QCRH 10-Q Quarter ended March 31, 2018

---

---

---

		March 31,				December 31,
		2018				2017
ASSETS
Cash and due from banks		$	61,845,988			$	75,721,663
Federal funds sold			14,505,000				30,197,000
Interest-bearing deposits at financial institutions			45,051,555				55,765,012
Securities held to maturity, at amortized cost			378,584,337				379,474,205
Securities available for sale, at fair value			259,644,940				272,907,907
Total securities			638,229,277				652,382,112
Loans receivable held for sale			279,750				645,001
Loans/leases receivable held for investment			3,054,622,689				2,963,840,399
Gross loans/leases receivable			3,054,902,439				2,964,485,400
Less allowance for estimated losses on loans/leases			(36,532,602	)			(34,355,728	)
Net loans/leases receivable			3,018,369,837				2,930,129,672
Bank-owned life insurance			59,477,481				59,059,494
Premises and equipment, net			63,564,277				62,838,255
Restricted investment securities			22,413,075				19,782,525
Other real estate owned, net			12,750,023				13,558,308
Goodwill			28,334,092				28,334,092
Core deposit intangible			8,774,402				9,078,953
Other assets			52,999,407				45,817,687
Total assets		$	4,026,314,414			$	3,982,664,773
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing		$	784,815,082			$	789,547,696
Interest-bearing			2,495,186,410				2,477,107,360
Total deposits			3,280,001,492				3,266,655,056
Short-term borrowings			16,859,753				13,993,122
Federal Home Loan Bank advances			216,345,000				192,000,000
Other borrowings			64,062,500				66,000,000
Junior subordinated debentures			37,534,402				37,486,487
Other liabilities			51,083,350				53,242,979
Total liabilities			3,665,886,497				3,629,377,644
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; shares authorized 250,000 March 2018 and December 2017 - No shares issued or outstanding			-				-
Common stock, $1 par value; shares authorized 20,000,000 March 2018 - 13,936,957 shares issued and outstanding December 2017 - 13,918,168 shares issued and outstanding			13,936,957				13,918,168
Additional paid-in capital			189,684,858				189,077,550
Retained earnings			162,345,792				151,962,661
Accumulated other comprehensive loss:
Securities available for sale			(4,917,148	)			(866,223	)
Interest rate cap derivatives			(622,542	)			(805,027	)
Total stockholders' equity			360,427,917				353,287,129
Total liabilities and stockholders' equity		$	4,026,314,414			$	3,982,664,773

---

		2018				2017
Interest and dividend income:
Loans/leases, including fees		$	34,213,732			$	27,211,417
Securities:
Taxable			1,555,884				1,142,235
Nontaxable			3,289,002				2,647,722
Interest-bearing deposits at financial institutions			197,003				198,652
Restricted investment securities			234,344				130,430
Federal funds sold			56,331				14,643
Total interest and dividend income			39,546,296				31,345,099
Interest expense:
Deposits			4,881,149				2,232,756
Short-term borrowings			32,913				23,960
Federal Home Loan Bank advances			1,064,113				403,469
Other borrowings			718,176				683,208
Junior subordinated debentures			447,027				332,823
Total interest expense			7,143,378				3,676,216
Net interest income			32,402,918				27,668,883
Provision for loan/lease losses			2,539,839				2,105,109
Net interest income after provision for loan/lease losses			29,863,079				25,563,774
Noninterest income:
Trust department fees			2,237,081				1,740,207
Investment advisory and management fees			952,344				961,599
Deposit service fees			1,531,453				1,316,390
Gains on sales of residential real estate loans, net			100,815				96,323
Gains on sales of government guaranteed portions of loans, net			358,434				950,641
Swap fee income			958,694				113,520
Earnings on bank-owned life insurance			417,987				469,687
Debit card fees			766,108				702,801
Correspondent banking fees			264,827				245,189
Other			953,706				687,397
Total noninterest income			8,541,449				7,283,754
Noninterest expense:
Salaries and employee benefits			15,977,975				13,307,331
Occupancy and equipment expense			3,065,811				2,502,219
Professional and data processing fees			2,707,716				2,083,392
Acquisition costs			92,539				5,630
FDIC insurance, other insurance and regulatory fees			756,211				621,242
Loan/lease expense			290,747				293,538
Net cost of operations of other real estate			131,742				14,230
Advertising and marketing			693,239				609,431
Bank service charges			440,571				423,901
Correspondent banking expense			204,754				198,351
CDI amortization			304,551				230,867
Other			1,197,641				982,985
Total noninterest expense			25,863,497				21,273,117
Net income before income taxes			12,541,031				11,574,411
Federal and state income tax expense			1,991,070				2,389,446
Net income		$	10,549,961			$	9,184,965
Basic earnings per common share		$	0.76			$	0.70
Diluted earnings per common share		$	0.74			$	0.68
Weighted average common shares outstanding			13,888,661				13,133,382
Weighted average common and common equivalent shares outstanding			14,205,584				13,488,417
Cash dividends declared per common share		$	0.06			$	0.05

