Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - QCR HOLDINGS INCc97271exv31w1.htm
EX-32.1 - EXHIBIT 32.1 - QCR HOLDINGS INCc97271exv32w1.htm
EX-99.1 - EXHIBIT 99.1 - QCR HOLDINGS INCc97271exv99w1.htm
EX-32.2 - EXHIBIT 32.2 - QCR HOLDINGS INCc97271exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - QCR HOLDINGS INCc97271exv31w2.htm
EX-21.1 - EXHIBIT 21.1 - QCR HOLDINGS INCc97271exv21w1.htm
EX-99.2 - EXHIBIT 99.2 - QCR HOLDINGS INCc97271exv99w2.htm
EX-23.1 - EXHIBIT 23.1 - QCR HOLDINGS INCc97271exv23w1.htm
Table of Contents

 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009.
Commission file number: 0-22208
QCR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
(State of incorporation)
  42-1397595
(I.R.S. Employer Identification No.)
3551 7th Street, Moline, Illinois 61265
(Address of principal executive offices)
(309) 736-3580
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common stock, $1.00 Par Value The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Exchange Act:
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The NASDAQ Capital Market on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $39,850,370.
As of February 26, 2010, the Registrant had outstanding 4,582,791 shares of common stock, $1.00 par value per share.
Documents incorporated by reference:
Part III of Form 10-K — Proxy statement for annual meeting of stockholders to be held in May 2010.
 
 

 

 


 

QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
         
    Page  
    Number(s)  
 
       
       
 
       
    3-7  
 
       
    7-15  
 
       
    15  
 
       
    16  
 
       
    16  
 
       
    16  
 
       
       
 
       
    17-18  
 
       
    18-19  
 
       
    20-41  
 
       
    42  
 
       
    43-93  
 
       
    94  
 
       
    94-97  
 
       
    97  
 
       
       
 
       
    97  
 
       
    97  
 
       
    97-98  
 
       
    98  
 
       
    98  
 
       
       
 
       
    98-102  
 
       
    103-104  
 
       
 Exhibit 21.1
 Exhibit 23.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 Exhibit 99.1
 Exhibit 99.2

 

2


Table of Contents

Part I
Item 1.  
Business
General. QCR Holdings, Inc. (the “Company”) is a multi-bank holding company headquartered in Moline, Illinois that was formed in February 1993 under the laws of the state of Delaware. The Company serves the Quad City, Cedar Rapids, and Rockford communities through the following three wholly-owned banking subsidiaries, which provide full-service commercial and consumer banking and trust and asset management services:
   
Quad City Bank and Trust Company (“Quad City Bank & Trust”), which is based in Bettendorf, Iowa and commenced operations in 1994;
   
Cedar Rapids Bank and Trust Company (“Cedar Rapids Bank & Trust”), which is based in Cedar Rapids, Iowa and commenced operations in 2001; and
   
Rockford Bank and Trust Company (“Rockford Bank & Trust”), which is based in Rockford, Illinois and commenced operations in 2005.
The Company also engages in direct financing lease contracts through the 80% equity investment by Quad City Bank & Trust in m2 Lease Funds, LLC, based in Brookfield, Wisconsin, and in real estate holdings through its 73% equity investment in Velie Plantation Holding Company, LLC, based in Moline, Illinois.
Quad City Bancard, Inc. (“Bancard”), previously a wholly-owned subsidiary of the Company, conducted the Company’s credit card issuing operation. Effective December 31, 2009, Bancard was dissolved and liquidated. The credit card issuing operation was merged in as a department of Quad City Bank & Trust.
During 2008, Bancard sold its merchant credit card acquiring business. The resulting gain on sale, net of taxes and related expenses, was approximately $3.0 million. The current and comparative financial results associated with the merchant credit card acquiring business have been reflected as discontinued operations throughout the annual report.
On December 31, 2008, the Company sold its Milwaukee, Wisconsin subsidiary, First Wisconsin Bank and Trust Company (“First Wisconsin Bank & Trust”), for $13.7 million which resulted in a pre-tax gain on sale of approximately $495 thousand. The current and comparative financial results associated with First Wisconsin Bank & Trust have been reflected as discontinued operations throughout the annual report.
Subsidiary Banks. Quad City Bank & Trust was capitalized on October 13, 1993 and commenced operations on January 7, 1994. Quad City Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. Quad City Bank & Trust provides full service commercial and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. Quad City Bank & Trust has the 80% equity investment in m2 Lease Funds. Quad City Bank & Trust, on a consolidated basis with m2 Lease Funds, had total segment assets of $975.8 million and $908.6 million as of December 31, 2009 and 2008, respectively. See Financial Statement Note 22 for additional business segment information.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law. The Company commenced operations in Cedar Rapids in June 2001 operating as a branch of Quad City Bank & Trust. The Cedar Rapids branch operation then began functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its two facilities. The headquarters for Cedar Rapids Bank & Trust is located in downtown Cedar Rapids, and its first branch location is located in northern Cedar Rapids. Cedar Rapids Bank & Trust had total segment assets of $542.7 million and $468.3 million as of December 31, 2009 and 2008, respectively. See Financial Statement Note 22 for additional business segment information.

 

3


Table of Contents

Rockford Bank & Trust is an Illinois-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law. The Company commenced operations in Rockford, Illinois in September 2004 operating as a branch of Quad City Bank & Trust, and that operation began functioning under the Rockford Bank & Trust charter in January 2005. It provides full-service commercial and consumer banking and trust and asset management services to Rockford and adjacent communities through its original office located in downtown Rockford and its branch facility located on Guilford Road at Alpine Road in Rockford. Rockford Bank & Trust had total segment assets of $265.8 million and $228.0 million as of December 31, 2009 and 2008, respectively. See Financial Statement Note 22 for additional business segment information.
Operating Subsidiaries. On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of m2 Lease Funds. John Engelbrecht, the President and Chief Executive Officer of m2 Lease Funds, retained 20% of the membership units. m2 Lease Funds, which is based in Brookfield, Wisconsin, is engaged in the business of leasing machinery and equipment to commercial and industrial businesses under direct financing lease contracts.
Beginning in 1998, the Company held a 20% equity investment in Velie Plantation Holding Company. In 2006, the Company acquired an additional 37% of the membership units bringing its total equity investment to 57% in aggregate. During 2009, the Company acquired an additional 16% of the membership units to bring its total equity investment to 73% in aggregate. Velie Plantation Holding Company is engaged in holding the real estate property known as the Velie Plantation Mansion in Moline, Illinois.
On January 1, 2008, Quad City Bank & Trust acquired 100% of the membership units of CMG Investment Advisors, LLC, which is an investment management and advisory company.
Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 2009 and 2008:
                                 
                    Interest     Interest  
                    Rate as     Rate as  
                    of     of  
Name   Date Issued   Amount Issued     Interest Rate   12/31/09     12/31/08  
 
                               
QCR Holdings Statutory Trust II
  February 2004   $ 12,372,000     6.93%*     6.93 %     6.93 %
 
                               
QCR Holdings Statutory Trust III
  February 2004     8,248,000     2.85% over 3-month LIBOR     3.10 %     6.61 %
 
                               
QCR Holdings Statutory Trust IV
  May 2005     5,155,000     1.80% over 3-month LIBOR     2.08 %     6.62 %
 
                               
QCR Holdings Statutory Trust V
  February 2006     10,310,000     6.62%**     6.62 %     6.62 %
 
                             
 
      $ 36,085,000                      
     
*  
Rate is fixed until March 31, 2011, then becomes variable based on 3-month LIBOR plus 2.85%, reset quarterly.
 
**  
Rate is fixed until April 7, 2011, then becomes variable based on 3-month LIBOR plus 1.55%, reset quarterly.
Securities issued by Trust II mature in thirty years, but are callable at par anytime after seven years from issuance. Securities issued by Trust III, Trust IV, and Trust V mature in thirty years, but are callable at par anytime after five years from issuance.

 

4


Table of Contents

Other Ownership Interests. The Company invests limited amounts of its capital in stocks of financial institutions and mutual funds. In addition to its wholly-owned and majority-owned subsidiaries, the Company owns a 20% equity position in Nobel Real Estate Investors, LLC. In June 2005, Cedar Rapids Bank & Trust entered into a joint venture as a 50% owner of Cedar Rapids Mortgage Company, LLC.
The Company and its subsidiaries collectively employed 343 and 345 full-time equivalents (“FTEs”) at December 31, 2009 and 2008, respectively.
Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities, as described more fully in this Form 10-K. Its operating results also can be affected by trust fees, deposit service charge fees, fees from the sale of residential real estate loans and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.
The Board of Governors of the Federal Reserve System (the “Federal Reserve”) is the primary federal regulator of the Company and its subsidiaries. In addition, Quad City Bank & Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking (the “Iowa Superintendent”), and Rockford Bank & Trust is regulated by the State of Illinois Department of Financial and Professional Regulation (“the Illinois DFPR”). The FDIC, as administrator of the Deposit Insurance Fund, has regulatory authority over the subsidiary banks.
Lending/Leasing. The Company and its subsidiaries provide a broad range of commercial and retail lending and investment services to corporations, partnerships, individuals and government agencies. The subsidiary banks actively market their services to qualified lending and deposit clients. Officers actively solicit the business of new clients entering their market areas as well as long-standing members of the local business community. The subsidiary banks have established lending policies which include a number of underwriting factors to be considered in making a loan, including, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit history of the borrower.
In accordance with Iowa regulation, the legal lending limit to one borrower for Quad City Bank & Trust and Cedar Rapids Bank & Trust, calculated as 15% of aggregate capital, was $14.5 million and $8.3 million, respectively, as of December 31, 2009. In accordance with Illinois regulation, the legal lending limit to one borrower for Rockford Bank & Trust, calculated as 25% of aggregate capital, totaled $7.5 million as of December 31, 2009.
As part of the loan monitoring activity at the three subsidiary banks, credit administration personnel interact closely with senior bank management. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks. To complement the in-house loan review, an independent third-party performs external loan reviews. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of these situations.
As noted above, the subsidiary banks are active commercial lenders. The current areas of emphasis include loans to wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, the subsidiary banks often take personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. Some of the subsidiary banks’ commercial business loans have floating interest rates or reprice within one year. The banks also make commercial real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower.

 

5


Table of Contents

The following table presents total loans/leases by type and subsidiary as of December 31, 2009 and 2008. Residential real estate loans held for sale are included in residential real estate loans below.
                                                                                         
    Quad City     m2     Cedar Rapids     Rockford     Intercompany     Consolidated  
    Bank & Trust     Lease Funds     Bank & Trust     Bank & Trust     Elimination     Total  
    $     %     $     %     $     %     $     %     $     $     %  
    (dollars in thousands)  
As of December 31, 2009:
                                                                                       
 
                                                                                       
Commercial and industrial loans
  $ 217,873       39 %   $       0 %   $ 148,420       39 %   $ 75,243       36 %   $     $ 441,536       35 %
Commercial real estate loans
    261,902       47 %           0 %     188,750       49 %     107,634       51 %     (2,279 )     556,007       45 %
Direct financing leases
          0 %     90,059       98 %           0 %           0 %           90,059       7 %
Residential real estate loans
    33,221       6 %           0 %     21,982       6 %     15,405       7 %           70,608       6 %
Installment and other consumer loans
    48,057       9 %           0 %     24,075       6 %     12,139       6 %           84,271       7 %
Deferred loan/lease origination costs, net of fees
    64       0 %     2,206       2 %     (427 )     0 %     (4 )     0 %           1,839       0 %
 
                                                                 
 
  $ 561,117       100 %   $ 92,265       100 %   $ 382,800       100 %   $ 210,417       100 %   $ (2,279 )   $ 1,244,320       100 %
 
                                                                 
 
                                                                                       
As of December 31, 2008:
                                                                                       
 
                                                                                       
Commercial and industrial loans
  $ 236,023       40 %   $       0 %   $ 133,191       38 %   $ 69,903       36 %   $     $ 439,117       36 %
Commercial real estate loans
    254,848       43 %           0 %     175,481       49 %     98,757       52 %     (2,418 )     526,668       43 %
Direct financing leases
          0 %     79,408       98 %           0 %           0 %           79,408       7 %
Residential real estate loans
    44,480       8 %           0 %     22,608       6 %     12,141       6 %           79,229       7 %
Installment and other consumer loans
    54,151       9 %           0 %     23,597       7 %     10,793       6 %           88,541       7 %
Deferred loan/lease origination costs, net of fees
    118       0 %     1,864       2 %     (299 )     0 %     44       0 %           1,727       0 %
 
                                                                 
 
  $ 589,620       100 %   $ 81,272       100 %   $ 354,578       100 %   $ 191,638       100 %   $ (2,418 )   $ 1,214,690       100 %
 
                                                                 
The subsidiary banks sell the majority of their residential real estate loans in the secondary market. The following table presents the originations and sales of residential real estate loans for the Company.
                         
    For the year ended December 31,  
    2009     2008     2007  
    (dollars in thousands)  
 
                       
Originations of residential real estate loans
  $ 157,180     $ 116,662     $ 134,965  
Sales of residential real estate loans
  $ 141,619     $ 87,907     $ 103,640  
Percentage of sales to originations
    90 %     75 %     77 %
Generally, the subsidiary banks’ residential mortgage loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market.
The consumer lending departments of each bank provide many types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines.
m2 Lease Funds leases machinery and equipment to commercial and industrial customers under direct financing leases.
Competition. The Company currently operates in the highly competitive Quad City, Cedar Rapids, and Rockford markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. The Company competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.

 

6


Table of Contents

Appendices. The commercial banking business is a highly regulated business. See Appendix A for a summary of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative statistical information relating to the business of the Company required to be presented pursuant to federal securities laws. Consistent with the information presented in Form 10-K, results are presented for the fiscal years ended December 31, 2009, 2008, 2007, 2006, and 2005 and have been reclassified, as appropriate, for discontinued operations.
Internet Site, Securities Filings and Governance Documents. The Company maintains Internet sites for itself and its three banking subsidiaries. The Company makes available free of charge through these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Also available are many of our corporate governance documents, including our Code of Conduct and Ethics Policy. The sites are www.qcrh.com, www.qcbt.com, www.crbt.com, and www.rkfdbank.com.
Item 1A.  
Risk Factors
In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:
Our business may be adversely affected by the continued downturn in the United States economy and the difficult market conditions in our industry.
Since 2007, the United States economy has experienced a severe downturn that continued in 2009. Business activity across a wide range of industries and regions is greatly reduced, and many businesses and local governments are experiencing serious difficulty in remaining profitable due to the lack of consumer spending and the lack of liquidity in the credit markets. Over the past few years, unemployment in the United States has increased significantly.
As a result of this economic downturn, many lending institutions, including us, have experienced declines in the performance of their loans, including commercial loans, commercial real estate loans and consumer loans. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Moreover, competition among depository institutions for deposits and quality loans has increased significantly. Bank and bank holding company stock prices have been negatively affected, and the ability of banks and bank holding companies to raise capital or borrow in the debt markets has become more difficult in recent years.
If the current weak economic conditions continue or worsen, our business, growth and profitability are likely to suffer. A continued downturn in economic conditions could affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry.
Overall, during the past year, the general business environment has had an adverse effect on our business, and there can be no assurance that the environment will improve in the near term. Until conditions improve, we expect our business, financial condition and results of operations to be adversely affected.

 

7


Table of Contents

Our business is concentrated in and dependent upon the continued growth and welfare of the Quad City, Cedar Rapids, and Rockford markets.
We operate primarily in the Quad City, Cedar Rapids, and Rockford markets, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a particularly strong presence in Bettendorf, Cedar Rapids and Davenport, Iowa and Moline and Rockford, Illinois and their surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce demand for our products and services, affect the ability of our customers to repay their loans to us, increase the levels of our non-performing and problem loans, and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, deposits, investment maturities and calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from the Federal Reserve Bank or other correspondent banks, FHLB advances, wholesale and customer repurchase agreements, brokered time deposits, and the ability to borrow at the Federal Reserve Bank’s Discount Window. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as further disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Since late 2007, the financial services industry and the credit markets generally have been materially and adversely affected by significant declines in asset values and by a lack of liquidity. The liquidity issues have been particularly acute for regional and community banks, as many of the larger financial institutions have significantly curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks. In addition, many of the larger correspondent lenders have reduced or even eliminated federal funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans/leases, invest in securities, meet our expenses, pay dividends to our shareholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
We face intense competition in all phases of our business from other banks and financial institutions.
The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services. Additionally, if the regulatory trend toward reducing restrictions on the interstate operations of financial institutions continues, we will continue to experience increased competition as a result.
Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and offer a broader range of financial services than we can offer.

 

8


Table of Contents

Our community banking strategy relies heavily on our subsidiaries’ independent management teams, and the unexpected loss of key managers may adversely affect our operations.
We rely heavily on the success of our bank subsidiaries’ independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain the executive officers, current management teams, branch managers and loan officers of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we manage our existing portfolio and grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
The American Recovery and Reinvestment Act of 2009 that was signed into law in February 2009 includes extensive new restrictions on our ability to pay retention awards, bonuses and other incentive compensation during the period in which we have any outstanding securities held by the U.S. Treasury that were issued under the Capital Purchase Program. Many of the restrictions may not be limited to our senior executives and could cover other employees whose contributions to revenue and performance can be significant. The limitations may adversely affect our ability to recruit and retain these key employees in addition to our senior executive officers, especially if we are competing for talent against institutions that are not subject to the same restrictions. The Federal Reserve, and perhaps the FDIC, are contemplating proposed rules governing the compensation practices of financial institutions and these rules, if adopted, may make it more difficult to attract and retain the people we need to operate our businesses and limit our ability to promote our objectives through our compensation and incentive programs.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
The Company and each of its banking subsidiaries are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations. Our ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market condition, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. Our failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and preferred stock and to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition.

 

9


Table of Contents

Interest rates and other conditions impact our results of operations.
Our profitability is in large part a function of the spread between the interest rates earned on investments and loans/leases and the interest rates paid on deposits and other interest bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan/lease terms or the mix of adjustable and fixed rate loans/leases in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures about Market Risk” included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.
The majority of our subsidiary banks’ loan portfolios are invested in commercial and industrial and commercial real estate loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area’s largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to commercial and commercial real estate loans, our subsidiary banks are also active in residential mortgage and consumer lending. Should the economic climate worsen, our borrowers may experience financial difficulties, and the level of non-performing loans, charge-offs and delinquencies could rise, which could negatively impact our business.
Commercial and industrial loans make up a large portion of our loan/lease portfolio.
Commercial and industrial loans/leases were $441.5 million, or approximately 35% of our total loan/lease portfolio, as of December 31, 2009. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal guarantee on commercial loans. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, a continued decline in the United States economy or a prolonged recovery period could harm or continue to harm the businesses of our commercial and industrial customers and reduce the value of the collateral securing these loans.

