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Table of Contents

 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 2010
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-22208
QCR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
     
Delaware   42-1397595
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer ID Number)
3551 7th Street, Moline, Illinois 61265
(Address of principal executive offices)
(309) 736-3580
(Registrant’s telephone number, including area code)
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 Date 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of May 3, 2010, the Registrant had outstanding 4,592,420 shares of common stock, $1.00 par value per share.
 
 

 

 


 

QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
         
    Page  
    Number(s)  
       
 
       
       
 
       
    2  
 
       
    3-4  
 
       
    5  
 
       
    6  
 
       
    7-18  
 
       
    19-36  
 
       
    37-38  
 
       
    39  
 
       
       
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    41  
 
       
    42  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) 
As of March 31, 2010 and December 31, 2009
                 
    March 31,     December 31,  
    2010     2009  
ASSETS
               
Cash and due from banks
  $ 25,784,537     $ 35,878,046  
Federal funds sold
    61,070,000       6,598,333  
Interest-bearing deposits at financial institutions
    24,270,983       29,329,413  
 
               
Securities held to maturity, at amortized cost
    350,000       350,000  
Securities available for sale, at fair value
    387,390,959       370,170,459  
 
           
Total securities
    387,740,959       370,520,459  
 
           
 
               
Loans receivable held for sale
    3,876,959       6,135,130  
Loans/leases receivable held for investment
    1,234,677,156       1,238,184,436  
 
           
Gross loans/leases receivable
    1,238,554,115       1,244,319,566  
Less allowance for estimated losses on loans/leases
    (22,885,490 )     (22,504,734 )
 
           
Net loans/leases receivable
    1,215,668,625       1,221,814,832  
 
           
 
               
Premises and equipment, net
    31,675,247       31,454,893  
Goodwill
    3,222,688       3,222,688  
Accrued interest receivable
    7,668,001       7,565,513  
Bank-owned life insurance
    32,568,809       29,694,077  
Prepaid FDIC insurance
    7,236,229       7,801,076  
Restricted investment securities
    16,117,400       15,210,100  
Other assets
    19,310,547       20,556,677  
 
           
 
               
Total assets
  $ 1,832,334,025     $ 1,779,646,107  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
LIABILITIES
               
Deposits:
               
Noninterest-bearing
  $ 208,658,484     $ 207,843,554  
Interest-bearing
    940,630,347       881,479,172  
 
           
Total deposits
    1,149,288,831       1,089,322,726  
 
           
 
               
Short-term borrowings
    116,263,571       150,899,571  
Federal Home Loan Bank advances
    230,950,000       215,850,000  
Other borrowings
    152,213,280       140,059,841  
Junior subordinated debentures
    36,085,000       36,085,000  
Other liabilities
    19,676,700       21,834,093  
 
           
Total liabilities
    1,704,477,382       1,654,051,231  
 
           
 
               
STOCKHOLDERS’ EQUITY
               
Preferred stock, $1 par value; shares authorized 250,000
March 2010 and December 2009 — 38,805 shares issued and outstanding
    38,805       38,805  
Common stock, $1 par value; shares authorized 10,000,000
March 2010 — 4,704,037 shares issued and 4,582,791 outstanding
December 2009 — 4,674,536 shares issued and 4,553,290 outstanding
    4,704,037       4,674,536  
Additional paid-in capital
    82,583,911       82,194,330  
Retained earnings
    38,717,067       38,458,477  
Accumulated other comprehensive income
    1,798,844       135,608  
Noncontrolling interests
    1,620,489       1,699,630  
 
           
 
    129,463,153       127,201,386  
Treasury Stock
               
March 2010 and December 2009 — 121,246 common shares, at cost
    1,606,510       1,606,510  
 
           
Total stockholders’ equity
    127,856,643       125,594,876  
 
           
Total liabilities and stockholders’ equity
  $ 1,832,334,025     $ 1,779,646,107  
 
           

 

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Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
                 
    2010     2009  
Interest and dividend income:
               
Loans/leases, including fees
  $ 17,513,489     $ 17,860,030  
Securities:
               
Taxable
    2,462,680       2,620,037  
Nontaxable
    228,724       252,413  
Interest-bearing deposits at financial institutions
    144,918       18,795  
Restricted investment securities
    105,479       13,083  
Federal funds sold
    21,287       18,837  
 
           
Total interest and dividend income
    20,476,577       20,783,195  
 
           
 
               
Interest expense:
               
Deposits
    3,375,009       5,326,973  
Short-term borrowings
    168,846       165,721  
Federal Home Loan Bank advances
    2,244,077       2,260,646  
Other borrowings
    1,389,119       754,310  
Junior subordinated debentures
    478,958       518,436  
 
           
Total interest expense
    7,656,009       9,026,086  
 
           
 
               
Net interest income
    12,820,568       11,757,109  
 
               
Provision for loan/lease losses
    1,603,229       4,358,543  
 
           
Net interest income after provision for loan/lease losses
    11,217,339       7,398,566  
 
           
 
               
Non-interest income:
               
Credit card issuing fees, net of processing costs
    86,142       245,865  
Trust department fees
    905,788       718,115  
Deposit service fees
    822,768       826,974  
Gains on sales of loans, net
    168,954       411,911  
Gain on sale of foreclosed asset
    21,167        
Earnings on bank-owned life insurance
    334,506       291,040  
Investment advisory and management fees, gross
    434,695       351,045  
Other
    421,330       811,091  
 
           
Total non-interest income
    3,195,350       3,656,041  
 
           
 
               
Non-interest expenses:
               
Salaries and employee benefits
    6,891,004       6,764,610  
Professional and data processing fees
    1,157,398       1,153,489  
Advertising and marketing
    166,241       245,529  
Occupancy and equipment expense
    1,371,346       1,321,092  
Stationery and supplies
    120,398       131,110  
Postage and telephone
    262,740       227,765  
Bank service charges
    61,251       122,292  
FDIC and other insurance
    803,526       619,195  
Loan/lease expense
    569,015       332,164  
Other-than-temporary impairment losses on securities
          14,355  
Losses on lease residual values
    617,000        
Writedowns in value of foreclosed assets
    363,713        
Other
    422,003       180,898  
 
           
Total non-interest expenses
    12,805,635       11,112,499  
 
           
 
               
Net income (loss) before income taxes
    1,607,054       (57,892 )
Federal and state income tax expense (benefit)
    392,121       (293,682 )
 
           
Net income
    1,214,933       235,790  
(continued)
See Notes to Consolidated Financial Statements

 

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Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (continued)
Three Months Ended March 31,
                 
    2010     2009  
 
               
Net income
  $ 1,214,933     $ 235,790  
Less: Net income (loss) attributable to noncontrolling interests
    (77,076 )     151,446  
 
           
Net income attributable to QCR Holdings, Inc.
  $ 1,292,009     $ 84,344  
 
               
Less preferred stock dividends
    1,033,419       695,728  
 
           
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
  $ 258,590     $ (611,384 )
 
           
 
               
Earnings (loss) per common share attributable to QCR Holdings, Inc. (Note 3):
               
Basic
  $ 0.06     $ (0.14 )
Diluted
  $ 0.06     $ (0.14 )
 
               
Weighted average common shares outstanding
    4,573,765       4,523,851  
Weighted average common and common equivalent shares outstanding
    4,582,319       4,523,851  
 
               
Cash dividends declared per common share
  $ 0.00     $ 0.00  
See Notes to Consolidated Financial Statements

 

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Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended March 31, 2010 and 2009
                                                                 
                                    Accumulated                    
                    Additional             Other                    
    Preferred     Common     Paid-In     Retained     Comprehensive     Noncontrolling     Treasury        
    Stock     Stock     Capital     Earnings     Income     Interests     Stock     Total  
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  
Comprehensive income:
                                                               
Net income
                      1,292,009             (77,076 )           1,214,933  
Other comprehensive loss, net of tax
                            1,663,236                   1,663,236  
 
                                               
Comprehensive income
                                                            2,878,169  
 
                                               
Preferred cash dividends declared and accrued
                      (924,088 )                       (924,088 )
Discount accretion on cumulative preferred stock
                109,331       (109,331 )                        
Proceeds from issuance of warrants to purchase 54,000 shares of common stock in conjunction with the issuance of Series A Subordinated Notes
                84,240                               84,240  
Proceeds from issuance of 6,270 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
          6,270       40,849                               47,119  
Exchange of 367 shares of common stock in connection with payroll taxes for restricted stock
          (367 )     (2,730 )                             (3,097 )
Stock compensation expense
                181,489                                       181,489  
Restricted stock awards
          23,598       (23,598 )                              
Other adjustments to noncontrolling interests
                                  (2,065 )           (2,065 )
 
