executive Vice President
			Chief Operating Officer
			Chief Financial Officer


Date	May 9, ~~2018~~ 2019		/s/ Elizabeth A. Grabin
			Elizabeth A. Grabin, ~~First~~Senior Vice President
		~~Director of Financial Reporting~~	Chief Accounting Officer
		~~Principal Accounting Officer~~

69

62

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


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