 

10


Table of Contents

Our loan/lease portfolio has a significant concentration of commercial real estate loans, which involve risks specific to real estate value.
Commercial real estate lending comprises a significant portion of our lending business. Specifically, commercial real estate loans were $556.0 million, or approximately 45% of our total loan/lease portfolio, as of December 31, 2009. Of this amount, $158.9 million, or approximately 29%, is owner-occupied. The market value of real estate securing our commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
The problems that have occurred in the residential real estate and mortgage markets throughout much of the United States have begun to spread to the commercial real estate market. In our market areas, we have generally experienced a downturn in credit performance by our commercial real estate loan customers, and in light of the uncertainty that exists in the economy and credit markets, there can be no guarantee that we will not experience further deterioration in the performance of commercial real estate and other real estate loans in the future. In such case, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results, financial condition and/or capital.
Our allowance for loan/lease losses may prove to be insufficient to absorb potential losses in our loan/lease portfolio.
We established our allowance for loan/lease losses in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2009, our allowance for loan/lease losses as a percentage of total gross loans/leases was 1.81% and as a percentage of total nonperforming loans/leases was approximately 75%. Because of the concentration of commercial and industrial and commercial real estate loans in our loan portfolio, which tend to be larger in amount than residential real estate loans, the movement of a small number of loans to nonperforming status can have a significant impact on these ratios. Although management believes that the allowance for loan/lease losses as of December 31, 2009 was adequate to absorb losses on any existing loans/leases that may become uncollectible, in light of the current economic environment, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance for loan/lease losses will prove sufficient to cover actual loan/lease losses in the future, particularly if economic conditions worsen beyond what management currently expects. Additional provisions to the allowance for loan/lease losses and loan/lease losses in excess of our allowance for loan/lease losses may adversely affect our business, financial condition and results of operations.
Increases in FDIC insurance premiums may have a material adverse effect on the Company’s earnings.
Recently, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund. In addition, the FDIC instituted two temporary programs in 2008 to further insure customer deposits at FDIC-member banks through December 31, 2009: (1) deposit accounts are now insured up to $250,000 per customer (up from $100,000), and (2) non-interest bearing transactional accounts (as defined by the FDIC) are fully insured (unlimited coverage) for those institutions who opted into the program. These programs have placed additional stress on the Deposit Insurance Fund. On May 20, 2009, the FDIC extended the $250,000 per customer insurance limit through December 31, 2013. On August 26, 2009, the FDIC extended the unlimited insurance on non-interest bearing transaction accounts through June 30, 2010.

 

11


Table of Contents

In order to maintain a strong funding position and restore reserve ratios of the Deposit Insurance Fund, the FDIC increased assessment rates of insured institutions uniformly by 7 cents for every $100 of deposits beginning with the first quarter of 2009, with additional changes effective April 1, 2009, which required riskier institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels.
On May 22, 2009, the FDIC adopted a final rule that imposed a special assessment on all insured depository institutions. Pursuant to the final rule, the FDIC imposed on the Company’s subsidiary banks special assessments in the total amount of $794,000, which was due and payable on September 30, 2009.
On November 12, 2009, the FDIC adopted a final rule that required insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. On December 30, 2009, our subsidiary banks paid the FDIC a total of $8.8 million in prepaid assessments.
These actions by the FDIC significantly increased our noninterest expense in 2009 and are expected to increase our costs for the foreseeable future.
We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.
The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

 

12


Table of Contents

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.
Government regulation can result in limitations on our operations.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including Treasury, the Federal Reserve, the FDIC, the Iowa Superintendent, and the Illinois DFPR. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of stockholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law.
In addition, as a result of ongoing challenges facing the United States economy, the potential exists for new laws and regulations regarding lending and funding practices and liquidity standards to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal or informal enforcement actions or orders. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect profitability. For example, new legislation or regulation may limit the manner in which we may conduct our business, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
Failure to pay interest on our debt or dividends on our preferred stock may adversely impact our ability to pay common stock dividends.
As of December 31, 2009, we had $36.1 million of junior subordinated debentures held by four business trusts that we control. Interest payments on the debentures, which totaled $2.1 million for 2009, must be paid before we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. As of December 31, 2009, the Company had 568 shares of non-cumulative perpetual preferred stock issued and outstanding. Although these non-cumulative preferred shares will accrue no dividends, dividends will be payable on the preferred shares if declared, but no dividends may be declared on the Company’s common stock unless and until dividends have been declared on the outstanding shares. Deferral, of either interest payments on the debentures or preferred dividends on the preferred shares, could cause a subsequent decline in the market price of our common stock because the Company would not be able to pay dividends on its common stock.
In addition, on February 13, 2009, we issued shares of cumulative perpetual senior preferred stock to Treasury as part of the Capital Purchase Program. The terms of the senior preferred stock restrict the payment of dividends on shares of our common stock. Without the prior consent of Treasury, we are prohibited from increasing common stock dividends for the first three years while Treasury holds the senior preferred stock. Further, we are prohibited from continuing to pay dividends on our common stock unless we have fully paid all required dividends on the senior preferred stock. Although we expect to be able to pay all required dividends on the senior preferred stock (and to continue to pay dividends on common stock at current levels), there is no guarantee that we will be able to do so.
Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.
The market value of investments in our securities portfolio has become increasingly volatile over the past year, and as of December 31, 2009, we had gross unrealized losses of $2.3 million in our investment portfolio (more than offset by gross unrealized gains of $2.5 million). The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we formally evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if our investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on our results of operations in the periods in which the write-offs occur.

 

13


Table of Contents

We cannot predict the effect on our operations of recent legislative and regulatory initiatives that were enacted in response to the ongoing financial crisis.
United States federal, state and foreign governments have taken or are considering taking extraordinary actions in an attempt to deal with the worldwide financial crisis. To the extent adopted, many of these actions have been in effect for only a limited time, and have produced limited or no relief to the capital, credit and real estate markets. There is no assurance that these actions or other actions under consideration will ultimately be successful.
In the United States, the federal government adopted the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. With authority granted under these laws, the Treasury proposed a financial stability plan that is intended to:
   
invest in financial institutions and purchase troubled assets and mortgages from financial institutions for the purpose of stabilizing and providing liquidity to the United States financial markets;
   
temporarily increase the limit on FDIC deposit insurance coverage to $250,000 per depositor through December 31, 2009 (which was recently extended to December 31, 2013 under the Helping Families Save Their Homes Act of 2009); and
   
provide for various forms of economic stimulus, including to assist homeowners restructure and lower mortgage payments on qualifying loans.
Numerous other actions have been taken by the United States Congress, the Federal Reserve, the Treasury, the FDIC, the SEC and others to address the liquidity and credit crisis that has followed the sub-prime mortgage crisis that commenced in 2007, including the financial stability plan adopted by the Treasury. In addition, President Obama recently announced a financial regulatory reform proposal, and the House and Senate are expected to consider competing proposals over the coming years.
There can be no assurance that the financial stability plan proposed by the Treasury, the other proposals under consideration or any other legislative or regulatory initiatives will be effective at dealing with the ongoing economic crisis and improving economic conditions globally, nationally or in our markets, or that the measures adopted will not have adverse consequences. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, results of operations, financial condition and the trading prices of our securities.
Changes in future rules applicable to participants in the Capital Purchase Program could adversely affect our business, results of operations and financial condition.
On February 13, 2009, we issued shares of perpetual senior preferred stock to Treasury as part of the Capital Purchase Program. The rules and policies applicable to recipients of capital under the Capital Purchase Program continue to evolve and their scope, timing and effect cannot be predicted. Any changes in these rules and policies could adversely affect our business, results of operations and financial condition.

 

14


Table of Contents

Any redemption of the securities sold to the U.S. Treasury to avoid these restrictions would require prior Federal Reserve and Treasury approval. Based on guidelines recently issued by the Federal Reserve, institutions seeking to redeem Capital Purchase Program preferred stock must demonstrate an ability to access the long-term debt markets, successfully demonstrate access to public equity markets and meet a number of additional requirements and considerations before such institutions can redeem any securities sold to the Treasury.
The limitations on bonuses, retention awards, severance payments, and incentive compensation applicable to participants in the Capital Purchase Program may adversely affect our ability to retain key employees.
For so long as any of the equity securities we issued to the U.S. Treasury under the Capital Purchase Program remain outstanding, we are subject to limitations on the payment of bonuses, retention awards, severance payments, and other incentive compensation to the Company’s five senior executive officers and up to the next 20 highest paid employees. These limitations may adversely affect our ability to recruit and retain key employees, including our executive officers, especially if we are competing for talent against institutions that are not subject to the same limitations.
Item 1B.  
Unresolved Staff Comments
There are no unresolved staff comments.

 

15


Table of Contents

Item 2.  
Properties
The following table is a listing of the Company’s operating facilities for its subsidiary banks:
             
    Facility      
    Square     Facility Owned or
Facility Address   Footage     Leased
 
           
Quad City Bank & Trust
           
 
           
2118 Middle Road in Bettendorf, IA
    6,700     Owned
4500 Brady Street in Davenport, IA
    36,000     Owned
3551 7th Street in Moline, IL
    30,000        Owned *
5515 Utica Ridge Road in Davenport, IA **
    6,000     Leased
1700 Division Street in Davenport, IA
    12,000     Owned
 
           
Cedar Rapids Bank & Trust
           
 
           
500 1st Avenue NE, Suite 100 in Cedar Rapids, IA
    36,000     Owned
5400 Council Street in Cedar Rapids, IA
    5,900     Owned
 
           
Rockford Bank & Trust
           
 
           
127 North Wyman Street in Rockford, IL
    7,800     Leased
4571 Guilford Road in Rockford, IL
    20,000     Owned
     
*  
The building is owned by Velie Plantation Holding Company, in which the Company has a 73% interest.
 
**  
Effective April 1, 2010, Quad City Bank & Trust is moving the branch operations currently located at 5515 Utica Ridge Road in Davenport, Iowa to 5405 Utica Ridge Road in Davenport, Iowa. The new facility is leased and will have 7,400 square feet available.
The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company.
No individual real estate property or mortgage amounts to 10% or more of consolidated assets.
Item 3.  
Legal Proceedings
There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 4.  
[Reserved]

 

16


Table of Contents

Part II
Item 5.  
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. The common stock, par value $1.00 per share, of the Company is listed on The NASDAQ Global Market under the symbol “QCRH”. The stock began trading on NASDAQ on October 6, 1993. The Company transferred its listing from the NASDAQ Capital Market to the NASDAQ Global Market on March 1, 2010. As of December 31, 2009, there were 4,553,290 shares of common stock outstanding held by approximately 2,600 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by NASDAQ for the periods indicated.
                                                 
    2009 Sales Price     2008 Sales Price     2007 Sales Price  
    High     Low     High     Low     High     Low  
 
                                               
First quarter
  $ 11.930     $ 7.120     $ 17.020     $ 14.150     $ 17.900     $ 15.280  
Second quarter
    11.000       7.760       16.200       12.130       17.750       15.150  
Third quarter
    10.980       9.470       16.200       9.700       16.430       13.760  
Fourth quarter
    10.490       7.060       14.240       9.440       16.000       14.250  
Dividends on Common Stock. On April 21, 2009, the Company declared a cash dividend of $0.04 per share, or $181 thousand, which was paid on July 6, 2009, to stockholders of record as of June 22, 2009. On November 5, 2009, the Company declared a cash dividend of $0.04 per share, or $182 thousand, which was paid on January 6, 2010, to stockholders of record as of December 21, 2009. In the future, it is the Company’s intention to continue to consider the payment of dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital for continued growth, but believes that operating results have reached a level that can sustain dividends to stockholders as well.
The Company is heavily dependent on dividend payments from its subsidiary banks to make dividend payments on the Company’s preferred and common stock. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Iowa and Illinois law provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits.
The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.
The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debentures in four private placements. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. During the fourth quarters of 2006 and 2007, the Company issued shares of non-cumulative perpetual preferred stock. Also, under the terms of this preferred stock, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances currently exist.
In addition, as a result of the Company’s issuance of the preferred stock to the U.S. Treasury on February 13, 2009 under the Capital Purchase Program, the ability of the Company to declare or pay dividends on its common stock is subject to restrictions, including the restriction on increasing dividends from the last semi-annual cash dividend declared prior to October 14, 2008, which was $0.04 per share. This restriction will terminate on the earlier of (a) the third anniversary of the date of issuance of the preferred stock and (b) the date on which the preferred stock has been redeemed in whole or the U.S. Treasury has transferred all of the preferred stock to one or more third parties. Further, the ability of the Company to declare or pay dividends on its common stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends on the preferred stock issued to the U.S. Treasury.

 

17


Table of Contents

Purchase of Equity Securities by the Company. There were no purchases of equity securities by the Company for the year ended December 31, 2009. On December 31, 2008, the Company repurchased 121,246 shares of its common stock. The common stock was repurchased at $13.25 per share for a total cost of $1,606,510.
Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2004 and ending December 31, 2009, a comparison of cumulative total returns for the Company, the NASDAQ Composite Index and the SNL Bank NASDAQ Index prepared by SNL Securities, Charlottesville, Virginia. The graph was prepared at the Company’s request by SNL Securities. The information assumes that $100 was invested at the closing price in December 31, 2004 in the common stock of the Company and each index, and that all dividends were reinvested.
(PERFORMECE GRAPH)
                                                 
    Period Ending  
Index   12/31/04     12/31/05     12/31/06     12/31/07     12/31/08     12/31/09  
QCR Holdings, Inc.
    100.00       94.18       84.81       68.79       48.59       40.93  
NASDAQ Composite
    100.00       101.37       111.03       121.92       72.49       104.31  
SNL Bank NASDAQ
    100.00       96.95       108.85       85.45       62.06       50.34  
Item 6.  
Selected Financial Data
The following “Selected Consolidated Financial Data” of the Company is derived in part from, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto. See Item 8 “Financial Statements.” Results for past periods are not necessarily indicative of results to be expected for any future period. All periods reported have been reclassified, as appropriate, for discontinued operations comparative purposes.

 

18


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
                                         
    Years Ended December 31,  
    2009     2008     2007     2006     2005  
STATEMENT OF INCOME DATA
                                       
 
                                       
Continuing Operations:
                                       
Interest income
  $ 85,308     $ 84,652     $ 82,491     $ 68,803     $ 48,688  
Interest expense
    34,949       40,524       48,139       38,907       21,281  
 
                             
Net interest income
    50,359       44,128       34,352       29,896       27,407  
Provision for loan/lease losses
    16,976       9,222       2,336       3,284       877  
Non-interest income
    15,644       14,426       13,499       10,998       9,106  
Non-interest expense
    46,731       42,334       35,734       34,063       28,922  
Income tax expense
    247       1,735       2,893       724       2,121  
 
                             
Income from continuing operations
    2,049       5,263       6,888       2,823       4,593  
 
                                       
Discontinued Operations:
                                       
Income (loss) from discontinued operations, before taxes
          2,580       (1,221 )     378       456  
Income tax expense (benefit)
          846       (498 )     133       161  
 
                             
Income (loss) from discontinued operations
          1,734       (723 )     245       295  
 
                                       
Net income
    2,049       6,997       6,165       3,068       4,888  
Less: net income attributable to noncontrolling interests
    277       288       388       266       78  
 
                             
Net income attributable to QCR Holdings, Inc.
    1,772       6,709       5,777       2,802       4,810  
Less: preferred stock dividends and discount accretion
    3,844       1,785       1,072       164        
 
                             
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
    (2,072 )     4,924       4,705       2,638       4,810  
 
                             
 
                                       
PER COMMON SHARE DATA
                                       
 
                                       
Income (loss) from continuing operations — BASIC (1)
  $ (0.46 )   $ 0.69     $ 1.19     $ 0.52     $ 1.00  
Income (loss) from discontinued operations — BASIC (1)
          0.38       (0.16 )     0.05       0.06  
Net income (loss) — BASIC (1)
    (0.46 )     1.07       1.03       0.57       1.06  
Income (loss) from continuing operations — DILUTED (1)
    (0.46 )     0.69       1.18       0.52       0.98  
Income (loss) from discontinued operations — DILUTED (1)
          0.37       (0.16 )     0.05       0.06  
Net income (loss) — DILUTED (1)
    (0.46 )     1.06       1.02       0.57       1.04  
Cash dividends declared
    0.08       0.08       0.08       0.08       0.08  
Dividend payout ratio
    (17.39 )%     7.48 %     7.77 %     14.04 %     7.55 %
 
                                       
BALANCE SHEET DATA
                                       
 
                                       
Total assets
  $ 1,779,646     $ 1,605,629     $ 1,476,564     $ 1,271,675     $ 1,042,614  
Securities
    370,520       256,076       220,557       194,774       182,365  
Total loans/leases
    1,244,320       1,214,690       1,056,988       960,747       756,254  
Allowance for estimated losses on loans/leases
    22,505       17,809       11,315       10,612       8,884  
Deposits
    1,089,323       1,058,959       884,005       875,447       698,504  
Stockholders’ equity:
                                       
Preferred
    58,578       20,158       20,158       12,884        
Common
    67,017       72,337       67,629       59,361       55,118  
 
                                       
KEY RATIOS
                                       
 
                                       
Return on average assets (2)
    0.10 %     0.43 %     0.43 %     0.24 %     0.51 %
Return on average common stockholders’ equity (3)
    (2.84 )     7.07       7.40       4.65       9.08  
Return on average total stockholder’s equity (2)
    1.43       7.47       7.55       4.77       9.08  
Net interest margin, tax equivalent yield (4)
    3.15       3.27       2.86       2.87       3.25  
Efficiency ratio (5)
    70.80       72.30       74.68       83.30       79.21  
Nonperforming assets to total assets
    2.27       1.58       0.51       0.58       0.36  
Allowance for estimated losses on loans/leases to total loans/leases
    1.81       1.47       1.07       1.10       1.17  
Net charge-offs to average loans/leases
    1.05       0.24       0.14       0.18       0.25  
Average total stockholders’ equity to average total assets
    7.18       5.78       5.66       5.09       6.63  
     
(1)  
Income (loss) amounts are attributable to QCR Holdings, Inc.
 
(2)  
Numerator is net income attributable to QCR Holdings, Inc.
 
(3)  
Numerator is net income (loss) available to QCR Holdings, Inc. common stockholders
 
(4)  
Interest earned and yields on nontaxable investments ar determined on a tax equivalent basis using a 34% tax rate
 
(5)  
Non-interest expenses divided by the sum of net interest income before provision for loan/lease losses and non-interest income

 

19


Table of Contents

Item 7.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides additional information regarding our operations for the twelve-month periods ending December 31, 2009, 2008, and 2007, and our financial condition at December 31, 2009 and 2008. This discussion should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.
OVERVIEW
The Company was formed in February 1993 for the purpose of organizing Quad City Bank & Trust. Over the past seventeen years, the Company has grown to include two additional banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2009, the Company had $1.78 billion in consolidated assets, including $1.24 billion in total loans/leases and $1.09 billion in deposits.
The Company recognized net income attributable to QCR Holdings, Inc. of $1.8 million, or diluted earnings per share of ($0.46) after preferred stock dividends and discount accretion of $3.8 million for the year ended December 31, 2009. For the same period in 2008, the Company reported net income attributable to QCR Holdings, Inc. of $6.7 million, or diluted earnings per share of $1.06 after preferred stock dividends of $1.8 million. By comparison, for 2007, the Company realized net income attributable to QCR Holdings, Inc. of $5.8 million, or diluted earnings per share of $1.02 after preferred stock dividends of $1.1 million. As previously reported in 2008, the Company sold its merchant credit card acquiring business and its Milwaukee, Wisconsin bank subsidiary, First Wisconsin Bank & Trust. As a result, the Company recognized income from discontinued operations totaling $1.7 million for the year ended December 31, 2008.
For 2009, income from continuing operations attributable to QCR Holdings, Inc. were $1.8 million, or diluted earnings per share of ($0.46), compared to $5.0 million, or diluted earnings per share of $0.69, for 2008, and $6.5 million, or diluted earnings per share of $1.18, for 2007. The Company experienced an increase in net interest income year-over-year of $6.2 million, or 14%. Additionally, the Company sold securities during the year which realized gains totaling $1.5 million. More than offsetting these items, the Company’s provision for loan/lease losses increased $7.8 million, or 84%, from $9.2 million for the year ended December 31, 2008 to $17.0 million for the year ended December 31, 2009. Significant increases in FDIC insurance expense and loan/lease expense related to nonperforming assets were the primary contributors to an increase in non-interest expense of $4.4 million, or 10%.