                                               
Balance March 31, 2010
  $ 38,805     $ 4,704,037     $ 82,583,911     $ 38,717,067     $ 1,798,844     $ 1,620,489     $ (1,606,510 )   $ 127,856,643  
 
                                               
                                                                 
                                    Accumulated                    
                    Additional             Other                    
    Preferred     Common     Paid-In     Retained     Comprehensive     Noncontrolling     Treasury        
    Stock     Stock     Capital     Earnings     Income     Interests     Stock     Total  
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
                      84,344             151,446             235,790  
Other comprehensive income, net of tax
                            (745,735 )                 (745,735 )
 
                                               
Comprehensive income
                                                            (509,945 )
 
                                               
Preferred cash dividends declared and accrued
                      (446,125 )                       (446,125 )
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 5,821 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
          5,821       46,568                               52,389  
Stock compensation expense
                246,201                               246,201  
Restricted stock awards
          15,908       (15,908 )                              
Other adjustments to noncontrolling interests
                                  (96,971 )           (96,971 )
 
                                               
Balance March 31, 2009
  $ 38,805     $ 4,652,612     $ 81,381,715     $ 40,531,523     $ 2,882,625     $ 1,912,773     $ (1,606,510 )   $ 129,793,543  
 
                                               

 

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Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
                 
    2010     2009  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net income
  $ 1,292,009     $ 84,344  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    651,432       714,453  
Provision for loan/lease losses
    1,603,229       4,358,543  
Amortization of offering costs on subordinated debentures
    3,579       3,579  
Stock-based compensation expense
    202,995       134,375  
Net (loss) income attributable to noncontrolling interests
    (77,076 )     151,446  
Gain on sale of foreclosed asset
    (21,167 )      
Amortization of premiums on securities, net
    922,718       226,845  
Other-than-temporary impairment losses on securities
          14,355  
Losses on lease residual values
    617,000        
Writedowns in value of foreclosed assets
    363,713        
Loans originated for sale
    (14,794,145 )     (38,574,682 )
Proceeds on sales of loans
    17,221,270       41,747,846  
Gains on sales of loans, net
    (168,954 )     (411,911 )
(Increase) decrease in accrued interest receivable
    (102,488 )     268,948  
Amortization of prepaid FDIC insurance premiums
    564,847        
Increase in other assets
    (151,088 )     (794,479 )
Decrease in other liabilities
    (1,997,266 )     (2,335,212 )
 
           
Net cash provided by operating activities
  $ 6,130,608     $ 5,588,450  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net increase in federal funds sold
    (54,471,667 )     (36,528,750 )
Net decrease (increase) in interest-bearing deposits at financial institutions
    5,058,430       (34,549,286 )
Proceeds from sales of foreclosed assets
    21,167        
Activity in securities portfolio:
               
Purchases
    (75,051,624 )     (67,364,998 )
Calls, maturities and redemptions
    59,500,000       41,786,705  
Paydowns
    99,503       76,485  
Purchases of restricted investment securities
    (907,300 )     (271,150 )
Activity in bank-owned life insurance:
               
Purchases
    (3,150,000 )      
Increase in cash value of bank-owned life insurance
    (334,516 )     (291,040 )
Surrender of policy
    609,784        
Net loans/leases originated and held for investment
    1,667,807       4,843,135  
Purchase of premises and equipment
    (871,786 )     (190,135 )
 
           
Net cash used in investing activities
  $ (67,830,202 )   $ (92,489,034 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposit accounts
    59,966,105       27,628,995  
Net (decrease) increase in short-term borrowings
    (34,636,000 )     20,720,466  
Activity in Federal Home Loan Bank advances:
               
Advances
    18,000,000        
Payments
    (2,900,000 )     (7,700,000 )
Net increase (decrease) in other borrowings
    9,537,679       (35,128 )
Proceeds from issuance of Series A Subordinated Notes and detachable warrants to purchase 54,000 shares of common stock
    2,700,000        
Payment of cash dividends
    (1,105,721 )     (631,160 )
Proceeds from issuance of preferred stock and common stock warrant, net
          38,052,823  
Proceeds from issuance of common stock, net
    44,022       52,389  
 
           
Net cash provided by financing activities
  $ 51,606,085     $ 78,088,385  
 
           
 
               
Net decrease in cash and due from banks
    (10,093,509 )     (8,812,199 )
Cash and due from banks, beginning
    35,878,046       33,464,074  
 
           
Cash and due from banks, ending
  $ 25,784,537     $ 24,651,875  
 
           
 
               
Supplemental disclosure of cash flow information, cash payments for:
               
Interest
  $ 7,945,264     $ 10,024,462  
 
           
 
               
Income/franchise taxes
  $ 370,032     $ 1,355,663  
 
           
 
               
Supplemental schedule of noncash investing activities:
               
Change in accumulated other comprehensive income, unrealized gains (losses) on securities available for sale, net
  $ 1,663,236     $ (745,735 )
 
           
 
               
Transfers of loans to other real estate owned
  $     $ 110,952  
 
           
See Notes to Consolidated Financial Statements

 

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Table of Contents

Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2009, including QCR Holdings, Inc.’s (the “Company”) Form 10-K filed with the Securities and Exchange Commission on March 5, 2010. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.
The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management’s discussion and analysis are due to rounding. The results of the interim periods ended March 31, 2010, are not necessarily indicative of the results expected for the year ending December 31, 2010.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include three state-chartered commercial banks: Quad City Bank & Trust Company (“QCBT”), Cedar Rapids Bank & Trust Company (“CRBT”), and Rockford Bank & Trust Company (“RB&T”). The Company also engages in direct financing lease contracts through its 80% equity investment by QCBT in m2 Lease Funds, LLC (“m2 Lease Funds”), and in real estate holdings through its 73% equity investment in Velie Plantation Holding Company, LLC (“Velie Plantation Holding Company”). All material intercompany transactions and balances have been eliminated in consolidation.
Subsequent events: The Company has evaluated all subsequent events through the date of issuance of the consolidated financial statements.
Restricted investment securities: The restricted investment 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 these securities 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-impairment write-downs recorded on these securities.

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
Stock-based compensation plans: Please refer to Note 15 of our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009, for information related to the Company’s stock option and incentive plans, stock purchase plan, and stock appreciation rights.
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 expense over the requisite service period for awards expected to vest. Stock-based compensation expense totaled $203 thousand and $134 thousand for the three months ended March 31, 2010 and 2009, respectively. A key component in the calculation of stock-based compensation expense is the market price of the Company’s stock.
Reclassifications: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders’ equity, to conform with current period presentation.
Recent accounting developments: On June 12, 2009, the Financial Accounting Standards Board (“FASB”) issued two related accounting pronouncements changing the accounting principles and disclosures requirements related to securitizations and special-purposed entities. Specifically, these pronouncements eliminated the concept of a “qualifying special-purpose entity”, changed the requirements for derecognizing financial assets and changed 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 expanded 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. 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 control by the selling institution, the Company is not allowed to recognize the sale and is required to record as a secured borrowing. The adoption did not have a material impact to the financial statements taken as a whole for the three months ended March 31, 2010. Management intends to continue to minimize the frequency of these situations.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820); Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires new disclosures on transfers into and out of Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value. It is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchase, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
In February 2010, the FASB issued ASU 2010-09, Subsequent Events; Amendments to Certain Recognition and Disclosure Requirements. In order to avoid conflict with SEC requirements, ASU 2010-09 removes the requirement for an SEC filer to disclose in the financial statements the date through which subsequent events have been evaluated for disclosure in the financial statements. This amendment was effective upon issuance and had no impact on the Company’s consolidated financial statements.
In March 2010, the FASB issued ASU 2010-11, Derivatives and Hedging; Scope Exception Related to Embedded Credit Derivatives. ASU 2010-11 provides clarification and additional examples to resolve potential ambiguity about the breadth of the embedded credit derivates scope exception in the original guidance. This amendment is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements.

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
NOTE 2 — INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of March 31, 2010 and December 31, 2009 are summarized as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     (Losses)     Value  
March 31, 2010:
                               
Securities held to maturity, other bonds
  $ 350,000     $     $     $ 350,000  
 
                       
 
                               
Securities available for sale:
                               
U.S. govt. sponsored agency securities
  $ 360,439,159     $ 2,489,833     $ (425,515 )   $ 362,503,477  
Residential mortgage-backed securities
    405,557       10,164             415,721  
Municipal securities
    21,780,527       875,210       (111,411 )     22,544,326  
Trust preferred securities
    200,000             (56,200 )     143,800  
Other securities
    1,656,602       129,568       (2,535 )     1,783,635  
 
                       
 
  $ 384,481,845     $ 3,504,775     $ (595,661 )   $ 387,390,959  
 
                       
                                 
            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  
 
                       

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—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 March 31, 2010 and December 31, 2009, 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  
March 31, 2010:
                                               
Securities available for sale:
                                               
U.S. govt. sponsored agency securities
  $ 76,074,424     $ (399,265 )   $ 2,973,750     $ (26,250 )   $ 79,048,174     $ (425,515 )
Municipal securities
    2,074,226       (74,357 )     1,088,625       (37,054 )     3,162,851       (111,411 )
Trust preferred securities
                143,800       (56,200 )     143,800       (56,200 )
Other securities
    6,183       (687 )     6,452       (1,848 )     12,635       (2,535 )
 
                                   
 
  $ 78,154,833     $ (474,309 )   $ 4,212,627     $ (121,352 )   $ 82,367,460     $ (595,661 )
 
                                   
                                                 
    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 )
 
                                   
At March 31, 2010, the investment portfolio included 346 securities. Of this number, 62 securities have current unrealized losses with aggregate depreciation less than 1% from the amortized cost basis. 10 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 March 31, 2010 and December 31, 2009, the Company’s equity securities represented less than 1% of the total portfolio.
The Company has not recognized other-than-temporary impairment on any debt securities for the three months ended March 31, 2010 and 2009, respectively.
For the three months ended March 31, 2010, the Company did not recognize other-than-temporary impairment on any equity securities. For the three months ended March 31, 2009, the Company’s evaluation determined that one publicly-traded equity security experienced a decline in fair value that was other-than-temporary. As a result, the Company wrote down the value of the security and recognized a loss in the amount of $14 thousand.

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
For the three months ended March 31, 2010 and 2009, there were no sales of investment securities.
The amortized cost and fair value of securities as of March 31, 2010 by contractual maturity are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the 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
  $ 17,863,750     $ 17,947,673  
Due after one year through five years
    109,891,676       110,779,446  
Due after five years
    254,664,260       256,464,484  
 
           
 
  $ 382,419,686     $ 385,191,603  
Residential mortgage-backed securities
    405,557       415,721  
Other securities
    1,656,602       1,783,635  
 
           
 
  $ 384,481,845     $ 387,390,959  
 
           

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
NOTE 3 — EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a basic and diluted basis:
                 
    Three months ended  
    March 31,  
    2010     2009  
Net income
  $ 1,214,933     $ 235,790  
Less: Net income (loss) attributable to noncontrolling interests
    (77,076 )     151,446  
 
           
Net income attributable to QCR Holdings, Inc.
  $ 1,292,009     $ 84,344  
 
               
Less: Preferred stock dividends
    1,033,419       695,728  
 
           
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
  $ 258,590     $ (611,384 )
 
           
 
               
Earnings (loss) per common share attributable to QCR Holdings, Inc.:
               
Basic
  $ 0.06     $ (0.14 )
Diluted
  $ 0.06     $ (0.14 )
 
               
Weighted average common shares outstanding
    4,573,765       4,523,851  
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan
    8,554       *
 
           
Weighted average common and common equivalent shares outstanding
    4,582,319       4,523,851 *
     
*   In accordance with U.S. GAAP, the common equivalent shares are not considered in the calculation of diluted earnings per share as the numerator is a net loss.
NOTE 4 — BUSINESS SEGMENT INFORMATION
Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of QCR Holdings, Inc. have been defined by the structure of the Company’s internal organization, focusing on the financial information that the Company’s operating decision-makers routinely use to make decisions about operating matters.
The Company’s primary segment, Commercial Banking, is geographically divided by markets into the secondary segments which are the three subsidiary banks wholly-owned by the Company: QCBT, CRBT, and RB&T. Each of these secondary segments offer similar products and services, but are managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.
The Company’s Trust Management segment represents the trust and asset management services offered at the Company’s three subsidiary banks in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. No assets of the subsidiary banks have been allocated to the Trust Management segment.

