QCR HOLDINGS INC - Quarter Report: 2019 March (Form 10-Q)

Table of Contents

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 March 31, 2019

[ ] 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 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 736‑3580

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [ X ] No [ ]

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


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

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

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

Yes [ ] No [ X ]

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


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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of May 1, 2019, the Registrant had outstanding 15,758,261 shares of common stock, $1.00 par value per share.

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


			Page Number(s)
Part I	FINANCIAL INFORMATION

	Item 1	Consolidated Financial Statements (Unaudited)

		Consolidated Balance Sheets As of March 31, 2019 and December 31, 2018	4

		Consolidated Statements of Income For the Three Months Ended March 31, 2019 and 2018	5

		Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2019 and 2018	6

		Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2019 and 2018	7

		Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2019 and 2018	8

		Notes to Consolidated Financial Statements	10

		Note 1. Summary of Significant Accounting Policies	10
		Note 2. Investment Securities	12
		Note 3. Loans/Leases Receivable	16
		Note 4. Derivatives	25
		Note 5. Subordinated Notes	26
		Note 6. Earnings Per Share	26
		Note 7. Fair Value	27
		Note 8. Business Segment Information	29
		Note 9. Regulatory Capital Requirements	30

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

		Introduction	32
		General	32
		Executive Overview	32
		Long-Term Financial Goals	34
		Strategic Developments	35
		GAAP to Non-GAAP Reconciliations	36
		Net Interest Income (Tax Equivalent Basis)	38
		Critical Accounting Policies	40
		Results of Operations	41
		Interest Income	41

Table of Contents


		Interest Expense	41
		Provision for Loan/Lease Losses	41
		Noninterest Income	42
		Noninterest Expense	44
		Income Taxes	45
		Financial Condition	46
		Investment Securities	46
		Loans/Leases	47
		Allowance for Estimated Losses on Loans/Leases	49
		Nonperforming Assets	51
		Deposits	51
		Borrowings	52
		Stockholders' Equity	53
		Liquidity and Capital Resources	54
		Special Note Concerning Forward-Looking Statements	55

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	57

	Item 4	Controls and Procedures	59

Part II	OTHER INFORMATION		60

	Item 1	Legal Proceedings	60

	Item 1A	Risk Factors	60

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	60

	Item 3	Defaults upon Senior Securities	60

	Item 4	Mine Safety Disclosures	60

	Item 5	Other Information	60

	Item 6	Exhibits	61

Signatures			62

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

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2019 and December 31, 2018


	March 31,		December 31,
	2019		2018
	(dollars in thousands)
Assets
Cash and due from banks	$	76,527	$	85,523
Federal funds sold		1,872		26,398
Interest-bearing deposits at financial institutions		214,160		133,198

Securities held to maturity, at amortized cost		395,302		401,913
Securities available for sale, at fair value		260,447		261,056
Total securities		655,749		662,969

Loans receivable held for sale		1,994		1,295
Loans/leases receivable held for investment		3,797,438		3,731,459
Gross loans/leases receivable		3,799,432		3,732,754
Less allowance for estimated losses on loans/leases		(41,164)		(39,847)
Net loans/leases receivable		3,758,268		3,692,907

Bank-owned life insurance		68,323		67,783
Premises and equipment, net		77,194		75,582
Restricted investment securities		22,904		25,689
Other real estate owned, net		9,110		9,378
Goodwill		77,872		77,832
Intangibles		16,918		17,450
Other assets		87,765		75,001
Total assets	$	5,066,662	$	4,949,710

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	821,599	$	791,102
Interest-bearing		3,372,621		3,185,929
Total deposits		4,194,220		3,977,031

Short-term borrowings		15,886		28,774
Federal Home Loan Bank advances		126,180		266,492
Other borrowings		35,000		67,250
Subordinated notes		68,215		4,782
Junior subordinated debentures		37,713		37,670
Other liabilities		101,041		94,573
Total liabilities		4,578,255		4,476,572


Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 March 2019 and December 2018- No shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 March 2019 - 15,755,442 shares issued and outstanding December 2018 - 15,718,208 shares issued and outstanding		15,755		15,718
Additional paid-in capital		271,673		270,761
Retained earnings		204,179		192,203
Accumulated other comprehensive loss:
Securities available for sale		(1,131)		(4,268)
Derivatives		(2,069)		(1,276)
Total stockholders' equity		488,407		473,138
Total liabilities and stockholders' equity	$	5,066,662	$	4,949,710

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31, 2019 and 2018


	2019		2018
	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	45,568	$	34,214
Securities:
Taxable		1,666		1,556
Nontaxable		3,545		3,289
Interest-bearing deposits at financial institutions		923		197
Restricted investment securities		307		234
Federal funds sold		93		56
Total interest and dividend income		52,102		39,546

Interest expense:
Deposits		12,479		4,881
Short-term borrowings		71		33
Federal Home Loan Bank advances		903		1,064
Other borrowings		605		718
Subordinated notes		564		—
Junior subordinated debentures		572		447
Total interest expense		15,194		7,143
Net interest income		36,908		32,403
Provision for loan/lease losses		2,134		2,540
Net interest income after provision for loan/lease losses		34,774		29,863

Noninterest income:
Trust department fees		2,493		2,237
Investment advisory and management fees		1,736		952
Deposit service fees		1,554		1,531
Gains on sales of residential real estate loans, net		369		101
Gains on sales of government guaranteed portions of loans, net		31		358
Swap fee income		3,198		959
Earnings on bank-owned life insurance		540		418
Debit card fees		792		766
Correspondent banking fees		216		265
Other		1,064		954
Total noninterest income		11,993		8,541