 

20


Table of Contents

As noted above, the Company’s net interest income grew significantly in 2009 compared to 2008. Specifically, on a tax equivalent basis, net interest income grew $6.2 million, or 14%, from $44.6 million to $50.8 million. Of this increase, $1.3 million was attributable to the recognition of interest income for cash interest payments previously received on a commercial loan which had been deferred pending the resolution of a contingency which was resolved in the third quarter of 2009. For 2009, average earning assets increased by $245.9 million, or 18%, and average interest-bearing liabilities increased by $159.0 million, or 13%, when compared with average balances for 2008. A comparison of yields, spreads and margins from 2009 to 2008 shows the following (on a tax equivalent basis):
   
The average yield on interest-earning assets decreased 91 basis points from 6.23% to 5.32%.
   
The average cost of interest-bearing liabilities decreased 76 basis points from 3.25% to 2.49%.
   
The net interest spread declined 15 basis points from 2.98% to 2.83%.
   
The net interest margin declined 12 basis points from 3.27% to 3.15%.
Net interest income, on a tax equivalent basis, significantly increased $9.7 million, or 28%, from $34.9 million for 2007 to $44.6 million for 2008. For 2008, average earning assets increased by $148.0 million, or 12%, and average interest-bearing liabilities increased by $135.9 million, or 12%, when compared with average balances for 2007. A comparison of yields, spreads and margins from 2008 to 2007 shows the following (on a tax equivalent basis):
   
The average yield on interest-earning assets decreased 59 basis points from 6.82% to 6.23%.
   
The average cost of interest-bearing liabilities decreased 108 basis points from 4.33% to 3.25%.
   
The net interest spread improved 49 basis points from 2.49% to 2.98%.
   
The net interest margin improved 41 basis points from 2.86% to 3.27%.
The Company’s management closely monitors and manages net interest margin. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and majority-owned leasing company is the improvement of their net interest margins. Management continually addresses this issue with pricing strategies and the use of alternative funding sources.

 

21


Table of Contents

The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories, as well as the components of change in net interest income, are presented in the following tables:
                                                                         
    Years Ended December 31,  
    2009     2008     2007  
            Interest     Average             Interest     Average             Interest     Average  
    Average     Earned     Yield or     Average     Earned     Yield or     Average     Earned     Yield or  
    Balance     or Paid     Cost     Balance     or Paid     Cost     Balance     or Paid     Cost  
    (dollars in thousands)  
 
                                                                       
ASSETS
                                                                       
Interest earnings assets:
                                                                       
Federal funds sold
  $ 45,850     $ 134       0.29 %   $ 5,631     $ 100       1.78 %   $ 5,450     $ 248       4.55 %
Interest-bearing deposits at at financial institutions
    31,090       313       1.01       5,313       165       3.11       6,142       346       5.63  
Investment securities (1)
    312,043       12,180       3.90       230,342       12,279       5.33       204,364       10,605       5.19  
Gross loans/leases receivable (2) (3)
    1,222,493       73,145       5.98       1,124,255       72,566       6.45       1,001,633       71,796       7.17  
 
                                                           
 
                                                                       
Total interest earning assets
    1,611,476       85,772       5.32       1,365,541       85,110       6.23       1,217,589       82,995       6.82  
 
                                                                       
Noninterest-earning assets:
                                                                       
Cash and due from banks
  $ 30,521                     $ 32,651                     $ 36,880                  
Premises and equipment, net
    30,868                       31,535                       31,705                  
Less allowance for estimated losses on loans/leases
    (21,831 )                     (13,770 )                     (11,178 )              
Other
    73,613                       136,791                       76,486                  
 
                                                               
 
                                                                       
Total assets
  $ 1,724,647                     $ 1,552,748                     $ 1,351,482                  
 
                                                               
 
                                                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                                       
Interest-bearing liabilities:
                                                                       
Interest-bearing demand deposits
  $ 366,687       3,834       1.05 %   $ 299,417       5,709       1.91 %   $ 305,699       10,790       3.53 %
Savings deposits
    48,596       323       0.66       57,955       806       1.39       31,300       651       2.08  
Time deposits
    511,359       14,217       2.78       443,122       17,379       3.92       404,544       19,786       4.89  
Short-term borrowings
    113,614       712       0.63       154,456       2,962       1.92       141,778       5,217       3.68  
Federal Home Loan Bank advances
    212,494       9,082       4.27       193,119       8,525       4.41       160,474       7,237       4.51  
Junior subordinated debentures
    36,085       2,016       5.59       36,085       2,389       6.62       36,085       2,623       7.27  
Other borrowings
    117,271       4,765       4.06       62,975       2,754       4.37       31,398       1,835       5.84  
 
                                                           
 
                                                                       
Total interest-bearing liabilities
    1,406,106       34,949       2.49       1,247,129       40,524       3.25       1,111,278       48,139       4.33  
 
                                                                       
Noninterest-bearing demand deposits
    171,968                       135,860                       125,117                  
Other noninterest-bearing liabilities
    22,759                       79,956                       38,511                  
Total liabilities
    1,600,833                       1,462,945                       1,274,906                  
 
                                                                       
Stockholders’ equity
    123,814                       89,803                       76,576                  
 
                                                               
 
                                                                       
Total liabilities and stockholders’ equity
  $ 1,724,647                     $ 1,552,748                     $ 1,351,482                  
 
                                                               
 
                                                                       
Net interest income
          $ 50,823                     $ 44,586                     $ 34,856          
 
                                                               
 
                                                                       
Net interest spread
                    2.83 %                     2.98 %                     2.49 %
 
                                                                 
 
                                                                       
Net interest margin
                    3.15 %                     3.27 %                     2.86 %
 
                                                                 
 
                                                                       
Ratio of average interest earning assets to average interest- bearing liabilities
    114.61 %                     109.49 %                     109.57 %              
 
                                                               
     
(1)  
Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented.
 
(2)  
Loan/lease fees are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
 
(3)  
Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

 

22


Table of Contents

For the years ended December 31, 2009, 2008 and 2007
                         
    Inc./(Dec.)     Components  
    from     of Change (1)  
    Prior Year     Rate     Volume  
    2009 vs. 2008  
    (dollars in thousands)  
INTEREST INCOME
                       
Federal funds sold
  $ 34     $ (147 )   $ 181  
Interest-bearing deposits at other financial institutions
    148       (178 )     326  
Investment securities (2)
    (99 )     (3,790 )     3,691  
Gross loans/leases receivable (2) (3) (4)
    579       (5,510 )     6,089  
 
                 
 
                       
Total change in interest income
  $ 662     $ (9,625 )   $ 10,287  
 
                 
 
                       
INTEREST EXPENSE
                       
Interest-bearing demand deposits
  $ (1,875 )   $ (2,965 )   $ 1,090  
Savings deposits
    (483 )     (369 )     (114 )
Time deposits
    (3,162 )     (5,568 )     2,406  
Short-term borrowings
    (2,250 )     (1,616 )     (634 )
Federal Home Loan Bank advances
    557       (277 )     834  
Junior subordinated debentures
    (373 )     (373 )      
Other borrowings
    2,011       (208 )     2,219  
 
                 
 
                       
Total change in interest expense
  $ (5,575 )   $ (11,376 )   $ 5,801  
 
                 
 
                       
Total change in net interest income
  $ 6,237     $ 1,751     $ 4,486  
 
                 
                         
    Inc./(Dec.)     Components  
    from     of Change (1)  
    Prior Year     Rate     Volume  
    2008 vs. 2007  
    (dollars in thousands)  
INTEREST INCOME
                       
Federal funds sold
  $ (148 )   $ (156 )   $ 8  
Interest-bearing deposits at other financial institutions
    (181 )     (139 )     (42 )
Investment securities (2)
    1,674       296       1,378  
Gross loans/leases receivable (2) (3) (4)
    770       (7,537 )     8,307  
 
                 
 
                       
Total change in interest income
  $ 2,115     $ (7,536 )   $ 9,651  
 
                 
 
                       
INTEREST EXPENSE
                       
Interest-bearing demand deposits
  $ (5,081 )   $ (4,863 )   $ (218 )
Savings deposits
    155       (267 )     422  
Time deposits
    (2,407 )     (4,172 )     1,765  
Short-term borrowings
    (2,255 )     (2,687 )     432  
Federal Home Loan Bank advances
    1,288       (156 )     1,444  
Junior subordinated debentures
    (234 )     (234 )      
Other borrowings
    919       (555 )     1,474  
 
                 
 
                       
Total change in interest expense
  $ (7,615 )   $ (12,934 )   $ 5,319  
 
                 
 
                       
Total change in net interest income
  $ 9,730     $ 5,398     $ 4,332  
 
                 
     
(1)  
The column “Inc/(Dec) from Prior Year” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.
 
(2)  
Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented.
 
(3)  
Loan/lease fees are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
 
(4)  
Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

 

23


Table of Contents

The Company’s operating results are also impacted by various sources of non-interest income, including trust department fees, deposit service fees, gains from the sales of residential real estate loans, investment advisory and management fees, and other income. More than offsetting these items, the Company incurs non-interest expenses which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.
CRITICAL ACCOUNTING POLICIES
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan/lease losses (also referred to as ‘allowance for estimated losses on loans/leases’). The Company’s allowance for loan/lease loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan/lease loss that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest, and in particular, the economic health of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan/lease portfolio, it enhances its methodology accordingly. Management may report a materially different amount for the provision for loan/lease losses in the statement of operations to change the allowance for loan/lease losses if its assessment of the above factors were different. The discussion regarding the Company’s allowance for loan/lease losses should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this Form 10-K, as well as the portion of this Management’s Discussion and Analysis section entitled “Financial Condition — Allowance for Estimated Losses on Loans/Leases.” Although management believed the level of the allowance as of December 31, 2009 was adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
The Company’s assessment of other-than-temporary impairment of its available-for-sale securities portfolio is another critical accounting policy as a result of the level of judgment required by management. Available-for-sale securities are evaluated to determine whether declines in fair value below their cost are other-than-temporary. In estimating other-than-temporary impairment losses management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the Company to not sell the security prior to recovery and whether it is not more-likely-than-not that the Company will be required to sell the security prior to recovery. The discussion regarding the Company’s assessment of other-than-temporary impairment should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this Form 10-K. For the year ended December 31, 2009, the Company’s evaluation determined that 11 publicly traded equity securities experienced declines in fair value that were other-than-temporary. As a result, the Company wrote down the value of these securities and recognized losses in the amount of $206,369. For the years ended December 31, 2008 and 2007, the Company did not recognize other-than-temporary impairment of any equity securities. For 2009, 2008 and 2007, the Company did not recognize other-than-temporary impairment of any debt securities.

 

24


Table of Contents

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, and 2007
Overview. Net income attributable to QCR Holdings, Inc. for 2009 was $1.8 million, or diluted earnings per share of ($0.46) after preferred stock dividends and discount accretion of $3.8 million, compared to $6.7 million, or diluted earnings per share of $1.06 after preferred stock dividends of $1.8 million, for 2008. During 2008, the Company sold its merchant credit card acquiring business and Milwaukee banking subsidiary resulting in income from discontinued operations, net of taxes, of $1.7 million, or $0.37 per share (on a diluted basis). The Company was successful in improving its net interest income by $6.2 million, or 14%, from $44.2 million for 2008 to $50.4 million for 2009. More than offsetting this increase, the Company’s provision for loan/lease losses for 2009 increased $7.8 million, or 84%, from 2008. Additionally, FDIC and other insurance expense increased $2.3 million, or 175%, during 2009. Loan/lease expenses related to carrying higher levels of nonperforming assets increased $1.2 million, or 164%, on a year-over-year basis.
Net income attributable to QCR Holdings, Inc. for 2008 was $6.7 million compared to $5.8 million for 2007, which is an increase of $931 thousand, or 16%. Diluted earnings per share for 2008 was $1.06 compared to $1.02 for 2007. During 2008, the Company sold its merchant credit card acquiring business and Milwaukee banking subsidiary resulting in income from discontinued operations, net of taxes, of $1.7 million, or $0.37 per share (on a diluted basis). The Company was successful in improving its net interest income during 2008 as net interest income grew $9.8 million, or 28%, from 2007. Offsetting these increases, the Company’s provision for loan/lease losses for 2008 increased $6.9 million, or 295%, from 2007, and noninterest expenses for 2008 increased $6.6 million, or 18%, from 2007.
Interest income. Interest income increased $656 thousand, or 1%, from $84.7 million for 2008 to $85.3 million for 2009. Excluding the impact of the $1.3 million positive one-time adjustment to interest income in the third quarter of 2009, interest income experienced a slight decrease of $617 thousand, or 1%. As a result of the economic recession and a historically low interest rate environment in 2009, the decline in yield on interest-earnings assets outpaced the increase in interest income from the growth realized across all interest-earning asset types.
Interest income increased $2.2 million, or 3%, from $82.5 million for 2007 to $84.7 million for 2008. As a result of the deteriorating economy and a significant declining interest rate environment in 2008, the majority of the increase in interest income was a result of growth in interest-earning assets, principally loans and leases.
Interest expense. Interest expense decreased $5.6 million, or 14%, from $40.5 million for 2008 to $34.9 million for 2009. With the economic recession and historically low levels of interest rates for 2009, the Company managed down its funding costs as the average cost on interest bearing liabilities decreased 76 basis points from 3.25% for 2008 down to 2.49% for 2009.
Interest expense decreased $7.6 million, or 16%, from $48.1 million for 2007 to $40.5 million for 2008. With the economic recession and drop in rates during 2008, the Company was successful in managing its cost of funds as the average cost on interest bearing liabilities decreased 108 basis points from 4.33% for 2007 down to 3.25% for 2008.

 

25


Table of Contents

Provision for loan/lease losses. The provision for loan/lease losses is established based on a number of factors, including the Company’s historical loss experience, delinquencies and charge-off trends, the local and national economy and the risk associated with the loans/leases in the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company had an allowance for estimated losses on loans/leases of 1.81% of total gross loans/leases at December 31, 2009, compared to 1.47% of total gross loans/leases at December 31, 2008, and compared to approximately 1.07% of total gross loans/leases at December 31, 2007.
The Company’s provision for loan/lease losses increased significantly from $9.2 million for 2008 to $17.0 million for 2009. This increase was the result of the following:
   
The Company experienced continued degradation within the loan/lease portfolio. Specifically, the Company’s nonperforming loans/leases grew $8.9 million, or 43%, from $21.1 million at December 31, 2008 to $30.0 million at December 31, 2009. The majority of these nonperforming loans/leases required specific reserves.
   
Due to the economic recession and related uncertainty as to the severity and duration of its impact on the national and local economies, the Company continued to increase the qualitative factors impacting the allowance for estimate losses on loans/leases.
   
The Company grew its loan/lease portfolio 2% during 2009 as gross loans/leases increased $29.6 million.
During 2008, the Company’s provision for loan/lease losses increased significantly from $2.3 million for 2007 to $9.2 million. This increase was a result of the following:
   
The Company grew its loan portfolio 15% during 2008 as gross loans/leases increased from $1.1 billion as of December 31, 2007 to $1.2 billion as of December 31, 2008.
   
Due to the economic recession and related uncertainty as to the severity and duration of its impact on the national and local economies, the Company increased the qualitative factors impacting the allowance for estimate losses on loans/leases.
   
The Company experienced some degradation in specific commercial credits within the loan portfolio that required specific reserves.

 

26


Table of Contents

Non-interest income. The following tables set forth the various categories of non-interest income for the years ended December 31, 2009, 2008 and 2007.
                                 
    Years Ended              
    December 31,     December 31,              
    2009     2008     $ Change     % Change  
 
                               
Credit card fees, net of processing costs
  $ 930,435     $ 987,769     $ (57,334 )     (5.8 )%
Trust department fees
    2,883,482       3,333,812       (450,330 )     (13.5 )
Deposit service fees
    3,319,967       3,134,869       185,098       5.9  
Gains on sales of loans, net
    1,677,312       1,068,545       608,767       57.0  
Securities gains, net
    1,488,391       199,500       1,288,891       646.1  
Other-than-temporary impairment losses on securities
    (206,369 )           (206,369 )     (100.0 )
Gains on sales of foreclosed assets
    177,736       394,103       (216,367 )     (54.9 )
Earnings on bank-owned life insurance
    1,243,324       1,016,864       226,460       22.3  
Investment advisory and management fees, gross
    1,507,557       1,975,236       (467,679 )     (23.7 )
Other
    2,621,599       2,315,531       306,068       13.2  
 
                       
 
  $ 15,643,434     $ 14,426,229     $ 1,217,205       8.4 %
 
                       
                                 
    Years Ended              
    December 31,     December 31,              
    2008     2007     $ Change     % Change  
 
                               
Credit card fees, net of processing costs
  $ 987,769     $ 746,725     $ 241,044       32.3 %
Trust department fees
    3,333,812       3,672,501       (338,689 )     (9.2 )
Deposit service fees
    3,134,869       2,606,724       528,145       20.3  
Gains on sales of loans, net
    1,068,545       1,219,800       (151,255 )     (12.4 )
Securities gains, net
    199,500             199,500       100.0  
Gains on sales of foreclosed assets
    394,103       1,007       393,096       39,036.3  
Gains on sales of other assets
          435,791       (435,791 )     (100.0 )
Earnings on bank-owned life insurance
    1,016,864       846,071       170,793       20.2  
Investment advisory and management fees, gross
    1,975,236       1,575,887       399,349       25.3  
Other
    2,315,531       2,394,893       (79,362 )     (3.3 )
 
                       
 
  $ 14,426,229     $ 13,499,399     $ 926,830       6.9 %
 
                       
   
Trust department fees continue to be a significant contributor to non-interest income. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. Total trust assets under administration were $1.22 billion at December 31, 2009 compared to $811.9 million at December 31, 2008 and compared to $1.19 billion at December 31, 2007. Although the value of trust assets under administration rebounded at the end of 2009, many of the investments experienced downward volatility throughout 2008 and 2009. The fee income recognized was based on the values throughout the years.
   
Deposit service fees have increased significantly over the past two years. This increase was primarily a result of an increase in NSF (non-sufficient funds or overdraft) charges related to demand deposit accounts at the Company’s subsidiary banks. The amount and number of demand deposit accounts have increased in each of 2008 and 2009. Service charges and NSF charges related to the Company’s demand deposit accounts were the main components of deposit service fees.

 

27


Table of Contents

   
Gains on sales of loans, net, increased 57.0% in 2009 compared to 2008 which more than reversed the 12.4% decrease in 2008 compared to 2007. This consists primarily of sales of residential mortgages to the secondary market. In 2009, loan origination and sales activity for these loan types increased as a result of the reduction in interest rates and the resulting increase in residential mortgage refinancing transactions. The Company sells the majority of residential mortgages it originations. For 2008, loan origination and sales activity slowed with the beginning of the recession and crisis in the mortgage industry.
   
In 2009, the Company identified several U.S. government-sponsored agency securities with favorable market positions which were sold at pre-tax gains totaling $1.5 million. These gains were partially offset as the Company wrote down the value of 11 publicly-traded equity securities owned by the Holding Company which had experienced declines in fair value deemed to be other-than-temporary. The Company recognized losses in the amount of $206 thousand for these write-downs.
   
