QCR HOLDINGS INC - Quarter Report: 2014 September (Form 10-Q)

qcrh20140930_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

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

For the transition period from to________

Commission file number 0-22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


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

3551 7^th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 743-7724

(Registrant’s telephone number, including area code)

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

Yes [ X ] No [ ]

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

Yes [ X ] No [ ]

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

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ X ]

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

Yes [ ] No [ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of November 1, 2014, the Registrant had outstanding 7,942,188 shares of common stock, $1.00 par value per share.

QCR HOLDINGS, INC. AND SUBSIDIARIES

INDEX

			Page Number(s)
Part I	FINANCIAL INFORMATION

	Item 1	Consolidated Financial Statements (Unaudited)

		Consolidated Balance Sheets As of September 30, 2014 and December 31, 2013	2

		Consolidated Statements of Income For the Three Months Ended September 30, 2014 and 2013	3

		Consolidated Statements of Income For the Nine Months Ended September 30, 2014 and 2013	4

		Consolidated Statements of Comprehensive Income (Loss) For the Three and Nine Months Ended September 30, 2014 and 2013	5

		Consolidated Statements of Changes in Stockholders' Equity For the Nine Months Ended September 30, 2014 and 2013	6-7

		Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2014 and 2013	8-9

		Notes to the Consolidated Financial Statements	10-34

	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	35-64

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	65-67

	Item 4	Controls and Procedures	68

Part II	OTHER INFORMATION

	Item 1	Legal Proceedings	69

	Item 1A	Risk Factors	69

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	69

	Item 3	Defaults upon Senior Securities	69

	Item 4	Mine Safety Disclosures	69

	Item 5	Other Information	69

	Item 6	Exhibits	70

Signatures			71

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of September 30, 2014 and December 31, 2013

	September 30,			December 31,
	2014			2013
ASSETS
Cash and due from banks	$	42,326,177		$	41,950,790
Federal funds sold		29,760,000			39,435,000
Interest-bearing deposits at financial institutions		34,631,773			33,044,917

Securities held to maturity, at amortized cost		185,840,139			145,451,895
Securities available for sale, at fair value		466,944,567			551,758,458
Total securities		652,784,706			697,210,353

Loans receivable held for sale		1,642,300			1,358,290
Loans/leases receivable held for investment		1,571,226,845			1,458,921,268
Gross loans/leases receivable		1,572,869,145			1,460,279,558
Less allowance for estimated losses on loans/leases		(22,767,917	)		(21,448,048	)
Net loans/leases receivable		1,550,101,228			1,438,831,510

Premises and equipment, net		36,001,748			36,755,364
Goodwill		3,222,688			3,222,688
Core deposit intangible		1,720,799			1,870,433
Bank-owned life insurance		53,278,942			52,002,041
Restricted investment securities		15,303,175			17,027,625
Other real estate owned, net		10,679,847			9,729,053
Other assets		20,784,470			23,873,150
Total assets	$	2,450,595,553		$	2,394,952,924

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	535,967,035		$	542,566,087
Interest-bearing		1,177,900,358			1,104,425,156
Total deposits		1,713,867,393			1,646,991,243

Short-term borrowings		162,186,698			149,292,967
Federal Home Loan Bank advances		196,500,000			231,350,000
Other borrowings		151,455,209			142,448,362
Junior subordinated debentures		40,389,809			40,289,830
Other liabilities		48,016,468			37,003,742
Total liabilities		2,312,415,577			2,247,376,144

STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; shares authorized 250,000		-			29,867
September 2014 - 0 shares issued and outstanding
December 2013 - 29,867 shares issued and outstanding
Common stock, $1 par value; shares authorized 20,000,000		8,058,059			8,005,708
September 2014 - 8,058,059 shares issued and 7,936,813 outstanding
December 2013 - 8,005,708 shares issued and 7,884,462 outstanding
Additional paid-in capital		61,277,831			90,154,528
Retained earnings		75,199,959			64,637,173
Accumulated other comprehensive loss:
Securities available for sale		(4,596,938	)		(13,643,986	)
Interest rate cap derivatives		(152,425	)		-
Less treasury stock, September 2014 and December 2013 - 121,246 common shares, at cost		(1,606,510	)		(1,606,510	)
Total stockholders' equity		138,179,976			147,576,780
Total liabilities and stockholders' equity	$	2,450,595,553		$	2,394,952,924

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended September 30,

	2014		2013
Interest and dividend income:
Loans/leases, including fees	$	17,735,190	$	18,262,579
Securities:
Taxable		2,327,836		2,417,515
Nontaxable		1,531,534		1,090,880
Interest-bearing deposits at financial institutions		66,397		72,808
Restricted investment securities		128,153		143,640
Federal funds sold		7,532		8,821
Total interest and dividend income		21,796,642		21,996,243

Interest expense:
Deposits		1,168,385		1,393,745
Short-term borrowings		64,665		57,277
Federal Home Loan Bank advances		1,497,456		1,704,824
Other borrowings		1,279,626		1,201,498
Junior subordinated debentures		311,179		328,563
Total interest expense		4,321,311		4,685,907

Net interest income		17,475,331		17,310,336

Provision for loan/lease losses		1,063,323		1,366,984
Net interest income after provision for loan/lease losses		16,412,008		15,943,352

Noninterest income:
Trust department fees		1,355,700		1,312,349
Investment advisory and management fees		726,908		634,446
Deposit service fees		1,168,961		1,228,685
Gains on sales of residential real estate loans		120,627		184,596
Gains on sales government guaranteed portions of loans		158,736		338,338
Securities gains		19,429		416,936
Earnings on bank-owned life insurance		434,065		466,028
Income (losses) on other real estate owned, net		30,596		(36,745	)
Other		1,052,620		1,390,020
Total noninterest income		5,067,642		5,934,653

Noninterest expense:
Salaries and employee benefits		10,358,783		9,802,712
Occupancy and equipment expense		1,805,949		1,914,996
Professional and data processing fees		1,530,139		1,902,799
FDIC and other insurance		711,792		712,954
Loan/lease expense		184,908		396,477
Advertising and marketing		555,076		406,085
Postage and telephone		146,759		276,580
Stationery and supplies		138,377		143,226
Bank service charges		337,067		306,539
Acquisition and data conversion costs		-		388,663
Other		619,259		776,237
Total noninterest expense		16,388,109		17,027,268

Net income before income taxes		5,091,541		4,850,737
Federal and state income tax expense		1,028,876		1,038,793
Net income	$	4,062,665	$	3,811,944

Less: Preferred stock dividends		-		810,837
Net income attributable to QCR Holdings, Inc. common stockholders	$	4,062,665	$	3,001,107

Earnings per common share attributable to QCR Holdings, Inc. common shareholders
Basic	$	0.51	$	0.52
Diluted	$	0.50	$	0.51

Weighted average common shares outstanding		7,931,944		5,806,019
Weighted average common and common equivalent shares outstanding		8,053,985		5,915,279

Cash dividends declared per common share	$	-	$	-

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Nine Months Ended September 30,

	2014			2013
Interest and dividend income:
Loans/leases, including fees	$	51,379,586		$	49,721,011
Securities:
Taxable		7,484,279			7,507,796
Nontaxable		4,434,005			2,837,453
Interest-bearing deposits at financial institutions		228,167			194,286
Restricted investment securities		396,648			399,896
Federal funds sold		14,544			12,684
Total interest and dividend income		63,937,229			60,673,126

Interest expense:
Deposits		3,371,593			3,687,391
Short-term borrowings		177,172			224,979
Federal Home Loan Bank advances		4,549,412			5,164,258
Other borrowings		3,625,751			3,555,146
Junior subordinated debentures		923,386			831,647
Total interest expense		12,647,314			13,463,421

Net interest income		51,289,915			47,209,705

Provision for loan/lease losses		3,159,364			3,944,903
Net interest income after provision for loan/lease losses		48,130,551			43,264,802

Noninterest income:
Trust department fees		4,300,456			3,549,200
Investment advisory and management fees		2,086,758			1,938,881
Deposit service fees		3,306,769			3,190,731
Gains on sales of residential real estate loans		317,085			722,368
Gains on sales government guaranteed portions of loans		860,923			1,949,300
Securities gains		40,625			433,396
Earnings on bank-owned life insurance		1,276,901			1,328,598
Bargain purchase gain on Community National Acquisition		-			1,841,385
Losses on other real estate owned, net		(114,109	)		(566,714	)
Other		3,083,288			3,700,293
Total noninterest income		15,158,696			18,087,438

Noninterest expense:
Salaries and employee benefits		30,298,892			27,731,628
Occupancy and equipment expense		5,539,208			4,930,707
Professional and data processing fees		4,518,460			4,481,613
FDIC and other insurance		2,121,907			1,896,255
Loan/lease expense		908,036			893,436
Advertising and marketing		1,394,211			1,082,694
Postage and telephone		695,555			752,882
Stationery and supplies		435,763			404,614
Bank service charges		959,496			866,379
Acquisition and data conversion costs		-			1,177,567
Other		1,763,530			2,002,342
Total noninterest expense		48,635,058			46,220,117

Net income before income taxes		14,654,189			15,132,123
Federal and state income tax expense		2,694,473			4,009,804
Net income	$	11,959,716		$	11,122,319

Less: Preferred stock dividends		1,081,877			2,432,512
Net income attributable to QCR Holdings, Inc. common stockholders	$	10,877,839		$	8,689,807

Earnings per common share attributable to QCR Holdings, Inc. common shareholders
Basic	$	1.37		$	1.62
Diluted	$	1.35		$	1.59

Weighted average common shares outstanding		7,919,201			5,375,557
Weighted average common and common equivalent shares outstanding		8,040,418			5,482,298

Cash dividends declared per common share	$	0.04		$	0.04

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three and Nine Months Ended September 30, 2014 and 2013

	Three Months Ended September 30,
	2014			2013
Net income	$	4,062,665		$	3,811,944

Other comprehensive income loss:
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period before tax		(1,455,231	)		(800,796	)
Less reclassification adjustment for gains included in net income before tax		19,429			416,936
		(1,474,660	)		(1,217,732	)
Unrealized gain on derivative instruments		98,724			-
Other comprehensive loss, before tax		(1,375,936	)		(1,217,732	)
Tax benefit		(563,761	)		(399,541	)
Other comprehensive loss, net of tax		(812,175	)		(818,191	)

Comprehensive income attributable to QCR Holdings, Inc.	$	3,250,490		$	2,993,753

	Nine Months Ended September 30,
	2014			2013
Net income	$	11,959,716		$	11,122,319

Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		14,691,007			(23,395,367	)
Less reclassification adjustment for gains included in net income before tax		40,625			433,396
		14,650,382			(23,828,763	)
Unrealized losses on derivative instruments		(152,425	)		-
Other comprehensive income (loss), before tax		14,497,957			(23,828,763	)
Tax expense (benefit)		5,603,334			(9,082,725	)
Other comprehensive income (loss), net of tax		8,894,623			(14,746,038	)

Comprehensive income (loss) attributable to QCR Holdings, Inc.	$	20,854,339		$	(3,623,719	)

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Nine Months Ended September 30, 2014

	Preferred Stock			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance December 31, 2013	$	29,867		$	8,005,708		$	90,154,528		$	64,637,173		$	(13,643,986	)	$	(1,606,510	)	$	147,576,780
Net income		-			-			-			3,889,215			-			-			3,889,215
Other comprehensive income, net of tax - unrealized gains on securities available for sale		-			-			-			-			5,230,784			-			5,230,784
Preferred cash dividends declared		-			-			-			(708,008	)		-			-			(708,008	)
Redemption of 15,000 shares of Series F Noncumulative Perpetual Preferred Stock		(15,000	)		-			(14,985,000	)		-			-			-			(15,000,000	)
Proceeds from issuance of 6,189 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-			6,189			78,256			-			-			-			84,445
Proceeds from issuance of 9,814 shares of common stock as a result of stock options exercised		-			9,814			85,582			-			-			-			95,396
Stock compensation expense		-			-			347,752												347,752
Tax benefit of nonqualified stock options exercised		-			-			18,647			-			-			-			18,647
Restricted stock awards		-			27,197			(27,197	)		-			-			-			-
Exchange of 10,300 shares of common stock in connection with restricted stock vested, net		-			(10,300	)		(167,684	)		-			-			-			(177,984	)
Balance March 31, 2014	$	14,867		$	8,038,608		$	75,504,884		$	67,818,380		$	(8,413,202	)	$	(1,606,510	)	$	141,357,027
Net income		-			-			-			4,007,836			-			-			4,007,836
Other comprehensive income, net of tax - unrealized gains on securities available for sale of $4,727,163, unrealized losses on interest rate cap derivatives of ($251,149)		-			-			-			-			4,476,014			-			4,476,014
Common cash dividends declared, $0.04 per share		-			-			-			(315,053	)		-			-			(315,053	)
Preferred cash dividends declared		-			-			-			(373,869	)		-			-			(373,869	)
Redemption of 14,867 shares of Series F Noncumulative Perpetual Preferred Stock		(14,867	)		-			(14,809,055	)		-			-			-			(14,823,922	)
Proceeds from issuance of 8,361 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-			8,361			119,797			-			-			-			128,158
Proceeds from issuance of 630 shares of common stock as a result of stock options exercised		-			630			5,159			-			-			-			5,789
Stock compensation expense		-			-			179,265												179,265
Tax benefit of nonqualified stock options exercised		-			-			1,284			-			-			-			1,284
Restricted stock awards		-			2,290			(2,290	)		-			-			-			-
Balance June 30, 2014	$	-		$	8,049,889		$	60,999,044		$	71,137,294		$	(3,937,188	)	$	(1,606,510	)	$	134,642,529
Net income		-			-			-			4,062,665			-			-			4,062,665
Other comprehensive loss, net of tax - unrealized losses on securities available for sale of ($910,899), unrealized gains on interest rate cap derivatives $98,724		-			-			-			-			(812,175	)		-			(812,175	)
Proceeds from issuance of 5,481 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-			5,481			78,533			-			-			-			84,014
Proceeds from issuance of 2,400 shares of common stock as a result of stock options exercised		-			2,400			19,097			-			-			-			21,497
Tax benefit of nonqualified stock options exercised								5,189												5,189
Stock compensation expense		-			-			176,257												176,257
Restricted stock awards		-			289			(289	)		-			-			-			-
Balance September 30, 2014	$	-		$	8,058,059		$	61,277,831		$	75,199,959		$	(4,749,363	)	$	(1,606,510	)	$	138,179,976

(Continued)

QCR HOLDINGS, INC. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2013

	Preferred Stock		Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance December 31, 2012	$	54,867	$	5,039,448		$	78,912,791		$	53,326,542		$	4,706,683		$	(1,606,510	)	$	140,433,821
Net income		-		-			-			3,265,144			-			-			3,265,144
Other comprehensive loss, net of tax - unrealized losses on securities available for sale		-		-			-			-			(836,358	)		-			(836,358	)
Preferred cash dividends declared		-		-			-			(810,837	)		-			-			(810,837	)
Proceeds from issuance of 5,884 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-		5,884			63,487			-			-			-			69,371
Proceeds from issuance of 19,278 shares of common stock as a result of stock options exercised		-		19,278			153,550			-			-			-			172,828
Exchange of 7,048 shares of common stock in connection with stock options exercised		-		(7,048	)		(111,628	)		-			-			-			(118,676	)
Stock compensation expense		-		-			293,798												293,798
Tax benefit of nonqualified stock options exercised		-		-			35,251			-			-			-			35,251
Restricted stock awards		-		16,798			(16,798	)		-			-			-			-
Exchange of 16,798 shares of common stock in connection with restricted stock vested, net		-		(16,798	)		(289,113	)		-			-			-			(305,911	)
Balance March 31, 2013	$	54,867	$	5,057,562		$	79,041,338		$	55,780,849		$	3,870,325		$	(1,606,510	)	$	142,198,431
Net income		-		-			-			4,045,231			-			-			4,045,231
Other comprehensive loss, net of tax - unrealized losses on securities available for sale		-		-			-			-			(13,091,489	)		-			(13,091,489	)
Common cash dividends declared, $0.04 per share		-		-			-			(228,971	)		-			-			(228,971	)
Preferred cash dividends declared		-		-			-			(810,838	)		-			-			(810,838	)
Proceeds from issuance of 834,715 shares of common stock as a result of the acquisition of Community National Bancorporation, net		-		834,715			12,181,894			-			-			-			13,016,609
Proceeds from issuance of 9,560 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-		9,560			104,221			-			-			-			113,781
Proceeds from issuance of 3,769 shares of common stock as a result of stock options exercised		-		3,769			33,070			-			-			-			36,839
Stock compensation expense		-		-			162,123												162,123
Tax benefit of nonqualified stock options exercised		-		-			4,197			-			-			-			4,197
Restricted stock awards		-		12,707			(12,707	)		-			-			-			-
Balance June 30, 2013	$	54,867	$	5,918,313		$	91,514,136		$	58,786,271		$	(9,221,164	)	$	(1,606,510	)	$	145,445,913
Net income		-		-			-			3,811,944			-			-			3,811,944
Other comprehensive loss, net of tax - unrealized losses on securities available for sale		-		-			-			-			(818,191	)		-			(818,191	)
Preferred cash dividends declared		-		-			-			(810,837	)		-			-			(810,837	)
Proceeds from issuance of 5,973 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-		5,973			65,116			-			-			-			71,089
Proceeds from issuance of 7,230 shares of common stock as a result of stock options exercised		-		7,230			76,718			-			-			-			83,948
Tax benefit of nonqualified stock options exercised							6,026												6,026
Stock compensation expense		-		-			163,585												163,585
Restricted stock awards		-		332			(332	)		-			-			-			-
Balance September 30, 2013	$	54,867	$	5,931,848		$	91,825,249		$	61,787,378		$	(10,039,355	)	$	(1,606,510	)	$	147,953,477

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 2014 and 2013

	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	11,959,716		$	11,122,319
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,092,992			1,995,829
Provision for loan/lease losses		3,159,364			3,944,903
Stock-based compensation expense		703,274			619,506
Deferred compensation expense accrued		996,941			623,781
Losses on other real estate owned, net		114,109			566,714
Amortization of premiums on securities, net		1,470,641			2,862,396
Securities gains		(40,625	)		(433,396	)
Loans originated for sale		(32,643,486	)		(70,569,738	)
Proceeds on sales of loans		33,537,484			76,372,739
Gains on sales of residential real estate loans		(317,085	)		(722,368	)
Gains on sales of government guaranteed portions of loans		(860,923	)		(1,949,300	)
Amortization of core deposit intangible		149,634			129,003
Accretion of acquisition fair value adjustments, net		(549,604	)		(592,620	)
Gain on the sale of premises and equipment		(42,554	)		-
Increase in cash value of bank-owned life insurance		(1,276,901	)		(1,328,598	)
Bargain purchase gain on Community National acquisition		-			(1,841,385	)
Decrease (increase) in other assets		(595,429	)		7,319,681
Increase in other liabilities		687,445			2,553,307
Net cash provided by operating activities	$	18,544,993		$	30,672,773

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold		9,675,000			(9,297,000	)
Net decrease (increase) in interest-bearing deposits at financial institutions		(1,586,856	)		8,521,233
Proceeds from sales of other real estate owned		1,172,365			662,586
Purchase of derivative instruments		(2,071,650	)		-
Activity in securities portfolio:
Purchases		(48,493,532	)		(297,033,410	)
Calls, maturities and redemptions		30,827,423			138,661,369
Paydowns		19,147,455			38,967,219
Sales		65,754,467			37,393,047
Activity in restricted investment securities:
Purchases		(1,653,450	)		(6,184,250	)
Redemptions		3,377,900			7,243,400
Net increase in loans/leases originated and held for investment		(115,589,620	)		(65,747,455	)
Net cash received from the sale of premises and equipment		291,006			-
Purchase of premises and equipment		(1,587,828	)		(1,597,434	)
Net cash received from Community National acquisition		-			3,025,073
Net cash used in investing activities	$	(40,737,320	)	$	(145,385,622	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		66,893,213			112,711,191
Net increase (decrease) in short-term borrowings		12,893,731			(1,823,399	)
Activity in Federal Home Loan Bank advances:
Advances		17,000,000			163,000,000
Calls and maturities		(51,850,000	)		(160,000,000	)
Proceeds from term debt		10,000,000			10,000,000
Principal payments on term debt		(1,000,000	)		-
Payment on 364-day revolving note		-			(5,600,000	)
Repayment of Community National's other borrowings at acquisition		-			(3,950,000	)
Payment of cash dividends on common and preferred stock		(1,964,607	)		(2,853,434	)
Redemption of 15,000 shares of Series F Noncumulative Perpetual Preferred Stock, net		(15,000,000	)		-
Redemption of 14,867 shares of Series F Noncumulative Perpetual Preferred Stock, net		(14,823,922	)		-
Proceeds from issuance of common stock, net		419,299			384,315
Net cash provided by financing activities	$	22,567,714		$	111,868,673

Net increase (decrease) in cash and due from banks		375,387			(2,844,176	)
Cash and due from banks, beginning		41,950,790			61,568,446
Cash and due from banks, ending	$	42,326,177		$	58,724,270

(Continued)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Nine Months Ended September 30, 2014 and 2013

	2014			2013
Supplemental disclosure of cash flow information, cash payments for:
Interest	$	12,445,044		$	13,546,215

Income/franchise taxes	$	3,457,500		$	1,371,120

Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale and derivative instruments, net	$	8,894,623		$	(14,746,038	)

Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised	$	(177,984	)	$	(424,587	)

Transfers of loans to other real estate owned	$	2,237,268		$	5,220,235

Change in due to broker	$	9,750,000		$	-

Supplemental disclosure of cash flow information for Community National Acquisition:
Fair value of assets acquired:
Cash and due from banks *	$	-		$	9,286,757
Federal funds sold		-			12,335,000
Interest-bearing deposits at financial institutions		-			2,024,539
Securities available for sale		-			45,853,826
Loans/leases receivable held for investment, net		-			195,658,486
Premises and equipment, net		-			8,132,021
Core deposit intangible		-			3,440,076
Bank-owned life insurance		-			4,595,529
Restricted investment securities		-			1,259,375
Other real estate owned		-			550,326
Other assets		-			5,178,583
Total assets acquired	$	-		$	288,314,518

Fair value of liabilities assumed:
Deposits	$	-		$	255,045,071
Other borrowings		-			3,950,000
Junior subordinated debentures		-			4,125,175
Other liabilities		-			3,911,053
Total liabilities assumed	$	-		$	267,031,299

Net assets acquired	$	-		$	21,283,219
Consideration paid:
Cash paid *	$	-		$	6,261,684
Issuance of 834,715 shares of common stock		-			13,180,150
Total consideration paid	$	-		$	19,441,834

Bargain purchase gain	$	-		$	1,841,385

* Net cash received at closing totaled $3,025,073

See Notes to Consolidated Financial Statements (Unaudited)

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2014

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, 2013, included in QCR Holdings, Inc.’s (the “Company”) Form 10-K filed with the Securities and Exchange Commission on March 10, 2014. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management’s discussion and analysis are due to rounding. The results of the interim period ended September 30, 2014, are not necessarily indicative of the results expected for the year ending December 31, 2014.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include three commercial banks: Quad City Bank & Trust Company (“QCBT”), Cedar Rapids Bank & Trust Company (“CRBT”), and Rockford Bank & Trust Company (“RB&T”). On May 13, 2013, the Company acquired Community National Bancorporation (“Community National”) and its banking subsidiary Community National Bank (“CNB”). The Company operated CNB as a separate banking charter from the acquisition date until October 26, 2013, when CNB’s charter was merged with and into CRBT. CNB’s merged branch offices operate as a division of CRBT under the name of “Community Bank & Trust”. QCBT, CRBT, and RB&T are all state-chartered commercial banks. The Company also engages in direct financing lease contracts through m2 Lease Funds, LLC (“m2 Lease Funds”), a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

Recent accounting developments: In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of ASU 2014-04 is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and is not expected to have a significant impact on the Company’s consolidated financial statements.

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 is effective on January 1, 2017 and is not expected to have a significant impact on the Company’s financial statements.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

In June 2014, FASB issued ASU 2014-11, Transfers and Servicing. ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings, consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entail the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. The standard requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral and remaining tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 is effective on January 1, 2015 and is not expected to have a significant impact on the Company’s consolidated financial statements.

In August 2014, FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure. ASU 2014-14 requires creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them as other real estate owned. The most common types of government guaranteed loans include those guaranteed by the Federal Housing Authority (FHA), U.S. Department of Housing and Urban Development (HUD), U.S. Department of Veterans Affairs (VA) and the U.S. Small Business Administration (SBA). The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. ASU 2014-14 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and is not expected to have a significant impact on the Company’s consolidated financial statements.

Allowance for estimated losses on loans/leases: The Company has certain loans risk-rated 7 (substandard), which are not classified as impaired based on the facts of the credit. For these non-impaired and risk-rated 7 loans, the Company does not provide a general allowance as it does for all other non-impaired loans. Rather, the Company performs a more precise analysis including evaluation of the cash flow and collateral valuation for each individual credit. A specific allowance is established based upon this evaluation. These non-impaired risk-rated 7 loans exist primarily in the commercial and industrial and commercial real estate segments.

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

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 September 30, 2014 and December 31, 2013 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
September 30, 2014
Securities held to maturity:
Municipal securities	$	184,790,139	$	1,861,338	$	(1,765,426	)	$	184,886,051
Other securities		1,050,000		-		-			1,050,000
	$	185,840,139	$	1,861,338	$	(1,765,426	)	$	185,936,051

Securities available for sale:
U.S. govt. sponsored agency securities	$	315,019,934	$	30,913	$	(9,046,242	)	$	306,004,605
Residential mortgage-backed and related securities		127,822,284		1,372,274		(1,414,809	)		127,779,749
Municipal securities		30,209,955		1,149,656		(99,465	)		31,260,146
Other securities		1,354,116		545,951		-			1,900,067
	$	474,406,289	$	3,098,794	$	(10,560,516	)	$	466,944,567

December 31, 2013:
Securities held to maturity:
Municipal securities	$	144,401,895	$	299,789	$	(7,111,579	)	$	137,590,105
Other securities		1,050,000		-		-			1,050,000
	$	145,451,895	$	299,789	$	(7,111,579	)	$	138,640,105

Securities available for sale:
U.S. govt. sponsored agency securities	$	376,574,132	$	41,696	$	(20,142,841	)	$	356,472,987
Residential mortgage-backed and related securities		160,110,199		1,153,409		(3,834,157	)		157,429,451
Municipal securities		35,813,866		923,315		(778,324	)		35,958,857
Other securities		1,372,365		524,798		-			1,897,163
	$	573,870,562	$	2,643,218	$	(24,755,322	)	$	551,758,458

The Company’s held to maturity municipal securities consist largely of private issues of municipal debt. The municipalities are located within the Midwest with a portion in or adjacent to the communities of QCBT and CRBT. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

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

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 September 30, 2014 and December 31, 2013, 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
September 30, 2014:
Securities held to maturity:
Municipal securities	$	29,794,026	$	(633,024	)	$	43,172,941	$	(1,132,402	)	$	72,966,967	$	(1,765,426	)

Securities available for sale:
U.S. govt. sponsored agency securities	$	32,208,945	$	(156,930	)	$	262,773,625	$	(8,889,312	)	$	294,982,570	$	(9,046,242	)
Residential mortgage-backed and related securities		10,125,288		(74,264	)		58,008,272		(1,340,545	)		68,133,560		(1,414,809	)
Municipal securities		1,446,532		(3,113	)		5,616,381		(96,352	)		7,062,913		(99,465	)
	$	43,780,765	$	(234,307	)	$	326,398,278	$	(10,326,209	)	$	370,179,043	$	(10,560,516	)

December 31, 2013:
Securities held to maturity:
Municipal securities	$	101,983,602	$	(6,711,240	)	$	2,697,375	$	(400,339	)	$	104,680,977	$	(7,111,579	)

Securities available for sale:
U.S. govt. sponsored agency securities	$	333,194,820	$	(19,141,077	)	$	10,978,390	$	(1,001,764	)	$	344,173,210	$	(20,142,841	)
Residential mortgage-backed and related securities		94,723,092		(2,947,770	)		14,117,719		(886,387	)		108,840,811		(3,834,157	)
Municipal securities		13,890,692		(724,939	)		985,687		(53,385	)		14,876,379		(778,324	)
	$	441,808,604	$	(22,813,786	)	$	26,081,796	$	(1,941,536	)	$	467,890,400	$	(24,755,322	)

At September 30, 2014, the investment portfolio included 505 securities. Of this number, 241 securities had current unrealized losses with aggregate depreciation of less than 3% from the total amortized cost basis. Of these, 190 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 does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. At September 30, 2014 and December 31, 2013, equity securities represented less than 1% of the total portfolio.

The Company did not recognize other-than-temporary impairment on any debt or equity securities for the three and nine months ended September 30, 2014 and 2013.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

All sales of securities for the three and nine months ended September 30, 2014 and 2013, respectively, were from securities identified as available for sale. Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013

Proceeds from sales of securities	$	39,876,889		$	31,225,516		$	65,754,467		$	37,393,047
Pre-tax gross gains from sales of securities		357,934			506,611			379,130			523,071
Pre-tax gross losses from sales of securities		(338,505	)		(89,675	)		(338,505	)		(89,675	)

The amortized cost and fair value of securities as of September 30, 2014 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 called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table. “Other securities” available for sale are excluded from the maturity categories as there is no fixed maturity date for those securities.

	Amortized Cost		Fair Value
Securities held to maturity:
Due in one year or less	$	12,682,406	$	12,683,453
Due after one year through five years		16,825,667		16,856,667
Due after five years		156,332,066		156,395,931
	$	185,840,139	$	185,936,051

Securities available for sale:
Due in one year or less	$	3,649,998	$	3,664,418
Due after one year through five years		60,972,541		60,242,076
Due after five years		280,607,350		273,358,257
	$	345,229,889	$	337,264,751
Residential mortgage-backed and related securities		127,822,284		127,779,749
Other securities		1,354,116		1,900,067
	$	474,406,289	$	466,944,567

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

	Amortized Cost		Fair Value
Securities held to maturity:
Municipal securities	$	99,883,698	$	100,074,857

Securities available for sale:
U.S. govt. sponsored agency securities		250,617,040		243,092,527
Municipal securities		18,473,306		18,985,950
	$	269,090,346	$	262,078,477

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The Company had available for sale municipal securities with a fair value of $31.3 million and $36.0 million as of September 30, 2014 and December 31, 2013, respectively. In addition, the Company had held to maturity municipal securities which were reported at amortized cost totaling $184.8 million and $144.4 million as of September 30, 2014 and December 31, 2013, respectively.

As of September 30, 2014, the Company’s municipal securities portfolios were comprised of general obligation bonds with fair values totaling $63.2 million and revenue bonds issued by 272 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $153.0 million. The Company held investments in general obligation bonds in 19 states, including three states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in eight states, including four states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2013, the Company’s municipal securities portfolios were comprised of general obligation bonds with fair values totaling $54.2 million and revenue bonds issued by 269 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $119.3 million. The Company held investments in general obligation bonds in 20 states, including two states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in eight states, including four states in which the aggregate fair value exceeded $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:

September 30, 2014:
U.S. State:	Number of Issuers		Amortized Cost		Fair Value		Average Exposure Per Issuer (Fair Value)

Illinois		32	$	23,058,258	$	23,431,499	$	732,234
Iowa		25		16,557,625		16,746,965		669,879
Missouri		12		6,136,797		6,097,169		508,097
Other		52		16,674,720		16,908,510		325,164
Total general obligation bonds		121	$	62,427,400	$	63,184,143	$	522,183

December 31, 2013:
U.S. State:	Number of Issuers		Amortized Cost		Fair Value		Average Exposure Per Issuer (Fair Value)

Iowa		30	$	17,946,059	$	17,444,045	$	581,468
Illinois		36		15,063,325		15,264,718		424,020
Other		67		22,166,026		21,512,582		321,083
Total general obligation bonds		133	$	55,175,410	$	54,221,345	$	407,679

The general obligations bonds are diversified across many issuers. As of September 30, 2014 and December 31, 2013, the Company did not hold general obligation bonds of any single issuer, the aggregate book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the general obligation bonds in the Company’s portfolio, the majority are unrated bonds that represent small, private issuances. All unrated general obligation bonds were underwritten according to loan underwriting standards and have an average risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential services (water, sewer, education, medical facilities).

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-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:

September 30, 2014:
U.S. State:	Number of Issuers		Amortized Cost		Fair Value		Average Exposure Per Issuer (Fair Value)

Iowa		37	$	59,955,899	$	60,603,053	$	1,637,920
Missouri		65		54,016,464		53,997,386		830,729
Indiana		12		17,991,200		17,835,277		1,486,273
Kansas		6		12,310,134		12,139,318		2,023,220
Other		31		8,298,997		8,387,020		270,549
Total revenue bonds		151	$	152,572,694	$	152,962,054	$	1,012,994

December 31, 2013:
U.S. State:	Number of Issuers		Amortized Cost		Fair Value		Average Exposure Per Issuer (Fair Value)

Iowa		31	$	47,903,572	$	46,257,997	$	1,492,193
Missouri		57		42,085,249		40,054,613		702,713
Indiana		8		15,020,000		14,324,717		1,790,590
Kansas		5		11,022,382		9,997,068		1,999,414
Other		35		9,009,148		8,693,222		248,378
Total revenue bonds		136	$	125,040,351	$	119,327,617	$	877,409

The revenue bonds are diversified across many issuers. As of September 30, 2014 and December 31, 2013, the Company did not hold revenue bonds of any single issuer, the aggregate book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the revenue bonds in the Company’s portfolio, the majority are unrated bonds that represent small, private issuances. All unrated revenue bonds were underwritten according to loan underwriting standards and have an average risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential services (water, sewer, education, medical facilities).

The Company’s municipal securities are owned by each of the three charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually and as of September 30, 2014, all were well-within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of total risk-based capital.

As of September 30, 2014, the Company’s regular monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credits 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.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of September 30, 2014 and December 31, 2013 is presented as follows:

	As of September 30,			As of December 31,
	2014			2013

Commercial and industrial loans	$	479,747,059		$	431,688,129
Commercial real estate loans
Owner-occupied commercial real estate		251,076,360			261,215,912
Commercial construction, land development, and other land		69,856,024			57,844,902
Other non owner-occupied commercial real estate		376,795,649			352,692,115
		697,728,033			671,752,929

Direct financing leases *		162,476,079			128,901,442
Residential real estate loans **		154,954,020			147,356,323
Installment and other consumer loans		71,760,173			76,033,810
		1,566,665,364			1,455,732,633
Plus deferred loan/lease origination costs, net of fees		6,203,781			4,546,925
		1,572,869,145			1,460,279,558
Less allowance for estimated losses on loans/leases		(22,767,917	)		(21,448,048	)
	$	1,550,101,228		$	1,438,831,510


* Direct financing leases:
Net minimum lease payments to be received	$	184,475,603		$	145,662,254
Estimated unguaranteed residual values of leased assets		1,538,482			1,694,499
Unearned lease/residual income		(23,538,006	)		(18,455,311	)
		162,476,079			128,901,442
Plus deferred lease origination costs, net of fees		6,339,575			4,814,183
		168,815,654			133,715,625
Less allowance for estimated losses on leases		(3,106,887	)		(2,517,217	)
	$	165,708,767		$	131,198,408

*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 and management’s expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three and nine months ended September 30, 2014 and 2013.

**Includes residential real estate loans held for sale totaling $1,642,300 and $1,358,290 as of September 30, 2014, and December 31, 2013, respectively.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The aging of the loan/lease portfolio by classes of loans/leases as of September 30, 2014 and December 31, 2013 is presented as follows:

	As of September 30, 2014
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

Commercial and Industrial	$	470,898,126		$	638,002		$	284,380		$	-		$	7,926,551		$	479,747,059
Commercial Real Estate
Owner-Occupied Commercial Real Estate		249,903,102			-			-			-			1,173,258			251,076,360
Commercial Construction, Land Development, and Other Land		68,732,309			510,364			-			-			613,351			69,856,024
Other Non Owner-Occupied Commercial Real Estate		363,737,989			266,956			25,543			-			12,765,161			376,795,649
Direct Financing Leases		159,714,653			699,590			392,119			-			1,669,717			162,476,079
Residential Real Estate		153,145,275			49,543			382,281			51,094			1,325,827			154,954,020
Installment and Other Consumer		70,404,267			284,429			203,591			4,312			863,574			71,760,173
	$	1,536,535,721		$	2,448,884		$	1,287,914		$	55,406		$	26,337,439		$	1,566,665,364

As a percentage of total loan/lease portfolio		98.08	%		0.16	%		0.08	%		0.00	%		1.68	%		100.00	%

	As of December 31, 2013
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

Commercial and Industrial	$	429,557,699		$	199,949		$	185,500		$	-		$	1,744,981		$	431,688,129
Commercial Real Estate
Owner-Occupied Commercial Real Estate		258,557,660			465,418			993,163			60,286			1,139,385			261,215,912
Commercial Construction, Land Development, and Other Land		56,301,186			358,626			-			-			1,185,090			57,844,902
Other Non Owner-Occupied Commercial Real Estate		341,743,730			476,877			151,017			-			10,320,491			352,692,115
Direct Financing Leases		126,878,515			714,464			414,005			-			894,458			128,901,442
Residential Real Estate		142,353,936			3,088,516			275,262			20,126			1,618,483			147,356,323
Installment and Other Consumer		74,811,489			127,082			116,468			3,762			975,009			76,033,810
	$	1,430,204,215		$	5,430,932		$	2,135,415		$	84,174		$	17,877,897		$	1,455,732,633

As a percentage of total loan/lease portfolio		98.25	%		0.37	%		0.15	%		0.01	%		1.23	%		100.00	%

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Nonperforming loans/leases by classes of loans/leases as of September 30, 2014 and December 31, 2013 are presented as follows:

	As of September 30, 2014
Classes of Loans/Leases	Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases *		Troubled Debt Restructurings - Accruing		Total Nonperforming Loans/Leases		Percentage of Total Nonperforming Loans/Leases

Commercial and Industrial	$	-	$	7,926,551	$	1,437,974	$	9,364,525		32.83	%
Commercial Real Estate
Owner-Occupied Commercial Real Estate		-		1,173,258		-		1,173,258		4.11	%
Commercial Construction, Land Development, and Other Land		-		613,351		-		613,351		2.15	%
Other Non Owner-Occupied Commercial Real Estate		-		12,765,161		-		12,765,161		44.76	%
Direct Financing Leases		-		1,669,717		-		1,669,717		5.85	%
Residential Real Estate		51,094		1,325,827		333,895		1,710,816		6.00	%
Installment and Other Consumer		4,312		863,574		357,000		1,224,886		4.29	%
	$	55,406	$	26,337,439	$	2,128,869	$	28,521,714		100.00	%

*Nonaccrual loans/leases includes $9,620,674 of troubled debt restructurings, including $81,043 in commercial and industrial loans, $8,768,590 in commercial real estate loans, $64,144 in direct financing leases, $515,827 in residential real estate loans, and $191,070 in installment loans.

	As of December 31, 2013
Classes of Loans/Leases	Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases **		Troubled Debt Restructurings - Accruing		Total Nonperforming Loans/Leases		Percentage of Total Nonperforming Loans/Leases

Commercial and Industrial	$	-	$	1,744,981	$	878,381	$	2,623,362		12.81	%
Commercial Real Estate
Owner-Occupied Commercial Real Estate		60,286		1,139,385		-		1,199,671		5.86	%
Commercial Construction, Land Development, and Other Land		-		1,185,090		-		1,185,090		5.79	%
Other Non Owner-Occupied Commercial Real Estate		-		10,320,491		905,205		11,225,696		54.80	%
Direct Financing Leases		-		894,458		-		894,458		4.37	%
Residential Real Estate		20,126		1,618,483		371,995		2,010,604		9.82	%
Installment and Other Consumer		3,762		975,009		367,000		1,345,771		6.57	%
	$	84,174	$	17,877,897	$	2,522,581	$	20,484,652		100.00	%

**Nonaccrual loans/leases includes $10,890,785 of troubled debt restructurings, including $77,072 in commercial and industrial loans, $10,077,501 in commercial real estate loans, $446,996 in residential real estate loans, and $289,216 in installment loans.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Changes in the allowance for estimated losses on loans/leases by portfolio segment for the three and nine months ended September 30, 2014 and 2013, respectively, are presented as follows:

	Three Months Ended September 30, 2014

	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Balance, beginning	$	6,549,378		$	10,277,692		$	3,319,131		$	1,439,185		$	1,481,638		$	23,067,024
Provisions (credits) charged to expense		851,542			(196,865	)		509,657			(53,963	)		(47,048	)		1,063,323
Loans/leases charged off		(741,127	)		(120,505	)		(741,478	)		(42,022	)		(86,370	)		(1,731,502	)
Recoveries on loans/leases previously charged off		254,265			68,346			19,577			9,870			17,014			369,072
Balance, ending	$	6,914,058		$	10,028,668		$	3,106,887		$	1,353,070		$	1,365,234		$	22,767,917

	Three Months Ended September 30, 2013

	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Balance, beginning	$	4,790,828		$	12,190,497		$	2,187,605		$	1,165,341		$	822,108		$	21,156,379
Provisions (credits) charged to expense		765,582			88,761			338,984			102,523			71,134			1,366,984
Loans/leases charged off		(214,920	)		(443,721	)		(203,724	)		(13,599	)		(51,673	)		(927,637	)
Recoveries on loans/leases previously charged off		26,034			375,325			644			13,240			51,420			466,663
Balance, ending	$	5,367,524		$	12,210,862		$	2,323,509		$	1,267,505		$	892,989		$	22,062,389

	Nine Months Ended September 30, 2014

	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Balance, beginning	$	5,648,774		$	10,705,434		$	2,517,217		$	1,395,849		$	1,180,774		$	21,448,048
Provisions (credits) charged to expense		1,930,050			(460,356	)		1,428,678			42,712			218,280			3,159,364
Loans/leases charged off		(967,207	)		(436,056	)		(885,966	)		(95,464	)		(102,107	)		(2,486,800	)
Recoveries on loans/leases previously charged off		302,441			219,646			46,958			9,973			68,287			647,305
Balance, ending	$	6,914,058		$	10,028,668		$	3,106,887		$	1,353,070		$	1,365,234		$	22,767,917

	Nine Months Ended September 30, 2013

	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Balance, beginning	$	4,531,545		$	11,069,502		$	1,990,395		$	1,070,328		$	1,263,434		$	19,925,204
Provisions (credits) charged to expense		1,026,073			1,875,132			1,057,744			307,196			(321,242	)		3,944,903
Loans/leases charged off		(253,820	)		(1,264,446	)		(726,395	)		(126,490	)		(192,160	)		(2,563,311	)
Recoveries on loans/leases previously charged off		63,726			530,674			1,765			16,471			142,957			755,593
Balance, ending	$	5,367,524		$	12,210,862		$	2,323,509		$	1,267,505		$	892,989		$	22,062,389

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The allowance for estimated losses on loans/leases by impairment evaluation and by portfolio segment as of September 30, 2014 and December 31, 2013 is presented as follows:

	As of September 30, 2014
	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Allowance for impaired loans/leases	$	2,204,926		$	2,473,500		$	165,617		$	129,859		$	506,860		$	5,480,762
Allowance for nonimpaired loans/leases		4,709,132			7,555,168			2,941,270			1,223,211			858,374			17,287,155
	$	6,914,058		$	10,028,668		$	3,106,887		$	1,353,070		$	1,365,234		$	22,767,917


Impaired loans/leases	$	8,258,681		$	14,431,006		$	1,669,717		$	1,659,722		$	1,278,089		$	27,297,215
Nonimpaired loans/leases		471,488,378			683,297,027			160,806,362			153,294,298			70,482,084			1,539,368,149
	$	479,747,059		$	697,728,033		$	162,476,079		$	154,954,020		$	71,760,173		$	1,566,665,364


Allowance as a percentage of impaired loans/leases		26.70	%		17.14	%		9.92	%		7.82	%		39.66	%		20.08	%
Allowance as a percentage nonimpaired loans/leases		1.00	%		1.11	%		1.83	%		0.80	%		1.22	%		1.12	%
		1.44	%		1.44	%		1.91	%		0.87	%		1.90	%		1.45	%

	As of December 31, 2013
	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Allowance for impaired loans/leases	$	927,453		$	3,174,704		$	192,847		$	246,266		$	467,552		$	5,008,822
Allowance for nonimpaired loans/leases		4,721,321			7,530,730			2,324,370			1,149,583			713,222			16,439,226
	$	5,648,774		$	10,705,434		$	2,517,217		$	1,395,849		$	1,180,774		$	21,448,048

Impaired loans/leases	$	1,761,850		$	12,956,915		$	894,458		$	2,116,747		$	1,350,450		$	19,080,420
Nonimpaired loans/leases		429,926,279			658,796,014			128,006,984			145,239,576			74,683,360			1,436,652,213
	$	431,688,129		$	671,752,929		$	128,901,442		$	147,356,323		$	76,033,810		$	1,455,732,633

Allowance as a percentage of impaired loans/leases		52.64	%		24.50	%		21.56	%		11.63	%		34.62	%		26.25	%
Allowance as a percentage nonimpaired loans/leases		1.10	%		1.14	%		1.82	%		0.79	%		0.95	%		1.14	%
		1.31	%		1.59	%		1.95	%		0.95	%		1.55	%		1.47	%

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Information for impaired loans/leases is presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the nine months ended September 30, 2014 are presented as follows:

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

Impaired Loans/Leases with No Specific Allowance Recorded:
Commercial and Industrial	$	560,005	$	667,983	$	-	$	647,016	$	19,754	$	19,754
Commercial Real Estate
Owner-Occupied Commercial Real Estate		760,586		873,808		-		536,402		-		-
Commercial Construction, Land Development, and Other Land		1,385,356		1,496,556		-		1,615,643		-		-
Other Non Owner-Occupied Commercial Real Estate		4,989,393		5,044,816		-		3,169,784		13,283		13,283
Direct Financing Leases		1,109,844		1,109,884		-		966,959		-		-
Residential Real Estate		1,113,535		1,113,535		-		1,332,539		2,879		2,879
Installment and Other Consumer		455,457		455,457		-		520,020		-		-
	$	10,374,176	$	10,762,039	$	-	$	8,788,363	$	35,916	$	35,916

Impaired Loans/Leases with Specific Allowance Recorded:
Commercial and Industrial	$	7,698,676	$	8,464,069	$	2,204,926	$	1,702,548	$	-	$	-
Commercial Real Estate
Owner-Occupied Commercial Real Estate		439,701		439,701		143,453		282,878		-		-
Commercial Construction, Land Development, and Other Land		794,703		806,703		457,086		801,643		-		-
Other Non Owner-Occupied Commercial Real Estate		6,061,267		6,760,858		1,872,961		5,971,713		-		-
Direct Financing Leases		559,873		559,873		165,617		425,472		-		-
Residential Real Estate		546,187		546,187		129,859		520,782		2,074		2,074
Installment and Other Consumer		822,632		822,632		506,860		779,968		2,670		2,670
	$	16,923,039	$	18,400,023	$	5,480,762	$	10,485,004	$	4,744	$	4,744

Total Impaired Loans/Leases:
Commercial and Industrial	$	8,258,681	$	9,132,052	$	2,204,926	$	2,349,564	$	19,754	$	19,754
Commercial Real Estate
Owner-Occupied Commercial Real Estate		1,200,287		1,313,509		143,453		819,280		-		-
Commercial Construction, Land Development, and Other Land		2,180,059		2,303,259		457,086		2,417,286		-		-
Other Non Owner-Occupied Commercial Real Estate		11,050,660		11,805,674		1,872,961		9,141,497		13,283		13,283
Direct Financing Leases		1,669,717		1,669,757		165,617		1,392,431		-		-
Residential Real Estate		1,659,722		1,659,722		129,859		1,853,321		4,953		4,953
Installment and Other Consumer		1,278,089		1,278,089		506,860		1,299,988		2,670		-
	$	27,297,215	$	29,162,062	$	5,480,762	$	19,273,367	$	40,660	$	40,660

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

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended September 30, 2014 and 2013, respectively, are presented as follows:

	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
Classes of Loans/Leases	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received

Impaired Loans/Leases with No Specific Allowance Recorded:
Commercial and Industrial	$	621,836	$	17,855	$	17,855	$	834,405	$	1,950	$	1,950
Commercial Real Estate						-
Owner-Occupied Commercial Real Estate		751,191		-		-		2,295,969		-		-
Commercial Construction, Land Development, and Other Land		1,397,733		-		-		1,943,718		-		-
Other Non Owner-Occupied Commercial Real Estate		4,051,261		-		-		1,739,053		354		354
Direct Financing Leases		1,152,456		-		-		527,153		-		-
Residential Real Estate		1,186,197		704		704		1,273,943		-		-
Installment and Other Consumer		494,498		-		-		1,012,035		1,689		1,689
	$	9,655,172	$	18,559	$	18,559	$	9,626,276	$	3,993	$	3,993

Impaired Loans/Leases with Specific Allowance Recorded:
Commercial and Industrial	$	3,454,429	$	-	$	-	$	1,913,841	$	9,340	$	9,340
Commercial Real Estate						-
Owner-Occupied Commercial Real Estate		439,701		-		-		1,181,798		-		-
Commercial Construction, Land Development, and Other Land		796,194		-		-		1,897,759		1,992		1,992
Other Non Owner-Occupied Commercial Real Estate		6,034,473		-		-		8,893,535		26,484		26,484
Direct Financing Leases		578,317		-		-		172,428		-		-
Residential Real Estate		564,278		1,296		1,296		561,752		801		801
Installment and Other Consumer		826,092		890		890		422,808		-		-
	$	12,693,484	$	2,186	$	2,186	$	15,043,921	$	38,617	$	38,617

Total Impaired Loans/Leases:
Commercial and Industrial	$	4,076,265	$	17,855	$	17,855	$	2,748,246	$	11,290	$	11,290
Commercial Real Estate
Owner-Occupied Commercial Real Estate		1,190,892		-		-		3,477,767		-		-
Commercial Construction, Land Development, and Other Land		2,193,927		-		-		3,841,477		1,992		1,992
Other Non Owner-Occupied Commercial Real Estate		10,085,734		-		-		10,632,588		26,838		26,838
Direct Financing Leases		1,730,773		-		-		699,581		-		-
Residential Real Estate		1,750,475		2,000		2,000		1,835,695		801		801
Installment and Other Consumer		1,320,590		890		890		1,434,843		1,689		1,689
	$	22,348,656	$	20,745	$	20,745	$	24,670,197	$	42,610	$	42,610

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

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, 2013 are presented as follows:

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

Impaired Loans/Leases with No Specific Allowance Recorded:
Commercial and Industrial	$	492,622	$	568,951	$	-
Commercial Real Estate
Owner-Occupied Commercial Real Estate		392,542		392,542		-
Commercial Construction, Land Development, and Other Land		1,943,168		2,054,368		-
Other Non Owner-Occupied Commercial Real Estate		1,790,279		1,902,279		-
Direct Financing Leases		557,469		557,469		-
Residential Real Estate		1,071,927		1,071,927		-
Installment and Other Consumer		509,667		509,667		-
	$	6,757,674	$	7,057,203	$	-

Impaired Loans/Leases with Specific Allowance Recorded:
Commercial and Industrial	$	1,269,228	$	1,956,755	$	927,453
Commercial Real Estate
Owner-Occupied Commercial Real Estate		159,247		159,247		67,498
Commercial Construction, Land Development, and Other Land		888,547		1,011,747		503,825
Other Non Owner-Occupied Commercial Real Estate		7,783,132		8,488,414		2,603,381
Direct Financing Leases		336,989		336,989		192,847
Residential Real Estate		1,044,820		1,044,820		246,266
Installment and Other Consumer		840,783		840,783		467,552
	$	12,322,746	$	13,838,755	$	5,008,822

Total Impaired Loans/Leases:
Commercial and Industrial	$	1,761,850	$	2,525,706	$	927,453
Commercial Real Estate
Owner-Occupied Commercial Real Estate		551,789		551,789		67,498
Commercial Construction, Land Development, and Other Land		2,831,715		3,066,115		503,825
Other Non Owner-Occupied Commercial Real Estate		9,573,411		10,390,693		2,603,381
Direct Financing Leases		894,458		894,458		192,847
Residential Real Estate		2,116,747		2,116,747		246,266
Installment and Other Consumer		1,350,450		1,350,450		467,552
	$	19,080,420	$	20,895,958	$	5,008,822

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

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

For commercial and industrial and commercial real estate loans, the Company’s credit quality indicator is 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 direct financing leases, residential real estate loans, and installment and other consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of September 30, 2014 and December 31, 2013:

	As of September 30, 2014
			Commercial Real Estate
					Non Owner-Occupied
Internally Assigned Risk Rating	Commercial and Industrial		Owner-Occupied Commercial Real Estate		Commercial Construction, Land Development, and Other Land		Other Commercial Real Estate		Total

Pass (Ratings 1 through 5)	$	448,093,142	$	241,429,419	$	66,448,462	$	349,173,522	$	1,105,144,545
Special Mention (Rating 6)		15,306,200		6,598,947		-		2,058,884		23,964,031
Substandard (Rating 7)		16,347,717		3,047,994		3,407,562		25,563,243		48,366,516
Doubtful (Rating 8)		-		-		-		-		-
	$	479,747,059	$	251,076,360	$	69,856,024	$	376,795,649	$	1,177,475,092

	As of September 30, 2014
Delinquency Status *	Direct Financing Leases		Residential Real Estate		Installment and Other Consumer		Total

Performing	$	160,806,362	$	153,243,203	$	70,535,287	$	384,584,852
Nonperforming		1,669,717		1,710,817		1,224,886		4,605,420
	$	162,476,079	$	154,954,020	$	71,760,173	$	389,190,272

	As of December 31, 2013
			Commercial Real Estate
					Non Owner-Occupied
Internally Assigned Risk Rating	Commercial and Industrial		Owner-Occupied Commercial Real Estate		Commercial Construction, Land Development, and Other Land		Other Commercial Real Estate		Total

Pass (Ratings 1 through 5)	$	407,294,743	$	250,028,731	$	51,868,919	$	326,168,882	$	1,035,361,275
Special Mention (Rating 6)		11,355,713		8,318,232		1,588,086		3,310,017		24,572,048
Substandard (Rating 7)		13,037,673		2,868,949		4,387,897		23,213,216		43,507,735
Doubtful (Rating 8)		-		-		-		-		-
	$	431,688,129	$	261,215,912	$	57,844,902	$	352,692,115	$	1,103,441,058

	As of December 31, 2013
Delinquency Status *	Direct Financing Leases		Residential Real Estate		Installment and Other Consumer		Total

Performing	$	128,006,984	$	145,345,719	$	74,688,039	$	348,040,742
Nonperforming		894,458		2,010,604		1,345,771		4,250,833
	$	128,901,442	$	147,356,323	$	76,033,810	$	352,291,575

*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 troubled debt restructurings.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of September 30, 2014 and December 31, 2013, troubled debt restructurings totaled $11,749,543 and $13,413,366, respectively.

For each class of financing receivable, the following presents the number and recorded investment of troubled debt restructurings, by type of concession, that were restructured during the three and nine months ended September 30, 2014 and 2013. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

	For the three months ended September 30, 2014								For the three months ended September 30, 2013
Classes of Loans/Leases	Number of Loans / Leases		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Specific Allowance		Number of Loans / Leases		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Specific Allowance

CONCESSION - Interest rate adjusted below market
Residential Real Estate		-	$	-	$	-	$	-		1	$	79,661	$	79,661	$	24,408
		-	$	-	$	-	$	-		1	$	79,661	$	79,661	$	24,408

CONCESSION - Extension of Maturity
Owner-Occupied Commercial Real Estate		-	$	-	$	-	$	-		1	$	61,517	$	61,517	$	-
Other Non Owner-Occupied Commercial Real Estate		-		-		-		-		7		6,637,835		6,637,835		1,518,303
		-	$	-	$	-	$	-		8	$	6,699,352	$	6,699,352	$	1,518,303

CONCESSION - Other
Residential Real Estate		1	$	96,439	$	71,760	$	7,125		-	$	-	$	-	$	-
		1	$	96,439	$	71,760	$	7,125		-	$	-	$	-	$	-

TOTAL		1	$	96,439	$	71,760	$	7,125		9	$	6,779,013	$	6,779,013	$	1,542,711

	For the nine months ended September 30, 2014								For the nine months ended September 30, 2013
Classes of Loans/Leases	Number of Loans / Leases		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Specific Allowance		Number of Loans / Leases		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Specific Allowance

CONCESSION - Significant payment delay
Commercial and Industrial		3	$	889,154	$	889,154	$	239,783		-	$	-	$	-	$	-
Owner-Occupied Commercial Real Estate		-		-		-		-		1		47,958		47,958		-
Direct Financing Leases		1		89,443		89,443		-		-		-		-		-
Residential Real Estate		-		-		-		-		1		91,581		91,581		-
Installment and Other Consumer		-		-		-		-		1		370,000		370,000		-
		4	$	978,597	$	978,597	$	239,783		3	$	509,539	$	509,539	$	-

CONCESSION - Interest rate adjusted below market
Commercial Construction, Land Development, and Other Land		-	$	-	$	-	$	-		1	$	337,500	$	337,500	$	-
Residential Real Estate		-		-		-		-		2		240,288		240,288		24,408
		-	$	-	$	-	$	-		3	$	577,788	$	577,788	$	24,408

CONCESSION - Extension of maturity
Commercial and Industrial		-	$	-	$	-	$	-		3	$	809,494	$	809,494	$	188,700
Owner-Occupied Commercial Real Estate		-		-		-		-		1		61,517		61,517		-
Other Non Owner-Occupied Commercial Real Estate		-		-		-		-		7		6,637,835		6,637,835		1,518,303
Direct Financing Leases		1		70,144		70,144		24,246		-		-		-		-
		1	$	70,144	$	70,144	$	24,246		11	$	7,508,846	$	7,508,846	$	1,707,003

CONCESSION - Other
Commercial and Industrial		1	$	427,849	$	427,849	$	113,449		-	$	-	$	-	$	-
Residential Real Estate		1	$	96,439	$	71,760	$	7,125
		2	$	524,288	$	499,609	$	120,574		-	$	-	$	-	$	-

TOTAL		7	$	1,573,029	$	1,548,350	$	384,603		17	$	8,596,173	$	8,596,173	$	1,731,411

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Of the troubled debt restructurings reported above, three with a post-modification recorded investment totaling $75,767 were on nonaccrual as of September 30, 2014, and ten with post-modification recorded investments totaling $6,087,296 were on nonaccrual as of September 30, 2013.

For the three and nine months ended September 30, 2014 and 2013, none of the Company’s troubled debt restructurings had redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 4 - EARNINGS PER SHARE

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013

Net income	$	4,062,665	$	3,811,944	$	11,959,716	$	11,122,319

Less: Preferred stock dividends		-		810,837		1,081,877		2,432,512
Net income attributable to QCR Holdings, Inc. common stockholders	$	4,062,665	$	3,001,107	$	10,877,839	$	8,689,807

Earnings per common share attributable to QCR Holdings, Inc. common stockholders
Basic	$	0.51	$	0.52	$	1.37	$	1.62
Diluted	$	0.50	$	0.51	$	1.35	$	1.59

Weighted average common shares outstanding*		7,931,944		5,806,019		7,919,201		5,375,557
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan		122,041		109,260		121,217		106,741
Weighted average common and common equivalent shares outstanding		8,053,985		5,915,279		8,040,418		5,482,298

*On December 23, 2013, the Company converted $25.0 million of its outstanding shares of Series E Preferred Stock to common stock, which resulted in the issuance of 2,057,502 shares of common stock.

NOTE 5 – BUSINESS SEGMENT INFORMATION

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

The Company’s primary segment, Commercial Banking, is geographically divided by markets into the secondary segments which are the three subsidiary banks wholly-owned by the Company: QCBT, CRBT, and RB&T. CRBT includes CNB’s operations from the date of its acquisition on May 13, 2013. Each of these secondary segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

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

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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

Selected financial information on the Company’s business segments is presented as follows for the three and nine months ended September 30, 2014 and 2013.

	Commercial Banking
			Cedar
	Quad City		Rapids		Rockford		Wealth					Intercompany			Consolidated
	Bank & Trust		Bank & Trust		Bank & Trust		Management		All Other			Eliminations			Total
Three Months Ended September 30, 2014
Total revenue	$	12,467,712	$	8,801,737	$	3,595,245	$	2,082,609	$	5,526,296		$	(5,609,315	)	$	26,864,284
Net interest income	$	9,234,089	$	6,179,763	$	2,584,613	$	-	$	(523,134	)	$	-		$	17,475,331
Net income	$	2,602,238	$	1,861,236	$	669,814	$	358,997	$	4,062,665		$	(5,492,285	)	$	4,062,665
Total assets	$	1,274,033,270	$	822,348,680	$	346,791,265	$	-	$	212,236,225		$	(204,813,887	)	$	2,450,595,553
Provision for loan/lease losses	$	609,657	$	331,666	$	122,000	$	-	$	-		$	-		$	1,063,323
Goodwill	$	3,222,688	$	-	$	-	$	-	$	-		$	-		$	3,222,688
Core deposit intangible	$	-	$	1,720,799	$	-	$	-	$	-		$	-		$	1,720,799

Three Months Ended September 30, 2013
Total revenue	$	12,610,738	$	10,006,670	$	3,457,684	$	1,946,795	$	5,398,152		$	(5,489,143	)	$	27,930,896
Net interest income	$	8,494,707	$	6,883,007	$	2,421,255	$	-	$	(488,633	)	$	-		$	17,310,336
Net income	$	2,541,293	$	1,941,807	$	445,521	$	458,813	$	3,811,944		$	(5,387,434	)	$	3,811,944
Total assets	$	1,248,417,915	$	927,667,522	$	333,804,180	$	-	$	214,875,126		$	(239,050,305	)	$	2,485,714,438
Provision for loan/lease losses	$	674,984	$	580,000	$	112,000	$	-	$	-		$	-		$	1,366,984
Goodwill	$	3,222,688	$	-	$	-	$	-	$	-		$	-		$	3,222,688
Core deposit intangible	$	-	$	3,311,073	$	-	$	-	$	-		$	-		$	3,311,073

Nine Months Ended September 30, 2014
Total revenue	$	36,368,665	$	25,816,115	$	10,779,962	$	6,387,215	$	16,016,503		$	(16,272,535	)	$	79,095,925
Net interest income	$	27,235,902	$	17,820,878	$	7,637,029	$	-	$	(1,403,894	)	$	-		$	51,289,915
Net income	$	7,397,943	$	5,577,993	$	1,755,117	$	1,205,204	$	11,959,716		$	(15,936,257	)	$	11,959,716
Total assets	$	1,274,033,270	$	822,348,680	$	346,791,265	$	-	$	212,236,225		$	(204,813,887	)	$	2,450,595,553
Provision for loan/lease losses	$	1,779,698	$	881,666	$	498,000	$	-	$	-		$	-		$	3,159,364
Goodwill	$	3,222,688	$	-	$	-	$	-	$	-		$	-		$	3,222,688
Core deposit intangible	$	-	$	1,720,799	$	-	$	-	$	-		$	-		$	1,720,799

Nine Months Ended September 30, 2013
Total revenue	$	36,476,985	$	24,911,543	$	10,291,554	$	5,488,081	$	16,570,031		$	(14,977,630	)	$	78,760,564
Net interest income	$	25,371,337	$	15,905,288	$	7,160,723	$	-	$	(1,227,643	)	$	-		$	47,209,705
Net income	$	6,989,589	$	5,430,289	$	1,261,243	$	1,000,558	$	11,122,319		$	(14,681,679	)	$	11,122,319
Total assets	$	1,248,417,915	$	927,667,522	$	333,804,180	$	-	$	214,875,126		$	(239,050,305	)	$	2,485,714,438
Provision for loan/lease losses	$	2,052,889	$	980,014	$	912,000	$	-	$	-		$	-		$	3,944,903
Goodwill	$	3,222,688	$	-	$	-	$	-	$	-		$	-		$	3,222,688
Core deposit intangible	$	-	$	3,311,073	$	-	$	-	$	-		$	-		$	3,311,073

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 6 – 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.

Assets measured at fair value on a recurring basis comprise the following at September 30, 2014 and December 31, 2013:

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

September 30, 2014:
Securities available for sale:
U.S. govt. sponsored agency securities	$	306,004,605	$	-	$	306,004,605	$	-
Residential mortgage-backed and related securities		127,779,749		-		127,779,749		-
Municipal securities		31,260,146		-		31,260,146		-
Other securities		1,900,067		317,021		1,583,046		-
Derivative instruments		1,848,119		-		1,848,119		-
	$	468,792,686	$	317,021	$	468,475,665	$	-

December 31, 2013:
Securities available for sale:
U.S. govt. sponsored agency securities	$	356,472,987	$	-	$	356,472,987	$	-
Residential mortgage-backed and related securities		157,429,451		-		157,429,451		-
Municipal securities		35,958,857		-		35,958,857		-
Other securities		1,897,163		317,698		1,579,465		-
	$	551,758,458	$	317,698	$	551,440,760	$	-

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and nine months ended September 30, 2014 and 2013.

A small portion of the securities available for sale 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).

The remainder of the securities available for sale 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).

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Derivative instruments consist of interest rate caps that are used for the purpose of hedging interest rate risk. See Note 8 to the Consolidated Financial Statements for the details of these instruments. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

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

Assets measured at fair value on a non-recurring basis comprise the following at September 30, 2014 and December 31, 2013:

			Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3
September 30, 2014:
Impaired loans/leases	$	13,616,631	$	-	$	-	$	13,616,631
Other real estate owned		11,534,235		-		-		11,534,235
	$	25,150,866	$	-	$	-	$	25,150,866

December 31, 2013:
Impaired loans/leases	$	9,009,557	$	-	$	-	$	9,009,557
Other real estate owned		10,507,377		-		-		10,507,377
	$	19,516,934	$	-	$	-	$	19,516,934

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 may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.

Other real estate owned 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 a Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the property.

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:

	Quantitave Information about Level Fair Value Measurments
	Fair Value		Valuation Technique	Unobservable Input	Range
September 30, 2014:
Impaired loans/leases	$	13,616,631	Appraisal of collateral	Appraisal adjustments	-10.00% to -50.00%
Other real estate owned		11,534,235	Appraisal of collateral	Appraisal adjustments	0.00% to -35.00%

	Quantitave Information about Level Fair Value Measurments
	Fair Value		Valuation Technique	Unobservable Input	Range
December 31, 2013:
Impaired loans/leases	$	9,009,557	Appraisal of collateral	Appraisal adjustments	-10.00% to -50.00%
Other real estate owned		10,507,377	Appraisal of collateral	Appraisal adjustments	0.00% to -35.00%

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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

There have been no changes in valuation techniques used for any assets measured at fair value during the three and nine months ended September 30, 2014 and 2013.

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

	Fair Value	As of September 30, 2014				As of December 31, 2013
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value

Cash and due from banks	Level 1	$	42,326,177	$	42,326,177	$	41,950,790	$	41,950,790
Federal funds sold	Level 2		29,760,000		29,760,000		39,435,000		39,435,000
Interest-bearing deposits at financial institutions	Level 2		34,631,773		34,631,773		33,044,917		33,044,917
Investment securities:
Held to maturity	Level 3		185,840,139		185,936,051		145,451,895		138,640,105
Available for sale	See Previous Table		466,944,567		466,944,567		551,758,458		551,758,458
Loans/leases receivable, net	Level 3		12,607,992		13,616,631		8,342,182		9,009,557
Loans/leases receivable, net	Level 2		1,537,493,236		1,544,453,008		1,430,489,328		1,441,952,443
Derivative instruments	Level 2		1,848,119		1,848,119		-		-
Deposits:
Nonmaturity deposits	Level 2		1,298,921,913		1,298,921,913		1,256,209,352		1,256,209,352
Time deposits	Level 2		414,945,479		416,050,000		390,781,891		391,923,000
Short-term borrowings	Level 2		162,186,698		162,186,698		149,292,967		149,292,967
Federal Home Loan Bank advances	Level 2		196,500,000		202,507,000		231,350,000		241,623,000
Other borrowings	Level 2		151,455,209		160,531,000		142,448,362		152,761,000
Junior subordinated debentures	Level 2		40,389,809		28,457,573		40,289,830		28,094,228

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include: cash and due from banks, federal funds sold, interest-bearing deposits at financial institutions, non-maturity deposits, and short-term borrowings. The Company used the following methods and assumptions in estimating the fair value of the following instruments:

Securities held to maturity: The fair values are estimated using pricing models that consider certain observable market data, however, as most of the securities have limited or no trading activity and are not rated, the fair value is partially dependent upon unobservable inputs.

Loans/leases receivable: The fair values for all types of loans/leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans/leases with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market.

Deposits: The fair values disclosed for demand deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits.

FHLB advances and junior subordinated debentures: The fair value of these instruments is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Other borrowings: The fair value for the wholesale repurchase agreements and fixed rate other borrowings is estimated using rates currently available for debt with similar terms and remaining maturities. The fair value for variable rate other borrowings is equal to its carrying value.

Commitments to extend credit: The fair value of these commitments is not material.

NOTE 7 – FULL REDEMPTION OF SERIES F PREFERRED STOCK

On June 30, 2014, the Company redeemed the remaining 14,867 shares of its Series F Non-Cumulative Perpetual Preferred Stock (the “Series F Preferred Stock”) from the United States Department of the Treasury (“Treasury”) for an aggregate redemption amount of $14,823,922, plus unpaid dividends to the date of redemption of $373,869.

Previously, on September 15, 2011, the Company issued 40,090 shares of Series F Preferred Stock to the Treasury for an aggregate purchase price of $40,090,000. The sale of Series F Preferred Stock was the result of an investment by Treasury under the Small Business Lending Fund. On June 29, 2012, the Company redeemed 10,223 shares of Series F Preferred Stock and on March 31, 2014, the Company redeemed an additional 15,000 shares.

With the final redemption on June 30, 2014, the Company no longer has any outstanding preferred stock and all preferred stock dividend payment commitments have been eliminated.

NOTE 8 – DERIVATIVES AND HEDGING ACTIVITIES

The Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates.

Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying index (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying index.

The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market (although this type of derivative is negligible); and (2) interest rate caps to manage the interest rate risk of certain fixed and variable rate assets and variable rate liabilities. This footnote will address the latter.

During the second quarter of 2014, the Company executed and designated two interest rate cap derivatives as cash flow hedges of short-term FHLB advances. The short-term FHLB advance rates will fluctuate with rate movements; therefore the Bank determined it was necessary to hedge against this increase in interest expense in a rising rate environment. The caps purchased will essentially set a ceiling on the rate paid on the FHLB advances, minimizing the risk associated with rate increases.

Below is a summary of the interest rate cap derivatives held by the Company as of September 30, 2014. An initial premium of $2.1 million was paid for the two caps. The fair value of these instruments will fluctuate with market value changes, as well as amortization of the initial premium to interest expense.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Effective Date	Maturity Date	Balance Sheet Location	Notional Amount		Accounting Treatment	Fair Value
June 5, 2014	June 5, 2019	Other Assets	$	15,000,000	Cash Flow Hedging	$	751,668
June 5, 2014	June 5, 2021	Other Assets		15,000,000	Cash Flow Hedging		1,096,451
			$	30,000,000		$	1,848,119

Changes in the fair values of derivative financial instruments accounted for as cash flow hedges to the extent they are effective hedges, are recorded as a component of accumulated other comprehensive income. The following is a summary of how accumulated other comprehensive income was impacted during the reporting periods:

	Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
Unrealized loss at beginning of period	$	(251,149	)	$	-
Amount reclassified from accumulated other comprehensive income to noninterest income		(10,968	)		(10,968	)
Amount of gain (loss) recognized in other comprehensive income		109,692			(141,457	)
Unrealized loss at end of period	$	(152,425	)	$	(152,425	)

Changes in the fair value related to the ineffective portion of cash flow hedges, are reported in noninterest income during the period of the change. As shown in the table above, $10,968 of the change in fair value, both for the current period and year-to-date, was due to ineffectiveness.

Derivative financial instruments are valued by the transaction counterparty on a monthly basis and corroborated by a third party annually. The company uses the hypothetical derivative method to assess and measure effectiveness in accordance with ASC 815, Derivatives and Hedging.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

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

QCBT and CRBT are Iowa-chartered commercial banks, and RB&T is an Illinois-chartered commercial bank. All are members of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation (“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 Lease Funds, located in Brookfield, Wisconsin. In addition, QCBT owns 100% of Quad City Investment Advisors, LLC, which is an investment management and advisory company.

●

CRBT commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its main office located on First Avenue in downtown Cedar Rapids, Iowa and its branch facility located on Council Street in northern Cedar Rapids. On October 26, 2013, CNB, which was acquired by the Company on May 13, 2013, merged with and into CRBT. CNB’s merged branch offices operate as a division of CRBT under the name “Community Bank & Trust,” and serve Cedar Falls and Waterloo, Iowa and adjacent communities through its three offices (two in Waterloo and one in Cedar Falls).

●

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.

OVERVIEW

The Company recognized net income of $4.1 million for the quarter ended September 30, 2014 and reported diluted earnings per common share of $0.50. By comparison, for the third quarter of 2013, the Company recognized net income of $3.8 million, which included $389 thousand of acquisition costs related to the acquisition of CNB. After preferred stock dividends of $811 thousand, the Company reported net income attributable to common stockholders of $3.0 million, or diluted earnings per common share of $0.51 for the third quarter of 2013.

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

	For the three months ended				For the nine months ended
	September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013

Net income	$	4,062,665	$	3,811,944	$	11,959,716	$	11,122,319
Less: Preferred stock dividends		-		810,837		1,081,877		2,432,512
Net income attributable to QCR Holdings, Inc. common stockholders	$	4,062,665	$	3,001,107	$	10,877,839	$	8,689,807

Diluted earnings per common share	$	0.50	$	0.51	$	1.35	$	1.59

Weighted average common and common equivalent outstanding*		8,053,985		5,915,279		8,040,418		5,482,298

*On December 23, 2013, the Company converted $25.0 million of its outstanding shares of Series E Preferred Stock to common stock, which resulted in the issuance of 2,057,502 shares of common stock.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

	For the three months ended									For the nine months ended
	September 30, 2014			June 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013

Net interest income	$	17,475,331		$	16,965,343		$	17,310,336		$	51,289,915		$	47,209,705
Provision for loan/lease losses		(1,063,323	)		(1,001,879	)		(1,366,984	)		(3,159,364	)		(3,944,903	)
Noninterest income		5,067,642			5,344,213			5,934,653			15,158,696			18,087,438
Noninterest expense		(16,388,109	)		(16,106,529	)		(17,027,268	)		(48,635,058	)		(46,220,117	)
Federal and state income tax		(1,028,876	)		(1,193,312	)		(1,038,793	)		(2,694,473	)		(4,009,804	)
Net income	$	4,062,665		$	4,007,836		$	3,811,944		$	11,959,716		$	11,122,319

In comparing quarter-over-quarter, following are some noteworthy changes in the Company’s financial results:

●

Provision for loan/lease losses increased 6% compared to the second quarter of 2014 and decreased 22% from the third quarter of 2013.

●

Noninterest income decreased 5% compared to the second quarter of 2014. A decrease in gains on the sale of government guaranteed portions of loans accounted for a large portion of this change.

●

Noninterest expense increased 2% compared to the second quarter of 2014.

●

Federal and state income tax expense decreased 14% compared to the second quarter of 2014.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NET INTEREST INCOME

Net interest income, on a tax equivalent basis, increased $505 thousand, or 3%, to $18.5 million for the quarter ended September 30, 2014, from $18.0 million for the same period of 2013. Net interest income improved primarily as the result of:

●

Organic loan/lease growth,

●

Further diversification of the Company’s securities portfolio with increased investment in tax-exempt municipal securities, and

●

Continued reductions in the cost of deposits.

A comparison of yields, spread and margin from the third quarter of 2013 to the third quarter of 2014 is as follows (on a tax equivalent basis):

●

The average yield on interest-earning assets increased 2 basis points.

●

The average cost of interest-bearing liabilities decreased 7 basis points.

●

The net interest spread increased 9 basis points from 2.81% to 2.90%.

●

The net interest margin improved 8 basis points from 3.07% to 3.15%.

Net interest income, on a tax equivalent basis, increased $5.0 million, or 10%, to $54.1 million for the first three quarters of 2014, from $49.1 million for the first three quarters of 2013. The increase in net interest income was primarily driven by the acquisition of CNB in May 2013, as well as by the additional items listed above.

A comparison of yields, spread and margin from the first three quarters of 2013 to the first three quarters of 2014 is as follows (on a tax equivalent basis):

●

The average yield on interest-earning assets was flat at 3.86%.

●

The average cost of interest-bearing liabilities decreased 12 basis points.

●

The net interest spread increased 12 basis points from 2.74% to 2.86%.

●

The net interest margin improved 10 basis points from 3.03% to 3.13%.

The Company’s management closely monitors and manages net interest margin. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and leasing company is the improvement of their net interest margins while balancing interest rate risk. Management continually addresses this issue with pricing and other balance sheet management strategies including, but not limited to, the use of alternative funding sources. Over the past several years, the Company’s management has emphasized improving its funding mix by reducing its reliance on long-term wholesale funding, which tends to be at a higher cost than deposits. Also, the Company’s management has focused on reducing the cost of portions of the Company’s existing wholesale funding. As an example, during the first quarter of 2013, QCBT modified $50.0 million of fixed rate wholesale structured repurchase agreements (“structured repos”) with a weighted average interest rate of 3.21% and a weighted average maturity of February 2016 into new fixed rate structured repos with a weighted average interest rate of 2.65% and a weighted average maturity of May 2020. This modification serves to reduce interest expense and improve net interest margin, and minimizes the exposure to rising rates through duration extension of fixed rate liabilities.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

	For the three months ended September 30,
	2014								2013
				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	$	23,894		$	8		0.13	%	$	24,208		$	9		0.15	%
Interest-bearing deposits at financial institutions		45,614			66		0.57	%		40,416			73		0.72	%
Investment securities (1)		673,416			4,644		2.74	%		717,195			4,043		2.24	%
Restricted investment securities		16,210			128		3.13	%		16,279			144		3.51	%
Gross loans/leases receivable (1) (2) (3)		1,572,638			18,003		4.54	%		1,529,771			18,440		4.78	%

Total interest earning assets	$	2,331,772		$	22,849		3.89	%	$	2,327,869		$	22,709		3.87	%

Noninterest-earning assets:
Cash and due from banks	$	44,815							$	44,349
Premises and equipment		36,191								39,067
Less allowance for estimated losses on loans/leases		(23,355	)							(21,401	)
Other		77,768								66,283

Total assets	$	2,467,191							$	2,456,167

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	751,808		$	466		0.25	%	$	759,851		$	625		0.33	%
Time deposits		415,693			702		0.67	%		452,751			769		0.67	%
Short-term borrowings		164,161			65		0.16	%		144,606			57		0.16	%
Federal Home Loan Bank advances		216,311			1,497		2.75	%		205,613			1,705		3.29	%
Junior subordinated debentures		40,373			311		3.06	%		40,222			329		3.25	%
Other borrowings		151,508			1,280		3.35	%		142,697			1,201		3.34	%

Total interest-bearing liabilities	$	1,739,854		$	4,321		0.99	%	$	1,745,740		$	4,686		1.06	%

Noninterest-bearing demand deposits	$	559,614							$	525,708
Other noninterest-bearing liabilities		31,320								38,681
Total liabilities	$	2,330,788							$	2,310,129

Stockholders' equity		136,403								146,038

Total liabilities and stockholders' equity	$	2,467,191							$	2,456,167

Net interest income				$	18,528							$	18,023

Net interest spread							2.90	%							2.81	%

Net interest margin							3.15	%							3.07	%

Ratio of average interest-earning assets to average interest-bearing liabilities		134.02	%							133.35	%

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

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

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the three months ended September 30, 2014

	Inc./(Dec.)			Components
	from			of Change (1)
	Prior Period			Rate			Volume
	2014 vs. 2013
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	(1	)	$	(1	)	$	-
Interest-bearing deposits at financial institutions		(7	)		(49	)		42
Investment securities (2)		601			2,010			(1,409	)
Restricted investment securities		(16	)		(15	)		(1	)
Gross loans/leases receivable (3) (4)		(437	)		(2,914	)		2,477

Total change in interest income	$	140		$	(969	)	$	1,109

INTEREST EXPENSE
Interest-bearing deposits	$	(159	)	$	(153	)	$	(6	)
Time deposits		(67	)		(5	)		(62	)
Short-term borrowings		8			0			8
Federal Home Loan Bank advances		(208	)		(694	)		486
Junior subordinated debentures		(18	)		(26	)		8
Other borrowings		79			5			74

Total change in interest expense	$	(365	)	$	(873	)	$	508

Total change in net interest income	$	505		$	(96	)	$	601

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

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

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

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

	For the nine months ended September 30,
	2014								2013
				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	$	15,737		$	15		0.13	%	$	11,656		$	13		0.15	%
Interest-bearing deposits at financial institutions		59,145			228		0.52	%		37,803			194		0.69	%
Investment securities (1)		699,405			14,063		2.69	%		693,547			11,742		2.26	%
Restricted investment securities		16,688			397		3.18	%		16,075			399		3.32	%
Gross loans/leases receivable (1) (2) (3)		1,518,867			52,063		4.58	%		1,409,066			50,221		4.77	%

Total interest earning assets	$	2,309,842		$	66,766		3.86	%	$	2,168,147		$	62,569		3.86	%

Noninterest-earning assets:
Cash and due from banks	$	44,350							$	42,016
Premises and equipment		36,482								35,322
Less allowance for estimated losses on loans/leases		(22,708	)							(21,272	)
Other		74,372								72,292

Total assets	$	2,442,338							$	2,296,505

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	729,516		$	1,366		0.25	%	$	651,895		$	1,430		0.29	%
Time deposits		392,493			2,006		0.68	%		400,844			2,257		0.75	%
Short-term borrowings		158,821			177		0.15	%		171,838			225		0.18	%
Federal Home Loan Bank advances		226,055			4,549		2.69	%		208,319			5,164		3.31	%
Junior subordinated debentures		40,339			923		3.06	%		39,235			832		2.84	%
Other borrowings		145,977			3,626		3.32	%		140,333			3,555		3.39	%

Total interest-bearing liabilities	$	1,693,201		$	12,647		1.00	%	$	1,612,464		$	13,463		1.12	%

Noninterest-bearing demand deposits	$	573,943							$	505,017
Other noninterest-bearing liabilities		32,195								34,393
Total liabilities	$	2,299,339							$	2,151,874

Stockholders' equity		142,999								144,631

Total liabilities and stockholders' equity	$	2,442,338							$	2,296,505

Net interest income				$	54,119							$	49,106

Net interest spread							2.86	%							2.74	%

Net interest margin							3.13	%							3.03	%

Ratio of average interest-earning assets to average interest-bearing liabilities		136.42	%							134.46	%

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

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

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the nine months ended September 30, 2014

	Inc./(Dec.)			Components
	from			of Change (1)
	Prior Period			Rate			Volume
	2014 vs. 2013
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	2		$	(3	)	$	5
Interest-bearing deposits at financial institutions		34			(79	)		113
Investment securities (2)		2,321			2,221			100
Restricted investment securities		(2	)		(22	)		20
Gross loans/leases receivable (3) (4)		1,842			(2,839	)		4,681

Total change in interest income	$	4,197		$	(722	)	$	4,919

INTEREST EXPENSE
Interest-bearing deposits	$	(64	)	$	(287	)	$	223
Time deposits		(251	)		(205	)		(46	)
Short-term borrowings		(48	)		(32	)		(16	)
Federal Home Loan Bank advances		(615	)		(1,233	)		618
Junior subordinated debentures		91			67			24
Other borrowings		71			(102	)		173

Total change in interest expense	$	(816	)	$	(1,792	)	$	976

Total change in net interest income	$	5,013		$	1,070		$	3,943

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

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

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

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for estimated losses on loans/leases (“allowance”). The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors include 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 structure, 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 for loan/lease losses (“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 portion in the section entitled “Financial Condition” of this Management’s Discussion and Analysis that discusses the allowance. Although management believes the level of the allowance as of September 30, 2014 was adequate to absorb losses inherent 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.

The Company’s assessment of other-than-temporary impairment of its available-for-sale securities portfolio is another critical accounting policy as a result of the level of judgment required by management. Available-for-sale securities are evaluated to determine whether declines in fair value below their cost are other-than-temporary. In estimating other-than-temporary impairment losses, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the Company to not sell the security prior to recovery and whether it is not more-likely-than-not that the Company will be required to sell the security prior to recovery. The discussion regarding the Company’s assessment of other-than-temporary impairment should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income decreased $200 thousand, or 1%, comparing the third quarter of 2014 to the same period of 2013. For the first three quarters of 2014, interest income grew $3.3 million, or 5%, compared to the first three quarters of 2013. The majority of this growth was the result of the acquisition of CNB and the addition of its earning assets. Secondarily, the Company’s three legacy charters had success growing loans and leases over the last twelve months. Overall, the Company’s earning assets increased a total of $145.8 million, comparing September 30, 2014 to September 30, 2013. The securities portfolio yield continued to increase (from 2.24% for the third quarter of 2013 to 2.74% for the third quarter of 2014 and from 2.26% for the first three quarters of 2013 to 2.69% for the first three quarters of 2014) as the Company continued to focus on diversifying its securities portfolio, including increasing its portfolio of agency-sponsored mortgage-backed securities as well as tax-exempt municipal securities, in an effort to increase interest income. Of the latter, all are located in the Midwest with strong underwriting conducted before investment.

The Company intends to continue to grow quality loans and leases as well as to diversify the securities portfolio to maximize yield while minimizing credit and interest rate risk.

INTEREST EXPENSE

Interest expense for the third quarter of 2014 decreased $365 thousand, or 8%, from the third quarter of 2013. For the first three quarters of 2014, interest expense decreased $816 thousand, or 6%, compared to the first three quarters of 2013. Considering the growth of interest-bearing liabilities (average balances grew $81 million, or 5%, from September 30, 2013 to September 30, 2014) from the acquisition of CNB as well as organic growth at the Company’s legacy charters, the Company has been successful in maintaining pricing discipline on deposits and decreasing the cost of borrowings, which has more than offset the growth impact and contributed to the net decline in interest expense. Management has placed a strong focus on reducing the reliance on long-term wholesale funding as it tends to be higher cost than deposits. In recent years, the majority of maturing wholesale funds have been replaced by core deposits, or, to a lesser extent, have been replaced by new wholesale funds at significantly reduced cost. Continuing this trend will strengthen the Company’s franchise value, reduce funding costs, and increase fee income opportunities through deposit service charges.

Management continues to consider strategies to accelerate the reduction of the reliance on wholesale funding and continue the shift in mix to a funding base consisting of a higher percentage of core deposits, including noninterest-bearing deposits. An important consideration to these strategies is the impact on the Company’s interest rate risk position, as some of its wholesale funding was originally borrowed to help strengthen the Company’s net interest income in rising interest rate scenarios.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

PROVISION FOR LOAN/LEASE LOSSES

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

The provision totaled $1.1 million for the third quarter of 2014, which was up $61 thousand from the prior quarter, and down $304 thousand from the third quarter of 2013. The provision totaled $3.2 million for the first nine months of 2014, compared to $3.9 million for the first nine months of 2013. The Company had net charge-offs of $1.4 million for the third quarter of 2014 which, when coupled with the provision of $1.1 million, decreased the Company’s allowance to $22.8 million at September 30, 2014. As of September 30, 2014, the Company’s allowance to total loans/leases was 1.45%, which was down from 1.49% at June 30, 2014, and up from 1.43% at September 30, 2013.

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

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended
	September 30, 2014		September 30, 2013			$ Change			% Change

Trust department fees	$	1,355,700	$	1,312,349		$	43,351			3.3	%
Investment advisory and management fees		726,908		634,446			92,462			14.6
Deposit service fees		1,168,961		1,228,685			(59,724	)		(4.9	)
Gains on sales of residential real estate loans		120,627		184,596			(63,969	)		(34.7	)
Gains on sales of government guaranteed portions of loans		158,736		338,338			(179,602	)		(53.1	)
Earnings on bank-owned life insurance		434,065		466,028			(31,963	)		(6.9	)
Subtotal	$	3,964,997	$	4,164,442		$	(199,445	)		(4.8	)
Gains (losses) on other real estate owned, net		30,596		(36,745	)		67,341			(183.3	)
Securities gains, net		19,429		416,936			(397,507	)		(95.3	)
Other		1,052,620		1,390,020			(337,400	)		(24.3	)
Total noninterest income	$	5,067,642	$	5,934,653		$	(867,011	)		(14.6	)%

	Nine Months Ended
	September 30, 2014			September 30, 2013			$ Change			% Change

Trust department fees	$	4,300,456		$	3,549,200		$	751,257			21.2	%
Investment advisory and management fees		2,086,758			1,938,881			147,877			7.6
Deposit service fees		3,306,769			3,190,731			116,038			3.6
Gains on sales of residential real estate loans		317,085			722,368			(405,283	)		(56.1	)
Gains on sales of government guaranteed portions of loans		860,923			1,949,300			(1,088,377	)		(55.8	)
Earnings on bank-owned life insurance		1,276,901			1,328,598			(51,698	)		(3.9	)
Subtotal	$	12,148,892		$	12,679,078		$	(530,186	)		(4.2	)
Losses on other real estate owned, net		(114,109	)		(566,714	)		452,605			(79.9	)
Securities gains, net		40,625			433,396			(392,771	)		(90.6	)
Bargain purchase gain on Community National acquisition		-			1,841,385			(1,841,385	)		(100.0	)
Other		3,083,288			3,700,293			(617,005	)		(16.7	)
Total noninterest income	$	15,158,696		$	18,087,438		$	(2,928,742	)		(16.2	)%

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Trust department fees continue to be a significant contributor to noninterest income. Trust department fees grew 3% from the third quarter of 2013 to the third quarter of 2014, and grew 21% from the first nine months of 2013 to the first nine months of 2014. Part of the increase stems from the addition of CNB’s trust department, which recognized $225 thousand of trust department fees for the third quarter of 2014 and $747 thousand of trust department fees for the first nine months of 2014. The majority of the trust department fees are determined based on the value of the investments within the managed trusts. As markets have strengthened with the national economy’s continued recovery from recession, the Company’s fee income has experienced similar growth. Additionally, the Company has been successful in organically expanding its customer base at its legacy charters, which has helped drive the recent increases in trust department fee income.

In recent years, the Company has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company’s Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Fee income for investment advisory and management services grew 15% comparing the third quarter of 2014 to the same period of 2013, and grew 8% comparing the first nine months of 2014 to the first nine months of 2013. Similar to trust department fees, these fees are largely determined based on the value of the investments managed. Continued expansion of the customer base in the Company’s legacy markets has helped drive the recent increases in investment advisory and management services fee income. CNB did not provide investment advisory and management services; however, the Company is in the process of leveraging its existing infrastructure to efficiently offer these services in the communities previously served by CNB and now served by CRBT through Community Bank & Trust.

As management focuses on growing fee income, expanding market share in trust and investment advisory services across all of the Company’s markets will continue to be a primary strategic focus.

Deposit service fees contracted 5% comparing the third quarter of 2014 to the same period in 2013, due to a decrease in non-sufficient funds, overdrafts, and related fees, while expanding 4% comparing the first nine months of 2014 to the same period in 2013. Most of the year-over-year growth is attributable to the acquisition of CNB and its deposit portfolio. Additionally, the Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this 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 fell 35% comparing the third quarter of 2014 to the third quarter of 2013, and fell 56% when comparing the first nine months of 2014 to the same period in 2013. With the sustained historically low interest rate environment, refinancing activity has slowed as many of the Company’s existing and prospective customers have already executed a refinancing.

The Company’s gains on the sale of government guaranteed portions of loans for the third quarter of 2014 totaled $159 thousand. Gains totaled $861 thousand for the first nine months of 2014, down 56% from the same period of 2013. Sales activity for government guaranteed portions of loans tends to fluctuate depending on the demand for small business loans that fit the criteria for the government guarantee. Further, some of the transactions can be large and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can be large. Lastly, a strategy for improved pricing is packaging loans together for sale. From time to time, the Company may execute on this strategy, which may delay the gains on sales of some loans to achieve better pricing. Despite the fluctuation, this remains a core strategy for the Company and the pipelines for small business loans are active.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

During the first quarter of 2013, the Company wrote down one existing individual other real estate owned (“OREO”) property by $463 thousand as a result of a further decline in appraised value. Management continues to proactively manage its OREO portfolio in an effort to sell the properties timely at minimal loss, as evidenced by the minimal losses recognized thus far in 2014.

In accordance with acquisition accounting rules, the Company recognized a bargain purchase gain of $1.8 million in recording the acquisition of Community National during the second quarter of 2013.

The following table sets forth the various categories of other noninterest income for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended
	September 30, 2014		September 30, 2013		$ Change			% Change

Debit card fees	$	251,600	$	265,000	$	(13,400	)		(5.1	)%
Correspondent banking fees		295,149		214,310		80,839			37.7
Participation service fees on commercial loan participations		218,268		213,747		4,521			2.1
Income earned on other real estate owned		96,692		11,692		85,000			727.0
Credit card issuing fees, net of processing costs		75,691		57,538		18,153			31.5
Gain on the disposal of leased assets		88,589		37,644		50,945			135.3
Fees on interest rate swaps on commercial loans		-		44,240		(44,240	)		(100.0	)
Lawsuit Award		-		444,732		(444,732	)		(100.0	)
Miscellaneous		26,631		101,117		(74,486	)		(73.7	)
Other noninterest income	$	1,052,620	$	1,390,020	$	(337,400	)		(24.3	)%

	Nine Months Ended
	September 30, 2014		September 30, 2013		$ Change			% Change

Debit card fees	$	763,005	$	752,100	$	10,905			1.4	%
Correspondent banking fees		745,794		535,914		209,880			39.2
Participation service fees on commercial loan participations		632,469		563,217		69,252			12.3
Income earned on other real estate owned		327,735		16,701		311,034			1,862.4
Credit card issuing fees, net of processing costs		258,074		192,509		65,565			34.1
Gain on the disposal of leased assets		107,812		79,900		27,912			34.9
Fees on interest rate swaps on commercial loans		62,000		50,960		11,040			21.7
Gain on sale of credit card loan portfolio		-		495,405		(495,405	)		(100.0	)
Gain on sale of credit card issuing operations		-		355,268		(355,268	)		(100.0	)
Lawsuit Award		-		444,732		(444,732	)		(100.0	)
Miscellaneous		186,399		213,587		(27,188	)		(12.7	)
Other noninterest income	$	3,083,288	$	3,700,293	$	(617,005	)		(16.7	)%

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees decreased 5% comparing the third quarter of 2014 to the third quarter of 2013, and increased 1% comparing the first nine months of 2014 to the first nine months of 2013. As an opportunity to maximize fees, the Company’s legacy charters offer a deposit product with a modest increased interest rate that incentivizes debit card activity. Offering a similar product in the Company’s newest markets, Waterloo and Cedar Falls, Iowa, is currently under strategic review.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Correspondent banking fees increased 38% comparing the third quarter of 2014 to the third quarter of 2013, and increased 39% comparing the first nine months of 2014 to the first nine months of 2013. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of noninterest bearing deposits that can be used to fund additional loan growth as well as a steady source of fee income.

Participation service fees on commercial loan participations represent fees paid annually to the Company by the participant(s) to cover servicing expenses incurred by the Company. The fee is generally 25 basis points of the participated loan amount. Additionally, the Company receives a mandated 1% servicing fee on the sold portion of government guaranteed loans. Participation service fees grew 2% comparing the third quarter of 2014 to the third quarter of 2013, and grew 12% comparing the first nine months of 2014 to the first nine months of 2013. A portion of this growth is the result of the acquisition of CNB’s participated loan portfolio as well as organic growth of commercial loan participations across the Company’s legacy charters.

Income earned on other real estate owned is comprised mostly of rental income on properties that the Company has repossessed. In accordance with accounting rules, all revenues recognized and expenses incurred from these types of properties must be accounted for on a gross basis; therefore, the increased revenue helps to offset holding expenses (mostly loan/lease expense and professional fees) related to maintaining the properties until they are sold.

In recent years, as a result of the sustained historically low interest rate environment, CRBT introduced the execution of interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while CRBT receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management believes that these swaps help position CRBT more favorably for rising rate environments. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks as the circumstances are appropriate for the borrower and the Company.

During the first quarter of 2013, QCBT sold its credit card loan portfolio for a pre-tax gain on sale of $495 thousand. In addition, QCBT sold its credit card issuing operations to the same purchaser for a pre-tax gain on sale of $355 thousand.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and nine months ended September, 2014 and 2013.

	Three Months Ended
	September 30, 2014		September 30, 2013		$ Change			% Change

Salaries and employee benefits	$	10,358,783	$	9,802,712	$	556,071			5.7	%
Occupancy and equipment expense		1,805,949		1,914,996		(109,047	)		(5.7	)
Professional and data processing fees		1,530,139		1,902,799		(372,660	)		(19.6	)
FDIC and other insurance		711,792		712,954		(1,162	)		(0.2	)
Loan/lease expense		184,908		396,477		(211,569	)		(53.4	)
Advertising and marketing		555,076		406,085		148,991			36.7
Postage and telephone		146,759		276,580		(129,821	)		(46.9	)
Stationery and supplies		138,377		143,226		(4,849	)		(3.4	)
Bank service charges		337,067		306,539		30,528			10.0
Subtotal	$	15,768,850	$	15,862,368	$	(93,518	)		(0.6	)
Acquisition and data conversion costs		-		388,663		(388,663	)		(100.0	)
Other		619,259		776,237		(156,978	)		(20.2	)
Total noninterest expense	$	16,388,109	$	17,027,268	$	(639,159	)		(3.8	)%

	Nine Months Ended
	September 30, 2014		September 30, 2013		$ Change			% Change

Salaries and employee benefits	$	30,298,892	$	27,731,628	$	2,567,264			9.3	%
Occupancy and equipment expense		5,539,208		4,930,707		608,501			12.3
Professional and data processing fees		4,518,460		4,481,613		36,847			0.8
FDIC and other insurance		2,121,907		1,896,255		225,652			11.9
Loan/lease expense		908,036		893,436		14,600			1.6
Advertising and marketing		1,394,211		1,082,694		311,517			28.8
Postage and telephone		695,555		752,882		(57,327	)		(7.6	)
Stationery and supplies		435,763		404,614		31,149			7.7
Bank service charges		959,496		866,379		93,117			10.7
Subtotal	$	46,871,528	$	43,040,208	$	3,831,320			8.9
Acquisition and data conversion costs		-		1,177,567		(1,177,567	)		(100.0	)
Other		1,763,530		2,002,342		(238,812	)		(11.9	)
Total noninterest expense	$	48,635,058	$	46,220,117	$	2,414,941			5.2	%

Management places a strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency. The addition of CNB’s cost structure impacted the Company’s noninterest expenses. Management successfully executed on its integration plan for CNB over the second half of 2013 to help increase efficiency and realize cost savings.

Salaries and employee benefits, which was the largest component of noninterest expense, increased from the third quarter of 2013 to the third quarter of 2014 by 6%. This increase was largely the result of:

●

The addition of CNB’s cost structure.

●

Customary annual salary and benefits increases for the majority of the Company’s employee base in 2014.

●

Continued increases in health insurance-related employee benefits for the majority of the Company’s employee base.

●

Higher accrued incentive compensation based on loan/lease and deposit growth for the first nine months of 2014.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Occupancy and equipment expense increased for the year to date with the addition of CNB’s branch network. Additionally, throughout 2013, the Company purchased additional technology for enhanced customer service and for improved fraud detection and prevention systems. The third quarter of 2013 also included a one-time item related to the termination of a lease agreement totaling approximately $183 thousand.

Professional and data processing fees stayed relatively flat from the prior year, however they decreased significantly when comparing the third quarter of 2014 to the same period of 2013 due to reduced legal expenses. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.

FDIC and other insurance expense has generally fallen over the past several years since the FDIC modified its assessment calculation to more closely align with bank performance and risk. The increase from the prior year was primarily attributable to the addition of CNB’s assets, as well as growth at the Company’s three legacy charters.

Loan/lease expense decreased 53% comparing the third quarter of 2014 to the same quarter of 2013, and increased 2% comparing the first nine months of 2014 to the same period of 2013. Some of the increase was the result of the addition of CNB’s cost structure. In addition, the Company incurred elevated levels of expense at the legacy banks for certain existing nonperforming loans as workouts progressed. Generally, loan/lease expense has a direct relationship with the level of nonperforming loans/leases; however, it may deviate depending upon the individual nonperforming loans/leases. Management expects these historically elevated levels of expense to continue to decline in line with the declining trend in nonperforming loans/leases. Additionally, a portion of these expenses are offset by the increase in income earned on other real estate owned, as the income and expense related to repossessed properties must be recognized on a gross basis.

The Company incurred additional expenses for advertising and marketing compared to the prior year. Most of the increase was due to the addition of CNB’s advertising and marketing costs, including the cost of rebranding CNB to Community Bank & Trust.

Bank service charges, which include costs incurred to provide services to QCBT’s correspondent banking customer portfolio, have increased over the past several quarters. The increase is due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio over recent years. Moreover, the addition of CNB’s items processing has added expense in this category.

With the acquisition of CNB on May 13, 2013, the Company incurred acquisition costs totaling $389 thousand for the third quarter of 2013 and $1.2 million for the first nine months of 2013 as the Company incurred professional fees (legal, investment banking, and accounting) in preparation for the closing of the acquisition. In accordance with generally accepted accounting principles, the Company expensed these costs as incurred.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INCOME TAXES

The provision for income taxes totaled $1.0 million, or an effective tax rate of 20%, for the third quarter of 2014 compared to $1.0 million, or an effective tax rate of 21%, for the same quarter of 2013. For the first nine months of 2014, the provision for income taxes totaled $2.7 million, or an effective tax rate of 18%, compared to $4.0 million, or an effective tax rate of 26%, for the same period of 2013. The decline in effective tax rate was partly the result of continued growth in nontaxable income from increased investments in tax-exempt municipal securities, as the Company grew its portfolio of tax-exempt municipal securities by 30% from September 30, 2013 to September 30, 2014. The growth in nontaxable income outpaced the growth in taxable income which helped reduce the effective tax rate. Additionally, the Company recognized a one-time tax benefit in the first quarter of 2014 of $359 thousand as a result of the finalization of the tax issues related to the Community National acquisition following the filing of the acquired entity’s final tax returns.

FINANCIAL CONDITION

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

	As of
	September 30, 2014					June 30, 2014					December 31, 2013					September 30, 2013

	(dollars in thousands)

	Amount		%			Amount		%			Amount		%			Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	106,718		4	%	$	113,569		5	%	$	114,431		5	%	$	122,779		5	%
Securities		652,785		27	%		682,122		28	%		697,210		29	%		703,699		28	%
Net loans/leases		1,550,101		63	%		1,526,301		62	%		1,438,832		60	%		1,517,321		61	%
Other assets		140,992		6	%		142,847		5	%		144,480		6	%		141,915		6	%
Total assets	$	2,450,596		100	%	$	2,464,839		100	%	$	2,394,953		100	%	$	2,485,714		100	%

Total deposits	$	1,713,867		70	%	$	1,677,368		69	%	$	1,646,991		68	%	$	1,741,832		70	%
Total borrowings		550,532		22	%		619,031		25	%		563,381		24	%		557,513		22	%
Other liabilities		48,017		2	%		33,797		1	%		37,004		2	%		38,416		2	%
Total stockholders' equity		138,180		6	%		134,643		5	%		147,577		6	%		147,953		6	%
Total liabilities and stockholders' equity	$	2,450,596		100	%	$	2,464,839		100	%	$	2,394,953		100	%	$	2,485,714		100	%

During the third quarter of 2014, the Company’s total assets decreased $14.2 million, or 1%, to a total of $2.45 billion. Net loans/leases grew $23.8 million, or 2%, while securities decreased $29.3 million, or 4%. A majority of the loan growth was funded through the sale of securities.

Other liabilities increased $14.2 million, or 42%, comparing the third quarter of 2014 to the second quarter of 2014. Most of this increase was attributable to an accrual of $9.8 million recorded in September 2014 representing the amount due to broker for a bond purchase that had a trade date before September 30, 2014 but a settlement date in October of 2014.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INVESTMENT SECURITIES. The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on the Company’s asset-liability position and maximizing return. With the strong growth in deposits more than offsetting the pace of loan growth over the past several years, the Company has grown and diversified its securities portfolio, including increasing the portfolio of agency-sponsored mortgage-backed securities as well as more than tripling the portfolio of tax-exempt municipal securities. Of the latter, the large majority are located in the Midwest with some in or near the Company’s existing markets and require a thorough underwriting process before investment. As the portfolio has grown over recent years, management has elevated its focus on maximizing return while minimizing credit and interest rate risk. Additionally, management will continue to diversify the portfolio with further growth strictly dictated by the pace of growth in deposits and loans. Ideally, management expects to fund future loan growth partially with cashflow from the securities portfolio (calls and maturities of government sponsored agencies, paydowns on residential mortgage-backed securities, and/or targeted sales of securities that meet certain criteria as defined by management).

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

	As of
	September 30, 2014						June 30, 2014						December 31, 2013						September 30, 2013
	Amount			%			Amount			%			Amount			%			Amount			%
	(dollars in thousands)
U.S. govt. sponsored agency securities	$	306,005			47	%	$	325,620			48	%	$	356,473			51	%	$	367,525			52	%
Municipal securities		216,050			33	%		199,595			29	%		180,361			26	%		166,771			24	%
Residential mortgage-backed and related securities		127,780			20	%		153,895			23	%		157,429			23	%		166,545			24	%
Other securities		2,950			0	%		3,012			0	%		2,947			0	%		2,858			0	%
	$	652,785			100	%	$	682,122			100	%	$	697,210			100	%	$	703,699			100	%

As a % of Total Assets		26.64	%					27.83	%					29.11	%					28.31	%
Net Unrealized Losses as a % of Amortized Cost		-1.12	%					-1.03	%					-4.02	%					-3.10	%
Duration (in years)		4.6						4.4						4.7						4.5

With the increase in long-term interest rates during the middle of 2013, the Company’s securities portfolio shifted from a net unrealized gain position to a net unrealized loss position. Management expected this shift to occur with the increase in long-term interest rates. Management performs an evaluation of the portfolio quarterly to understand the current market value as well as projections of market value in a variety of rising and falling interest rate scenarios. In addition, management has evaluated those securities with an unrealized loss position to determine whether the loss is derived from credit deterioration or the movement in interest rates. The evaluation determined that there were no securities with other-than-temporary impairment. See the “Critical Accounting Policies” section for further discussion on this evaluation.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The duration of the securities portfolio has lengthened over the recent years for two reasons:

●

A portion of the government-sponsored agency securities contain call options at the discretion of the issuer whereby the issuer can call the security at par at certain times which vary by individual security. With the sharp increase in longer-term rates in 2013, the duration of these callable agency securities lengthened as the likelihood of a call became less likely.

●

The increased investment in tax-exempt municipal securities which tend to be longer term (average maturity is approximately 7 years). Management understands that this extended the duration of its securities portfolio and continually evaluates the combined benefit of increased interest income and reduced effective income tax rate and the impact on interest rate risk.

The Company has not invested in commercial 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 Wall Street Reform and Consumer Protection Act, known as the “Dodd-Frank Act”).

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

LOANS/LEASES. Total loans/leases grew 1% during the third quarter of 2014, and 8% over the first nine months of 2014. Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more commercial and industrial loans, owner-occupied commercial real estate loans, and leases and fewer non owner-occupied commercial real estate and construction loans. The addition of CNB’s portfolio helped maintain this shift in mix as CNB’s portfolio mix was similar to that of the Company’s three legacy banks. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.

	As of
	September 30, 2014						June 30, 2014						December 31, 2013						September 30, 2013
	Amount			%			Amount			%			Amount			%			Amount			%

	(dollars in thousands)

Commercial and industrial loans	$	479,747			31	%	$	480,494			31	%	$	431,688			30	%	$	471,257			31	%
Commercial real estate loans		697,728			45	%		683,376			44	%		671,753			46	%		714,701			46	%
Direct financing leases		162,476			10	%		155,004			10	%		128,902			9	%		121,268			8	%
Residential real estate loans		154,954			10	%		153,200			10	%		147,356			10	%		150,825			10	%
Installment and other consumer loans		71,760			5	%		71,443			5	%		76,034			5	%		77,226			5	%

Total loans/leases	$	1,566,665			100	%	$	1,543,517			100	%	$	1,455,733			100	%	$	1,535,277			100	%

Plus deferred loan/lease origination costs, net of fees		6,204						5,851						4,547						4,106
Less allowance for estimated losses on loans/leases		(22,768	)					(23,067	)					(21,448	)					(22,062	)

Net loans/leases	$	1,550,101					$	1,526,301					$	1,438,832					$	1,517,321

Because commercial real estate loans have historically been the Company’s largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’s commercial real estate loan portfolio. For example, management tracks the level of owner-occupied commercial real estate loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of September 30, 2014 and December 31, 2013, approximately 36% and 39%, respectively, of the commercial real estate loan portfolio was owner-occupied.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Following is a listing of significant industries within the Company’s commercial real estate loan portfolio as of September 30, 2014 and December 31, 2013:

	As of September 30,					As of June 30,					As of December 31,					As of September 30,
	2014					2014					2013					2013
	Amount		%			Amount		%			Amount		%			Amount		%

	(dollars in thousands)

Lessors of Nonresidential Buildings	$	239,600		34	%	$	235,187		34	%	$	229,284		34	%	$	230,692		33	%
Lessors of Residential Buildings		68,409		10	%		65,237		10	%		64,659		10	%		80,507		11	%
Land Subdivision		24,518		4	%		28,234		4	%		29,117		4	%		29,940		4	%
Nursing Care Facilities		19,853		3	%		22,626		3	%		19,212		3	%		16,784		2	%
Hotels		16,990		2	%		20,207		3	%		20,975		3	%		22,808		3	%
Lessors of Other Real Estate Property		16,675		2	%		16,642		3	%		15,509		2	%		15,221		2	%
New Car Dealers		16,473		2	%		16,010		2	%		16,597		2	%		22,730		3	%
Other *		295,210		43	%		279,233		41	%		276,400		42	%		296,019		42	%

Total Commercial Real Estate Loans	$	697,728		100	%	$	683,376		100	%	$	671,753		100	%	$	714,701		100	%

* “Other” consists of all other industries. None of these had concentrations greater than $16.0 million, or 2.3% of total commercial real estate loans.

The Company’s residential real estate loan portfolio consists of 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 fixed rate residential real estate loans that met certain credit guidelines.

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

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES. Changes in the allowance for the three and nine months ended September 30, 2014 and 2013 are presented as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013

	(dollars in thousands)						(dollars in thousands)

Balance, beginning	$	23,067		$	21,156		$	21,448		$	19,925
Provisions charged to expense		1,063			1,367			3,160			3,945
Loans/leases charged off		(1,731	)		(928	)		(2,487	)		(2,563	)
Recoveries on loans/leases previously charged off		369			467			647			755
Balance, ending	$	22,768		$	22,062		$	22,768		$	22,062

The allowance was $22.8 million at September 30, 2014 compared to $21.4 million at December 31, 2013 and $22.1 million at September 30, 2013. Net charge-offs of loans/leases for the first nine months of 2014 was 12 basis points of average loans/leases which compares favorably to 13 basis points of average loans/leases for the first nine months of 2013. The allowance was determined based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmental guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed monthly with specific detailed reviews completed on all loans risk-rated worse than “fair quality” and carrying aggregate exposure in excess of $100 thousand. The adequacy of the allowance is monitored by the loan review staff and reported to management and the board of directors.

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

	As of
Internally Assigned Risk Rating *	September 30, 2014		June 30, 2014		December 31, 2013		September 30, 2013

	(dollars in thousands)

Special Mention (Rating 6)	$	23,964	$	34,306	$	24,572	$	29,646
Substandard (Rating 7)		48,367		53,409		43,508		50,206
Doubtful (Rating 8)		-		-		-		202
	$	72,331	$	87,715	$	68,080	$	80,054


Criticized Loans **	$	72,331	$	87,715	$	68,080	$	80,054
Classified Loans ***	$	48,367	$	53,409	$	43,508	$	50,408

* Amounts above include the government guaranteed portion, if any. For the calculation of allowance for estimated losses on loans/leases, the Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.

** Criticized loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

*** Classified loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 7 or 8, regardless of performance.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The Company experienced a modest increase in criticized and classified loans during the first nine months of 2014, as compared to December 31, 2013, which also translated to an increase in nonperforming loans. Nonperforming loans/leases increased $8.0 million during the same period. The ratio of the Company’s performing delinquent loans/leases (as defined as those past due 30 days or more and accruing) to total loans/leases has improved over the first nine months of 2014 (24 basis points of total loans/leases at September 30, 2014, which is down from 53 basis points of total loans/leases at December 31, 2013). The Company continues its strong focus on improving credit quality, including close management of criticized and classified loans as well as performing delinquent loans/leases, in an effort to limit translation to impairment and growth in nonperforming loans/leases.

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

	As of
	September 30, 2014			June 30, 2014			December 31, 2013			September 30, 2013

Allowance / Gross Loans/Leases		1.45	%		1.49	%		1.47	%		1.43	%
Allowance / Nonperforming Loans/Leases *		79.83	%		115.68	%		104.70	%		88.51	%

*Nonperforming loan/leases consist of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing troubled debt restructurings.

In accordance with generally accepted accounting principles for acquisition accounting, the acquired CNB loans were recorded at market value; therefore, there was no allowance associated with CNB’s loans at acquisition, which caused a drop in the Company’s allowance to total loans/leases percentage during the second quarter of 2013.

Although management believes that the allowance at September 30, 2014 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s allowance for estimated losses on loans/leases.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NONPERFORMING ASSETS. The table below presents the amounts of nonperforming assets.

	As of September 30,			As of June 30,			As of December 31,			As of September 30,			As of December 31,
	2014			2014			2013			2013			2012

	(dollars in thousands)

Nonaccrual loans/leases (1) (2)	$	26,337		$	17,652		$	17,878		$	22,126		$	17,932
Accruing loans/leases past due 90 days or more		55			104			84			61			159
Troubled debt restructurings - accruing		2,129			2,184			2,523			2,739			7,300
Total nonperforming loans/leases		28,521			19,940			20,485			24,926			25,391
Other real estate owned		10,680			10,951			9,729			8,496			3,955
Other repossessed assets		210			290			346			255			212
Total nonperforming assets	$	39,411		$	31,181		$	30,560		$	33,677		$	29,558

Nonperforming loans/leases to total loans/leases		1.81	%		1.29	%		1.40	%		1.62	%		1.97	%
Nonperforming assets to total loans/leases plus reposessed property		2.49	%		2.00	%		2.08	%		2.18	%		2.29	%
Nonperforming assets to total assets		1.61	%		1.27	%		1.28	%		1.35	%		1.41	%
Texas ratio (3)		25.13	%		20.23	%		18.43	%		20.44	%		18.68	%

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes troubled debt restructurings of $9.6 million at September 30, 2014, $9.8 million at June 30, 2014, $10.9 million at December 31, 2013, $13.7 million at September 30, 2013, and $5.7 million at December 31, 2012.

(3)

Texas Ratio = Nonperforming Assets (excluding Other Repossessed Assets) / Tangible Equity plus Allowance for Estimated Losses on Loans/Leases. Texas Ratio is a non-GAAP financial measure. Management included this ratio as this is considered by many investors and analysts to be a metric with which to analyze and evaluate asset quality. Other companies may calculate this ratio differently.

The large majority of the nonperforming assets consist of nonaccrual loans/leases, accruing troubled debt restructurings (“TDRs”), and OREO. For nonaccrual loans/leases and accruing TDRs, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate. Additionally, a portion of several of the nonaccrual loans are guaranteed by the government. At September 30, 2014, government guaranteed amounts of nonaccrual loans totaled approximately $557 thousand, or 2% of the $26.3 million of total nonaccrual loans/leases. OREO is carried at the lower of carrying amount or fair value less costs to sell.

Nonperforming assets at September 30, 2014 were $39.4 million, which were up $8.9 million from December 31, 2013, and up $5.7 million from September 30, 2013. In addition, the ratio of nonperforming assets to total assets was 1.61% at September 30, 2014, which was up from 1.28% at December 31, 2013, and up from 1.35% at September 30, 2013. During the first nine months of 2014, the Company experienced fluctuations in the performance of several individual credits. Several of these credits experienced improved performance (sustained performance of accruing TDRs and payoffs of nonaccrual loans) and other isolated credits experienced degradation (new nonaccrual loans/leases and OREO).

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

DEPOSITS. Deposits grew $36.5 million during the third quarter of 2014, mostly in short-term, low cost brokered and retail time deposits. The table below presents the composition of the Company’s deposit portfolio.

	As of
	September 30, 2014					June 30, 2014					December 31, 2013					September 30, 2013

	(dollars in thousands)

	Amount		%			Amount		%			Amount		%			Amount		%
Noninterest bearing demand deposits	$	535,967		31	%	$	531,063		31	%	$	542,566		33	%	$	515,365		29	%
Interest bearing demand deposits		762,954		45	%		760,242		46	%		715,643		43	%		780,546		45	%
Time deposits		319,105		19	%		298,011		18	%		326,852		20	%		382,819		22	%
Brokered time deposits		95,841		6	%		88,052		5	%		61,930		4	%		63,103		4	%
	$	1,713,867		100	%	$	1,677,368		100	%	$	1,646,991		100	%	$	1,741,833		100	%

The Company has been successful in growing its noninterest bearing deposit portfolio over the past few years, growing average balances $68.9 million, or 14%, comparing the year-to-date average for the third quarter of 2014 to the same period of 2013. Most of this growth continued to be derived from QCBT’s correspondent banking business. The continued strength of the noninterest bearing deposit portfolio has provided flexibility to manage down deposit pricing and reduce reliance on higher cost wholesale funds, which has helped drive down the Company’s interest expense.

BORROWINGS. The subsidiary banks offer short-term repurchase agreements to some of their significant customers. Also, the subsidiary banks purchase federal funds for short-term funding needs from the Federal Reserve Bank or from their correspondent banks. The table below presents the composition of the Company’s short-term borrowings.

	As of
	September 30, 2014		June 30, 2014		December 31, 2013		September 30, 2013

	(dollars in thousands)

Overnight repurchase agreements with customers	$	135,697	$	114,712	$	98,823	$	124,330
Federal funds purchased		26,490		89,610		50,470		44,930
	$	162,187	$	204,322	$	149,293	$	169,260

As a result of their memberships in either the Federal Home Loan Bank (“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. 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. FHLB advances decreased by $26.4 million, or 12%, during the third quarter of 2014.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Other borrowings consist largely of structured repos which are utilized as an alternative funding source to FHLB advances and customer deposits. The table below presents the composition of the Company’s other borrowings.

	As of
	September 30, 2014		June 30, 2014		December 31, 2013		September 30, 2013

	(dollars in thousands)

Structured repos	$	130,000	$	130,000	$	130,000	$	130,000
Term note		18,800		18,800		9,800		10,000
364-day revolving note		-		-		-		-
Series A subordinated notes		2,655		2,653		2,648		2,646
	$	151,455	$	151,453	$	142,448	$	142,646

In June of 2014, the Company restructured its existing term debt ($8.8 million at the time of restructure which was the net remaining amount after the acquisition of CNB) and borrowed an additional $10.0 million of term debt to help assist with the final redemption of the Series F Preferred Stock. The term debt is secured by common stock of the Company’s subsidiary banks and has a 4-year term with principal and interest due quarterly. Interest is calculated at the effective LIBOR rate plus 3.00% per annum (3.23% at September 30, 2014). Additionally, the Company continued to maintain its $10.0 million revolving line of credit note. At September 30, 2014, the Company had not borrowed on this revolving credit note and had the full $10.0 million line available.

It is management’s intention to continue to reduce the reliance on wholesale funding, including FHLB advances, structured repos, and brokered time deposits. Replacement of this funding with core deposits helps to reduce interest expense as the wholesale funding tends to be higher funding cost. However, the Company may choose to utilize advances 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 cost for the Company’s combined wholesale funding portfolio.

	September 30, 2014				December 31, 2013
			Weighted				Weighted
			Average				Average
			Interest Rate				Interest Rate
	Amount Due		at Quarter-End		Amount Due		at Year-End
Maturity:
Year ending December 31:	(dollar amounts in thousands)

2014	$	64,219		0.51	$	110,521		1.24
2015		67,000		1.35		41,000		2.00
2016		48,642		3.63		48,642		3.63
2017		48,145		3.17		43,075		3.43
2018		60,042		3.41		58,042		3.47
Thereafter		134,293		3.23		122,000		3.33
Total Wholesale Funding	$	422,341		2.58	$	423,280		2.72

During the first nine months of 2014, wholesale funding maturing in 2014 decreased by $46.3 million. This is the net result of $99.2 million of maturities offset by the addition of $52.9 million in short-term, low cost FHLB advances and brokered time deposits.

Importantly, a large portion of the Company’s FHLB advances and structured repos have putable options which allow the lender (FHLB or counterparty), at its discretion, to terminate the borrowing and require the subsidiary banks to repay at predetermined dates prior to the stated maturity.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

STOCKHOLDERS’ EQUITY. The table below presents the composition of the Company’s stockholders’ equity, including the common and preferred equity components.

	As of
	September 30, 2014						June 30, 2014						December 31, 2013						September 30, 2013
	Amount			%			Amount			%			Amount			%			Amount			%

	(dollars in thousands)

Common stock	$	8,058					$	8,050					$	8,006					$	5,932
Additional paid in capital - common		61,277						60,999						60,360						38,716
Retained earnings		75,200						71,137						64,637						61,787
Accumulated other comprehensive loss		(4,749	)					(3,937	)					(13,644	)					(10,039	)
Less: Treasury stock		(1,606	)					(1,606	)					(1,606	)					(1,606	)
Total common stockholders' equity		138,180			100	%		134,643			100	%		117,753			80	%		94,790			64	%

Preferred stock		-						-						30						55
Additional paid in capital - preferred		-						-						29,794						53,108
Total preferred stockholders' equity		-			-			-			-			29,824			20	%		53,163			36	%

Total stockholders' equity	$	138,180			100	%	$	134,643			100	%	$	147,577			100	%	$	147,953			100	%

Tangible common equity (TCE)* / total tangible assets (TA)		5.45	%					5.27	%					4.71	%					3.56	%
TCE/TA excluding accumulated other comprehensive income (loss)		5.64	%					5.43	%					5.29	%					3.96	%

*Tangible common equity is defined as total common stockholders’ equity excluding goodwill and other intangibles. This ratio is a non-GAAP financial measure. Management included this ratio as it is considered by many investors and analysts to be a metric with which to analyze and evaluate the equity composition. Other companies may calculate this ratio differently.

The following table presents the rollforward of stockholders’ equity for the three and nine months ended September 30, 2014 and 2013, respectively.

	For the quarter ended September 30,						For the nine months ended September 30,
	2014			2013			2014			2013
	(dollars in thousands)
Beginning balance	$	134,643		$	145,446		$	147,577		$	140,434
Net income		4,063			3,812			11,960			11,122
Other comprehensive income (loss), net of tax		(812	)		(818	)		8,895			(14,746	)
Preferred and common cash dividends declared		-			(811	)		(1,397	)		(2,663	)
Issuance of 834,715 shares of common stock for acquisition of CNB, net		-			-			-			13,017
Redemption of 15,000 shares of Series F Preferred Stock		-			-			(15,000	)		-
Redemption of 14,867 shares of Series F Preferred Stock		-			-			(14,824	)		-
Other *		286			324			969			789
Ending balance	$	138,180		$	147,953		$	138,180		$	147,953

*Includes mostly common stock issued for options exercised and the employee stock purchase plans, as well as stock-based compensation.

With the final redemption of the remaining Series F Preferred Stock on June 30, 2014, the Company has completely retired all preferred stock and eliminated the associated dividend payment commitments. See Note 7 to the Consolidated Financial Statements for additional information regarding the Company’s final redemption of the Series F Preferred Stock.

Part I

Item 2

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’ 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 $114.3 million during the third quarter of 2014, $102.8 million during 2013 and $98.6 million during 2012. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, structured repos, brokered time deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio (both residential mortgage-backed securities and municipal securities). At September 30, 2014, the subsidiary banks had 35 lines of credit totaling $371.7 million, of which $18.2 million was secured and $353.5 million was unsecured. At September 30, 2014, $258.8 million was available as $26.5 million was utilized for short-term borrowing needs at the three banks. At December 31, 2013, the subsidiary banks had 33 lines of credit totaling $351.3 million, of which $26.8 million was secured and $324.5 million was unsecured. At December 31, 2013, $315.3 million was available as $36.0 million was utilized for short-term borrowing needs at QCBT. 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 its $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 24, 2015. At September 30, 2014, the Company had not borrowed on this revolving credit note and had the full amount available.

Investing activities used cash of $40.7 million during the first nine months of 2014 compared to $145.4 million for the same period of 2013. Proceeds from calls, maturities, paydowns, and sales of securities were $115.7 million for the first nine months of 2014 compared to $215.0 million for the same period of 2013. Purchases of securities used cash of $48.5 million for the first nine months of 2014 compared to $297.0 million for the same period of 2013. The net increase in loans/leases used cash of $115.6 million for the first nine months of 2014 compared to $65.7 million for the same period of 2013.

Financing activities provided cash of $22.6 million for the first nine months of 2014 compared to $111.9 million for same period of 2013. Net increases in deposits totaled $66.9 million for the first nine months of 2014 compared to $112.7 million for the same period of 2013. During the first nine months of 2014, the Company’s short-term borrowings increased $12.9 million. Also, during the first quarter of 2014, the Company partially redeemed its outstanding shares of Series F Preferred Stock totaling $15.0 million and then fully redeemed the remaining $14.8 million in the second quarter of 2014.

Total cash provided by operating activities was $18.5 million for the first nine months of 2014 compared to $30.7 million for the same period of 2013.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Throughout its history, the Company has secured additional capital through various resources, including the issuance of preferred stock (discussed above) and trust preferred securities. Trust preferred securities are reported on the Company’s balance sheet as liabilities, but currently qualify for treatment as regulatory capital.

The following table presents the details of the trust preferred securities issued and outstanding as of September 30, 2014.

Name	Date Issued	Amount Issued		Interest Rate	Interest Rate as of 9/30/2014			Interest Rate as of 12/31/2013

QCR Holdings Statutory Trust II	February 2004	$	12,372,000	2.85% over 3-month LIBOR		3.08	%		3.10	%
QCR Holdings Statutory Trust III	February 2004		8,248,000	2.85% over 3-month LIBOR		3.08	%		3.10	%
QCR Holdings Statutory Trust IV	May 2005		5,155,000	1.80% over 3-month LIBOR		2.03	%		2.04	%
QCR Holdings Statutory Trust V	February 2006		10,310,000	1.55% over 3-month LIBOR		1.78	%		1.79	%
Community National Statutory Trust II	September 2004		3,093,000	2.17% over 3-month LIBOR		2.40	%		2.42	%
Community National Statutory Trust III	March 2007		3,609,000	1.75% over 3-month LIBOR		1.98	%		1.99	%
		$	42,787,000	Weighted Average Rate		2.50	%		2.51	%

The Company assumed the trust preferred securities originally issued by Community National in connection with its acquisition in May 2013. As a result of acquisition accounting, the liabilities were recorded at fair value upon acquisition with the resulting discount being accreted as interest expense on a level yield basis over the expected term. The original discount totaled $2.6 million. As of September 30, 2014, the remaining discount was $2.4 million.

On June 30, 2014, the Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”). This registration statement, declared effective by the SEC on July 14, 2014, will allow the Company to issue various types of securities, including common stock, preferred stock, debt securities or warrants, from time to time, up to an aggregate amount of $75.0 million. The specific terms and prices of the securities will be determined at the time of any future offering and described in a separate prospectus supplement, which would be filed with the SEC at the time of the particular offering, if any.

The Company (on a consolidated basis) and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications 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 tables) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of September 30, 2014 and December 31, 2013, that the Company and the subsidiary banks met all capital adequacy requirements to which they were subject.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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 and Tier 1 leverage ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of September 30, 2014 and December 31, 2013 are also presented in the following tables (dollars in thousands). As of September 30, 2014 and December 31, 2013, the subsidiary banks met the requirements to be “well capitalized”.

												To Be Well
												Capitalized Under
						For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
As of September 30, 2014:
Company:
Total risk-based capital	$	200,649		11.10	%	$	144,672	>		8.0	%	N/A			N/A
Tier 1 risk-based capital		175,146		9.69	%		72,336	>		4.0		N/A			N/A
Leverage ratio		175,146		7.53	%		92,995	>		4.0		N/A			N/A
Quad City Bank & Trust:
Total risk-based capital	$	103,195		11.41	%	$	72,337	>		8.0	%	$	90,421	>		10.00	%
Tier 1 risk-based capital		92,808		10.26	%		36,168	>		4.0			54,252	>		6.00	%
Leverage ratio		92,808		7.23	%		51,330	>		4.0			64,162	>		5.00	%
Cedar Rapids Bank & Trust:
Total risk-based capital	$	75,550		11.87	%	$	50,922	>		8.0	%	$	63,653	>		10.00	%
Tier 1 risk-based capital		67,587		10.62	%		25,461	>		4.0			38,192	>		6.00	%
Leverage ratio		67,587		8.02	%		33,729	>		4.0			42,162	>		5.00	%
Rockford Bank & Trust:
Total risk-based capital	$	35,467		12.81	%	$	22,141	>		8.0	%	$	27,677	>		10.00	%
Tier 1 risk-based capital		32,002		11.56	%		11,071	>		4.0			16,606	>		6.00	%
Leverage ratio		32,002		9.06	%		14,122	>		4.0			17,652	>		5.00	%

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

												To Be Well
												Capitalized Under
						For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
As of December 31, 2013:
Company:
Total risk-based capital	$	217,011		12.87	%	$	134,935	>		8.0	%	N/A			N/A
Tier 1 risk-based capital		193,044		11.45	%		67,468	>		4.0	%	N/A			N/A
Tier 1 leverage		193,044		7.96	%		97,029	>		4.0	%	N/A			N/A
Quad City Bank & Trust:
Total risk-based capital	$	101,168		12.25	%	$	66,049	>		8.0	%	$	82,562	>		10.00	%
Tier 1 risk-based capital		91,820		11.12	%		33,025	>		4.0			49,537	>		6.00	%
Tier 1 leverage		91,820		7.13	%		51,527	>		4.0			64,408	>		5.00	%
Cedar Rapids Bank & Trust:
Total risk-based capital	$	74,912		12.54	%	$	47,808	>		8.0	%	$	59,760	>		10.00	%
Tier 1 risk-based capital		67,432		11.28	%		23,904	>		4.0			35,856	>		6.00	%
Tier 1 leverage		67,432		8.78	%		30,736	>		4.0			38,420	>		5.00	%
Rockford Bank & Trust:
Total risk-based capital	$	38,778		14.59	%	$	21,263	>		8.0	%	$	26,579	>		10.00	%
Tier 1 risk-based capital		35,449		13.34	%		10,631	>		4.0			15,947	>		6.00	%
Tier 1 leverage		35,449		10.54	%		13,459	>		4.0			16,824	>		5.00	%

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million). The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expand the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of instruments that now qualify as Tier 1 Capital will not qualify, or their qualifications will change. The Basel III Rules also permit smaller banking organizations (which includes the Company and its subsidiary banks) to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1 Capital ratio. In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more. Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015. Management is in the process of assessing the effect the Basel III Rules may have on the Company’s and the subsidiary banks’ capital positions and will monitor developments in this area. At present, management believes that its current capital structure and the execution of its existing capital plan will be more than sufficient to meet and exceed the revised regulatory capital ratios as required by the new Basel III Rules.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors which could have a material adverse effect on the Company’s operations and future prospects are detailed in the “Risk Factors” section included under Item 1A of Part I of the Company’s Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including the Company, which could have a material adverse effect on the Company’s operations and future prospects of the Company and its subsidiaries.

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

Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

In an attempt to manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank’s interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank. Internal asset/liability management teams consisting of members of the subsidiary banks’ management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks’ securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

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

Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 300, 400, and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 basis point downward shift. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve. Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift upward 100, 200, 300, and 400 basis points and a parallel and instantaneous shift downward 100 basis points. The Company will run additional interest rate scenarios on an as-needed basis. The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit has been increased to 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

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

				NET INTEREST INCOME EXPOSURE in YEAR 1
INTEREST RATE SCENARIO	POLICY LIMIT			As of June 30, 2014			As of December 31, 2013			As of December 31, 2012

100 basis point downward shift		-10.0	%		-1.3	%		-1.0	%		-1.5	%
200 basis point upward shift		-10.0	%		-5.6	%		-4.8	%		-0.9	%
300 basis point upward shock		-25.0	%		-13.8	%		-11.0	%		0.8	%

The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at June 30, 2014 (the most recent quarter available) were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn’t have a specific policy limit).

Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the second quarter of 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 initial cost (prepaid premium) of the interest rate caps totaled $2.1 million. This amount was recorded in the Other Assets section of the balance sheet. This asset will be amortized to interest expense according to a predetermined schedule and will also be adjusted to fair value on a recurring basis. The change in fair value will flow through Accumulated Other Comprehensive Income and the derivative transaction will be tested for effectiveness according to cash flow hedge accounting standards. The interest rate caps purchased will 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 interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2014. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In May 2013, the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) released an updated version of its Internal Control – Integrated Framework. The updated version supersedes the 1992 version effective December 15, 2014. The Company’s management has evaluated the updated COSO framework and will use the new framework to evaluate the adequacy of their internal control over financial reporting for the year ending December 31, 2014. The Company’s management expects no material changes to existing internal controls over financial reporting as a result of using the updated framework.

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 2013 Annual Report on Form 10-K. 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

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION - continued

Item 6

Exhibits

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

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

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

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

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014 and September 30, 2013; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three months and nine months ended September 30, 2014 and September 30, 2013; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2014 and September 30, 2013; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013; and (vi) Notes to the Consolidated Financial Statements.

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	November 7, 2014	/s/ Douglas M. Hultquist
		Douglas M. Hultquist, President
		Chief Executive Officer

Date	November 7, 2014	/s/ Todd A. Gipple
		Todd A. Gipple, Executive Vice President
		Chief Operating Officer
		Chief Financial Officer

Date	November 7, 2014	/s/ Elizabeth A. Grabin
		Elizabeth A. Grabin, Vice President
		Controller
		Principal Accounting Officer