---

		Three Months Ended March 31,
		2018				2017
Net income		$	10,549,961			$	9,184,965
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax			(5,366,113	)			598,190
Less reclassification for adoption of ASU 2016-01			666,900				-
			(4,699,213	)			598,190
Unrealized gains (losses) on interest rate cap derivatives:
Unrealized holding gains (losses) arising during the period before tax			150,478				(45,202	)
Less reclassification adjustment for ineffectiveness and caplet amortization before tax			(80,515	)			(122,813	)
			230,993				77,611
Other comprehensive income (loss), before tax			(4,468,220	)			675,801
Tax expense (benefit)			(1,266,680	)			265,062
Other comprehensive income (loss), net of tax			(3,201,540	)			410,739
Comprehensive income		$	7,348,421			$	9,595,704

---

														Accumulated
						Additional								Other
		Common				Paid-In				Retained				Comprehensive
		Stock				Capital				Earnings				(Loss)				Total
Balance December 31, 2017		$	13,918,168			$	189,077,550			$	151,962,661			$	(1,671,250	)		$	353,287,129
Net income			-				-				10,549,961				-				10,549,961
Other comprehensive loss, net of tax			-				-				-				(3,201,540	)			(3,201,540	)
Impact of adoption of ASU 2016-01			-				-				666,900				(666,900	)			-
Common cash dividends declared, $0.06 per share			-				-				(833,730	)			-				(833,730	)
Issuance of 2,669 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan			2,669				100,262				-				-				102,931
Issuance of 13,074 shares of common stock as a result of stock options exercised			13,074				192,522				-				-				205,596
Stock-based compensation expense			-				495,493												495,493
Restricted stock awards - 6,860 shares of common stock			6,860				(6,860	)			-				-				-
Exchange of 3,814 shares of common stock in connection with stock options exercised and restricted stock vested			(3,814	)			(174,109	)			-				-				(177,923	)
Balance March 31, 2018		$	13,936,957			$	189,684,858			$	162,345,792			$	(5,539,690	)		$	360,427,917

														Accumulated
						Additional								Other
		Common				Paid-In				Retained				Comprehensive
		Stock				Capital				Earnings				(Loss)				Total
Balance December 31, 2016		$	13,106,845			$	156,776,642			$	118,616,901			$	(2,459,589	)		$	286,040,799
Net income			-				-				9,184,965				-				9,184,965
Other comprehensive income, net of tax			-				-				-				410,739				410,739
Common cash dividends declared, $0.05 per share			-				-				(656,574	)			-				(656,574	)
Issuance of 3,573 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan			3,573				83,091				-				-				86,664
Issuance of 44,284 shares of common stock as a result of stock options exercised			44,284				630,290				-				-				674,574
Stock-based compensation expense			-				388,753				-				-				388,753
Restricted stock awards - 13,289 shares of common stock			13,289				(13,289	)			-				-				-
Exchange of 6,772 shares of common stock in connection with stock options exercised and restricted stock vested			(6,772	)			(283,518	)			-				-				(290,290	)
Balance March 31, 2017		$	13,161,219			$	157,581,969			$	127,145,292			$	(2,048,850	)		$	295,839,630