Investment advisory and management fees increased 25.3% in 2008 over 2007 which was effectively offset by a 23.7% decrease in 2009 compared to 2008. Similar to trust department fees, these fees are largely determined based on the value of the investments managed. The increase for 2008 was largely attributable to the acquisition of CMG Investment Advisors, LLC, a wholly-owned subsidiary of Quad City Bank & Trust, which occurred in the first quarter of 2008. For 2009, with the economic recession, many of these investments experienced declines in market value.

 

28


Table of Contents

Non-interest expenses. The following tables set forth the various categories of non-interest expenses for the years ended December 31, 2009, 2008 and 2007 and 2006.
                                 
    Years Ended              
    December 31,     December 31,              
    2009     2008     $ Change     % Change  
 
                               
Salaries and employee benefits
  $ 26,882,185     $ 26,124,160     $ 758,025       2.9 %
Professional and data processing fees
    4,829,667       4,801,087       28,580       0.6  
Advertising and marketing
    991,243       1,296,651       (305,408 )     (23.6 )
Occupancy and equipment expense
    5,372,101       5,091,545       280,556       5.5  
Stationery and supplies
    528,959       518,639       10,320       2.0  
Postage and telephone
    1,060,690       933,508       127,182       13.6  
Bank service charges
    481,223       559,614       (78,391 )     (14.0 )
FDIC and other insurance
    3,626,027       1,316,710       2,309,317       175.4  
Loan/lease expense
    1,997,583       757,315       1,240,268       163.8  
Other
    960,979       934,460       26,519       2.8  
 
                       
 
  $ 46,730,657     $ 42,333,689     $ 4,396,968       10.4 %
 
                       
                                 
    Years Ended              
    December 31,     December 31,              
    2008     2007     $ Change     % Change  
 
                               
Salaries and employee benefits
  $ 26,124,160     $ 21,976,683     $ 4,147,477       18.9 %
Professional and data processing fees
    4,801,087       3,469,331       1,331,756       38.4  
Advertising and marketing
    1,296,651       1,115,864       180,787       16.2  
Occupancy and equipment expense
    5,091,545       4,717,054       374,491       7.9  
Stationery and supplies
    518,639       513,210       5,429       1.1  
Postage and telephone
    933,508       936,032       (2,524 )     (0.3 )
Bank service charges
    559,614       565,092       (5,478 )     (1.0 )
FDIC and other insurance
    1,316,710       995,955       320,755       32.2  
Loss on sale of premises and equipment
          223,308       (223,308 )     (100.0 )
Loan/lease expense
    757,315       358,107       399,208       111.5  
Other
    934,460       863,339       71,121       8.2  
 
                       
 
  $ 42,333,689     $ 35,733,975     $ 6,599,714       18.5 %
 
                       
   
Salaries and employee benefits, which is the largest component of non-interest expenses, experienced a modest increase of $758 thousand, or 2.9%, in 2009 compared to 2008. This slight increase is primarily the result of customary annual salary and benefits increases for the majority of the Company’s employees. The Company’s employee base has stabilized over the past year as FTEs have remained relatively flat from 345 at December 31, 2008 to 343 at December 31, 2009. Salaries and employee benefits increased $4.1 million in 2008 compared to 2007. This increase was primarily due to an increase in the number of FTEs from 326 at December 31, 2007, to 345 at December 31, 2008. The large majority of these employee additions were attributable to the Company’s expansion in its existing markets.

 

29


Table of Contents

   
Professional and data processing fees remained flat during 2009. In 2008, professional and data processing fees increased 38.4% over 2007. The primary contributors to the year-over-year increase in 2008 were legal, consulting, and data processing fees incurred at the subsidiary banks. Fees incurred for data processing experienced an increase as the number of customers and volume of transactions have grown. In addition, the Company incurred significant expenses for consulting and legal services for work on troubled loans/leases, amendments of compensation agreements in compliance with a new regulation, and the evaluation of the EESA.
   
FDIC and other insurance expense experienced significant increases in each of the last two years. The reasons for these increases were twofold and both related to expenses for FDIC insurance. First, the FDIC introduced its new premium pricing system and assessment methodology for deposit insurance coverage for all depository institutions in 2007. The system was further modified in 2009. The result was increased premium cost for the subsidiary banks. Second, the FDIC required a one-time special assessment from all insured depository institutions, including the subsidiary banks, for the second quarter of 2009 which amounted to $794 thousand of additional expense. Management expects FDIC assessments will continue to be higher than historical levels.
   
Loan/lease expense increased significantly over the past two years. In conjunction with the increase in nonperforming assets over the past two years, the Company has incurred increased carrying costs and workout expenses related to these nonperforming assets.
Income tax expense. The provision for income taxes from continuing operations was $247 thousand for the year ended December 31, 2009 compared to $1.7 million for the year ended December 31, 2008 for a decrease of $1.5 million, or 86%. The decrease was the result of a decrease in income from continuing operations before income taxes of $4.7 million, or 67%, for 2009 when compared to 2008. Additionally, primarily due to a decrease in the proportionate share of taxable income to total income from year to year, the Company experienced a decrease in the effective tax rate from 24.8% for 2008 to 10.8% for 2009.
The provision for income taxes from continuing operations was $1.7 million for the year ended December 31, 2008 compared to $2.9 million for the year ended December 31, 2007 for a decrease of $1.2 million, or 40%. The decrease was the result of a decrease in income from continuing operations before income taxes of $2.8 million, or 28%, for 2008 when compared to 2007. Additionally, primarily due to a decrease in the proportionate share of taxable income to total income from year to year, the Company experienced a decrease in the effective tax rate from 29.7% for 2007 to 24.8% for 2008.
Discontinued operations. The Company did not recognize any income or loss from discontinued operations for the year ended December 31, 2009.
Income from discontinued operations for the year ended December 31, 2008 totaled $1.7 million which was a significant improvement from the loss from discontinued operations of $723 thousand incurred for the year ended December 31, 2007. The gain on sale of the merchant credit card acquiring business, after taxes, of approximately $3.0 million more than offset the increase in operating loss by First Wisconsin Bank & Trust, before taxes, of $1.2 million.

 

30


Table of Contents

FINANCIAL CONDITION
Overview. Total assets of the Company increased by $174.0 million, or 11%, to $1.78 billion at December 31, 2009 from $1.61 billion at December 31, 2008. Total assets of the Company increased by $129.1 million, or 9%, to $1.61 billion at December 31, 2008 from $1.48 billion at December 31, 2007. The growth in 2009 primarily resulted from an increase in the securities and loans/leases portfolios funded by increases in noninterest-bearing deposits and customer repurchase agreements, wholesale repurchase agreements, and the issuance of preferred stock.
Investments. The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on asset-liability position and maximizing return. The Company’s securities available for sale portfolio consists largely of U.S. Treasury and government sponsored agency securities. Residential mortgage-backed securities represents less than 1% of the entire portfolio as of December 31, 2009 and 2008, respectively. The Company has not invested in corporate mortgage-backed securities.
Securities increased $114.4 million, or 45%, to $370.5 million at December 31, 2009, from $256.1 million at December 31, 2008. The increase largely consisted of U.S. government sponsored agency securities and was the result of increased collateral needs for the customer and wholesale repurchase agreements at the subsidiary banks.
Securities increased by $35.5 million, or 16%, to $256.1 million at December 31, 2008, from $220.6 million at December 31, 2007. This increase was primarily investments of U.S. government sponsored agency securities and resulted to support the collateral needs of the subsidiary banks.
See Note 4 to the consolidated financial statements for additional information regarding the Company’s investments.
Loans/Leases. Total loans/leases grew by $29.6 million, or 2% from $1.21 billion at December 31, 2008 to $1.24 billion at December 31, 2009. Compared to 2007, total loans/leases grew by $157.7 million, or 15%, to $1.21 billion at December 31, 2008, from $1.06 billion at December 31, 2007.
The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.
                                                                                 
    As of December 31,  
    2009     2008     2007     2006     2005  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  
    (dollars in thousands)  
 
                                                                               
Real estate loans held for sale — residential mortgage
  $ 6,135       1 %   $ 7,377       1 %   $ 6,508       1 %   $ 6,187       1 %   $ 2,632       0 %
 
                                                                               
Real estate loans — residential mortgage
    61,561       5 %     69,466       6 %     68,281       6 %     68,913       7 %     54,125       7 %
Real estate loans — construction
    2,912       0 %     2,385       0 %     8,539       1 %     6,534       1 %     2,811       0 %
Commercial and industrial loans
    441,536       35 %     439,117       36 %     353,401       33 %     396,599       41 %     323,732       43 %
Commercial real estate loans
    556,007       45 %     526,669       43 %     472,284       45 %     350,339       37 %     269,730       36 %
Direct financing leases
    90,059       7 %     79,408       7 %     67,224       6 %     52,628       5 %     34,911       5 %
Installment and other consumer loans
    84,271       7 %     88,540       7 %     79,220       8 %     78,058       8 %     67,090       9 %
 
                                                           
 
                                                                               
Total loans/leases
  $ 1,242,481       100 %   $ 1,212,962       100 %   $ 1,055,457       100 %   $ 959,258       100 %   $ 755,031       100 %
 
                                                                               
Plus deferred loan/lease origination costs, net of fees
    1,839               1,727               1,531               1,489               1,223          
Less allowance for estimated losses on loans/leases
    (22,505 )             (17,809 )             (11,315 )             (10,612 )             (8,884 )        
 
                                                                     
 
                                                                               
Net loans/leases
  $ 1,221,815             $ 1,196,880             $ 1,045,673             $ 950,135             $ 747,370          
 
                                                                     
Consistent with the intention of the U.S. Treasury’s Capital Purchase Program, the Company is committed to providing transparency surrounding its utilization of the proceeds from participation in the Capital Purchase Program including its lending activities and support of the existing communities served. A summary of activity for the year ended December 31, 2009 is presented in the table on the following page.

 

31


Table of Contents

The majority of residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with long term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans in the following table.
                                                 
    For the twelve months ended December 31, 2009  
    Quad City     m2     Cedar Rapids     Rockford     Intercompany     Consolidated  
    Bank & Trust     Lease Funds     Bank & Trust     Bank & Trust     Elimination     Total  
    (dollars in thousands)  
BALANCE AS OF DECEMBER 31, 2008:
                                               
 
                                               
Commercial and industrial loans
  $ 236,023     $     $ 133,191     $ 69,903     $     $ 439,117  
Commercial real estate loans
    254,848             175,481       98,757       (2,418 )     526,668  
Direct financing leases
          79,408                         79,408  
Residential real estate loans
    44,480             22,608       12,141             79,229  
Installment and other consumer loans
    54,151             23,597       10,793             88,541  
 
                                   
 
    589,502       79,408       354,877       191,594       (2,418 )     1,212,963  
Plus deferred loan/lease origination costs, net of fees
    118       1,864       (299 )     44               1,727  
 
                                   
 
  $ 589,620     $ 81,272     $ 354,578     $ 191,638     $ (2,418 )   $ 1,214,690  
 
                                               
ORIGINATION OF NEW LOANS:
                                               
 
                                               
Commercial and industrial loans
    55,432       11,300       46,693       25,892             139,317  
Commercial real estate loans
    47,583             48,597       20,535             116,715  
Direct financing leases
          27,515                         27,515  
Residential real estate loans
    46,812             33,146       26,878             106,836  
Installment and other consumer loans
    10,852             3,661       2,925             17,438  
 
                                   
 
  $ 160,679     $ 38,815     $ 132,097     $ 76,230     $     $ 407,821  
 
                                               
PAYMENTS/MATURITIES/SALES, NET OF ADVANCES OR RENEWALS ON EXISTING LOANS:
                                               
 
                                               
Commercial and industrial loans
    (73,582 )     (11,300 )     (31,464 )     (20,552 )           (136,898 )
Commercial real estate loans
    (40,529 )           (35,328 )     (11,658 )     139       (87,376 )
Direct financing leases
          (16,864 )                       (16,864 )
Residential real estate loans
    (58,071 )           (33,772 )     (23,614 )           (115,457 )
Installment and other consumer loans
    (16,946 )           (3,183 )     (1,579 )           (21,708 )
 
                                   
 
  $ (189,128 )   $ (28,164 )   $ (103,747 )   $ (57,403 )   $ 139       (378,303 )
 
                                               
BALANCE AS OF DECEMBER 31, 2009:
                                               
 
                                               
Commercial and industrial loans
    217,873             148,420       75,243             441,536  
Commercial real estate loans
    261,902             188,750       107,634       (2,279 )     556,007  
Direct financing leases
          90,059                         90,059  
Residential real estate loans
    33,221             21,982       15,405             70,608  
Installment and other consumer loans
    48,057             24,075       12,139             84,271  
 
                                   
 
    561,053       90,059       383,227       210,421       (2,279 )     1,242,481  
Plus deferred loan/lease origination costs, net of fees
    64       2,207       (427 )     (4 )           1,839  
 
                                   
 
  $ 561,116     $ 92,266     $ 382,800     $ 210,417     $ (2,279 )     1,244,320  
 
                                   
The following table sets forth the remaining maturities by loan/lease type as of December 31, 2009. Maturities are based on contractual dates.
                                         
                            Maturities After One Year  
    Due in one     Due after one     Due after     Predetermined     Adjustable  
    year or less     through 5 years     5 years     interest rates     interest rates  
    (dollars in thousands)  
 
                                       
Real estate loans held for sale — mortgage
  $     $     $ 6,135     $ 6,135     $  
Real estate loans — residential mortgage
    815       572       60,174       8,249       52,497  
Real estate loans — construction
    2,912       0       0       0       0  
Commercial and industrial loans
    158,732       227,742       55,062       182,688       100,116  
Commercial real estate loans
    103,332       356,815       95,860       375,428       77,247  
Direct financing leases
    5,972       71,888       12,199       84,087       0  
Installment and other consumer loans
    27,813       47,733       8,725       12,347       44,111  
 
                             
 
  $ 299,576     $ 704,750     $ 238,155     $ 668,934     $ 273,971  
 
                             

 

32


Table of Contents

Allowance for Estimated Losses on Loans/Leases. The allowance for estimated losses on loans/leases was $22.5 million at December 31, 2009, compared to $17.8 million at December 31, 2008, for an increase of $4.7 million, or 26%. The allowance for estimated losses on loans/leases was $17.8 million at December 31, 2008, compared to $11.3 million at December 31, 2007, for an increase of $6.5 million, or 57%. The Company incurred net charge-offs totaling $12.3 million for the year ending December 31, 2009. This was a significant increase from $2.7 million for the year ending December 31, 2008 and from $1.6 million for the year ending December 31, 2007. The following table summarizes the activity in the allowance for estimated losses on loans/leases.
                                         
    Years ended December 31,  
    2009     2008     2007     2006     2005  
    (dollars in thousands)  
Average amount of loans/leases outstanding, before allowance for estimated losses on loans/leases
  $ 1,222,493     $ 1,124,255     $ 1,001,633     $ 855,872     $ 682,858  
 
                                       
Allowance for estimated losses on loans/leases:
                                       
Balance, beginning of fiscal period
  $ 17,809     $ 11,315     $ 10,612     $ 8,884     $ 9,262  
Charge-offs:
                                       
Commercial and industrial
    (7,510 )     (1,205 )     (754 )     (1,245 )     (1,097 )
Commercial real estate
    (2,824 )     (805 )     (300 )     (95 )     (432 )
Direct financing leases
    (1,255 )     (264 )     (527 )     (75 )     (1 )
Residential real estate *
    (314 )     (326 )     (174 )     (45 )     (160 )
Installment and other consumer
    (2,104 )     (1,085 )     (469 )     (460 )     (356 )
 
                             
Subtotal charge-offs
    (14,007 )     (3,685 )     (2,224 )     (1,920 )     (2,046 )
 
                             
Recoveries:
                                       
Commercial and industrial
    344       313       160       260       95  
Commercial real estate
    98       420       167       2       124  
Direct financing leases
    52                         26  
Residential real estate *
    40       81       173       52       25  
Installment and other consumer
    1,193       143       92       50       87  
 
                             
Subtotal recoveries
    1,727       957       592       364       357  
 
                             
 
                                       
Net charge-offs
    (12,280 )     (2,728 )     (1,632 )     (1,556 )     (1,689 )
Provision charged to expense
    16,976       9,222       2,335       3,284       877  
Acquisition of m2 Lease Funds, LLC
                            434  
 
                             
Balance, end of fiscal year
  $ 22,505     $ 17,809     $ 11,315     $ 10,612     $ 8,884  
 
                             
 
                                       
Ratio of net charge-offs to average loans/leases outstanding
    1.00 %     0.24 %     0.16 %     0.18 %     0.25 %
     
*  
Residential real estate includes construction, if any
The adequacy of the allowance for estimated losses on loans/leases was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions and other factors that, in management’s judgment, deserved evaluation in estimating loan/lease losses. To ensure that an adequate allowance was maintained, provisions were made based on the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed monthly with specific detailed reviews completed on all credits risk-rated less than “fair quality” and carrying aggregate exposure in excess of $100 thousand. The Company experienced continued degradation within the loan/lease portfolio during 2009. Specifically, the Company’s nonperforming loans/leases grew $8.9 million, or 43%, from $21.1 million at December 31, 2008 to $30.0 million at December 31, 2009. The majority of these nonperforming loans/leases required specific reserves. Additionally, due to the continued uncertainty regarding the national economy and the impact on local markets, the Company increased the qualitative reserve factors applied to all loans and leases within the reserve adequacy calculations for all of the subsidiary banks and the leasing company. As a direct result, the allowance for estimated losses on loans/leases as a percentage of total gross loans/leases was 1.81% at December 31, 2009, which was a significant increase from 1.47% at December 31, 2008, and 1.07% at December 31, 2007. The adequacy of the allowance for estimated losses on loans/leases was monitored by the credit administration staff and reported to management and the board of directors.

 

33


Table of Contents

The following table presents the allowance for estimated losses on loans/leases by type and the percentage of type to total loans/leases.
                                                                                 
    As of December 31,  
    2009     2008     2007     2006     2005  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  
    (dollars in thousands)  
 
                                                                               
Real estate loans held for sale — residential mortgage
  $ 64       0 %   $ 64       1 %   $ 46       1 %   $ 67       1 %   $ 16       0 %
 
                                                                               
Real estate loans — residential mortgage
    643       5 %     605       6 %     472       6 %     356       7 %     250       7 %
Real estate loans — construction
    30       0 %     21       0 %     62       1 %     40       1 %     12       0 %
Commercial and industrial loans
    6,239       36 %     8,260       36 %     4,697       33 %     4,465       41 %     3,999       43 %
Commercial real estate loans
    11,147       45 %     6,255       43 %     4,064       45 %     3,943       37 %     3,332       36 %
Direct Financing leases
    1,681       7 %     1,402       7 %     874       6 %     805       5 %     546       5 %
Installment and other consumer loans
    2,407       7 %     1,195       7 %     1,090       8 %     920       8 %     725       9 %
Unallocated
    294     NA     7     NA     10     NA     16     NA     4     NA
 
                                                           
 
  $ 22,505       100 %   $ 17,809       100 %   $ 11,315       100 %   $ 10,612       100 %   $ 8,884       100 %
 
                                                           
% — Represents the percentage of the certain type of loan/lease to total loans/leases
Although management believed that the allowance for estimated losses on loans/leases at December 31, 2009 was at a level adequate to absorb probable losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan/lease losses in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require additional increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.
Nonperforming Assets. The table below presents the amounts of nonperforming assets.
                                         
    As of December 31,  
    2009     2008     2007     2006     2005  
    (dollars in thousands)  
 
                                       
Nonaccrual loans/leases (1)
  $ 28,742     $ 20,828     $ 6,488     $ 6,538     $ 2,579  
Accruing loans/leases past due 90 days or more
    89       222       500       755       604  
Troubled debt restructures
    1,201                          
Other real estate owned
    9,286       3,857       496       93       545  
Other repossessed assets (2)
    1,071       450                    
 
                             
 
  $ 40,389     $ 25,357     $ 7,484     $ 7,386     $ 3,728  
 
                             
 
                                       
Nonperforming loans/leases to total loans/leases
    2.41 %     1.73 %     0.66 %     0.76 %     0.42 %
Nonperforming assets to total loans/leases plus reposessed property
    3.22 %     2.08 %     0.71 %     0.77 %     0.49 %
Nonperforming assets to total assets
    2.27 %     1.58 %     0.51 %     0.58 %     0.36 %
     
(1)  
Includes government guaranteed portion
 
(2)  
Company previously excluded repossessed assets from nonperforming assets. Company adjusted amounts reported in prior periods presented to reflect a consistent comparison. The adjustments did not have a significant impact on loan covenant compliance or other previously presented disclosures.

 

34


Table of Contents

The policy of the Company is to place a loan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected; or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. A loan/lease is well secured if it is secured by collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status.
The Company experienced an increase in nonperforming assets of $15.0 million, or 59%, from $25.4 million at December 31, 2008 to $40.4 million at December 31, 2009. During 2008, the Company’s nonperforming assets increased $17.9 million, or 239%, from $7.5 million as of December 31, 2007, to $25.4 million as of December 31, 2008. The large majority of the Company’s nonperforming assets consist of nonaccrual loans/leases and other real estate owned. For those nonaccrual loans/leases, management has thoroughly reviewed these loans/leases and has provided specific reserves as appropriate. Other real estate owned is carried at the lower of carrying amount or fair value less costs to sell. As previously noted, the Company’s allowance for estimated losses on loans/leases to total loans/leases increased to 1.81% at December 31, 2009 from 1.47% at December 31, 2008.
Deposits. Deposits increased by $30.4 million, or 3%, during 2009. Deposits increased by $175.0 million, or 20%, to $1.1 billion at December 31, 2008, from $884.0 million at December 31, 2007. The table below presents the composition of the Company’s deposit portfolio.
                         
    As of December 31,  
    2009     2008     2007  
    (dollars in thousands)  
 
                       
Non-interest bearing demand deposits
  $ 207,844     $ 161,126     $ 160,533  
Interest bearing demand deposits
    393,732       355,990       300,681  
Savings deposits
    34,195       31,756       33,337  
Time deposits
    382,798       386,097       341,581  
Brokered time deposits
    70,754       123,990       47,873  
 
                 
 
  $ 1,089,323     $ 1,058,959     $ 884,005  
 
                 
The Company experienced growth in non-interest bearing demand deposits during 2009 of $46.7 million, or 29%. This increase and the Company’s overall strong liquidity position have allowed the Company to reduce the level of brokered time deposits which have decreased $53.2 million, or 43%, during 2009. Excluding brokered time deposits, the Company’s deposits increased $83.6 million, or 9%, during 2009.
Short-term Borrowings. The subsidiary banks offer overnight repurchase agreements to some of their major customers. Also, the subsidiary banks purchase Federal funds for short-term funding needs from the Federal Reserve Bank, or from their correspondent banks. The table below presents the composition of the Company’s short-term borrowings.
                         
    As of December 31,  
    2009     2008     2007  
    (dollars in thousands)  
 
                       
Overnight repurchase agreements with customers
  $ 94,090     $ 68,107     $ 80,264  
Federal funds purchased
    56,810       33,350       89,940  
 
                 
 
  $ 150,900     $ 101,457     $ 170,204  
 
                 
See Note 8 of the consolidated financial statements for additional information on the Company’s short-term borrowings.

 

35


Table of Contents

FHLB Advances and Other Borrowings. FHLB advances decreased $2.8 million, or 1%, during 2009. FHLB advances increased $49.9 million, or 30%, from $168.8 million as of December 31, 2007, to $218.7 million as of December 31, 2008. As of December 31, 2009 and 2008, the subsidiary banks held $11.8 million of FHLB stock in aggregate. As a result of their memberships in the FHLB of Des Moines and Chicago, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. The subsidiary banks utilized FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provided a less costly source of funds than customer deposits. See Note 9 to the consolidated financial statements for additional information regarding FHLB advances.
Other borrowings increased significantly over the past two years. During 2009, other borrowings grew $64.5 million, or 85%, to $140.1 million at December 31, 2009. For 2008, the Company experienced a similar increase as other borrowings increased by $27.9 million, or 58%, from $47.7 million at December 31, 2007, to $75.6 million at December 31, 2008. The increases for both years are largely a result of the introduction and increased utilization of wholesale structured repurchase agreements as an alternative funding source to FHLB advances and customer deposits. Additional information regarding other borrowings is described in Note 10 to the consolidated financial statements.
Stockholders’ Equity. Stockholders’ equity increased $33.1 million, or 36%, during 2009. The majority of this increase resulted from the Company’s participation in the Capital Purchase Program whereby the Company issued $38.1 million, net of issuance costs, of cumulative perpetual preferred stock to the U.S. Treasury. Additionally, net income attributable to QCR Holdings, Inc. of $1.8 million increased retained earnings; however, this was more than offset by declaration and accrual of preferred stock dividends and discount accretion totaling $3.8 million, and declaration of common stock dividends of $363 thousand. The detail of the preferred stock dividends is as follows:
   
$1.1 million for the quarterly dividends on the outstanding shares of Series B Non-Cumulative Perpetual Preferred Stock at a stated rate of 8.00%,
   
$712 thousand for the quarterly dividends on the outstanding shares of Series C Non-Cumulative Perpetual Preferred Stock at a stated rate of 9.50%, and
   
$2.0 million for the quarterly dividends on the outstanding shares of Series D Cumulative Perpetual Preferred Stock at a stated rate of 5.00%, including the related discount accretion.
Lastly, the available for sale portion of the securities portfolio experienced a decrease in fair value of $3.5 million, net of tax, for 2009 as a result of the increase in market rates at the end of the year.
Stockholders’ equity increased $4.7 million from $87.8 million as of December 31, 2007 to $92.5 million as of December 31, 2008. Net income of $6.7 million for 2008 increased retained earnings. This increase was offset by the declaration of preferred stock dividends totaling $1.8 million, and the declaration of common stock dividends totaling $370 thousand. Specifically regarding the preferred stock dividends declared, $1.1 million represented the quarterly dividends on the outstanding shares of Series B Non-Cumulative Perpetual Preferred Stock at a stated rate of 8.00%, and $712 thousand was the amount of the quarterly dividends on the outstanding shares of Series C Non-Cumulative Perpetual Preferred Stock at a stated rate of 9.50%. Additionally, the available for sale portion of the securities portfolio experienced an increase in fair value of $817 thousand, net of tax, for 2008 as a result of the decrease in long-term interest rates.
See Note 12 to the consolidated financial statements for additional information regarding the Company’s preferred stock.

 

36


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and Federal funds sold, which totaled $71.8 million at December 31, 2009, $56.3 million at December 31, 2008, and $53.6 million at December 31, 2007.
The subsidiary banks have a variety of sources of short-term liquidity available to them, including Federal funds purchased from correspondent banks, FHLB advances, structured wholesale repurchase agreements, brokered certificates of deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, and loan participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities. At December 31, 2009, the subsidiary banks had 20 lines of credit with upstream correspondent banks totaling $156.1 million, of which $26.6 million is secured and $129.5 million is unsecured. At December 31, 2009, $135.1 million was available. Additionally, the Company has a single $20.0 million secured revolving credit note with a maturity of April 2, 2010. As of December 31, 2009, the Company had $15.0 million available as the note carried an outstanding balance of $5.0 million. See Note 10 to the consolidated financial statements for additional information regarding the lines of credit and revolving credit note.
Throughout its history, the Company has secured additional capital through various resources including approximately $36.1 million through the issuance of trust preferred securities and $58.2 million through the issuance of preferred stock, of which $38.1 million was issued on February 13, 2009 as part of the Company’s participation in the Capital Purchase Program. The board of directors and management believed it was prudent to participate in the Capital Purchase Program because (1) the cost of capital under this program was significantly lower than the cost of capital otherwise available to the Company at the time, and (2) despite being well-capitalized, additional capital under this program provided the Company additional capacity to meet future capital needs that may arise in this current uncertain economic environment. See Financial Statement Notes 11 and 12 for information on the issuance of trust preferred securities, and preferred stock, respectively.
On or about March 15, 2010, the Company expects to issue approximately $2.0 million of 6.0% Series A Subordinated Notes due September 1, 2018, to certain accredited investors in a private placement transaction. The transaction also includes the issuance of detachable warrants to purchase approximately 40,000 shares of the Company’s common stock at an exercise price per share equal to the greater of $10.00 or the market price of the common stock on the closing date. The Company intends to contribute such proceeds to Rockford Bank & Trust to further strengthen its capital position.
As of December 31, 2009 and 2008, the Company and subsidiary banks remained well-capitalized in accordance with regulatory capital requirements administered by the federal banking authorities. See Financial Statement Note 16 for detail of the capital amounts and ratios for the Company and subsidiary banks.

 

37


Table of Contents

COMMITMENTS, CONTINGENCIES, CONTRACTUAL OBLIGATIONS, AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management’s credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year, or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the banks would be required to fund the commitments. The maximum potential amount of future payments the banks could be required to make is represented by the contractual amount. If the commitment is funded, the banks would be entitled to seek recovery from the customer. At December 31, 2009 and 2008, no amounts had been recorded as liabilities for the banks’ potential obligations under these guarantees.
As of December 31, 2009 and 2008, commitments to extend credit aggregated $476.5 million and $494.8 million, respectively. As of December 31, 2009 and 2008, standby letters of credit aggregated $17.8 million and $15.2 million, respectively. Management does not expect that all of these commitments will be funded.
Additional information regarding commitments, contingencies, and off-balance sheet arrangements is described in Note 18 of the consolidated financial statements.

 

38


Table of Contents

The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following table presents, as of December 31, 2009, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
                                                 
    Financial     Payments Due by Period  
    Statement             One Year                    
Description   Note Reference     Total     or Less     2 - 3 Years     4 - 5 Years     After 5 Years  
    (dollars in thousands)  
 
                                               
Deposits without a stated maturity
    N/A     $ 636,196     $ 636,196     $     $     $  
 
                                               
Certificates of deposit
    7       453,127       360,284       85,249       7,594        
 
                                               
Short-term borrowings
    8       150,900       150,900                    
 
                                               
FHLB advances
    9       215,850       8,100       63,750       15,500       128,500  
 
                                               
Other borrowings
    10       140,060       5,060       45,000             90,000  
 
                                               
Junior subordinated debentures
    11       36,085                         36,085  
 
                                               
Rental commitments
    6       2,345       381       655       635       674  
 
                                               
Operating contracts
    N/A       8,760       2,784       3,135       2,841        
 
                                   
 
                                               
Total contractual cash obligations
          $ 1,643,323     $ 1,163,705     $ 197,789     $ 26,570     $ 255,259  
 
                                   
Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The Company had no purchase obligations at December 31, 2009. The Company’s operating contract obligations represent short and long-term lease payments for data processing equipment and services, software, and other equipment and professional services.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and the accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

 

39


Table of Contents

IMPACT OF NEW ACCOUNTING STANDARDS
On June 12, 2009, FASB issued two related accounting pronouncements changing the accounting principles and disclosures requirements related to securitizations and special-purpose entities. Specifically, these pronouncements eliminate the concept of a “qualifying special-purpose entity”, change the requirements for derecognizing financial assets and change how a company determines when an entity is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. These pronouncements also expand existing disclosure requirements to include more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. These pronouncements are effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions regarding transfers of financial assets shall be applied to transfers that occur on or after the effective date. The Company adopted these new pronouncements on January 1, 2010, as required. Transfers of financial assets include participation loans/leases sold by the Company’s banking subsidiaries and leasing company. For agreements of participation loans/leases sold that contain language that fail to meet the definition of a participating interest and/or surrender of control by the selling institution, the Company is not allowed to recognize the sale and is required to record as a secured borrowing. Management intends to minimize the frequency of these situations. As a result, the adoption is not expected to have a material impact to the financial statements taken as a whole.
On April 9, 2009, FASB issued three related accounting pronouncements intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. In particular, these pronouncements: (1) provide guidelines for making fair value measurements more consistent with the existing accounting principles when the volume and level of activity for the asset or liability have decreased significantly; (2) enhance consistency in financial reporting by increasing the frequency of fair value disclosures; and (3) modify existing general standards of accounting for and disclosure of other-than-temporary impairment losses for impaired debt securities.
All three pronouncements were effective for interim and annual periods ending after June 15, 2009. Entities were permitted to early adopt these pronouncements for interim and annual periods ending after March 15, 2009, but had to adopt all three pronouncements concurrently. The Company adopted these pronouncements for the quarterly reporting period ending June 30, 2009, as required. See Note 21 to the consolidated financial statements for additional information regarding fair value measurements of financial assets and liabilities, and Note 4 for additional information for investment securities. The adoption of these pronouncements did not have a material impact on the Company’s consolidated financial statements taken as a whole.

 

40


Table of Contents

FORWARD LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A. of Part I of this Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:
   
The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.
   
The costs, effects and outcomes of existing or future litigation.
   
Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board.
   
The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

41


Table of Contents

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company’s net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management monitors the Company’s interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank’s interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank. Internal asset/liability management teams consisting of members of the subsidiary banks’ management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks’ securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the board and management attempt to manage the Company’s interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board and management may decide to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 400, and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 basis point downward shift. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four (24) month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve. The asset/liability management committee of the board of directors has established policy limits of a 10% decline in the value of net interest income for the 200 basis point upward shift and the 100 basis point downward shift. Application of the simulation model analysis at December 31, 2009 demonstrated a 5.10% decrease in net interest income in year one with a 200 basis point increase in interest rates, and a 0.90% decrease in net interest income in year one with a 100 basis point decrease in interest rates. The simulation is within the board-established policy limit of a 10% decline in value for both scenarios.
Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company’s interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

 

42


Table of Contents

Item 8. Financial Statements
QCR Holdings, Inc.
Index to Consolidated Financial Statements

 

43


Table of Contents

(MCGLADREY & PULLEN LOGO)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
QCR Holdings, Inc.
We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QCR Holdings, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for noncontrolling interests effective January 1, 2009.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 5, 2010 expressed an unqualified opinion on the effectiveness of QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting.
(MCGLADREY & PULLEN, LLP)
Davenport, Iowa
March 5, 2010
McGladrey & Pullen, LLP is a member firm of RSM International —
an affiliation of separate and independent legal entities.

 

44


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008
                 
    2009     2008  
Assets
               
Cash and due from banks
  $ 35,878,046     $ 33,464,074  
Federal funds sold
    6,598,333       20,695,898  
Interest-bearing deposits at financial institutions
    29,329,413       2,113,904  
 
               
Securities held to maturity, at amortized cost (Note 4)
    350,000       350,000  
Securities available for sale, at fair value (Note 4)
    370,170,459       255,726,415  
 
           
 
    370,520,459       256,076,415  
 
           
 
               
Loans receivable, held for sale (Note 5)
    6,135,130       7,377,648  
Loans/leases receivable, held for investment (Note 5)
    1,238,184,436       1,207,311,984  
 
           
 
    1,244,319,566       1,214,689,632  
Less allowance for estimated losses on loans/leases (Note 5)
    (22,504,734 )     (17,809,170 )
 
           
 
    1,221,814,832       1,196,880,462  
 
           
 
               
Premises and equipment, net (Note 6)
    31,454,893       31,389,267  
Goodwill
    3,222,688       3,222,688  
Accrued interest receivable
    7,565,513       7,835,835  
Bank-owned life insurance
    29,694,077       27,450,751  
Prepaid FDIC insurance
    7,801,076        
Other assets
    35,766,777       26,499,720  
 
           
Total assets
  $ 1,779,646,107     $ 1,605,629,014  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Deposits:
               
Noninterest-bearing
  $ 207,843,554     $ 161,126,120  
Interest-bearing
    881,479,172       897,832,478  
 
           
Total deposits (Note 7)
    1,089,322,726       1,058,958,598  
 
               
Short-term borrowings (Note 8)
    150,899,571       101,456,950  
Federal Home Loan Bank advances (Note 9)
    215,850,000       218,695,000  
Other borrowings (Note 10)
    140,059,841       75,582,634  
Junior subordinated debentures (Note 11)
    36,085,000       36,085,000  
Other liabilities
    21,834,093       22,355,661  
 
           
Total liabilities
    1,654,051,231       1,513,133,843  
 
           
 
               
Commitments and Contingencies (Note 18)
               
 
               
Stockholders’ Equity (Note 16):
               
Preferred stock (Note 12), $1 par value, shares authorized 250,000
    38,805       568  
December 2009 - 38,805 shares issued and outstanding
               
December 2008 - 568 shares issued and outstanding
               
Common stock, $1 par value; shares authorized 10,000,000
    4,674,536       4,630,883  
December 2009 - 4,674,536 shares issued and 4,553,290 outstanding
               
December 2008 - 4,630,883 shares issued and 4,509,637 outstanding
               
Additional paid-in capital
    82,194,330       43,090,268  
Retained earnings
    38,458,477       40,893,304  
Accumulated other comprehensive income
    135,608       3,628,360  
Noncontrolling interests
    1,699,630       1,858,298  
 
           
 
    127,201,386       94,101,681  
Treasury stock, December 2009 and 2008 - 121,246 common shares, at cost
    1,606,510       1,606,510  
 
           
Total stockholders’ equity
    125,594,876       92,495,171  
 
           
Total liabilities and stockholders’ equity
  $ 1,779,646,107     $ 1,605,629,014  
 
           
See Notes to Consolidated Financial Statements.

 

45


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008, and 2007
                         
    2009     2008     2007  
Interest and dividend income:
                       
Loans/leases, including fees
  $ 73,145,289     $ 72,565,834     $ 71,796,172  
Securities:
                       
Taxable
    10,748,012       10,878,219       9,060,317  
Nontaxable
    967,940       942,667       1,039,623  
Interest-bearing deposits at financial institutions
    313,113       165,312       346,382  
Federal funds sold
    133,723       99,814       248,055  
 
                 
Total interest and dividend income
    85,308,077       84,651,846       82,490,549  
 
                 
 
                       
Interest expense:
                       
Deposits
    18,374,065       23,894,324       31,227,361  
Short-term borrowings
    711,801       2,962,169       5,216,576  
Federal Home Loan Bank advances
    9,082,039       8,524,772       7,237,026  
Other borrowings
    4,764,812       2,754,097       1,835,464  
Junior subordinated debentures
    2,016,449       2,388,574       2,622,531  
 
                 
Total interest expense
    34,949,166       40,523,936       48,138,958  
 
                 
 
                       
Net interest income
    50,358,911       44,127,910       34,351,591  
Provision for loan/lease losses (Note 5)
    16,975,517       9,221,670       2,335,518  
 
                 
Net interest income after provision for loan/lease losses
    33,383,394       34,906,240       32,016,073  
 
                 
 
                       
Noninterest income:
                       
Credit card fees, net of processing costs
    930,435       987,769       746,725  
Trust department fees
    2,883,482       3,333,812       3,672,501  
Deposit service fees
    3,319,967       3,134,869       2,606,724  
Gains on sales of loans, net
    1,677,312       1,068,545       1,219,800  
Securities gains, net
    1,488,391       199,500        
Other-than-temporary impairment losses on securities
    (206,369 )            
Gains on sales of foreclosed assets
    177,736       394,103       1,007  
Gains on sales of other assets
                435,791  
Earnings on bank-owned life insurance
    1,243,324       1,016,864       846,071  
Investment advisory and management fees, gross
    1,507,557       1,975,236       1,575,887  
Other
    2,621,599       2,315,531       2,394,893  
 
                 
Total noninterest income
    15,643,434       14,426,229       13,499,399  
 
                 
 
                       
Noninterest expenses:
                       
Salaries and employee benefits
    26,882,185       26,124,160       21,976,683  
Professional and data processing fees
    4,829,667       4,801,087       3,469,331  
Advertising and marketing
    991,243       1,296,651       1,115,864  
Occupancy and equipment expense
    5,372,101       5,091,545       4,717,054  
Stationery and supplies
    528,959       518,639       513,210  
Postage and telephone
    1,060,690       933,508       936,032  
Bank service charges
    481,223       559,614       565,092  
FDIC and other insurance
    3,626,027       1,316,710       995,955  
Loss on sale of premises and equipment
                223,308  
Loan/lease expense
    1,997,583       757,315       358,107  
Other
    960,979       934,460       863,339  
 
                 
Total noninterest expenses
    46,730,657       42,333,689       35,733,975  
 
                 
 
                       
Income from continuing operations before income taxes
    2,296,171       6,998,780       9,781,497  
Federal and state income tax expense from continuing operations (Note 13)
    247,340       1,735,717       2,893,421  
 
                 
Income from continuing operations
    2,048,831       5,263,063       6,888,076  
 
                 
(Continued)

 

46


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008, and 2007
                         
    2009     2008     2007  
 
                       
Discontinued operations (Note 2)
                       
Operating income from merchant credit card acquiring business
          361,160       409,569  
Gain on sale of merchant credit card acquiring business
          4,645,213        
Operating loss from First Wisconsin Bank & Trust
          (2,921,371 )     (1,630,105 )
Gain on sale of First Wisconsin Bank & Trust
          494,664        
 
                 
Income (loss) from discontinued operations before income taxes
          2,579,666       (1,220,536 )
Federal and state income tax expense (benefit) from discontinued operations
          845,435       (497,728 )
 
                 
Income (loss) from discontinued operations
  $     $ 1,734,231     $ (722,808 )
 
                 
 
                       
Net income
  $ 2,048,831     $ 6,997,294     $ 6,165,268  
Less: net income attributable to noncontrolling interests
    276,923       288,436       387,791  
 
                 
Net income attributable to QCR Holdings, Inc.
  $ 1,771,908     $ 6,708,858     $ 5,777,477  
 
                 
 
                       
Amounts attributable to QCR Holdings, Inc.:
                       
Income from continuing operations
  $ 1,771,908     $ 4,974,627     $ 6,500,285  
Income (loss) from discontinued operations
          1,734,231       (722,808 )
 
                 
Net income
  $ 1,771,908     $ 6,708,858     $ 5,777,477  
 
Less: preferred stock dividends and discount accretion
  $ 3,843,924       1,784,500       1,072,000  
 
                 
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
  $ (2,072,016 )   $ 4,924,358     $ 4,705,477  
 
                 
 
                       
Basic earnings (loss) per common share (Note 17):
                       
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
  $ (0.46 )   $ 0.69     $ 1.19  
Income (loss) from discontinued operations attributable to QCR Holdings, Inc.
          0.38       (0.16 )
 
                 
Net income (loss) attributable to QCR Holdings, Inc.
  $ (0.46 )   $ 1.07     $ 1.03  
 
                 
 
                       
Diluted earnings (loss) per common share (Note 17):
                       
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
  $ (0.46 )   $ 0.69     $ 1.18  
Income (loss) from discontined operations attributable to QCR Holdings, Inc.
          0.37       (0.16 )
 
                 
Net income (loss) attributable to QCR Holdings, Inc.
  $ (0.46 )   $ 1.06     $ 1.02  
 
                 
 
                       
Weighted average common shares outstanding
    4,540,792       4,617,057       4,581,919  
Weighted average common and common equivalent shares outstanding
    4,540,792       4,634,537       4,599,568  
 
                       
Cash dividends declared per common share
  $ 0.08     $ 0.08     $ 0.08  
 
                 
See Notes to Consolidated Financial Statements.

 

47


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2009, 2008, and 2007
                                                                 
                                    Accumulated                    
                    Additional             Other                    
    Preferred     Common     Paid-In     Retained     Comprehensive     Noncontrolling     Treasury        
    Stock     Stock     Capital     Earnings     Income     Interests     Stock     Total  
 
Balance, December 31, 2006
  $ 268     $ 4,560,629     $ 34,293,511     $ 32,000,213     $ 27,959     $ 1,362,820     $     $ 72,245,400  
Comprehensive income:
                                                               
Net income
                      5,777,477             387,791             6,165,268  
Other comprehensive income, net of tax (Note 3)
                            2,783,581                   2,783,581  
 
                                                             
Comprehensive income
                                                            8,948,849  
 
                                                             
Common cash dividends declared, $0.08 per share
                      (367,124 )                       (367,124 )
Preferred cash dividends declared
                      (1,072,000 )                       (1,072,000 )
Proceeds from issuance of 300 shares of preferred stock
    300             7,273,279                               7,273,579  
Proceeds from issuance of 19,834 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 15)
          19,834       259,054                               278,888  
Proceeds from issuance of 19,069 shares of common stock as a result of stock options exercised (Note 15)
          19,069       154,007                               173,076  
Exchange of 1,788 shares of common stock in connection with options exercised
          (1,788 )     (28,643 )                             (30,431 )
Tax benefit of nonqualified stock options exercised
                22,370                               22,370  
Stock-based compensation expense
                343,796                               343,796  
Other adjustments to noncontrolling interests
                                  (29,748 )           (29,748 )
 
                                               
Balance, December 31, 2007
  $ 568     $ 4,597,744     $ 42,317,374     $ 36,338,566     $ 2,811,540     $ 1,720,863     $     $ 87,786,655  
Comprehensive income:
                                                               
Net income
                      6,708,858             288,436             6,997,294  
Other comprehensive income, net of tax (Note 3)
                            816,820                   816,820  
 
                                                             
Comprehensive income
                                                            7,814,114  
 
                                                             
Common cash dividends declared, $0.08 per share
                      (369,620 )                       (369,620 )
Preferred cash dividends declared
                      (1,784,500 )                       (1,784,500 )
Proceeds from issuance of 22,767 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 15)
          22,767       246,037                               268,804  
Proceeds from issuance of 7,305 shares of common stock as a result of stock options exercised
          7,305       82,410                               89,715  
Exchange of 1,933 shares of common stock in connection with options exercised (Note 15)
          (1,933 )     (27,284 )                             (29,217 )
Tax benefit of nonqualified stock options exercised
                1,611                               1,611  
Stock-based compensation expense
                475,120                               475,120  
Restricted stock award
          5,000       (5,000 )                              
Other adjustments to noncontrolling interests
                                  (151,001 )           (151,001 )
Purchase of 121,246 shares of common stock for the treasury
                                        (1,606,510 )     (1,606,510 )
 
                                               
Balance, December 31, 2008
  $ 568     $ 4,630,883     $ 43,090,268     $ 40,893,304     $ 3,628,360     $ 1,858,298     $ (1,606,510 )   $ 92,495,171  
Comprehensive income:
                                                               
Net income
                      1,771,908             276,923             2,048,831  
Other comprehensive loss, net of tax (Note 3)
                            (3,492,752 )                 (3,492,752 )
 
                                                             
Comprehensive loss
                                                            (1,443,921 )
 
                                                             
Common cash dividends declared, $0.08 per share
                      (362,811 )                       (362,811 )
Preferred cash dividends declared and accrued
                      (3,467,989 )                       (3,467,989 )
Discount accretion on cumulative preferred stock
                375,935       (375,935 )                        
Proceeds from issuance of 38,237 shares of preferred stock and common stock warrant
    38,237             38,014,586                               38,052,823  
Proceeds from issuance of 28,575 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 15)
          28,575       205,585                               234,160  
Exchange of 830 shares of common stock in connection with payroll taxes for restricted stock (Note 15)
          (830 )     (6,889 )                             (7,719 )
Stock-based compensation expense
                609,713                               609,713  
Restricted stock awards
          15,908       (15,908 )                              
Purchase of noncontrolling interests
                (78,960 )                 (231,040 )           (310,000 )
Other adjustments to noncontrolling interests
                                  (204,551 )           (204,551 )
 
                                               
Balance, December 31, 2009
  $ 38,805     $ 4,674,536     $ 82,194,330     $ 38,458,477     $ 135,608     $ 1,699,630     $ (1,606,510 )   $ 125,594,876  
 
                                               
See Notes to Consolidated Financial Statements.

 

48


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008, and 2007
                         
    2009     2008     2007  
Cash Flows from Operating Activities:
                       
Net income
  $ 2,048,831     $ 6,997,294     $ 6,165,268  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    2,780,190       2,624,433       2,293,874  
Provision for loan/lease losses related to continuing operations
    16,975,517       9,221,670       2,335,518  
Provision for loan/lease losses related to discontinuing operations
          1,699,112       528,384  
Deferred income taxes
    (356,893 )     (1,816,719 )     472,393  
Amortization of offering costs on subordinated debentures
    14,317       14,317       14,317  
Stock-based compensation expense
    512,963       298,921       21,348  
Gains on sale of foreclosed assets, net
    (177,736 )     (394,103 )     (1,007 )
Gains on sale of other assets
                (435,791 )
Gain on sale of merchant credit card acquiring business
          (4,645,213 )      
Gain on sale of First Wisconsin Bank & Trust
          (494,664 )      
Amortization of premiums (accretion of discounts) on securities, net
    2,044,767       133,819       (92,868 )
Securities gains, net
    (1,488,391 )     (199,500 )      
Other-than-temporary impairment losses on securities
    206,369              
Loans originated for sale
    (140,376,155 )     (88,775,395 )     (103,958,168 )
Proceeds on sales of loans
    143,295,985       88,975,272       104,860,392  
Net gains on sales of loans
    (1,677,312 )     (1,068,545 )     (1,219,800 )
Loss on sale of premises and equipment
                223,308  
Decrease (increase) in accrued interest receivable
    270,322       (350,007 )     (804,259 )
Increase in prepaid FDIC insurance
    (7,801,076 )            
Increase in other assets
    (1,374,070 )     (3,115,370 )     (3,524,814 )
(Decrease) increase in other liabilities
    (660,397 )     (2,810,645 )     3,185,676  
 
                 
Net cash provided by operating activities
    14,237,231       6,294,677       10,063,771  
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Net decrease (increase) in federal funds sold
    14,097,565       (31,775,898 )     (4,300,000 )
Net (increase) decrease in interest-bearing deposits at financial institutions
    (27,215,509 )     2,980,577       (2,965,952 )
Proceeds from sale of foreclosed assets
    1,358,351       1,376,007       93,901  
Proceeds from sale of other assets
                500,000  
Proceeds from sale of merchant credit card acquiring business, net
          4,732,009        
Proceeds from sale of First Wisconsin Bank & Trust, net
          13,324,553        
Activity in securities portfolio:
                       
Purchases
    (316,260,882 )     (140,985,829 )     (129,121,827 )
Calls, maturities and redemptions
    169,176,856       102,733,654       92,041,150  
Paydowns
    406,998       736,057       562,361  
Sales
    25,966,885       285,000        
Activity in bank-owned life insurance:
                       
Purchases
    (1,000,002 )           (9,165,341 )
Increase in cash value
    (1,243,324 )     (1,016,864 )     (846,071 )
Net loans/leases originated and held for investment
    (50,077,380 )     (195,569,104 )     (147,780,355 )
Purchase of premises and equipment
    (2,845,816 )     (2,258,536 )     (2,261,028 )
Purchase of intangible asset
                (887,542 )
Net increase in cash related to discontinued operations, held for sale
          (1,789,295 )     (705,890 )
 
                 
Net cash used in investing activities
    (187,636,258 )     (247,227,669 )     (204,836,594 )
 
                 
(Continued)

 

49


Table of Contents

QCR Holdings, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2008, 2007, and 2006
                         
    2009     2008     2007  
Cash Flows from Financing Activities:
                       
Net increase in deposit accounts
  $ 30,364,128     $ 227,545,345     $ 53,979,951  
Net increase (decrease) in short-term borrowings
    49,442,621       (68,160,318 )     71,511,889  
Activity in Federal Home Loan Bank advances:
                       
Advances
    11,500,000       68,145,000       71,400,000  
Payments
    (14,345,000 )     (18,265,006 )     (54,443,743 )
Net increase in other borrowings
    64,477,207       27,892,512       43,928,486  
Tax benefit of nonqualified stock options exercised
          1,611       22,370  
Payment of cash dividends on common and preferred stock
    (3,595,221 )     (1,974,870 )     (1,334,012 )
Proceeds from issuance of Series D Cumulative Perpetual Preferred Stock and common stock warrant, net
    38,052,823              
Proceeds from issuance of Series C Cumulative Perpetual Preferred Stock, net
                7,273,579  
Proceeds from issuance of common stock, net
    226,441       329,302       421,533  
Purchase of noncontrolling interests
    (310,000 )                
Purchase of treasury stock
          (1,606,510 )      
 
                 
Net cash provided by financing activities
    175,812,999       233,907,066       192,760,053  
 
                 
 
                       
Net increase (decrease) in cash and due from banks
    2,413,972       (7,025,926 )     (2,012,770 )
Cash and due from banks, beginning
    33,464,074       40,490,000       42,502,770  
 
                 
Cash and due from banks, ending
  $ 35,878,046     $ 33,464,074     $ 40,490,000  
 
                 
 
                       
Supplemental Disclosures of Cash Flow Information, cash payments for:
                       
Interest
  $ 36,536,869     $ 40,526,554     $ 49,277,295  
Income and franchise taxes
    2,557,505       2,306,448       1,960,408  
 
                       
Supplemental Schedule of Noncash Investing Activities:
                       
Change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net
    (3,492,752 )     816,820       2,783,581  
Exchange of shares of common stock in connection with payroll taxes for restricted stock and options exercised
    (7,719 )     (29,217 )     (30,431 )
Transfers of loans to other real estate owned
    6,924,975       4,467,520       496,376  
 
                       
Proceeds from sale of First Wisconsin Bank & Trust, net
  $     $ 13,324,553     $  
Assets sold:
                       
Cash and due from banks
          2,495,185        
Federal funds sold
          17,700,000        
Interest-bearing deposits at financial institutions
          1,567        
Securities available for sale, at fair value
          18,460,320        
Loans/leases receivable held for investment
          80,169,171        
Less: Allowance for estimated losses on loans/leases
          (1,122,496 )      
Premises and equipment, net
          468,522        
Goodwill
                 
Intangilbe assets
          887,542        
Accrued interest receivable
          478,729        
Bank-owned life insurance
          2,453,660        
Other assets
          882,028        
 
                 
Total Assets
  $     $ 122,874,228     $  
 
                 
Liabilities sold:
                       
Noninteresting-bearing deposits
  $     $ 8,943,882     $  
Interest-bearing deposits
          89,070,083        
Short-term borrowings
          13,578,572        
Other liabilities
          (368,528 )      
 
                 
Total liabilities
  $     $ 111,224,009     $  
 
Accrued expenses related to sale of First Wisconsin Bank & Trust
          1,179,670        
 
                 
Gain on sale of First Wisconsin Bank & Trust
  $     $ 494,664     $  
 
                 
See Notes to Consolidated Financial Statements.

 

50


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
QCR Holdings, Inc. (the Company) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (Quad City Bank & Trust), Cedar Rapids Bank and Trust Company (Cedar Rapids Bank & Trust), Rockford Bank and Trust Company (Rockford Bank & Trust), Quad City Bancard, Inc. (Bancard), m2 Lease Funds, LLC (m2 Lease Funds), Velie Plantation Holding Company, LLC (Velie Plantation Holding Company), QCR Holdings Statutory Trust II (Trust II), QCR Holdings Statutory Trust III (Trust III), QCR Holdings Statutory Trust IV (Trust IV), and QCR Holdings Statutory Trust V (Trust V). Quad City Bank & Trust is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. Cedar Rapids Bank & Trust is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities. Rockford Bank & Trust is a commercial bank that serves Rockford, Illinois, and adjacent communities.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are chartered and regulated by the state of Iowa, and Rockford Bank & Trust is chartered and regulated by the state of Illinois. All three subsidiary banks are insured and subject to regulation by the Federal Deposit Insurance Corporation (FDIC), and are members of and regulated by the Federal Reserve System. m2 Lease Funds, which is an 80% owned subsidiary, based in the Milwaukee, Wisconsin area is engaged in the business of direct financing lease contracts. Velie Plantation Holding Company, LLC, which is a 73% owned subsidiary, is engaged in holding the real estate property known as the Velie Plantation Mansion in Moline, Illinois. Trust II, Trust III, Trust IV and Trust V were formed for the purpose of issuing various trust preferred securities (see Note 11).
Quad City Bancard, Inc. (Bancard), previously a wholly-owned subsidiary of the Company, conducted the Company’s credit card issuing operation and prior to the August 28, 2008 sale of the business, the Company’s merchant acquiring operations. Effective December 31, 2009, Bancard was liquidated. The credit card issuing operation was merged into the correspondent banking department of Quad City Bank & Trust in 2009.
As noted above, during 2008 Bancard sold its merchant credit card acquiring business. The current and comparative results related to the merchant credit card acquiring business have been reflected as discontinued operations (see Note 2).
On December 31, 2008, the Company sold its Wisconsin-chartered bank, First Wisconsin Bank & Trust Company (First Wisconsin Bank & Trust). The comparative results related to First Wisconsin Bank & Trust have been reflected as discontinued operations (see Note 2).
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for estimated losses on loans/leases, other-than-temporary impairment of securities, and the fair value of financial instruments.
Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, except Trust II, Trust III, Trust IV and Trust V, which do not meet the criteria for consolidation. All material intercompany accounts and transactions have been eliminated in consolidation. The results of discontinued operations have been reported separately in the consolidated financial statements and the previously reported financial statements have been reclassified.

 

51


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and non-interest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, and short-term and other borrowings are treated as net increases or decreases.
Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $270,000 and $250,000 as of December 31, 2009 and 2008, respectively.
Investment securities: Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities available for sale are carried at fair value. Unrealized gains or losses, net of taxes, are reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
All securities are evaluated to determine whether declines in fair value below their amortized cost are other-than-temporary.
In estimating other-than-temporary impairment losses on available for sale debt securities, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the Company to not sell the security prior to recovery and whether it is not more-likely-than-not that it will be required to sell the security prior to recovery. If the Company does not intend to sell the security, and it is not more-likely-than-not the entity will be required to sell the security before recovery of its amortized cost basis, the Company will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion would be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
In estimating other-than-temporary impairment losses on available for sale equity securities management considers factors (1), (2) and (3) above as well as whether the Company has the intent and the ability to hold the security until its recovery. If the Company (a) intends to sell an impaired equity security and does not expect the fair value of the security to fully recover before the expected time of sale, or (b) does not have the ability to hold the security until it’s recovery, the security is deemed other-than-temporarily impaired and the impairment is charged to earnings. The Company recognizes an impairment loss through earnings if based upon other factors the loss is deemed to be other-than-temporary even if the decision to sell has not been made.
Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.