Noninterest expense:
Salaries and employee benefits		20,879		15,978
Occupancy and equipment expense		3,694		3,066
Professional and data processing fees		2,750		2,708
Acquisition costs		—		93
Post-acquisition compensation, transition and integration costs		134		—
FDIC insurance, other insurance and regulatory fees		964		756
Loan/lease expense		214		291
Net cost and gains/losses on operations of other real estate		298		132
Advertising and marketing		785		693
Bank service charges		483		440
Correspondent banking expense		204		204
CDI amortization		532		305
Other		1,498		1,197
Total noninterest expense		32,435		25,863
Net income before income taxes		14,332		12,541
Federal and state income tax expense		1,414		1,991
Net income	$	12,918	$	10,550

Basic earnings per common share	$	0.82	$	0.76
Diluted earnings per common share	$	0.81	$	0.74

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

Cash dividends declared per common share	$	0.06	$	0.06

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three months ended March 31, 2019 and 2018



	2019		2018
	(dollars in thousands)

Net income	$	12,918	$	10,550

Other comprehensive income (loss):

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

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

Comprehensive income	$	15,262	$	7,348

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three months ended March 31, 2019 and 2018


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

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


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

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

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three months ended March 31, 2019 and 2018


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

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

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

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

(Continued)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three months ended March 31, 2019 and 2018


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

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

See Notes to Consolidated Financial Statements (Unaudited)

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Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10‑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 March 31, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2019, or for any other period.

The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10‑Q. It may be helpful to refer back to this page as you read this report.



Allowance: Allowance for estimated losses on loans/leases	GAAP: Generally Accepted Accounting Principles
AOCI: Accumulated other comprehensive income (loss)	Guaranty: Guaranty Bankshares, Ltd.
AFS: Available for sale	Guaranty Bank: Guaranty Bank and Trust Company
ASC: Accounting Standards Codification	HTM: Held to maturity
ASC 805: Business Combination Standard	m2: m2 Lease Funds, LLC
ASU: Accounting Standards Update	NIM: Net interest margin
Bates Companies: Bates Financial Advisors, Inc., Bates	NPA: Nonperforming asset
Financial Services, Inc., Bates Securities, Inc. and	NPL: Nonperforming loan
Bates Financial Group, Inc.	OREO: Other real estate owned
BOLI: Bank-owned life insurance	OTTI: Other-than-temporary impairment
Caps: Interest rate cap derivatives	PCI: Purchased credit impaired
CDI: Core deposit intangible	Provision: Provision for loan/lease losses
Community National: Community National Bancorporation	QCBT: Quad City Bank & Trust Company
CRBT: Cedar Rapids Bank & Trust Company	RB&T: Rockford Bank & Trust Company
CRE: Commercial real estate	ROAA: Return on Average Assets
CSB: Community State Bank	SBA: U.S. Small Business Administration
C&I: Commercial and industrial	SEC: Securities and Exchange Commission
Dodd-Frank Act: Dodd-Frank Wall Street Reform and	SFC Bank: Springfield First Community Bank
Consumer Protection Act	Springfield Bancshares: Springfield Bancshares, Inc.
EPS: Earnings per share	TA: Tangible assets
Exchange Act: Securities Exchange Act of 1934, as	Tax Act: Tax Cuts and Jobs Act
amended	TCE: Tangible common equity
FASB: Financial Accounting Standards Board	TDRs: Troubled debt restructurings
FDIC: Federal Deposit Insurance Corporation	TEY: Tax equivalent yield
FHLB: Federal Home Loan Bank	The Company: QCR Holdings, Inc.
FRB: Federal Reserve Bank of Chicago	USDA: U.S. Department of Agriculture

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

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

Recent accounting developments: In February 2016, the FASB issued ASU 2016‑02, Leases. Under ASU 2016‑02, lessees will be required to recognize a lease liability measured on a discounted basis and a right-of-use asset for all leases (with the exception of short-term leases). Lessor accounting is largely unchanged under ASU 2016‑02. However, the definition of initial direct costs was updated to include only initial direct costs that are considered incremental. This change in definition will change the manner in which the Company recognizes the costs associated with originating leases. ASU 2016‑02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The standard was adopted on January 1, 2019 and did not have a significant impact on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016‑13, Financial Instruments – Credit Losses. Under the standard, assets measured at amortized costs (including loans, leases and AFS securities) will be presented at the net amount expected to be collected. Rather than the “incurred” model that is currently being utilized, the standard will require the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset's life. For public companies, ASU 2016‑13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Companies may choose to early adopt for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of analyzing the impact of adoption on the Company's Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis. ASU 2017-04 requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. This guidance is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect this guidance to have a significant impact on its Consolidated Financial Statements.

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

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 2 – INVESTMENT SECURITIES

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
March 31, 2019:
Securities HTM:
Municipal securities	$	394,252	$	13,126	$	(2,056)	$	405,322
Other securities		1,050		—		(1)		1,049
	$	395,302	$	13,126	$	(2,057)	$	406,371

Securities AFS:
U.S. govt. sponsored agency securities	$	36,141	$	89	$	(387)	$	35,843
Residential mortgage-backed and related securities		163,438		351		(2,097)		161,692
Municipal securities		55,585		649		(110)		56,124
Other securities		6,754		74		(40)		6,788
	$	261,918	$	1,163	$	(2,634)	$	260,447


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

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

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

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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


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

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


	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
December 31, 2018:
Securities HTM:
Municipal securities	$	114,201	$	(2,187)	$	69,412	$	(4,616)	$	183,613	$	(6,803)
Other securities		549		(1)		—		—		549		(1)
	$	114,750	$	(2,188)	$	69,412	$	(4,616)	$	184,162	$	(6,804)
Securities AFS:
U.S. govt. sponsored agency securities	$	1,565	$	(34)	$	29,605	$	(744)	$	31,170	$	(778)
Residential mortgage-backed and related securities		12,810		(148)		133,535		(4,483)		146,345		(4,631)
Municipal securities		28,356		(394)		15,932		(309)		44,288		(703)
Other securities		4,249		(4)		—		—		4,249		(4)
	$	46,980	$	(580)	$	179,072	$	(5,536)	$	226,052	$	(6,116)

At March 31, 2019, the investment portfolio included 606 securities. Of this number, 182 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.4% of the total amortized cost of the portfolio. Of these 182 securities, 170 securities had an unrealized loss for twelve months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

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


	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Due in one year or less	$	2,060	$	2,064
Due after one year through five years		28,228		28,544
Due after five years		365,014		375,763
	$	395,302	$	406,371
Securities AFS:
Due in one year or less	$	1,375	$	1,387
Due after one year through five years		52,247		51,874
Due after five years		44,858		45,494
		98,480		98,755
Residential mortgage-backed and related securities		163,438		161,692
	$	261,918	$	260,447

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


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

Securities AFS:
U.S. govt. sponsored agency securities		4,999		4,955
Municipal securities		47,809		48,158
Other securities		6,505		6,541
	$	59,313	$	59,654

As of March 31, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 106 issuers with fair values totaling $86.0 million and revenue bonds issued by 161 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $375.4 million. The Company held investments in general obligation bonds in 25 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 19 states, including seven states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2018, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 110 issuers with fair values totaling $86.4 million and revenue bonds issued by 160 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $371.9 million. The Company held investments in general obligation bonds in 26 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 19 states, including seven states in which the aggregate fair value exceeded $5.0 million.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2019 and December 31, 2018 the Company held revenue bonds of one single issuer, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investment and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

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

As of March 31, 2019, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 3 – LOANS/LEASES RECEIVABLE

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



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

C&I loans *	$	1,479,247	$	1,429,410
CRE loans
Owner-occupied CRE		488,827		500,654
Commercial construction, land development, and other land		267,830		236,787
Other non owner-occupied CRE		1,034,188		1,028,670
		1,790,845		1,766,111

Direct financing leases **		108,543		117,969
Residential real estate loans ***		288,502		290,759
Installment and other consumer loans		123,087		119,381
		3,790,224		3,723,630
Plus deferred loan/lease origination costs, net of fees		9,208		9,124
		3,799,432		3,732,754
Less allowance		(41,164)		(39,847)
	$	3,758,268	$	3,692,907
** Direct financing leases:
Net minimum lease payments to be received	$	119,914	$	130,371
Estimated unguaranteed residual values of leased assets		745		828
Unearned lease/residual income		(12,116)		(13,230)
		108,543		117,969
Plus deferred lease origination costs, net of fees		3,158		3,642
		111,701		121,611
Less allowance		(1,606)		(1,792)
	$	110,095	$	119,819

* Includes equipment financing agreements outstanding at m2, totaling $112.8 million and $103.4 million as of March 31, 2019 and December 31, 2018, respectively.

** Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three months ended March 31, 2019 and 2018.

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Changes in accretable yield for acquired loans were as follows:


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

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


	Three months ended March 31, 2018
	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(191)	$	(6,280)	$	(6,471)
Accretion recognized		34		621		655
Balance at the end of the period	$	(157)	$	(5,659)	$	(5,816)

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


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

C&I	$	1,466,599		$	1,479		$	7,171		$	—		$	3,998		$	1,479,247
CRE
Owner-Occupied CRE		487,774			238			613			—			202			488,827
Commercial Construction, Land Development, and Other Land		266,591			699			236			—			304			267,830
Other Non Owner-Occupied CRE		1,028,663			299			400			—			4,826			1,034,188
Direct Financing Leases		105,451			1,151			196			—			1,745			108,543
Residential Real Estate		281,729			4,993			100			—			1,680			288,502
Installment and Other Consumer		121,943			406			26			61			651			123,087
	$	3,758,750		$	9,265		$	8,742		$	61		$	13,406		$	3,790,224

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


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

C&I	$	1,423,406		$	930		$	597		$	389		$	4,088		$	1,429,410
CRE
Owner-Occupied CRE		500,138			—			193			107			216			500,654
Commercial Construction, Land Development, and Other Land		234,704			1,764			—			—			319			236,787
Other Non Owner-Occupied CRE		1,022,664			484			—			—			5,522			1,028,670
Direct Financing Leases		114,078			1,642			488			—			1,761			117,969
Residential Real Estate		284,844			3,877			206			89			1,743			290,759
Installment and Other Consumer		118,343			356			24			47			611			119,381
	$	3,698,177		$	9,053		$	1,508		$	632		$	14,260		$	3,723,630

As a percentage of total loan/lease portfolio		99.32	%		0.24	%		0.04	%		0.02	%		0.38	%		100.00	%

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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


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

C&I	$	—	$	3,998	$	551	$	4,549	26.35	%
CRE
Owner-Occupied CRE		—		202		104		306	1.77	%
Commercial Construction, Land Development, and Other Land		—		304		—		304	1.76	%
Other Non Owner-Occupied CRE		—		4,826		2,984		7,810	45.25	%
Direct Financing Leases		—		1,745		155		1,900	11.01	%
Residential Real Estate		—		1,680		—		1,680	9.73	%
Installment and Other Consumer		61		651		—		712	4.12	%
	$	61	$	13,406	$	3,794	$	17,261	100.00	%

* Nonaccrual loans/leases included $1.5 million of TDRs, including $249 thousand in C&I loans, $679 thousand in CRE loans, $279 thousand in direct financing leases, $291 thousand in residential real estate loans, and $3 thousand in installment loans.


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

C&I	$	389	$	4,088	$	454	$	4,931	26.58	%
CRE
Owner-Occupied CRE		107		216		—		323	1.74	%
Commercial Construction, Land Development, and Other Land		—		319		—		319	1.72	%
Other Non Owner-Occupied CRE		—		5,522		2,984		8,506	45.86	%
Direct Financing Leases		—		1,761		111		1,872	10.09	%
Residential Real Estate		89		1,743		100		1,932	10.41	%
Installment and Other Consumer		47		611		9		667	3.60	%
	$	632	$	14,260	$	3,658	$	18,550	100.00	%

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

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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


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

Balance, beginning	$	16,420	$	17,719	$	1,792	$	2,557	$	1,359	$	39,847
Provisions (credits) charged to expense		1,007		534		445		(18)		166		2,134
Loans/leases charged off		(334)		—		(652)		—		(74)		(1,060)
Recoveries on loans/leases previously charged off		166		50		21		—		6		243
Balance, ending	$	17,259	$	18,303	$	1,606	$	2,539	$	1,457	$	41,164


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

Balance, beginning	$	14,323	$	13,963	$	2,382	$	2,466	$	1,222	$	34,356
Provisions (credits) charged to expense		808		965		605		(39)		201		2,540
Loans/leases charged off		(95)		—		(284)		(52)		(5)		(436)
Recoveries on loans/leases previously charged off		30		10		27		—		6		73
Balance, ending	$	15,066	$	14,938	$	2,730	$	2,375	$	1,424	$	36,533

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


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

Allowance for impaired loans/leases	$	841		$	2,113		$	142		$	236		$	107		$	3,439
Allowance for nonimpaired loans/leases		16,418			16,190			1,464			2,303			1,350			37,725
	$	17,259		$	18,303		$	1,606		$	2,539		$	1,457		$	41,164

Impaired loans/leases	$	4,301		$	10,155		$	2,185		$	1,693		$	925		$	19,259
Nonimpaired loans/leases		1,474,946			1,780,690			106,358			286,809			122,162			3,770,965
	$	1,479,247		$	1,790,845		$	108,543		$	288,502		$	123,087		$	3,790,224

Allowance as a percentage of impaired loans/leases		19.55	%		20.81	%		6.50	%		13.94	%		11.57	%		17.86	%
Allowance as a percentage of nonimpaired loans/leases		1.11	%		0.91	%		1.38	%		0.80	%		1.11	%		1.00	%
Total allowance as a percentage of total loans/leases		1.17	%		1.02	%		1.48	%		0.88	%		1.18	%		1.08	%


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

Allowance for impaired loans/leases	$	973		$	2,124		$	194		$	257		$	111		$	3,659
Allowance for nonimpaired loans/leases		15,447			15,595			1,598			2,300			1,248			36,188
	$	16,420		$	17,719		$	1,792		$	2,557		$	1,359		$	39,847

Impaired loans/leases	$	4,499		$	10,447		$	2,249		$	2,110		$	898		$	20,203
Nonimpaired loans/leases		1,424,911			1,755,664			115,720			288,649			118,483			3,703,427
	$	1,429,410		$	1,766,111		$	117,969		$	290,759		$	119,381		$	3,723,630

Allowance as a percentage of impaired loans/leases		21.62	%		20.33	%		8.63	%		12.18	%		12.38	%		18.11	%
Allowance as a percentage of nonimpaired loans/leases		1.08	%		0.89	%		1.38	%		0.80	%		1.05	%		0.98	%
Total allowance as a percentage of total loans/leases		1.15	%		1.00	%		1.52	%		0.88	%		1.14	%		1.07	%

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended March 31, 2019 are presented as follows:



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

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

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

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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


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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2018 are presented as follows:


			Unpaid
	Recorded		Principal		Related
Classes of Loans/Leases	Investment		Balance		Allowance
	(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I	$	1,846	$	4,540	$	—
CRE
Owner-Occupied CRE		106		106		—
Commercial Construction, Land Development, and Other Land		507		507		—
Other Non Owner-Occupied CRE		1,804		1,804		—
Direct Financing Leases		1,929		1,929		—
Residential Real Estate		984		1,058		—
Installment and Other Consumer		762		762		—
	$	7,938	$	10,706	$	—

Impaired Loans/Leases with Specific Allowance Recorded:
C&I	$	2,653	$	2,653	$	973
CRE
Owner-Occupied CRE		304		660		39
Commercial Construction, Land Development, and Other Land		149		149		33
Other Non Owner-Occupied CRE		7,577		7,577		2,052
Direct Financing Leases		320		320		194
Residential Real Estate		1,126		1,126		257
Installment and Other Consumer		136		136		111
	$	12,265	$	12,621	$	3,659

Total Impaired Loans/Leases:
C&I	$	4,499	$	7,193	$	973
CRE
Owner-Occupied CRE		410		766		39
Commercial Construction, Land Development, and Other Land		656		656		33
Other Non Owner-Occupied CRE		9,381		9,381		2,052
Direct Financing Leases		2,249		2,249		194
Residential Real Estate		2,110		2,184		257
Installment and Other Consumer		898		898		111
	$	20,203	$	23,327	$	3,659

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

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

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

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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


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

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


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

Performing	$	112,371	$	106,642	$	286,822	$	122,374	$	628,209	99.26	%
Nonperforming		397		1,901		1,680		713		4,691	0.74	%
	$	112,768	$	108,543	$	288,502	$	123,087	$	632,900	100.00	%


	As of December 31, 2018
			CRE
					Non-Owner Occupied
					Commercial
					Construction,
					Land
			Owner-Occupied		Development,						As a % of
Internally Assigned Risk Rating	C&I		CRE		and Other Land		Other CRE		Total		Total
	(dollars in thousands)

Pass (Ratings 1 through 5)	$	1,294,418	$	487,949	$	230,473	$	1,008,626	$	3,021,466	97.72	%
Special Mention (Rating 6)		23,302		9,599		3,848		5,309		42,058	1.36	%
Substandard (Rating 7)		8,286		3,106		2,466		14,735		28,593	0.92	%
Doubtful (Rating 8)		—		—		—		—		—	—	%
	$	1,326,006	$	500,654	$	236,787	$	1,028,670	$	3,092,117	100.00	%


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

Performing	$	102,713	$	116,097	$	288,827	$	118,714	$	626,351	99.18	%
Nonperforming		691		1,872		1,932		667		5,162	0.82	%
	$	103,404	$	117,969	$	290,759	$	119,381	$	631,513	100.00	%

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

As of March 31, 2019 and December 31, 2018, TDRs totaled $5.3 million and $6.5 million, respectively.

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

For the three months ended March 31, 2019

Pre-

Post-

Modification

Number of

Recorded

Specific

Classes of Loans/Leases

Loans / Leases

Investment

Allowance

(dollars in thousands)

CONCESSION - Significant Payment Delay

Direct Financing Leases

122,126

—

122,126

—


	For the three months ended March 31, 2018
		Pre-		Post-
		Modification		Modification
	Number of	Recorded		Recorded		Specific
Classes of Loans/Leases	Loans/Leases	Investment		Investment		Allowance
	(dollars in thousands)
CONCESSION - Significant Payment Delay
Residential Real Estate	1	$	46	$	46	$	—
Direct Financing Leases	2		48		48		—
	3	$	94	$	94	$	—

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

For the three months ended March 31, 2019, none of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 4 – DERIVATIVES

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


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

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

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


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

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

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

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

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


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

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

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NOTE 5 – SUBORDINATED NOTES

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

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

NOTE 6 - EARNINGS PER SHARE

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


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

Net income	$	12,918	$	10,550


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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 7 – 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 and liabilities measured at fair value on a recurring basis comprise the following at March 31, 2019 and December 31, 2018:


			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
March 31, 2019:
Securities AFS:
U.S. govt. sponsored agency securities	$	35,843	$	—	$	35,843	$	—
Residential mortgage-backed and related securities		161,692		—		161,692		—
Municipal securities		56,124		—		56,124		—
Other securities		6,788		—		6,788		—
Interest rate caps		297		—		297		—
Interest rate swaps - assets		36,078		—		36,078		—
Total assets measured at fair value	$	296,822	$	—	$	296,822	$	—

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


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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

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

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

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

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


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

December 31, 2018:
Impaired loans/leases	$	9,657	$	—	$	—	$	9,657
OREO		10,128		—		—		10,128
	$	19,785	$	—	$	—	$	19,785

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

OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the property.

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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


	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	March 31,		December 31,
	2019		2018		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)

Impaired loans/leases	$	8,665	$	9,657	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		9,838		10,128	Appraisal of collateral	Appraisal adjustments	0.00	%	to	(35.00)	%

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

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

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

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

NOTE 8 – BUSINESS SEGMENT INFORMATION

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

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

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

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 as of and for the three months ended March 31, 2019 and 2018.


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

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

NOTE 9 – REGULATORY CAPITAL REQUIREMENTS

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of March 31, 2019 and December 31, 2018, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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


										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer*					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2019:
Company:
Total risk-based capital	$	538,030	12.26	%	$	351,173	>	8.00	%	$	460,914	>	10.50	%	$	438,966	>	10.00	%
Tier 1 risk-based capital		433,453	9.87	%		263,379	>	6.00			373,121	>	8.50			351,173	>	8.00
Tier 1 leverage		433,453	8.90	%		194,905	>	4.00			194,905	>	4.00			243,632	>	5.00
Common equity Tier 1		395,740	9.02	%		197,535	>	4.50			307,276	>	7.00			295,328	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	166,864	11.59	%	$	115,131	>	8.00	%	$	151,110	>	10.50	%	$	143,914	>	10.00	%
Tier 1 risk-based capital		153,375	10.66	%		86,349	>	6.00			122,327	>	8.50			115,131	>	8.00
Tier 1 leverage		153,375	9.21	%		66,621	>	4.00			66,621	>	4.00			83,277	>	5.00
Common equity Tier 1		153,375	10.66	%		64,761	>	4.50			100,740	>	7.00			93,544	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	152,230	11.59	%	$	105,103	>	8.00	%	$	137,947	>	10.50	%	$	131,379	>	10.00	%
Tier 1 risk-based capital		139,406	10.61	%		78,827	>	6.00			111,672	>	8.50			105,103	>	8.00
Tier 1 leverage		139,406	10.03	%		55,617	>	4.00			55,617	>	4.00			69,521	>	5.00
Common equity Tier 1		139,406	10.61	%		59,120	>	4.50			91,965	>	7.00			85,396	>	6.50
Community State Bank:
Total risk-based capital	$	82,640	12.23	%	$	54,069	>	8.00	%	$	70,966	>	10.50	%	$	67,587	>	10.00	%
Tier 1 risk-based capital		76,329	11.29	%		40,552	>	6.00			57,449	>	8.50			54,069	>	8.00
Tier 1 leverage		76,329	9.97	%		30,630	>	4.00			30,630	>	4.00			38,287	>	5.00
Common equity Tier 1		76,329	11.29	%		30,414	>	4.50			47,311	>	7.00			43,931	>	6.50
Springfield First Community Bank:
Total risk-based capital	$	62,958	13.04	%	$	38,639	>	8.00	%	$	50,713	>	10.50	%	$	48,298	>	10.00	%
Tier 1 risk-based capital		56,666	11.73	%		28,979	>	6.00			41,053	>	8.50			38,639	>	8.00
Tier 1 leverage		56,666	10.36	%		21,883	>	4.00			21,883	>	4.00			27,353	>	5.00
Common equity Tier 1		56,666	11.73	%		21,734	>	4.50			33,809	>	7.00			31,394	>	6.50
Rockford Bank & Trust:
Total risk-based capital	$	51,286	10.93	%	$	37,530	>	8.00	%	$	49,259	>	10.50	%	$	46,913	>	10.00	%
Tier 1 risk-based capital		45,408	9.68	%		28,148	>	6.00			39,876	>	8.50			37,530	>	8.00
Tier 1 leverage		45,408	8.84	%		20,544	>	4.00			20,544	>	4.00			25,681	>	5.00
Common equity Tier 1		45,408	9.68	%		21,111	>	4.50			32,839	>	7.00			30,494	>	6.50


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

* March 31, 2019 minimums reflect the fully phased-in ratios (including the capital conservation buffer).

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

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

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

GENERAL

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

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

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

CSB was acquired by the Company in 2016 and provides full-service commercial and consumer banking services to the Des Moines, Iowa area and adjacent communities through its 10 offices, including its main office located on North Ankeny Boulevard in Ankeny, Iowa.

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

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

EXECUTIVE OVERVIEW

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

Net income of $12.9 million, or $0.81 per diluted share;

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

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

Annualized deposit growth of 21.8% for the quarter;

Noninterest income of $12.0 million for the quarter; and

Nonperforming assets down $1.6 million, or 5.6%, from the prior quarter.

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


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

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

Diluted earnings per common share	$	0.81	$	0.84	$	0.74

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

The increase in weighted average common shares outstanding from March 31, 2018 to December 31, 2018 and March 31, 2019 was primarily due to the common stock issued as a result of the merger with Springfield Bancshares as further described in Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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


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

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

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

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

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Provision expense in the first quarter of 2019 increased 32% compared to the fourth quarter of 2018. The increase was primarily due to a lower than normal provision in the fourth quarter of 2018 as a result of a more favorable outcome than expected on a large credit that was partially charged off. Provision expense decreased 16% compared to the first quarter of 2018. See the Provision for Loan Lease Losses section of this report for additional details.

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

Noninterest expense decreased 11% from the fourth quarter of 2018. In the fourth quarter of 2018, there was $1.4 million of post-acquisition compensation, transition and integration cost as compared to $134 thousand in the first quarter of 2019. Also, the fourth quarter of 2018 had $2.5 million in net costs and losses on operations of other real estate as compared to $298 thousand in the first quarter of 2019. Noninterest expense increased 25% from the first quarter of 2018 primarily due to the addition of SFC Bank.

Federal and state income tax expense in the first quarter of 2019 decreased 60% compared to the fourth quarter of 2018. Federal and state income tax expense in the first quarter of 2019 decreased 29% compared to the same quarter of 2018. See the “Income Taxes” section of this report for additional details on these decreases.

LONG-TERM FINANCIAL GOALS

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

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

Improve profitability (measured by NIM and ROAA);

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

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

Continue to focus on generating gains on sales of government guaranteed portions of loans and swap fee income between $8 million and $12 million annually; and

Grow wealth management net income by 10% annually.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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


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

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

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

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

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

STRATEGIC DEVELOPMENTS

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

The Company grew loans and leases in the first quarter of 2019 by 7.1% on an annualized basis. Strong loan and lease growth for the remainder of the year will help keep the Company's loans and leases to assets ratio within the targeted range of 73‑78%.

The Company has participated, and intends to continue to participate, as an acquirer in a prudent manner in the consolidation taking place in our markets to continue to grow EPS, further boost ROAA and improve the Company's efficiency ratio.

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

Management has continued to focus on reducing the Company's reliance on wholesale funding. Wholesale funding as a percentage of total assets decreased 2% in the first quarter of 2019 due to the strong core deposit growth which outpaced the Company’s loan growth. Management continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

noninterest bearing deposits of $220.9 million and average total interest bearing deposits of $206.1 million during the first quarter of 2018. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

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

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of March 31, 2019, the Company had $2.92 billion of total financial assets in trust (and related) accounts and $1.70 billion of total financial assets in brokerage (and related) accounts. Continued growth in assets under management will help drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management continues to focus on growing wealth management fee income, expanding market share will continue to be a primary strategy, both through organic growth as well as the acquisition of managed assets.

GAAP TO NON-GAAP RECONCILIATIONS

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

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

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

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

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

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

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

NIM (TEY) is a financial measure that the Company's management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate a great deal, making comparions difficult.

The efficiency ratio is a ratio that management utilizes to compare the Company to peers. It is a standard ratio in the banking industry and widely utilized by investors.

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


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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a tax equivalent basis, increased 15% to $38.7 million for the quarter ended March 31, 2019, compared to the same quarter of the prior year. Excluding the tax equivalent adjustments, net interest income increased 14% over the same period of the prior year. Net interest income improved due to two main factors:

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

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

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


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

Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it's important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:


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

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

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

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

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

Excess liquidity due to strong deposit growth; and

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

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

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

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


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

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

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

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

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

(1)

Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 21% tax rate.

(2)

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

(3)

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

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Analysis of Changes of Interest Income/Interest Expense

For the three months ended March 31, 2019



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

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

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

(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 21% 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.

CRITICAL ACCOUNTING POLICIES

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

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

GOODWILL

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

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ALLOWANCE FOR LOAN AND LEASE LOSSES

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

RESULTS OF OPERATIONS

INTEREST INCOME

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

Overall, the Company's average earning assets increased 23%, comparing the first quarter of 2019 to the first quarter of 2018. During the same time period, average gross loans and leases increased 25%, while average investment securities increased 2%. These increases were the result of the addition of SFC Bank and strong organic loan growth.

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

INTEREST EXPENSE

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

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

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, state and national economies and risk associated with the loans/leases in the portfolio as described in more detail in the “Critical Accounting Policies” section.

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

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

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charge-offs of $1.1 million for the first three months of 2019, increased the Company's allowance to $41.1 million at March 31, 2019. As of March 31, 2019, the Company's allowance to total loans/leases was 1.08%, which was up from 1.07% at December 31, 2018 and down from 1.20% at March 31, 2018. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($10.4 million and $7.3 million at March 31, 2019 and March 31, 2018, respectively).

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 months ended March 31, 2019 and 2018.


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

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

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

Investment advisory and management fees increased 82%, comparing the first quarter of 2019 to the same period of the prior year. In October 2018, the Company acquired the Bates Companies which increased the assets under management by approximately $704 million as of closing. Management has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company's Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Similar to trust department fees, these fees are largely determined based on the value of the investments managed.

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

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

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Company's existing and prospective customers have already executed a refinancing. Therefore, this area has generally become a smaller contributor to overall noninterest income.

The Company's gains on the sale of government-guaranteed portions of loans for the first quarter of 2019 decreased 91% compared to the first quarter of 2018. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. The Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company's portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. Recently, competitors have been offering SBA loan candidates traditional financing without the guarantee and the Company is not willing to relax its structure for those lending opportunities.

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

Earnings on BOLI increased 29% comparing the first quarter of 2019 to the first quarter of 2018. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby the returns are determined by the performance of the equity market and can lead to volatility in earnings. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 3% comparing the first quarter of 2019 to the first quarter of the prior year. This increase was primarily related to the recent acquisitions. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a retail deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees decreased 19% comparing the first quarter of 2019 to the first quarter of the prior year. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately 200 banks in Iowa, Illinois and Wisconsin.

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

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NONINTEREST EXPENSE

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


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

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

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges to post-acquisition transition and integration costs related to the core conversion of SFC Bank are expected to impact expense throughout 2019.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the first quarter of 2019 to the first quarter of 2018 by 31%. This increase was primarily related to the addition of SFC Bank employees, new hires and merit increases. Over the past year, the Company has added several producers to bolster growth prospects. And, to help support recent and expected growth, the Company is adding to operational infrastructure and investing in additional staffing both at the corporate level and at some of the bank charters. Some of these hires are opportunistic, as the Company takes advantage of talent availability in the marketplace as a result of ongoing industry consolidation.

Occupancy and equipment expense increased 21%, comparing the first quarter of 2019 to the same period of the prior year. The increased expense was due higher information technology service contract costs, increases in repairs and maintenance costs and the additions of SFC Bank and the Bates Companies.

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

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

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

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FDIC insurance, other insurance and regulatory fee expense increased 28%, comparing the first quarter of 2019 to the first quarter of 2018. The increase in expense was due to the addition of SFC Bank and organic asset growth.

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

Net cost and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net cost of operations of other real estate totaled $298 thousand for the first quarter of 2019, compared to $132 thousand for the first quarter of 2018. The first quarter of 2019 amount included the write-down of two OREO properties totaling $224 thousand.

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

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 10% from the first quarter of 2018 to the first quarter of 2019. As transactions volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

Correspondent banking expense was flat when comparing the first quarter of 2019 to the first quarter of 2018. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

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

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

INCOME TAXES

In the first quarter of 2019, the Company incurred income tax expense of $1.4 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three months ended March 31, 2019 and 2018.

In the first quarter of 2019, the Company incurred income tax expense of $1.4 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three months ended March 31, 2019 and 2018.
	For the Three Months Ended March 31,
	2019				2018
			% of				% of
			Pretax				Pretax
	Amount		Income		Amount		Income
	(dollars in thousands)

Computed "expected" tax expense	$	3,010	21.0	%	$	2,634	21.0	%
Tax exempt income, net		(1,107)	(7.7)			(943)	(7.5)
Bank-owned life insurance		(113)	(0.8)			(88)	(0.7)
State income taxes, net of federal benefit, current year		649	4.5			551	4.4
Tax credits		(39)	(0.3)			—	—
True-up adjustment to year-end provision		(715)	(5.0)			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(100)	(0.7)			(132)	(1.1)
Other		(171)	(1.2)			(31)	(0.2)
Federal and state income tax expense	$	1,414	9.9	%	$	1,991	15.9	%

The effective tax rate for the quarter ended March 31, 2019 was 9.9%, which was a 6% decrease from the effective tax rate of 15.9% for the quarter ended March 31, 2018. During the Company’s year-end tax preparation process, the

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Company identified a one-time true-up adjustment for $715 thousand. Excluding this, the Company’s effective tax rate was approximately 15.0%.

FINANCIAL CONDITION

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


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

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

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

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

INVESTMENT SECURITIES

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

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

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

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

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

The duration of the securities portfolio shortened modestly with the TEY on the portfolio increasing 16 bps in the first three months of 2019; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 33 basis points.

The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities.