---

		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	10,549,961			$	9,184,965
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			1,020,975				896,952
Provision for loan/lease losses			2,539,839				2,105,109
Stock-based compensation expense			495,493				388,753
Deferred compensation expense accrued			511,502				404,723
Losses on other real estate owned, net			118,159				-
Amortization of premiums on securities, net			438,641				347,178
Loans originated for sale			(12,939,466	)			(21,416,325	)
Proceeds on sales of loans			13,763,966				22,547,789
Gains on sales of residential real estate loans			(100,815	)			(96,323	)
Gains on sales of government guaranteed portions of loans			(358,434	)			(950,641	)
Amortization of core deposit intangible			304,551				230,867
Accretion of acquisition fair value adjustments, net			(732,689	)			(1,915,001	)
Increase in cash value of bank-owned life insurance			(417,987	)			(469,687	)
Decrease (increase) in other assets			(4,403,592	)			5,427,798
Decrease in other liabilities			(2,886,830	)			(5,852,341	)
Net cash provided by operating activities		$	7,903,274			$	10,833,816
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold			15,692,000				6,459,000
Net decrease (increase) in interest-bearing deposits at financial institutions			10,713,457				(93,471,781	)
Proceeds from sales of other real estate owned			736,370				34,191
Activity in securities portfolio:
Purchases			(7,100,109	)			(12,138,040	)
Calls, maturities and redemptions			4,540,000				17,385,968
Paydowns			9,085,377				8,486,628
Activity in restricted investment securities:
Purchases			(4,450,550	)			(7,600	)
Redemptions			1,820,000				1,315,500
Net increase in loans/leases originated and held for investment			(90,378,382	)			(29,236,438	)
Purchase of premises and equipment			(704,413	)			(1,396,902	)
Net cash used in investing activities		$	(60,046,250	)		$	(102,569,474	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts			13,377,517				136,704,261
Net increase (decrease) in short-term borrowings			2,866,631				(20,501,291	)
Activity in Federal Home Loan Bank advances:
Calls and maturities			-				(4,000,000	)
Net change in short-term and overnight advances			24,345,000				(26,950,000	)
Activity in other borrowings:
Calls, maturities and scheduled principal payments			(1,937,500	)			(8,000,000	)
Payment of cash dividends on common stock			(692,874	)			(522,574	)
Proceeds from issuance of common stock, net			308,527				761,238
Net cash provided by financing activities		$	38,267,301			$	77,491,634
Net decrease in cash and due from banks			(13,875,675	)			(14,244,024	)
Cash and due from banks, beginning			75,721,663				70,569,993
Cash and due from banks, ending		$	61,845,988			$	56,325,969

---

		2018				2017
Supplemental disclosure of cash flow information, cash payments for:
Interest		$	3,654,713			$	3,747,218
Income/franchise taxes		$	74,604			$	4,842
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net		$	(3,201,540	)		$	410,739
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised		$	(177,923	)		$	(290,290	)
Transfers of loans to other real estate owned		$	46,244			$	136,450
Dividends payable		$	833,730			$	656,574
Increase in the fair value of interest rate swap assets and liabilities		$	103,080			$	303,383
Transfer of equity securities from securities available for sale to other assets at fair value		$	2,614,261			$	-