 

52


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as an investing activity in the statement of cash flows.
When collection of loan payments is considered doubtful, income recognition is ceased and the loan receivable is placed on nonaccrual status. Previously recorded but uncollected amounts of interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Cash collected on nonaccrual loans is applied to principal.
Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment. Lease income is recognized on the interest method. Residual is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends. The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts.
When collection of lease payments is considered doubtful, income recognition is ceased and the lease receivable is placed on nonaccrual status. Previously recorded but uncollected amounts of interest on nonaccrual leases are reversed at the time the lease is placed on nonaccrual status. Cash collected on nonaccrual leases is applied to principal.
The Company defers and amortizes fees and certain incremental direct costs over the contractual term of the lease as an adjustment to the yield. These initial direct leasing costs generally approximate 4% of the leased asset’s cost. The unamortized direct costs are recorded as a reduction of unearned lease income.
Allowance for estimated losses on loans/leases: The allowance for estimated losses on loans/leases is established as losses are estimated to have occurred through a provision for loan/lease losses charged to earnings. Loan/lease losses are charged against the allowance when management believes the uncollectability of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for estimated losses on loans/leases is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans/leases in light of historical experience, the nature and volume of the loan/lease portfolio, adverse situations that may affect the borrower’s/lessee’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

53


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The allowance for estimated losses on loans/leases consists of specific and general components. The specific component relates to loans/leases that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan/lease is lower than the carrying value of that loan/lease. The general component covers nonclassified loans/leases and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans/leases after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan/lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan/lease agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans/leases that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan/lease and the borrower/lessee, including the length of the delay, the reasons for the delay, the borrower’s/lessee’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s/lease’s effective interest rate, the loan’s/lease’s obtainable market price, or the fair value of the collateral if the loan/lease is collateral dependent.
Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets.
Goodwill: The Company has recorded goodwill from the purchase of 80% of m2 Lease Funds. The goodwill is not being amortized, but is evaluated at least annually for impairment. An impairment charge is recognized when the calculated fair value of the reporting unit, including goodwill, is less than its carrying amount. Based on the annual analysis completed as of July 31, 2009, the Company believes that no goodwill impairment existed.
Bank-owned life insurance: Bank-owned life insurance is carried at cash surrender value with increases/decreases reflected as income/expense in the statement of income.

 

54


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Prepaid FDIC insurance: In November 2009, the FDIC adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessment for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. The payment, which was made in December 2009, was recorded as a prepaid asset and is being amortized over the assessment period.
Restricted investment securities: Included within other assets are restricted investment securities totaling $15,210,100 and $14,059,600 at December 31, 2009 and 2008, respectively. These restricted securities represent Federal Home Loan Bank and Federal Reserve Bank common stock. The stock is carried at cost. These equity securities are “restricted” in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other tradable equity securities. The Company views its investment in restricted stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value, rather than recognizing temporary declines in value. There have been no other-than-temporary write-downs recorded on these securities.
Foreclosed assets: Assets acquired through, or in lieu of, loan foreclosures, which are included in other assets on the consolidated balance sheets are held for sale and are recorded at the lower of cost or fair value. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell.
Noncontrolling interests: Effective January 1, 2009, in accordance with ASC 810, “Noncontrolling Interests in Consolidated Financial Statements,” the Company presents noncontrolling interests (previously shown as minority interest) as a component of equity on the consolidated balance sheets. Minority interest expense is no longer separately reported as a reduction to net income on the consolidated income statement, but is instead shown below net income under the heading “net income attributable to noncontrolling interests.” The presentation requirements of ASC 810, as applied to the current year, were applied retrospectively for prior years presented.

 

55


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Treasury stock: Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price. When treasury stock is reissued, any difference between the sales proceeds, or fair value when issued for business combinations, and the cost is recognized as a charge or credit to additional paid-in capital.
Stock-based compensation plans: At December 31, 2009, the Company had four stock-based employee compensation plans, which are described more fully in Note 15.
The Company accounts for stock-based compensation with measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation over the requisite service period for awards expected to vest.
During the years ended December 31, 2009, 2008, and 2007, the Company recognized additional stock-based compensation expense related to stock options, stock purchases, and stock appreciation rights of $512,963, $298,921, and $21,348, respectively. As required, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with the following assumptions for the indicated periods:
             
    2009   2008   2007
 
           
Dividend yield
  .78% to 1.04%   0.49% to 0.68%   0.46% to 0.53%
Expected volatility
  24.70% to 38.72%   23.58% to 25.13%   24.33% to 24.74%
Risk-free interest rate
  3.27% to 4.12%   3.27% to 4.34%   4.53% to 5.06%
Expected life of option grants
  6 years   6 years   6 years
Weighted-average grant date fair value
  $2.71   $5.05   $5.80
The Company also uses the Black-Scholes option pricing model to estimate the fair value of stock purchase grants with the following assumptions for the indicated periods:
             
    2009   2008   2007
 
           
Dividend yield
  .80%   0.56% to 0.64%   0.45% to 0.50%
Expected volatility
  28.80% to 34.14%   19.40% to 23.91%   13.98% to 17.80%
Risk-free interest rate
  .22% to .36%   1.98% to 3.41%   4.94% to 5.04%
Expected life of option grants
  3 to 6 months   3 to 6 months   3 to 6 months
Weighted-average grant date fair value
  $1.64   $2.00   $2.36
The fair value is amortized on a straight-line basis over the vesting periods of the grants and will be adjusted for subsequent changes in estimated forfeitures. The expected dividend yield assumption is based on the Company’s current expectations about its anticipated dividend policy. Expected volatility is based on historical volatility of the Company’s common stock price. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of grants is derived using the “simplified” method and represents the period of time that options are expected to be outstanding. Historical data is used to estimate forfeitures used in the model. Two separate groups of employees (employees subject to broad based grants, and executive employees and directors) are used.

 

56


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
As of December 31, 2009, there was $561,307 of unrecognized compensation cost related to share based payments, which is expected to be recognized over a weighted average period of 2.6 years.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 52,520 options that were in-the-money at December 31, 2009. The aggregate intrinsic value at December 31, 2009 was $68,321 on options outstanding and $66,431 on options exercisable. During the years ended December 31, 2008 and 2007, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $19,352 and $142,817, respectively, determined as of the date of the option exercise. No options were exercised during 2009.
Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company.
Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.
Trust assets: Trust assets held by the subsidiary banks in a fiduciary, agency, or custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not included in the accompanying consolidated financial statements since such items are not assets of the subsidiary banks.
Earnings per common share: See Note 17 for a complete description and calculation of basic and diluted earnings per common share.
Reclassifications: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders’ equity, to conform with the current period presentation.

 

57


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
New accounting pronouncements: On June 12, 2009, FASB issued two related accounting pronouncements changing the accounting principles and disclosures requirements related to securitizations and special-purposed entities. Specifically, these pronouncements eliminate the concept of a “qualifying special-purpose entity”, change the requirements for derecognizing financial assets and change how a company determines when an entity is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. These pronouncements also expand existing disclosure requirements to include more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. These pronouncements are effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions regarding transfers of financial assets shall be applied to transfers that occur on or after the effective date. The Company adopted these new pronouncements on January 1, 2010, as required. Transfers of financial assets include participation loans/leases sold by the Company’s banking and leasing subsidiaries. For agreements of participation loans/leases sold that contain language that fail to meet the definition of a participating interest and/or surrender of control by the selling institution, the Company is not allowed to recognize the sale and is required to record as a secured borrowing. Management intends to minimize the frequency of these situations. As a result, the adoption is not expected to have a material impact to the financial statements taken as a whole.
On April 9, 2009, FASB issued three related accounting pronouncements intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. In particular, these pronouncements: (1) provide guidelines for making fair value measurements more consistent with the existing accounting principles when the volume and level of activity for the asset or liability have decreased significantly; (2) enhance consistency in financial reporting by increasing the frequency of fair value disclosures and (3) modify existing general standards of accounting for and disclosure of other-than-temporary impairment (“OTTI”) losses for impaired debt securities.
All three pronouncements were effective for interim and annual periods ending after June 15, 2009. Entities were permitted to early adopt these pronouncements for interim and annual periods ending after March 15, 2009, but had to adopt all three pronouncements concurrently. The Company adopted these pronouncements for the quarterly reporting period ending June 30, 2009, as required. See Note 21 for additional information regarding fair value measurements of financial assets and liabilities, and Note 4 for additional information for investment securities. The adoption of these pronouncements did not have a material impact on the Company’s consolidated financial statements taken as a whole.
Subsequent events: The Company has evaluated all subsequent events through the date of issuance of the consolidated financial statements.
Note 2. Discontinued Operations
Sale of Merchant Credit Card Acquiring Business. On August 29, 2008, the Company’s subsidiary, Quad City Bancard, Inc., sold its merchant credit card acquiring business for $5.2 million and recorded an after-tax gain of approximately $3.0 million. Consequently, the business related to merchant credit card acquiring has been accounted for as discontinued operations. The assets and liabilities related to the merchant credit card acquiring business were not significant as of December 31, 2008.

 

58


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Discontinued Operations (Continued)
The results from discontinued operations of the merchant credit card acquiring business for the years ending December 31, 2008 and 2007 are presented in the following table. There is no 2009 activity.
                 
    2008     2007  
 
               
Credit card fees, net of processing costs
  $ 693,445     $ 985,267  
Non-interest expense
    332,285       575,698  
 
           
Income from discontinued operations, excluding gain on sale, before income taxes
  $ 361,160     $ 409,569  
Gain on sale of discontinued operations before income taxes
    4,645,213        
 
           
Income from discontinued operations, before income taxes
  $ 5,006,373     $ 409,569  
Income tax expense
    1,775,716       144,963  
 
           
Income from discontinued operations, net of taxes
  $ 3,230,657     $ 264,606  
 
           
Sale of First Wisconsin Bank & Trust. On December 31, 2008, the Company sold First Wisconsin Bank & Trust, its wholly-owned commercial banking subsidiary which served the Milwaukee, Wisconsin market. The transaction involved the sale of 100% of the stock of First Wisconsin Bank & Trust for $13.7 million and resulted in a pre-tax gain on sale of approximately $495,000. The activity related to First Wisconsin Bank & Trust is accounted for as discontinued operations.
The assets and liabilities of First Wisconsin Bank & Trust as of December 31, 2008 are presented as a supplemental disclosure in the Consolidated Statement of Cash Flows.
The results from discontinued operations of First Wisconsin Bank & Trust for the years ending December 31, 2008 and 2007 are presented in the following table. There is no 2009 activity.
                 
    2008     2007  
 
               
Interest income
  $ 5,292,678     $ 2,584,994  
Interest expense
    2,853,182       1,217,136  
 
           
Net interest income
    2,439,496       1,367,858  
Provision for loan losses
    1,699,112       528,384  
 
           
Net interest income after provision for loan losses
    740,384       839,474  
Noninterest income
    515,432       257,807  
Noninterest expense
    4,177,187       2,727,386  
 
           
Loss from discontinued operations, excluding gain on sale, before income taxes
    (2,921,371 )     (1,630,105 )
Gain on sale of discontinued operations before
    494,664        
 
           
income taxes
    (2,426,707 )     (1,630,105 )
Income tax benefit
    (930,281 )     (642,691 )
 
           
Loss from discontinued operations, net of taxes
  $ (1,496,426 )   $ (987,414 )
 
           

 

59


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income and other comprehensive income (loss), which for the Company is comprised entirely of unrealized gains and losses on securities available for sale.
Other comprehensive income (loss) for the years ended December 31, 2009, 2008, and 2007 is comprised as follows:
                         
            Tax        
    Before     Expense     Net  
    Tax     (Benefit)     of Tax  
 
                       
Year ended December 31, 2009:
                       
Unrealized gains (losses) on securities available for sale:
                       
Unrealized holding (losses) arising during the period
  $ (3,953,187 )   $ (1,293,749 )   $ (2,659,438 )
Less reclassification adjustment for net gains included in net income
    1,282,022       448,708       833,314  
 
                 
Other comprehensive loss
  $ (5,235,209 )   $ (1,742,457 )   $ (3,492,752 )
 
                 
 
                       
Year ended December 31, 2008:
                       
Unrealized gains on securities available for sale:
                       
Unrealized holding gains arising during the period
  $ 1,100,541     $ 154,046     $ 946,495  
Less reclassification adjustment for gains included in net income
    199,500       69,825       129,675  
 
                 
Other comprehensive income
  $ 901,041     $ 84,221     $ 816,820  
 
                 
 
                       
Year ended December 31, 2007:
                       
Unrealized gains on securities available for sale:
                       
Unrealized holding gains arising during the period
  $ 4,519,576     $ 1,735,995     $ 2,783,581  
Less reclassification adjustment for gains included in net income
                 
 
                 
Other comprehensive income
  $ 4,519,576     $ 1,735,995     $ 2,783,581  
 
                 

 

60


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment Securities
The amortized cost and fair value of investment securities as of December 31, 2009 and 2008 are summarized as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     (Losses)     Value  
December 31, 2009:
                               
Securities held to maturity, other bonds
  $ 350,000     $     $     $ 350,000  
 
                       
 
                               
Securities available for sale:
                               
U.S. govt. sponsored agency securities
  $ 345,623,347     $ 1,525,150     $ (2,124,049 )   $ 345,024,448  
Residential mortgage-backed securities
    481,460       14,847             496,307  
Municipal securities
    22,005,875       922,942       (79,025 )     22,849,792  
Trust preferred securities
    200,000             (100,800 )     99,200  
Other securities
    1,641,759       66,737       (7,784 )     1,700,712  
 
                       
 
  $ 369,952,441     $ 2,529,676     $ (2,311,658 )   $ 370,170,459  
 
                       
 
                               
December 31, 2008:
                               
Securities held to maturity, other bonds
  $ 350,000     $     $     $ 350,000  
 
                       
 
                               
Securities available for sale:
                               
U.S. Treasury securities
  $ 4,318,194     $ 71,351     $     $ 4,389,545  
U.S. govt. sponsored agency securities
    220,560,286       5,773,091       (90,217 )     226,243,160  
Residential mortgage-backed securities
    802,485       6,071       (1,417 )     807,139  
Municipal securities
    23,259,460       307,946       (219,181 )     23,348,225  
Trust preferred securities
    200,000             (35,000 )     165,000  
Other securities
    1,132,763       18,045       (377,462 )     773,346  
 
                       
 
  $ 250,273,188     $ 6,176,504     $ (723,277 )   $ 255,726,415  
 
                       

 

61


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment Securities (Continued)
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 December 31, 2009 and 2008, are summarized as follows:
                                                 
    Less than 12 Months     12 Months or More     Total  
            Gross             Gross             Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
December 31, 2009:
                                               
Securities available for sale:
                                               
U.S. govt. sponsored agency securities
  $ 172,292,005     $ (2,001,229 )   $ 2,877,180     $ (122,820 )   $ 175,169,185     $ (2,124,049 )
Municipal securities
    2,629,191       (40,245 )     1,086,919       (38,780 )     3,716,110       (79,025 )
Trust preferred securities
                99,200       (100,800 )     99,200       (100,800 )
Other securities
    32,179       (5,926 )     1,842       (1,858 )     34,021       (7,784 )
 
                                   
 
  $ 174,953,375     $ (2,047,400 )   $ 4,065,141     $ (264,258 )   $ 179,018,516     $ (2,311,658 )
 
                                   
 
                                               
December 31, 2008:
                                               
Securities available for sale:
                                               
U.S. govt. sponsored agency securities
  $ 8,003,720     $ (90,217 )   $     $     $ 8,003,720     $ (90,217 )
Residential mortgage-backed securities
    630,974       (1,417 )                 630,974       (1,417 )
Municipal securities
    8,001,415       (219,181 )                 8,001,415       (219,181 )
Trust preferred securities
    165,000       (35,000 )                 165,000       (35,000 )
Other securities
    84,264       (57,316 )     407,630       (320,146 )     491,894       (377,462 )
 
                                   
 
  $ 16,885,373     $ (403,131 )   $ 407,630     $ (320,146 )   $ 17,293,003     $ (723,277 )
 
                                   
At December 31, 2009, the investment portfolio included 340 securities. Of this number, 126 securities have current unrealized losses with aggregate depreciation of 1% from the amortized cost basis. Nine of these securities have had unrealized losses 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 does not intend to sell these securities and/or it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. At December 31, 2009 and 2008, the Company’s equity securities represent less than 1% of the total portfolio.

 

62


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment Securities (Continued)
The Company has not recognized other-than-temporary impairment on any debt securities for the years ended December 31, 2009 and 2008.
For the year ended December 31, 2009, the Company’s evaluation determined that 11 publicly-traded equity securities experienced declines in fair value that were other-than-temporary. As a result, the Company wrote down the value of these securities and recognized losses in the amount of $206,369. For the year ended December 31, 2008, the Company did not recognize other-than-temporary impairment on any equity securities.
All sales of securities, as applicable, for the years ended December 31, 2009, 2008 and 2007, respectively, were from securities identified as available for sale. Information on proceeds received, as well as the gains and losses from the sale of those securities is as follows:
                         
    2009     2008     2007  
 
                       
Proceeds from sales of securities
  $ 25,966,885     $ 285,000     $  
Gross gains from sales of securities
    1,488,391       199,500        
Gross losses from sales of securities
                 
The amortized cost and fair value of securities as of December 31, 2009 by contractual maturity are shown below. Expected maturities of residential mortgage-backed securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary. Other securities are excluded from the maturity categories as there is no fixed maturity date.
                 
    Amortized        
    Cost     Fair Value  
Securities held to maturity:
               
Due in one year or less
  $ 50,000     $ 50,000  
Due after one year through five years
    250,000       250,000  
Due after five years
    50,000       50,000  
 
           
 
  $ 350,000     $ 350,000  
 
           
 
               
Securities available for sale:
               
Due in one year or less
  $ 15,598,658     $ 15,751,625  
Due after one year through five years
    156,281,061       156,978,458  
Due after five years
    195,949,503       195,243,357  
 
           
 
  $ 367,829,222     $ 367,973,440  
Residential mortgage-backed securities
    481,460       496,307  
Other securities
    1,641,759       1,700,712  
 
           
 
  $ 369,952,441     $ 370,170,459  
 
           
As of December 31, 2009 and 2008, investment securities with a carrying value of $365,266,357 and $251,710,014, respectively, were pledged on securities sold under agreements to repurchase and for other purposes as required or permitted by law.