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

LOANS/LEASES

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


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

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

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less

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risk. As of March 31, 2019 and December 31, 2018, respectively, approximately 27% and 28% of the CRE loan portfolio was owner-occupied.

Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more C&I loans. C&I loans grew $50 million during the current quarter.

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

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


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

Lessors of Nonresidential Buildings	$	613,024	34	%	$	612,327	34	%	$	435,919	32	%
Lessors of Residential Buildings		355,850	20	%		346,270	19	%		221,978	16	%
Hotels		81,107	5	%		81,345	5	%		70,887	5	%
Nonresidential Property Managers		65,736	4	%		69,885	4	%		56,572	4	%
New Housing For-Sale Builders		47,276	3	%		47,598	3	%		52,951	4	%
Land Subdivision		46,042	3	%		48,378	3	%		45,356	3	%
Other *		581,810	31	%		560,308	32	%		474,040	36	%
Total CRE Loans	$	1,790,845	100	%	$	1,766,111	100	%	$	1,357,703	100	%

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

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

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

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

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

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


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

Trucks, Vans and Vocational Vehicles	$	43,489	19	%	$	40,588	18	%	$	28,219	13	%
Manufacturing - General		16,952	7	%		16,760	7	%		16,624	7	%
Construction - General		16,295	7	%		17,236	8	%		18,067	8	%
Food Processing Equipment		15,622	7	%		15,334	7	%		13,270	6	%
Marine - Travelifts		11,819	5	%		12,370	5	%		12,843	6	%
Trailers		9,603	4	%		9,842	4	%		9,161	4	%
Computer Hardware		8,350	4	%		9,166	4	%		10,694	5	%
Manufacturing - CNC		6,702	3	%		6,616	3	%		7,239	3	%
Crane		5,749	3	%		5,726	3	%		5,044	2	%
Other *		93,775	41	%		95,008	41	%		102,493	46	%
Total m2 loans and leases	$	228,356	100	%	$	228,646	100	%	$	223,654	100	%

* “Other” consists of all other equipment types. None of these had concentrations greater than 3% of total m2 loan and lease portfolio in the most recent period presented.

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

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

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


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

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

The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10‑K for the year ended December 31, 2018, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.

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


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

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

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

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

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

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

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

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


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

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

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

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NONPERFORMING ASSETS

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


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

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

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

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of $1.5 million at March 31, 2019, $2.3 million at December 31, 2018, and $2.6 million at March 31, 2018.

(3)

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

NPAs at March 31, 2019 were $26.4 million, down $1.6 million from December 31, 2018 and down $4.7 million from March 31, 2018.

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

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

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

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

DEPOSITS

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


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

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

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

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

BORROWINGS

The subsidiary banks purchase federal funds for short-term funding needs from the FRB or from their correspondent banks. The table below presents the composition of the Company's short-term borrowings.


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

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

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

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

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


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

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

Term FHLB advances decreased $9.9 million in the current quarter, as compared to the prior quarter. Overnight FHLB advances decreased by $130.4 million in the first quarter of 2019 due to strong deposit growth.

The Company has other borrowings which are wholesale structured repurchase agreements totaling $35.0 milion as of March 31, 2019, December 31, 2018 and March 31, 2018. The wholesale structured repurchase agreements are utilized as an alternative funding source to FHLB advances and customer deposits. Wholesale structured repurchase agreements are collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.

The Company has subordinated notes totaling $68.2 million as of March 31, 2019 and $4.8 million as of December 31, 2018. There were no outstanding subordinated notes as of March 31, 2018. See Note 5 to the Company’s Consolidated Financial Statements for additional information regarding our subordinated notes and the repayment of our term notes and our revolving line of credit during the quarter ended March 31, 2019.

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

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brokered deposits to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.

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


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

During the first three months of 2019, wholesale funding decreased $98.3 million. FHLB overnight advances and term advances decreased $130.4 million and $10 million in the first quarter of 2019, respectively. Brokered deposits increased $42.1 million in the first quarter 2019 as some of the banks rotated some overnight advances to short-term brokered deposits as the latter was cheaper.

STOCKHOLDERS' EQUITY

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


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

Common stock	$	15,755		$	15,718		$	13,937
Additional paid in capital		271,673			270,761			189,685
Retained earnings		204,179			192,203			162,346
AOCI (loss)		(3,200)			(5,544)			(5,540)
Total stockholders' equity	$	488,407		$	473,138		$	360,428

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

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

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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 $249.8 million during the first quarter of 2019 and $159.7 million during the full year of 2018. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

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

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

At December 31, 2018, the subsidiary banks had 33 lines of credit totaling $363.7 million, of which $1.7 million was secured and $362.0 million was unsecured. At December 31, 2018, $343.7 million of the $363.7 million was available.

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

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

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

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

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

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

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


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

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

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

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:

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

Changes in the interest rate environment.

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

The impact of cybersecurity risks.

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

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

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

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

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

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

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

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Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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

Table of Contents

Part I

Item 3

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


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

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

The simulation is well within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at March 31, 2019 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company's interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.

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Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d‑15(e) promulgated under the Exchange Act of 1934) as of March 31, 2019. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

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

Table of Contents

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

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

Item 1A Risk Factors

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

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6 Exhibits


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

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a‑14(a)/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 March 31, 2019 and December 31, 2018; (ii) Consolidated Statements of Income for the three months ended March 31, 2019 and March 31, 2018; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and March 31, 2018; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2019 and March 31, 2018; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and March 31, 2018; and (vi) Notes to the Consolidated Financial Statements.

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SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)


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


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


Date	May 9, 2019	/s/ Elizabeth A. Grabin
		Elizabeth A. Grabin, Senior Vice President
		Chief Accounting Officer