Note 2. Sales/Mergers/Acquisitions

Sale of Assets and Liabilities of Rockford Bank & Trust

On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc., for a cash payment. The cash payment amount was determined substantially by the following formula: (i) the “Purchase Price Premium”, plus (ii) the aggregate net book value of the acquired assets, minus (iii) the aggregate book value of the assumed liabilities. The Purchase Price Premium is equal to: (a) 8% of RB&T’s tangible assets, multiplied by (b) 0.345. The Purchase Price Premium totaled $12.5 million and the total payment by IB&T to the Company at closing was $46.6 million.

Note 2. Sales/Mergers/Acquisitions (continued)

Assets and liabilities of RB&T sold are summarized as follows as of the date of closing:


	As of
	November 30, 2019
	(dollars in thousands)

ASSETS
Cash and due from banks	$	3,973
Interest-bearing deposits at financial institutions		55,291
Securities held to maturity, at amortized cost		3,243
Securities available for sale, at fair value		21,874
Loans/leases receivable held for investment, net		357,931
Premises and equipment, net		5,612
Restricted investment securities		675
Other real estate owned, net		2,134
Other assets		3,228
Total assets sold	$	453,961

LIABILITIES
Noninterest-bearing deposits	$	69,802
Interest-bearing deposits		331,486
Short-term borrowings		1,158
Federal Home Loan Bank advances		15,000
Other liabilities		2,241
Total liabilities sold	$	419,687

Net assets sold	$	34,274

Cash consideration received	$	46,560
Gain on sale of assets and liabilities	$	12,286

The Company retained certain assets, mainly comprised of BOLI, and certain liabilities, mainly comprised of deferred compensation and income tax accruals. These assets and liabilities totaling $12.0 million and $5.0 million, respectively, as of December 31, 2019, are expected to be liquidated by June 30, 2020 and are included within assets and liabilities held for sale on the consolidated balance sheets.

Disposition costs related to the sale totaled $3.3 million and were comprised primarily of legal and accounting costs, costs in connection with the disposal of fixed assets and prepaids, personnel costs and IT deconversion costs related to the sale of RB&T.

General – Mergers/Acquisitions

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

Note 2. Sales/Mergers/Acquisitions (continued)

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.

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, as of December 31, 2018, is included in Other Liabilities on the Consolidated Balance Sheet. Required performance targets were met during 2019 and the Company issued 9,400 shares of common stock in December 2019 as described above.

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

The Company recorded a customer list intangible totaling $1.6 million 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 $3.7 million 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.

Note 2. Sales/Mergers/Acquisitions (continued)

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:


	For the 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

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 an independent charter of the Company.

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.

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. 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.

Note 2. Sales/Mergers/Acquisitions (continued)

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.


	As of
	July 1, 2018
	(dollars in thousands)
ASSETS
Cash and due from banks	$	4,586
Interest-bearing deposits at financial institutions		62,924
Securities		4,845
Loans/leases receivable, net		477,337
Bank-owned life insurance		7,092
Premises and equipment		6,092
Restricted investment securities		3,654
Intangibles		8,209
Other assets		1,471
Total assets acquired	$	576,210

LIABILITIES
Deposits	$	439,579
Short-term borrowings		1,143
FHLB advances		74,539
Other borrowings		9,544
Other liabilities		8,409
Total liabilities assumed	$	533,214
Net assets acquired	$	42,996

CONSIDERATION PAID:
Cash	$	8,334
Common stock		80,637
Total consideration paid	$	88,971
Goodwill	$	45,975

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


	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Contractually required principal payments	$	7,553	$	479,440	$	486,993
Nonaccretable discount		(1,563)		—		(1,563)
Principal cash flows expected to be collected	$	5,990	$	479,440	$	485,430
Accretable discount		(293)		(7,800)		(8,093)
Fair Value of acquired loans	$	5,697	$	471,640	$	477,337

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


	Year ended December 31, 2019
	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(659)	$	(5,849)	$	(6,508)
Reclassification of nonaccretable discount to accretable		(159)		—		(159)
Accretion recognized		767		2,325		3,092
Balance at the end of the period	$	(51)	$	(3,524)	$	(3,575)


	For the year ended December 31, 2018
	PCI		Performing
	Loans		Loans		Total
Balance at the beginning of the period	$	—	$	—	$	—
Discount added at acquisition		(293)		(7,800)		(8,093)
Reclassification of nonaccretable discount to accretable		(892)		—		(892)
Accretion recognized		526		1,951		2,477
Balance at the end of the period	$	(659)	$	(5,849)	$	(6,508)

Note 2. Sales/Mergers/Acquisitions (continued)

During 2019, there was no nonaccretable discount that was recognized due to the repayment of PCI loans. However, $159 thousand of nonaccretable discount was reclassified to accretable due to significant improvement on one specific credit subsequent to the merger date. Of this amount, $153 thousand was accreted to income in 2019, while the remainder will be accreted over the next 8 months, which is the remaining contractual life of the loan.

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:


	For the 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. Sales/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. Sales/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
	(dollars in thousands)
ASSETS
Cash and due from banks	$	4,435
Interest-bearing deposits at financial institutions		3,954
Securities		49,703
Loans/leases receivable, net		192,518
Premises and equipment		4,808
Restricted investment securities		477
Core deposit intangible		2,698
Other assets		998
Total assets acquired	$	259,591

LIABILITIES
Deposits	$	212,468
Short-term borrowings		13,102
FHLB advances		4,108
Junior subordinated debentures		3,857
Other liabilities		2,596
Total liabilities assumed	$	236,131
Net assets acquired	$	23,460

CONSIDERATION PAID:
Cash	$	7,803
Common stock		30,880
Total consideration paid	$	38,683
Goodwill	$	15,223

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


	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Contractually required principal payments	$	3,126	$	192,983	$	196,109
Nonaccretable discount		(1,147)		—		(1,147)
Principal cash flows expected to be collected	$	1,979	$	192,983	$	194,962
Accretable discount		(220)		(2,224)		(2,444)
Fair Value of acquired loans	$	1,759	$	190,759	$	192,518

Note 2. Sales/Mergers/Acquisitions (continued)

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


	For the year ended December 31, 2019
	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(8)	$	(1,613)	$	(1,621)
Reclassification of nonaccretable discount to accretable		(5)		—		(5)
Accretion recognized		7		518		525
Balance at the end of the period	$	(6)	$	(1,095)	$	(1,101)

	For the year ended December 31, 2018
	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(166)	$	(2,197)	$	(2,363)
Accretion recognized		158		584		742
Balance at the end of the period	$	(8)	$	(1,613)	$	(1,621)

	For the year ended December 31, 2017
	PCI		Performing
	Loans		Loans		Total
	(dollars in thousands)

Balance at the beginning of the period	$	(220)	$	(2,224)	$	(2,444)
Accretion recognized		54		27		81
Balance at the end of the period	$	(166)	$	(2,197)	$	(2,363)

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.

Note 2. Sales/Mergers/Acquisitions (continued)

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

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.