 

63


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Loans/Leases Receivable
The composition of the loan/lease portfolio as of December 31, 2009 and 2008 is presented as follows:
                 
    2009     2008  
 
               
Real estate loans held for sale — residential mortgage
  $ 6,135,130     $ 7,377,648  
 
               
Real estate loans — residential mortgage
    61,560,878       69,465,924  
Real estate loans — construction
    2,912,123       2,385,187  
Commercial and industrial loans
    441,535,998       439,116,945  
Commercial real estate loans
    556,006,759       526,668,290  
Direct financing leases
    90,058,839       79,408,464  
Installment and other consumer loans
    84,270,687       88,540,397  
 
           
 
    1,242,480,414       1,212,962,855  
Plus deferred loan/lease orgination costs, net of fees
    1,839,152       1,726,777  
 
           
 
    1,244,319,566       1,214,689,632  
Less allowance for estimated losses on loans/leases
    (22,504,734 )     (17,809,170 )
 
           
 
  $ 1,221,814,832     $ 1,196,880,462  
 
           
Loans/leases on nonaccrual status amounted to $28,741,799 and $20,828,126 as of December 31, 2009 and 2008, respectively.
Changes in the allowance for estimated losses on loans/leases for the years ended December 31, 2009, 2008, and 2007 are presented as follows:
                         
    2009     2008     2007  
 
                       
Balance, beginning
  $ 17,809,170     $ 11,315,253     $ 10,612,082  
Provisions charged to expense
    16,975,517       9,221,670       2,335,518  
Loans/leases charged off
    (14,007,019 )     (3,684,889 )     (2,224,093 )
Recoveries on loans/leases previously charged off
    1,727,066       957,136       591,746  
 
                 
Balance, ending
  $ 22,504,734     $ 17,809,170     $ 11,315,253  
 
                 

 

64


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Loans/Leases Receivable (Continued)
Loans/leases considered to be impaired as of December 31, 2009, 2008 and 2007 are as follows:
                         
    2009     2008     2007  
 
                       
Impaired loans/leases for which an allowance has been provided
  $ 21,874,214     $ 15,768,281     $ 5,058,107  
 
                 
Allowance provided for impaired loans/leases, included in the allowance for estimated losses on loans/leases
  $ 5,549,444     $ 5,291,743     $ 1,507,674  
 
                 
Impaired loans/leases for which no allowance has been provided
  $ 4,052,593     $ 2,517,574     $ 164,330  
 
                 
Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.
As explained in Note 1, a loan/lease is considered impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower/lessee in accordance with the contractual terms of the loan/lease. Impaired loans/leases include nonperforming commercial loans/leases but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
Included in impaired loans are troubled debt restructurings totaling $1,201,330 at December 31, 2009. There were no troubled debt restructurings at December 31, 2008 and 2007.
The following summarizes additional information regarding impaired loans/leases:
                         
    2009     2008     2007  
 
                       
Average recorded investment in impaired loans/leases for the years ended
  $ 24,185,391     $ 9,110,972     $ 5,821,901  
 
                 
 
                       
Interest income on impaired loans/leases recognized for the years ended
  $ 124,499     $ 11,230     $ 215,754  
 
                 
 
                       
Interest income on impaired loans/leases recognized for cash payments received for the years ended
  $ 124,499     $ 11,230     $ 215,754  
 
                 
 
                       
Loans past due 90 days or more and still accruing interest as of December 31,
  $ 88,563     $ 221,749     $ 499,546  
 
                 
There were no direct financing leases which were past due 90 days or more and still accruing interest as of December 31, 2009.

 

65


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Loans/Leases Receivable (Continued)
Loans are made in the normal course of business to directors, executive officers, and their related interests. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other persons. An analysis of the changes in the aggregate committed amount of loans greater than or equal to $60,000 during the years ended December 31, 2009, 2008, and 2007, was as follows:
                         
    2009     2008     2007  
 
                       
Balance, beginning
  $ 26,400,842     $ 21,327,609     $ 18,404,968  
Net (decrease) increase due to change in related parties
    (47,727 )     (3,798,611 )     7,517,875  
Advances
    5,451,123       20,948,422       5,118,811  
Repayments
    (6,271,816 )     (12,076,578 )     (9,714,045 )
 
                 
Balance, ending
  $ 25,532,422     $ 26,400,842     $ 21,327,609  
 
                 
The Company’s loan portfolio includes a geographic concentration in the Midwest. Additionally, the loan portfolio includes a concentration of loans in certain industries as of December 31, 2009 as follows:
         
Industry Name   Balance  
 
       
Lessors of Non-Residential Buildings & Dwellings
  $ 184,501,663  
Lessors of Residential Buildings & Dwellings
    60,344,245  
Land Subdivision
    45,226,759  
Note 6. Premises and Equipment
The following summarizes the components of premises and equipment as of December 31, 2009 and 2008:
                 
    2009     2008  
 
               
Land
  $ 5,525,022     $ 5,525,022  
Buildings (useful lives 15 to 50 years)
    26,384,243       25,127,523  
Furniture and equipment (useful lives 3 to 10 years)
    17,959,643       16,460,090  
 
           
 
    49,868,908       47,112,635  
Less accumulated depreciation
    18,414,015       15,723,368  
 
           
 
  $ 31,454,893     $ 31,389,267  
 
           
Certain facilities are leased under operating leases. Rental expense, including common area maintenance, was $458,778, $510,308, and $451,324, for the years ended December 31, 2009, 2008, and 2007, respectively.

 

66


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Premises and Equipment (Continued)
Future minimum rental commitments, excluding common area maintenance, under noncancelable leases are as follows as of December 31, 2009:
         
Year ending December 31:
       
2010
  $ 381,129  
2011
    326,966  
2012
    327,811  
2013
    328,672  
2014
    306,921  
Thereafter
    673,791  
 
     
 
  $ 2,345,290  
 
     
Note 7. Deposits
The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was $327,780,800 and $347,631,421 as of December 31, 2009 and 2008, respectively.
As of December 31, 2009, the scheduled maturities of certificates of deposit were as follows:
         
Year ending December 31:
       
2010
  $ 360,284,108  
2011
    72,446,670  
2012
    12,802,858  
2013
    3,695,827  
2014
    3,897,868  
 
     
 
  $ 453,127,331  
 
     
Note 8. Short-Term Borrowings
Short-term borrowings as of December 31, 2009 and 2008 are summarized as follows:
                 
    2009     2008  
 
               
Overnight repurchase agreements with customers
  $ 94,089,571     $ 68,106,950  
Federal funds purchased
    56,810,000       33,350,000  
 
           
 
  $ 150,899,571     $ 101,456,950  
 
           

 

67


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Short-Term Borrowings (Continued)
Information concerning overnight repurchase agreements with customers is summarized as follows as of December 31, 2009 and 2008:
                 
    2009     2008  
 
               
Average daily balance during the period
  $ 95,831,160     $ 74,463,649  
Average daily interest rate during the period
    0.62 %     1.54 %
Maximum month-end balance during the period
  $ 128,943,849     $ 86,536,776  
Weighted average rate as of end of period
    0.67 %     1.35 %
 
               
Securities underlying the agreements as of end of period:
               
Carrying value
  $ 158,514,084     $ 96,137,434  
Fair value
    158,514,084       96,137,434  
The securities underlying the agreements as of December 31, 2009 and 2008 were under the Company’s control in safekeeping at third-party financial institutions.
Information concerning federal funds purchased is summarized as follows as of December 31, 2009 and 2008:
                 
    2009     2008  
 
               
Average daily balance during the period
  $ 17,754,319     $ 82,909,624  
Average daily interest rate during the period
    0.41 %     2.24 %
Maximum month-end balance during the period
  $ 57,150,000     $ 144,940,000  
Weighted average rate as of end of period
    0.35 %     2.41 %

 

68


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Federal Home Loan Bank Advances
The subsidiary banks are members of the Federal Home Loan Bank (FHLB) of Des Moines or Chicago. As of December 31, 2009 and 2008, the subsidiary banks held $11,813,100 and $11,796,100, respectively, of FHLB stock, which is included in other assets on the consolidated balance sheet. Maturity and interest rate information on advances from FHLB as of December 31, 2009 and 2008 is as follows:
                 
    December 31, 2009  
            Weighted  
            Average  
            Interest Rate  
    Amount Due     at Year-End  
Maturity:
               
Year ending December 31:
               
2010
  $ 8,100,000       5.16 %
2011
    14,000,000       3.85  
2012
    49,750,000       4.43  
2013
    14,000,000       3.22  
2014
    1,500,000       2.83  
Thereafter
    128,500,000       4.11  
 
             
Total FHLB advances
  $ 215,850,000       4.14  
 
             
Of the advances outstanding, $183,500,000 have options which allow the FHLB, at its discretion, to terminate the advances and require the subsidiary banks to repay at predetermined dates prior to the stated maturity date of the advances.
                 
    December 31, 2008  
            Weighted  
            Average  
            Interest Rate  
    Amount Due     at Year-End  
Maturity:
               
Year ending December 31:
               
2009
  $ 14,345,000       4.04 %
2010
    8,100,000       5.16  
2011
    9,000,000       5.08  
2012
    44,750,000       4.68  
2013
    14,000,000       2.72  
Thereafter
    128,500,000       4.11  
 
             
Total FHLB advances
  $ 218,695,000       4.24  
 
             
Advances are collateralized by securities with a carrying value of $41,955,829 and $36,523,795 as of December 31, 2009 and 2008, respectively, and by loans pledged of $399,879,863 and $399,511,033, respectively, in aggregate. On pledged loans, the FHLB applies varying collateral maintenance levels from 125% to 333% based on the loan type.

 

69


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 10. Other Borrowings and Unused Lines of Credit
Other borrowings as of December 31, 2009 and 2008 are summarized as follows:
                 
    2009     2008  
 
               
Wholesale repurchase agreements
  $ 135,000,000     $ 70,000,000  
364-day revolving note
    5,000,000       5,000,000  
Other
    59,841       582,634  
 
           
 
  $ 140,059,841     $ 75,582,634  
 
           
Maturity and interest rate information concerning wholesale repurchase agreements is summarized as follows:
                                 
    December 31, 2009     December 31, 2008  
            Weighted             Weighted  
            Average             Average  
            Interest Rate             Interest Rate  
    Amount Due     at Year-End     Amount Due     at Year-End  
Maturity:
                               
Year ending December 31:
                               
2011
  $ 5,000,000       3.40 %   $ 5,000,000       3.40 %
2012
    40,000,000       4.47       40,000,000       4.47  
Thereafter
    90,000,000       3.76       25,000,000       3.54  
 
                           
 
  $ 135,000,000       3.96     $ 70,000,000       4.06  
 
                           
Each wholesale repurchase agreement has a one-time put option, at the discretion of the counterparty, to terminate the agreement and require the subsidiary bank to repay at predetermined dates prior to the stated maturity date of the agreement.
As of December 31, 2009 and 2008, embedded within $65,000,000 and $30,000,000, respectively, of the wholesale repurchase agreements are interest rate cap options with varying terms. The interest rate cap options are effected when the 3-month LIBOR rate increases to certain levels. If that situation occurs, the rate paid will be decreased by the difference between the 3-month LIBOR rate and the particular cap level. In no case will the rate paid fall below 0.00%.
At December 31, 2008, the Company had a single $25,000,000 unsecured revolving credit note which matures every 364 days. At December 31, 2008, the note carried a balance outstanding of $5,000,000. Interest was payable monthly at the effective Federal Funds rate plus 1.25% per annum, as defined by the credit agreement. As of December 31, 2008, the interest rate on the note was 1.34%. The note renewed on April 3, 2009, and the amount of credit was reduced from $25,000,000 down to $20,000,000 and is now secured with a new maturity date of April 2, 2010. At December 31, 2009, the note carried a balance outstanding of $5,000,000. Interest is payable monthly at the effective LIBOR rate plus 2.50% per annum, as defined in the credit agreement. As of December 31, 2009, the interest rate on the note was 2.74%.

 

70


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 10. Other Borrowings and Unused Lines of Credit (Continued)
The current revolving note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various operating ratios. As of December 31, 2009, the Company was in violation of one of the operating covenants. The Company has received a formal waiver of the covenant violation. The Company fully expects to renew the note upon maturity in April 2010, including modification of the covenant for future periods. The Company anticipates it will be in compliance with the revised covenants. The Company has the full ability to borrow on the revolving credit note.
Unused lines of credit of the subsidiary banks as of December 31, 2009 and 2008 are summarized as follows:
                 
    2009     2008  
 
               
Secured
  $ 26,640,499     $ 27,695,251  
Unsecured
    108,500,000       141,500,000  
 
           
 
  $ 135,140,499     $ 169,195,251  
 
           
The Company pledges the eligible portion of its municipal securities portfolio and select commercial real estate loans to the Federal Reserve Bank of Chicago for borrowing at the Discount Window.
Note 11. Junior Subordinated Debentures
Junior subordinated debentures are summarized as of December 31, 2009 and 2008 as follows:
                 
    2009     2008  
 
               
Note Payable to Trust II
  $ 12,372,000     $ 12,372,000  
Note Payable to Trust III
    8,248,000       8,248,000  
Note Payable to Trust IV
    5,155,000       5,155,000  
Note Payable to Trust V
    10,310,000       10,310,000  
 
           
 
  $ 36,085,000     $ 36,085,000  
 
           
A schedule of the Company’s trust preferred offerings outstanding as of December 31, 2009 and 2008, is as follows:
                                 
                    Interest     Interest  
                    Rate as     Rate as  
                    of     of  
Name   Date Issued   Amount Issued     Interest Rate   12/31/09     12/31/08  
 
                               
QCR Holdings Statutory Trust II
  February 2004   $ 12,372,000     6.93%*     6.93 %     6.93 %
 
QCR Holdings Statutory Trust III
  February 2004     8,248,000     2.85% over 3-month LIBOR     3.10 %     6.61 %
 
                               
QCR Holdings Statutory Trust IV
  May 2005     5,155,000     1.80% over 3-month LIBOR     2.08 %     6.62 %
 
QCR Holdings Statutory Trust V
  February 2006     10,310,000     6.62%**     6.62 %     6.62 %
 
                               
     
*  
Rate is fixed until March 31, 2011, then becomes variable based on 3-month LIBOR plus 2.85%, reset quarterly.
 
**  
Rate is fixed until April 7, 2011, then becomes variable based on 3-month LIBOR plus 1.55%, reset quarterly.

 

71


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Junior Subordinated Debentures (Continued)
Securities issued by Trust II mature in thirty years, but are callable at par anytime after seven years from issuance. Securities issued by Trust III, Trust IV, and Trust V mature in thirty years, but are callable at par anytime after five years from issuance.
Note 12. Preferred Stock
Series B Non-Cumulative Perpetual Preferred stock: The 268 shares of Series B Non-Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”) have a stated dividend rate of 8.00%. Dividends are not accrued and are payable only if declared and no dividends may be declared on the Company’s common stock unless and until dividends have been declared on the outstanding shares of Series B Preferred Stock. The Company has the right at any time after the first anniversary of the issuance of the shares of Series B Preferred Stock, subject to all required regulatory approvals, to redeem all, but not less than all, of the shares then outstanding. Any such redemption shall be made by the Company upon at least 30 days’ prior written notice. The shares can be redeemed for an amount per share in cash which is equal to: (i) the sum of (A) $50,000; plus (B) a premium in the amount of $4,000 multiplied by a fraction the numerator of which is the total number of calendar days the shares being redeemed have been outstanding and the denominator of which is 365; but (ii) less the aggregate amount of any dividends that have been paid on the shares. The Series B Preferred Stock was not registered under the Securities Act of 1933 (the “Act”) and was issued pursuant to an exemption from registration under Regulation D of the rules promulgated under the Act.
Series C Non-Cumulative Perpetual Preferred stock: The 300 shares of Series C Non-Cumulative Perpetual Preferred Stock (“Series C Preferred Stock”) have a stated dividend rate of 9.50%. Dividends are not accrued and are payable only if declared and no dividends may be declared on the Company’s common stock unless and until dividends have been declared on the outstanding shares of Series C Preferred Stock. The Company has the right at any time after the first anniversary of the issuance of the shares of Series C Preferred Stock, subject to all required regulatory approvals, to redeem all, but not less than all, of the shares then outstanding. Any such redemption shall be made by the Company upon at least 30 days’ prior written notice. The shares shall be redeemed for an amount per share in cash which is equal to: (i) the sum of (A) $25,000; plus (B) a premium in the amount of $2,375 multiplied by a fraction the numerator of which is the total number of calendar days the shares being redeemed have been outstanding and the denominator of which is 365; but (ii) less the aggregate amount of any dividends that have been paid on the shares. The Series C Preferred Stock was not registered under the Act and was issued pursuant to an exemption from registration under Regulation D of the rules promulgated under the Act.
Series D Cumulative Perpetual Preferred Stock and Common Stock Warrant: On February 13, 2009, the Company issued 38,237 shares of Series D Cumulative Perpetual Preferred Stock (“Series D Preferred Stock”) to the U.S. Department of the Treasury (“Treasury”) for an aggregate purchase price of $38,237,000. The sale of Series D Preferred Stock was a result of the Company’s participation in Treasury’s voluntary Capital Purchase Program (“CPP”). This sale also included the issuance of a warrant (“Warrant”) that allows Treasury to purchase up to 521,888 shares of common stock at an exercise price of $10.99.
The Series D Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series D Preferred Stock may be redeemed by the Company at any time, provided that the Company redeems at least 25 percent of the aggregate issue price of the Series D Preferred Stock. Any redemption of the Series D Preferred Stock will be at the per share liquidation amount of $1,000 per share, plus any accrued and unpaid dividends.

 

72


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Preferred Stock (Continued)
Prior to the third anniversary of Treasury’s purchase of the Series D Preferred Stock, unless the Series D Preferred Stock has been redeemed or Treasury has transferred all of the Series D Preferred Stock to one or more third parties, the consent of Treasury will be required for the Company to: (i) increase the dividend paid on its Common Stock; or (ii) repurchase its Common Stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice. The Series D Preferred Stock will be non-voting except for class voting rights on matters that would adversely affect the rights of the holders of the Series D Preferred Stock.
The Warrant has a ten-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $10.99 per share of the Common Stock.
The Series D Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Act. Upon the request of Treasury at any time, the Company has agreed to promptly enter into a deposit arrangement pursuant to which the Series D Preferred Stock may be deposited and depositary shares representing fractional shares of Series D Preferred Stock, may be issued. The Company has agreed to register the Warrant and the shares of Common Stock underlying the Warrant. Additionally, the Company has also agreed to register the shares of Series D Preferred Stock upon the written request of Treasury.
Treasury has the ability to unilaterally amend the CPP documents at any time to comply with changes in the law, and as a result, the terms of the CPP could change.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law, which contains provisions that significantly impact CPP recipients both retroactively and prospectively. Restrictions on repayment, including the Tier 1 qualified capital raise requirement, have been removed allowing institutions to repay the CPP funds, in whole or in part, upon consultation and approval from the Company’s primary federal banking regulator. If the Treasury is repaid, it will liquidate the warrant it holds at the fair market value. ARRA has also imposed more strict compensation limitations and expands the number of executives covered based upon the amount of CPP funds received. These provisions will apply to existing and future CPP recipients for periods the CPP capital is outstanding.
The proceeds received from the Treasury were allocated to the Series D Preferred Stock and the Warrant based on relative fair value. The fair value of the Series D Preferred Stock was determined through a discounted future cash flows model using a discount rate of 12%. The fair value of the Warrant was calculated using the Black-Scholes option pricing model, which includes assumptions regarding the Company’s dividend yield, stock price volatility, and the risk-free interest rate. The relative fair value of the Series D Preferred Stock and the Warrant on February 13, 2009, was $35.8 million and $2.4 million, respectively.
The Company calculated a discount on the Series D Preferred Stock in the amount of $2.4 million, which is being amortized over a 5 year period. The effective cost on the Series D Preferred Stock, including the accretion of the discount, is approximately 6.23%. In determining net income (loss) attributable to the Company’s common stockholders, the periodic accretion and the cash dividend on the preferred stock are subtracted from net income (loss) attributable to the Company.

 

73


Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Federal and State Income Taxes
Federal and state income tax expense from continuing operations was comprised of the following components for the years ended December 31, 2009, 2008, and 2007:
                         
    2009     2008     2007  
 
                       
Current
  $ 604,233     $ 3,552,436     $ 2,421,028  
Deferred
    (356,893 )     (1,816,719 )     472,393  
 
                 
 
  $ 247,340     $ 1,735,717     $ 2,893,421  
 
                 
A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of operations was as follows for the years ended December 31, 2009, 2008, and 2007:
                                                 
    Year Ended     Year Ended     Year Ended  
    December 31,     December 31,     December 31,  
    2009     2008     2007  
            % of             % of             % of  
            Pretax