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
The Company’s All Other segment includes the operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds. This segment includes the corporate operations of the parent company and the 73% owned real estate holding operations of Velie Plantation Holding Company.
Selected financial information on the Company’s business segments is presented as follows for the three months ended March 31, 2010 and 2009.
QCR HOLDINGS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA — BUSINESS SEGMENTS
Three Months Ended March 31, 2010 and 2009
                                                         
    Commercial Banking                            
    Quad City     Cedar Rapids     Rockford     Trust             Intercompany     Consolidated  
    Bank & Trust     Bank & Trust     Bank & Trust     Management     All other     Eliminations     Total  
Three Months Ended March 31, 2010
                                                       
Total revenue
  $ 12,093,843     $ 6,952,555     $ 3,433,179     $ 905,788     $ 2,491,644     $ (2,568,795 )   $ 23,308,214  
Net interest income
  $ 7,465,731     $ 3,968,419     $ 1,959,318     $     $ (572,900 )   $     $ 12,820,568  
Net income attributable to QCR Holdings, Inc.
  $ 1,122,175     $ 763,437     $ 269,028     $ 304,077     $ 1,318,125     $ (2,484,832 )   $ 1,292,009  
Total assets
  $ 1,002,357,066     $ 559,116,428     $ 271,448,762     $     $ 180,361,046     $ (180,949,277 )   $ 1,832,334,025  
Provision for loan/lease losses
  $ 676,229     $ 900,000     $ 27,000     $     $     $     $ 1,603,229  
Goodwill
  $ 3,222,688     $     $     $     $     $     $ 3,222,688  
 
                                                       
Three Months Ended March 31, 2009
                                                       
Total revenue
  $ 13,342,348     $ 6,902,443     $ 3,393,011     $ 718,115     $ 1,338,930     $ (1,255,612 )   $ 24,439,236  
Net interest income
  $ 7,405,973     $ 3,652,891     $ 1,469,383     $     $ (671,855 )   $ (99,283 )   $ 11,757,109  
Net income attributable to QCR Holdings, Inc.
  $ 1,138,408     $ 430,370     $ (563,433 )   $ 162,421     $ 161,868     $ (1,245,289 )   $ 84,344  
Total assets
  $ 954,885,967     $ 492,279,302     $ 234,509,356     $     $ 179,964,995     $ (180,729,974 )   $ 1,680,909,646  
Provision for loan/lease losses
  $ 2,147,543     $ 1,150,000     $ 1,061,000     $     $     $     $ 4,358,543  
Goodwill
  $ 3,222,688     $     $     $     $     $     $ 3,222,688  
NOTE 5 — COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company’s 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.
As of March 31, 2010 and December 31, 2009, commitments to extend credit aggregated were $461.1 million and $476.5 million, respectively. As of March 31, 2010 and December 31, 2009, standby, commercial and similar letters of credit aggregated were $18.8 million and $17.8 million, respectively. Management does not expect that all of these commitments will be funded.
Contractual obligations and other commitments were presented in the Company’s 2009 Annual Report on Form 10-K. There have been no material changes in the Company’s contractual obligations and other commitments since that report was filed.

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
NOTE 6 — FAIR VALUE
The measurement of fair value under U.S. GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:
  1.   Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;
 
  2.   Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
 
  3.   Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Assets measured at fair value on a recurring basis comprise the following at March 31, 2010 and December 31, 2009:
                                 
            Fair Value Measurements at Reporting Date Using  
            Quoted Prices     Significant        
            in Active     Other     Significant  
            Markets for     Observable     Unobservable  
            Identical Assets     Inputs     Inputs  
    Fair Value     (Level 1)     (Level 2)     (Level 3)  
 
                               
March 31, 2010:
                               
Securities available or sale:
                               
U.S. govt. sponsored agency securities
  $ 362,503,477     $     $ 362,503,477     $  
Mortgage-backed securities
    415,721             415,721        
Municipal securities
    22,544,326             22,544,326        
Trust preferred securities
    143,800             143,800        
Other securities
    1,783,635       191,993       1,591,642        
 
                       
 
  $ 387,390,959     $ 191,993     $ 387,198,966     $  
 
                       
 
                               
December 31, 2009:
                               
Securities available or sale:
                               
U.S. govt. sponsored agency securities
  $ 345,024,448     $     $ 345,024,448     $  
Mortgage-backed securities
    496,307             496,307        
Municipal securities
    22,849,792             22,849,792        
Trust preferred securities
    99,200             99,200        
Other securities
    1,700,712       169,939       1,530,773        
 
                       
 
  $ 370,170,459     $ 169,939     $ 370,000,520     $  
 
                       

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
A small portion of the securities available for sale portfolio consists of common stock issued by various unrelated bank holding companies. The fair values used by the Company are obtained from an independent pricing service and represent quoted market prices for the identical securities (Level 1 inputs).
The large majority of the securities available for sale portfolio consists of U.S. government sponsored agency securities for which the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).
Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Assets measured at fair value on a non-recurring basis comprise the following at March 31, 2010 and December 31, 2009:
                                 
            Quoted Prices     Significant        
            in Active     Other     Significant  
            Markets for     Observable     Unobservable  
            Identical Assets     Inputs     Inputs  
    Fair Value     (Level 1)     (Level 2)     (Level 3)  
March 31, 2010:
                               
Impaired loans/leases
  $ 18,760,370     $     $     $ 18,760,370  
Other real estate owned
    9,689,943                   9,689,943  
 
                       
 
  $ 28,450,313     $     $     $ 28,450,313  
 
                       
 
                               
December 31, 2009:
                               
Impaired loans/leases
  $ 17,630,752     $     $     $ 17,630,752  
Other real estate owned
    10,029,281                   10,029,281  
 
                       
 
  $ 27,660,032     $     $     $ 27,660,032  
 
                       
Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value and are classified as a Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Other real estate owned in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of the principal amount of loans outstanding, or the estimated fair value of the property, less disposal costs, and is classified as a Level 3 in the fair value hierarchy.

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company’s consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
                                 
    As of March 31, 2010     As of December 31, 2009  
    Carrying     Estimated     Carrying     Estimated  
    Value     Fair Value     Value     Fair Value  
 
                               
Cash and due from banks
  $ 25,784,537     $ 25,784,537     $ 35,878,046     $ 35,878,046  
Federal funds sold
    61,070,000       61,070,000       6,598,333       6,598,333  
Interest-bearing deposits at financial institutions
    24,270,983       24,270,983       29,329,413       29,329,413  
Investment securities:
                               
Held to maturity
    350,000       350,000       350,000       350,000  
Available for sale
    387,390,959       387,390,959       370,170,459       370,170,459  
Loans/leases receivable, net
    1,215,668,625       1,216,329,000       1,221,814,832       1,222,885,000  
Accrued interest receivable
    7,668,001       7,668,001       7,565,513       7,565,513  
Deposits
    1,149,288,831       1,153,519,000       1,089,322,726       1,094,430,000  
Short-term borrowings
    116,263,571       116,263,571       150,899,571       150,899,571  
Federal Home Loan Bank advances
    230,950,000       244,635,000       215,850,000       229,927,000  
Other borrowings
    152,213,280       158,780,000       140,059,841       145,135,000  
Accrued interest payable
    2,662,164       2,662,164       2,951,419       2,951,419  
The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include: cash and due from banks, federal funds sold, interest-bearing deposits at financial institutions, accrued interest receivable and payable, demand and other non-maturity deposits, and short-term borrowings. The Company used the following methods and assumptions in estimating the fair value of the following instruments:
Loans/leases receivable: The fair values for variable rate loans equal their carrying values. The fair values for all other types of loans/leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans/leases with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold on the secondary market.
Deposits: The fair values disclosed for demand and other non-maturity deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits.
Federal Home Loan Bank advances: The fair value of these instruments is estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

