Note

Acquisition of Community State Bank and Common Stock Offering

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 area. 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, 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

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.

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		5,283,937
Total assets acquired	$	581,676,478

LIABILITIES
Deposits	$	486,298,262
FHLB advances		20,368,877
Other liabilities		4,897,564
Total liabilities assumed	$	511,564,703
Net assets acquired	$	70,111,775

CONSIDERATION PAID:
Cash	$	80,000,000
Total consideration paid	$	80,000,000
Goodwill	$	9,888,225

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.

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

	PCI			Performing
	Loans			Loans			Total
Contractually required principal payments	$	8,349,688		$	427,398,400		$	435,748,088
Nonaccretable discount		(4,525,223	)		-			(4,525,223	)
Principal cash flows expected to be collected	$	3,824,465		$	427,398,400		$	431,222,865
Accretable discount		(277,579	)		(11,916,009	)		(12,193,588	)
Fair Value of acquired loans	$	3,546,886		$	415,482,391		$	419,029,277

Changes in accretable yield for the loans acquired were as follows:

	For the year ended December 31, 2016
	PCI			Performing
	Loans			Loans			Total
Balance at the beginning of the period	$	-		$	-		$	-
Discount added at acquisition		(277,579	)		(11,916,009	)		(12,193,588	)
Accretion recognized		83,273			2,800,395			2,883,668
Balance at the end of the period	$	(194,306	)	$	(9,115,614	)	$	(9,309,920	)

During the year, there was also

$186

thousand of nonaccretable discount that was recognized due to the 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.

Of this write-up amount,

$2,648,208

is attributable to land, while the remaining

$5,686,229

is attributable to the buildings. The fair value was determined with the assistance of a

third

party appraiser. The buildings and building write-ups will be recognized in depreciation expense over

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). See Note

to the Consolidated Financial Statements for additional information.

During the current year, 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

August

31,

2016

December

31,

2016,

CSB reported revenues of

$11.4

million and net income of

$2.1

million, which included

$473

thousand of after tax acquisition costs.

Unaudited pro forma combined operating results for the years ended

December

31,

2016

and

2015,

giving effect to the CSB acquisition as if it had occurred as of

January

2015,

are as follows:

	Year Ended December 31,
	2016		2015

Net interest income	$	110,035	$	98,483
Noninterest income	$	34,773	$	31,051
Net income	$	34,137	$	22,118

Earnings per common share:
Basic	$	2.62	$	1.91
Diluted	$	2.58	$	1.89

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

2015

or of future results of operations of the consolidated entities.