---

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, 2017, included in the Company’s Annual Report on Form 10 -K filed with the SEC on March 12, 2018. 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, 2018 are not necessarily indicative of the results expected for the year ending December 31, 2018, 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	Guaranty: Guaranty Bankshares, Ltd.
AOCI: Accumulated other comprehensive income (loss)	Guaranty Bank: Guaranty Bank and Trust Company
AFS: Available for sale	HTM: Held to maturity
ASC: Accounting Standards Codification	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 amended	Tax Act: Tax Cuts and Jobs Act of 2017
FASB: Financial Accounting Standards Board	TCE: Tangible common equity
FDIC: Federal Deposit Insurance Corporation	TDRs: Troubled debt restructurings
FHLB: Federal Home Loan Bank	TEY: Tax equivalent yield
FRB: Federal Reserve Bank of Chicago	The Company: QCR Holdings, Inc.
GAAP: Generally Accepted Accounting Principles	USDA: U.S. Department of Agriculture

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include four commercial banks: QCBT, CRBT, CSB 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. All material intercompany transactions and balances have been eliminated in consolidation.

The acquisition of Guaranty Bank, headquartered in Cedar Rapids, Iowa occurred on October 2, 2017 and Guaranty Bank was merged into CRBT on December 2, 2017. The financial results for the periods since acquisition are included in this report. See Note 2 of the Company’s Annual Report on Form 10 -K for the year ended December 31, 2017 for additional information about the acquisition.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Recent accounting developments : In May 2014, FASB issued ASU 2014 - 09, Revenue from Contracts with Customers . ASU 2014 - 09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014 - 09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014 - 09 was originally effective for the Company on January 1, 2017; however, FASB issued ASU 2015 - 14 which defers the effective date in order to provide additional time for both public and private entities to evaluate the impact. ASU 2014 - 09 was adopted by the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

In January 2016, FASB issued ASU 2016 - 01, Financial Instruments–Overall . ASU 2016 - 01 makes targeted adjustments to GAAP by eliminating the AFS classification for equity securities and requiring equity investments to be measured at fair value with changes in fair value recognized in net income. The standard also requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes. The standard clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to AFS securities in combination with the entity’s other deferred tax assets. It also requires an entity to present separately (within other comprehensive income) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, the standard eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Upon adoption of ASU 2016 - 01 by the Company on January 1, 2018, the fair value of the Company’s loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update had no significant impact on the consolidated financial statements.

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 Company is in the process of analyzing the impact of adoption 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.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

In February 2018, the FASB issued ASU 2018 - 02, Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under the standard, entities are allowed to make a one -time reclassification from AOCI to retained earnings for the effect of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a result of the change in the federal tax rate as defined by the Tax Act. ASU 2018 - 02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Companies may choose to early adopt for fiscal years or interim periods that have not been issued or made available for issuance as of February 14, 2018. The Company chose to early adopt ASU 2018 - 02 and apply the guidance to the consolidated financial statements for the year ended December 31, 2017.

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.

NOTE 2 – INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of March 31, 2018 and December 31, 2017 are summarized as follows:

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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.

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, 2018 and December 31, 2017, are summarized as follows:

At March 31, 2018, the investment portfolio included 604 securities. Of this number, 290 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 1.8% of the total amortized cost of the portfolio. Of these 290 securities, 105 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, 2018 and 2017.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

There were no sales of securities for the three months ended March 31, 2018 and 2017.

The amortized cost and fair value of securities as of March 31, 2018 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.

Portions of the U.S. government sponsored agency securities and municipal 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:

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of March 31, 2018, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 128 issuers with fair values totaling $101.3 million and revenue bonds issued by 148 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $334.6 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 16 states, including seven states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2017, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 131 issuers with fair values totaling $108.0 million and revenue bonds issued by 145 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $337.3 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 16 states, including seven states in which the aggregate fair value exceeded $5.0 million.

The amortized cost and fair values of the Company’s portfolio of general obligation bonds are summarized in the following tables by the issuer’s state:

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The amortized cost and fair values of the Company’s portfolio of revenue bonds are summarized in the following tables by the issuer’s state:

Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2018 and December 31, 2017, the Company did not hold general obligation or revenue bonds of any single issuer, the aggregate book or market value of which exceeded 5% of the Company’s stockholders’ equity. 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 four 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, 2018, 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, 2018, 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.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued