Note 2. Mergers/Acquisitions

General

The narrative in this subsection applies to all mergers and acquisitions detailed throughout this footnote.

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.

Note 2. Mergers/Acquisitions (continued)

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.

Bates Companies

On October 1, 2018, the Company acquired the Bates Companies, headquartered in Rockford, Illinois. The acquisition enhanced the wealth management services of the Company by adding approximately $704 million of assets under management at acquisition. In the acquisition, the Company acquired 100% of the Bates Companies’ outstanding common stock for aggregate consideration of $3.0 million cash and up to $3.0 million of the Company’s common stock. Of the total cash consideration, $1.5 million in cash was paid at closing funded through operating cash. The additional $1.5 million was recorded as a promissory note and will be repaid in five equal, annual installments of $300,000 each on the first through fifth anniversaries of the closing date. Interest will be paid at a rate of 2.18% per annum, based on the applicable federal rate as of the closing date. This $1.5 million promissory note is included in Other Liabilities on the Consolidated Balance Sheet. Additionally, in a private placement exempt from registration with the SEC, the Company issued 23,501 shares of Company stock in December 2018. Assuming all future performance based targets are met, total stock consideration can reach $3.0 million, which would result in the Company issuing approximately 47,003 additional common shares based on the 10-day volume weighted average of the closing stock price of the Company ending five days prior to closing. The contingent consideration for the additional common shares, totaling $2.0 million, is included in Other Liabilities on the Consolidated Balance Sheet.

During 2018, the Company incurred $394 thousand of expenses related to the acquisition, comprised primarily of legal and accounting costs.

The Company recorded estimates for the customer list intangible and goodwill during 2018, as purchase accounting calculations were not yet complete. The Company expects the initial purchase accounting to be complete in the first quarter of 2019. The Company recorded a customer list intangible totaling $1,854,932 which is the portion of the acquisition purchase price which represents the value assigned to the existing customer base. The customer list intangible has a finite life and is amortized over the estimated useful life of the customer base. The Company recorded goodwill totaling $3,766,074 which is the excess of the consideration paid over the fair value of the net assets acquired. This goodwill is not deductible for tax purposes. See Note 6 to the Consolidated Financial Statements for additional information.

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.

Unaudited pro forma combined operating results for the years ended December 31, 2018 and 2017, giving effect to the Bates Companies acquisition as if it had occurred as of January 1, 2017, are as follows:


	Year Ended December 31,
	2018		2017
	(dollars in thousands, except per share data)

Net interest income	$	142,368	$	116,029
Noninterest income	$	44,455	$	33,044
Net income	$	44,032	$	35,627

Earnings per common share:
Basic	$	2.98	$	2.67
Diluted	$	2.92	$	2.60

Note 2. Mergers/Acquisitions (continued)

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, 2017 or of future results of operations of the consolidated entities.

Springfield Bancshares, Inc.

On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri. The Company acquired 100% of Springfield Bancshares common stock in the merger. SFC Bank is a Missouri-chartered bank that operates one location in the Springfield, Missouri market. As a result of the transaction, SFC Bank became the Company’s fifth independent charter.

The merger with Springfield Bancshares allowed the Company to enter the Springfield, Missouri market which is consistent with the Company’s strategic plan to selectively acquire other high-performing financial institutions in vibrant mid-sized metropolitan markets with a high concentration of commercial clients. Financial metrics related to the transaction were favorable, as measured by EPS and ROAA accretion.

Stockholders of Springfield Bancshares received 0.3060 shares of the Company’s common stock and $1.50 in cash in exchange for each common share of Springfield Bancshares held. On June 29, 2018, the last trading date before the closing, the Company’s common stock closed at $47.45, resulting in stock consideration valued at $80.6 million and total consideration paid by the Company of $89.0 million. To help fund the cash portion of the purchase price, on June 29, 2018, the Company borrowed $4.1 million on its existing $10.0 million revolving line of credit. The Company also borrowed $4.9 million on this same revolving line of credit to fund the repayment of certain debt assumed in the merger shortly after closing. This note is included within Other Borrowings on the Consolidated Balance Sheets. The remaining cash consideration paid to the shareholders of Springfield Bancshares came from operating cash.

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 merger 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.

During the fourth quarter of 2018, various measurement period adjustments were made. The result of these adjustments was an increase to goodwill of $447 thousand.

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 fair values of the assets acquired and liabilities assumed, after measurement period adjustments to date, including the consideration paid and resulting goodwill is as follows.

Note 2. Mergers/Acquisitions (continued)


	As of
	July 1, 2018
ASSETS
Cash and due from banks	$	4,586,326
Interest-bearing deposits at financial institutions		62,924,396
Securities		4,845,441
Loans/leases receivable, net		477,336,699
Bank-owned life insurance		7,091,883
Premises and equipment		6,091,978
Restricted investment securities		3,654,200
Intangibles		8,208,728
Other assets		1,470,689
Total assets acquired	$	576,210,340

LIABILITIES
Deposits	$	439,579,328
Short-term borrowings		1,143,478
FHLB advances		74,539,463
Other borrowings		9,543,810
Other liabilities		8,408,463
Total liabilities assumed	$	533,214,542
Net assets acquired	$	42,995,798

CONSIDERATION PAID:
Cash	$	8,333,535
Common stock		80,637,194
Total consideration paid	$	88,970,729
Goodwill	$	45,974,931

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


	PCI		Performing
	Loans		Loans		Total
Contractually required principal payments	$	7,552,912	$	479,439,547	$	486,992,459
Nonaccretable discount		(1,562,455)		—		(1,562,455)
Principal cash flows expected to be collected	$	5,990,457	$	479,439,547	$	485,430,004
Accretable discount		(293,445)		(7,799,860)		(8,093,305)
Fair Value of acquired loans	$	5,697,012	$	471,639,687	$	477,336,699

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


	For the year ended December 31, 2018
	PCI		Performing
	Loans		Loans		Total
Discount added at acquisition	$	(293,445)	$	(7,799,860)	$	(8,093,305)
Reclassification of nonaccretable discount to accretable		(891,569)		—		(891,569)
Accretion recognized		525,704		1,950,795		2,476,499
Balance at the end of the period	$	(659,310)	$	(5,849,065)	$	(6,508,375)

Note 2. Mergers/Acquisitions (continued)

During 2018, there was no nonaccretable discount that was recognized due to the repayment of PCI loans. However, $892 thousand of nonaccretable discount was reclassified to accretable during the third quarter of 2018 due to significant improvement on one specific credit subsequent to the merger date. Of this amount, $396 thousand was accreted to income in 2018, while the remainder will be accreted over the next 8 months, which is the remaining contractual life of the loan.

Premises and equipment acquired with a fair value of $6.1 million includes one branch location. 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 39 years.

The Company recorded a core deposit intangible totaling $8.2 million which is the portion of the merger 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 6 to the Consolidated Financial Statements for additional information.

FHLB advances and other borrowings assumed with a fair value of $84.1 million included $40.0 million in overnight FHLB advances, $34.5 million of FHLB term advances, $4.7 million in subordinated debentures and a $4.8 million bank stock loan. The $4.8 million bank stock loan was paid off immediately after the merger date on July 2, 2018, at its book value. See Note 10 and 11 to the Consolidated Financial Statements for additional information.

During 2018, the Company incurred $1.4 million of expenses related to the merger comprised primarily of legal, accounting, and investment banking costs. These costs are presented on their own line within the consolidated statements of income. SFC Bank results are included in the consolidated statements of income effective on the merger date. For the period July 1, 2018 to December 31, 2018, SFC Bank reported revenues of $15.2 million and net income of $4.8 million, which included $391 thousand of after tax post-acquisition, compensation, transition and integration costs.

Unaudited pro forma combined operating results for the years ended December 31, 2018 and 2017, giving effect to the merger with Springfield Bancshares as if it had occurred as of January 1, 2017, are as follows:


	Year Ended December 31,
	2018		2017
	(dollars in thousands, except per share data)

Net interest income	$	153,229	$	136,190
Noninterest income	$	42,538	$	32,395
Net income	$	49,542	$	42,316

Earnings per common share:
Basic	$	3.17	$	2.82
Diluted	$	3.11	$	2.75

The pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the merger occurred on January 1, 2017 or of future results of operations of the consolidated entities.

Note 2. Mergers/Acquisitions (continued)

Guaranty Bank and Trust

On October 1, 2017 the Company acquired Guaranty Bank, headquartered in Cedar Rapids, Iowa, from Guaranty. Guaranty Bank is an Iowa-chartered bank that operates five banking locations throughout the Cedar Rapids metropolitan area.

The acquisition of Guaranty Bank allowed the Company to grow its market share in the Cedar Rapids market. Guaranty Bank has a strong core deposit base and retail franchise. Although Guaranty already had strong earnings, the Company has identified several opportunities for enhanced future earnings performance. Lastly, financial metrics related to the transaction were favorable, as measured by EPS accretion, ROAA accretion and earn back of tangible book value dilution.

In the acquisition, the Company acquired 100% of Guaranty Bank’s outstanding common stock and purchased certain assets and assumed certain liabilities of Guaranty for aggregate consideration consisting of 79% QCR Holdings common stock (678,670 shares) and 21% cash ($7.8 million). On September 29, 2017, the last trading date before the closing, the Company’s common stock closed at $45.50, resulting in stock consideration valued at $30.9 million and total consideration paid by the Company of $38.7 million.

To help fund the cash portion of the purchase price, on September 27, 2017, the Company executed a $7.0 million four-year term note with principal and interest due quarterly. See further information in Note 11. This note is included within other borrowings on the December 31, 2017 Consolidated Balance Sheets. The remaining cash consideration paid to Guaranty came from operating cash.

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 to be finalized.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill. This goodwill is deductible over 15 years 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 expanded market, increasing future earnings potential. Guaranty Bank has a strong core deposit base. There is also value added to the Company through having an expanded footprint in a market that has strong growth potential. The experience and value of the personnel at Guaranty Bank and their knowledge of the expanded market is also beneficial.

On December 2, 2017, the Company merged Guaranty Bank with and into CRBT, with CRBT as the surviving bank. As part of the merger, the Guaranty Bank branches located at 302 3rd Avenue SE, Cedar Rapids, Iowa and 1819 42nd Street NE, Cedar Rapids, Iowa, permanently closed. The three remaining Guaranty Bank branches have become banking offices of CRBT.

Note 2. Mergers/Acquisitions (continued)

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


	As of
	October 1, 2017
ASSETS
Cash and due from banks	$	4,434,511
Interest-bearing deposits at financial institutions		3,953,907
Securities		49,703,419
Loans/leases receivable, net		192,517,677
Premises and equipment		4,808,343
Restricted investment securities		476,500
Core deposit intangible		2,698,301
Other assets		997,810
Total assets acquired	$	259,590,468

LIABILITIES
Deposits	$	212,467,514
Short-term borrowings		13,102,043
FHLB advances		4,108,027
Junior subordinated debentures		3,857,275
Other liabilities		2,595,883
Total liabilities assumed	$	236,130,742
Net assets acquired	$	23,459,726

CONSIDERATION PAID:
Cash	$	7,803,420
Common stock		30,879,485
Total consideration paid	$	38,682,905
Goodwill	$	15,223,179

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


	PCI		Performing
	Loans		Loans		Total
Contractually required principal payments	$	3,126,327	$	192,982,439	$	196,108,766
Nonaccretable discount		(1,147,198)		—		(1,147,198)
Principal cash flows expected to be collected	$	1,979,129	$	192,982,439	$	194,961,568
Accretable discount		(219,902)		(2,223,989)		(2,443,891)
Fair Value of acquired loans	$	1,759,227	$	190,758,450	$	192,517,677

Note 2. Mergers/Acquisitions (continued)

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


	For the year ended December 31, 2018
	PCI		Performing
	Loans		Loans		Total
Balance at the beginning of the period	$	(165,832)	$	(2,197,153)	$	(2,362,985)
Accretion recognized		157,775		584,563		742,338
Balance at the end of the period	$	(8,057)	$	(1,612,590)	$	(1,620,647)


	For the year ended December 31, 2017
	PCI		Performing
	Loans		Loans		Total
Balance at the beginning of the period	$	—	$	—	$	—
Discount added at acquisition		(219,902)		(2,223,989)		(2,443,891)
Accretion recognized		54,070		26,836		80,906
Balance at the end of the period	$	(165,832)	$	(2,197,153)	$	(2,362,985)

During 2018 and 2017, there was also $137 thousand and $158 thousand, respectively, of nonaccretable discount that was recognized due to the repayment of PCI loans.

