NOTE 9 – ACQUISITION OF COMMUNITY STATE BANK AND COMMON STOCK OFFERING

On August 31, 2016, the Company acquired Community State Bank from Van Diest Investment Company. CSB is headquartered in Ankeny, Iowa and is an Iowa-chartered bank that operates ten banking locations throughout the Des Moines metropolitan area. The Company purchased 100% of the outstanding common stock of CSB for cash consideration of $80.0 million.

The acquisition of CSB allowed the Company to expand its footprint into the Des Moines market. CSB has an experienced and capable leadership team that is committed to leading the Company’s efforts in the Des Moines MSA. CSB has demonstrated significant improvement in earnings and asset quality during the last three years. Additionally, CSB has a strong core deposit base and retail franchise. Although CSB already has strong earnings with an expected ROAA of 1.00% in 2016, the Company has identified several opportunities for enhanced future earnings performance. With $581 million of assets acquired, the Company believes this acquisition is large enough to provide meaningful impact on the financial results, but is not too large to overstrain existing infrastructure. Lastly, financial metrics related to the transaction were favorable, as measured by EPS accretion and earn-back of tangible book value dilution.

In connection with the acquisition, during the second quarter of 2016, the Company sold 1,215,000 shares of its common stock at a price of $24.75 per share, for net proceeds of $29.8 million, after deducting expenses. The shares were offered to institutional investors in a registered direct offering conducted without an underwriter or placement agent. The offering was a partial take-down of a previously filed shelf registration and closed on May 23, 2016.

Cash received from the common stock offering was used to help finance the purchase price of the acquisition. Additionally, the Company drew $5.0 million on its $10.0 million revolving line of credit and fully funded its $30.0 million term facility. Both of these facilities are described further in Note 4 to the Consolidated Financial Statements. Cash dividends of $15.2 million from QCBT and CRBT were used to fund the remainder of the purchase price.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects. The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill. This goodwill is not deductible for tax purposes.

The Company has several areas of specialization, including government guaranteed lending, C&I lending, interest rate swaps, leasing, wealth management, private banking and municipal bond offerings that will be offered in this new market, increasing future earnings potential. There is also value added to the Company through having a footprint in a market that has strong growth potential. Additionally, there are qualitative benefits gained through the addition of a new charter including better leverage of centralized operations and increased lending limits. The experience and value of the personnel at CSB and their knowledge of the Des Moines MSA is also beneficial.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The fair values of the assets acquired and liabilities assumed including the consideration paid and resulting goodwill is as follows:

	As of
	August 31, 2016
ASSETS
Cash and due from banks	$	10,094,645
Federal funds sold		698,000
Interest-bearing deposits at financial institutions		14,730,157
Securities		102,640,029
Loans/leases receivable, net		419,029,277
Premises and equipment		20,684,880
Core deposit intangible		6,352,653
Restricted investment securities		1,512,900
Other real estate owned		650,000
Other assets		4,763,224
Total assets acquired	$	581,155,765

LIABILITIES
Deposits	$	486,298,262
FHLB advances		20,368,877
Other liabilities		4,897,564
Total liabilities assumed	$	511,564,703

Net assets acquired	$	69,591,062

CONSIDERATION PAID:
Cash	$	80,000,000
Total consideration paid	$	80,000,000

Goodwill	$	10,408,938

Loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date. Credit discounts are included in the determination of fair value. A third party valuation consultant assisted with the determination of fair value.

Purchased loans are segregated into two categories: PCI loans and non-PCI (performing) loans. PCI loans are accounted for in accordance with ASC 310-30, as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower. Performing loans are accounted for in accordance with ASC 310-20, as these loans do not have evidence of significant credit deterioration since origination and it is probable that the contractually required payments will be received from the borrower.

For PCI loans, the difference between the contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable discount. Further, any excess cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the expected remaining life of the loan. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an allowance for loan and lease losses and provision for loan losses.

For performing loans, the difference between the estimated fair value of the loans and the principal balance outstanding is accreted over the remaining life of the loans.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The following table presents the purchased loans as of the acquisition date:

	PCI			Performing
	Loans			Loans			Total
Contractually required principal payments	$	3,662,431		$	428,552,119		$	432,214,550
Nonaccretable discount		(991,685	)		-			(991,685	)
Principal cash flows expected to be collected	$	2,670,746		$	428,552,119		$	431,222,865
Accretable discount		(277,579	)		(11,916,009	)		(12,193,588	)
Fair Value of acquired loans	$	2,393,167		$	416,636,110		$	419,029,277

Changes in accretable yield for the loans acquired were as follows for the three and nine months ended September 30, 2016:

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

During the current quarter, there was also $89 thousand of nonaccretable discount that was accelerated due to the early repayment of PCI loans.

Premises and equipment acquired with a fair value of $20,684,880 includes ten branch locations with a fair value of $19,735,000, including a write-up of $8,334,437. The fair value was determined with the assistance of a third party appraiser. The write-up of these properties will be recognized as an increase in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $6,352,653 which is the portion of the acquisition purchase price which represents the value assigned to the existing deposit base. The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years).

The following table presents the changes in the carrying amount of core deposit intangibles, gross carrying amount, accumulated amortization, and net book value:

	September 30, 2016
Balance at the beginning of the period	$	6,352,653
Amortization expense		(60,834	)
Balance at the end of the period	$	6,291,819


Gross carrying amount	$	6,352,653
Accumulated amortization		(60,834	)
Net book value	$	6,291,819

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The following presents the estimated amortization expense of the core deposit intangible:

Years ending December 31,	Amount
2016	$	182,503
2017		723,955
2018		710,751
2019		694,374
2020		674,819
Thereafter		3,305,417
	$	6,291,819

*There is another core deposit intangible on the balance sheet totaling $1,321,774 that is related to a previous acquisition.

During the first nine months of 2016, the Company incurred $2.4 million of expenses related to the acquisition, comprised primarily of legal, accounting, investment banking costs and personnel costs. These acquisition costs are presented on their own line within the consolidated statements of income. CSB results are included in the consolidated statements of income effective on the acquisition date. For the period 8/31/16 to 9/30/16, CSB reported revenues of $2.7 million and net income of $189 thousand, which included $473 thousand of after tax acquisition costs.

Unaudited pro forma combined operating results for the three and nine months ended September 30, 2016 and 2015, giving effect to the CSB acquisition as if it had occurred as of January 1, 2015, are as follows:

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
	(in thousands, except for per share data)

Interest income	$	27,615	$	25,685	$	80,755	$	73,051
Noninterest income	$	11,415	$	8,074	$	27,744	$	23,167
Net income	$	7,301	$	8,216	$	23,813	$	15,324

Earnings per common share:
Basic	$	0.56	$	0.64	$	1.85	$	1.38
Diluted	$	0.55	$	0.63	$	1.82	$	1.36

The pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on January 1, 2015 or of future results of operations of the consolidated entities.