Premises and equipment acquired with a fair value of $4.8 million includes five branch locations with a fair value of $4.6 million. The fair value was determined with the assistance of a third party appraiser. The buildings and related fair value adjustments will be recognized in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $2.7 million 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 6 to the Consolidated Financial Statements for additional information.

During 2017, the Company incurred $805 thousand of expenses related to the acquisition, comprised primarily of legal, accounting and investment banking costs. These acquisition costs are presented on their own line within the consolidated statements of income. Also during 2017, the Company incurred $3.1 million of post-acquisition expenses, comprised primarily of personnel costs, IT integration, and conversion costs. Guaranty Bank results are included in the consolidated statements of income effective on the acquisition date.

Unaudited pro forma combined operating results for the years ended December 31, 2017 and 2016, giving effect to the Guaranty Bank acquisition as if it had occurred as of January 1, 2016, are as follows:


	Year Ended December 31,
	2017		2016
	(dollars in thousands, except per share data)

Net interest income	$	122,923	$	102,902
Noninterest income	$	32,703	$	34,238
Net income	$	38,728	$	27,103

Earnings per common share:
Basic	$	2.80	$	2.05
Diluted	$	2.73	$	2.02

Note 2. Mergers/Acquisitions (continued)

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, 2016 or of future results of operations of the consolidated entities.

Community State Bank

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 had an experienced and capable leadership team that was committed to leading the Company’s efforts in the Des Moines area. CSB had demonstrated significant improvement in earnings and asset quality during the last three years. Additionally, CSB had a strong core deposit base and retail franchise. Although CSB already had strong earnings, the Company had identified several opportunities for enhanced future earnings performance. With $581 million of assets acquired, the Company believed this acquisition was large enough to provide meaningful impact on the financial results, but was 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 11 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 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.

Note 2. Mergers/Acquisitions (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
Restricted investment securities		1,512,900
Core deposit intangible		6,352,653
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

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

Note 2. Mergers/Acquisitions (continued)

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


	For the year ended December 31, 2018
	PCI		Performing
	Loans		Loans		Total
Balance at the beginning of the period	$	(25,300)	$	(4,082,922)	$	(4,108,222)
Accretion recognized		25,300		1,888,043		1,913,343
Balance at the end of the period	$	—	$	(2,194,879)	$	(2,194,879)

	For the year ended December 31, 2017
	PCI		Performing
	Loans		Loans		Total
Balance at the beginning of the period	$	(194,306)	$	(9,115,614)	$	(9,309,920)
Accretion recognized		169,006		5,032,692		5,201,698
Balance at the end of the period	$	(25,300)	$	(4,082,922)	$	(4,108,222)

	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 2018, 2017 and 2016, there was also $25 thousand, $198 thousand and $186 thousand, respectively, of nonaccretable discount that was recognized due to the repayment of PCI loans.

Premises and equipment acquired with a fair value of $20.7 million includes ten branch locations with a fair value of $19.7 million, including a write-up of $8.3 million. 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 39 years.

The Company recorded a core deposit intangible totaling $6.4 million 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 6 to the Consolidated Financial Statements for additional information.

During 2016, the Company incurred $1.4 million of expenses related to the acquisition, comprised primarily of legal, accounting, and investment banking costs. These acquisition costs are presented on their own line within the consolidated statements of income. Also during 2016, the Company incurred $1.0 million of post-acquisition expenses, comprised primarily of personnel costs, IT integration, and conversion costs. CSB results are included in the consolidated statements of income effective on the acquisition date. For the period August 31, 2016 to 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.

During the current year, the Company incurred $1.2 million of post-acquisition compensation, transition and integration costs, comprised entirely of a fee that was paid for a core processor conversion of CSB.

Note 2. Mergers/Acquisitions (continued)

Unaudited pro forma combined operating results for the year ended December 31, 2016, giving effect to the CSB acquisition as if it had occurred as of January 1, 2015, is as follows:


	Year Ended December 31,
	2016
	(dollars in thousands,
	except per share data)

Net interest income	$	110,035
Noninterest income	$	34,773
Net income	$	34,137

Earnings per common share:
Basic	$	2.62
Diluted	$	2.58

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.