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Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
Other borrowings: The fair value for the wholesale repurchase agreements is estimated using rates currently available for debt with similar terms and remaining maturities. The fair value for variable rate other borrowings is equal to its carrying value.
Junior subordinated debentures: It is not practicable to estimate the fair value of the Company’s junior subordinated debentures as instruments with similar terms are not readily available in the market place.
Commitments to extend credit: The fair value of these instruments is not material.
NOTE 7 — ISSUANCE OF SERIES A SUBORDINATED NOTES AND WARRANTS
On March 19, 2010, the Company closed a private placement offering resulting in the issuance of 2,700 units (each, a “Unit”) to accredited investors for an aggregate purchase price of $2.7 million, or $1,000 per Unit. Each Unit consist of a 6.00% Series A Subordinated Note, due September 1, 2018 (collectively, the “Subordinated Notes”), $1,000 principal amount, and a detachable warrant (collectively, the “Warrants”) to acquire 20 shares of the Company’s common stock, par value $1.00 per share (the “Common Stock”), at a per share exercise price equal to $10.00 per share, subject to normal adjustments, as set forth in the Warrants.
The Subordinated Notes have a term of approximately eight years and have a maturity date of September 1, 2018. The Subordinated Notes bear interest payable semi-annually, in arrears, on June 30 and December 30 of each year, at a fixed interest rate of 6.00% per year, with the first such payment to be due on June 30, 2010. The Subordinated Notes are included in other borrowings on the consolidated balance sheet. Beginning on March 19, 2011, or any earlier date if the Subordinated Notes cease to be deemed to be Tier 2 capital, the Company may, at its option, subject to regulatory approvals, redeem some or all of the Subordinated Notes at a redemption price equal to 100% of the principal amount of the redeemed notes, plus any accrued but unpaid interest.
The Warrants will expire on March 19, 2015. On or after March 19, 2011, the Warrants may be exercised at any time prior to their expiration date, at the holder’s option, by payment of the cash exercise price. The Company may require holders of the Warrants to convert each Warrant into 20 shares of Common Stock, if at any time after the first anniversary of their date of issuance, the volume weighted-average per share price of the common stock equals or exceeds 130% of the exercise price for at least 20 trading days in a period of 30 consecutive trading days. The Warrants are detachable from the Subordinated Notes and, subject to any limitations imposed by applicable securities laws, may be transferred separately from the Subordinated Notes at any time after March 19, 2012.
The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory purposes. The Company used the net proceeds from the sale of the Units to further strengthen the capital positions of the Company and specifically Rockford Bank & Trust.

 

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Table of Contents

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QCR Holdings, Inc. is the parent company of Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Rockford Bank & Trust.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are Iowa-chartered commercial banks, and Rockford Bank & Trust is an Illinois-chartered commercial bank. All are members of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation (“FDIC”).
    Quad City Bank & Trust commenced operations in 1994 and provides full-service commercial and consumer banking, and trust and asset management services, to the Quad City area and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. Quad City Bank & Trust also provides leasing services through its 80%-owned subsidiary, m2 Lease Funds, located in Brookfield, Wisconsin. In addition, Quad City Bank & Trust owns 100% of Quad City Investment Advisors, LLC (formerly known as CMG Investment Advisors, LLC), which is an investment management and advisory company.
 
    Cedar Rapids Bank & Trust commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services, to Cedar Rapids, Iowa and adjacent communities through its main office located on First Avenue in downtown Cedar Rapids, Iowa and its branch facility located on Council Street in northern Cedar Rapids. Cedar Rapids Bank & Trust also provides residential real estate mortgage lending services through its 50%-owned joint venture, Cedar Rapids Mortgage Company.
 
    Rockford Bank & Trust commenced operations in January 2005 and provides full-service commercial and consumer banking, and trust and asset management services, to Rockford, Illinois and adjacent communities through its main office located in downtown Rockford and its branch facility on Guilford Road at Alpine Road in Rockford.
The Company engages in real estate holdings through its 73% equity investment in Velie Plantation Holding Company, LLC, based in Moline, Illinois.

 

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Table of Contents

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
OVERVIEW
The Company reported net income attributable to QCR Holdings, Inc. of $1.3 million for the quarter ended March 31, 2010, or diluted earnings per share for common stockholders of $0.06 after preferred stock dividends of $1.0 million. By comparison, for the quarter ended December 31, 2009, the Company reported net income of $919 thousand, or diluted earnings per share of ($0.02) after preferred stock dividends of $1.0 million. For the first quarter of 2009, the Company reported net income of $84 thousand, or diluted earnings per share of ($0.14) after preferred stock dividends of $695 thousand.
The Company’s net interest income for the current quarter totaled $12.8 million, nearly unchanged from the prior quarter, and an increase of 9% over the first quarter of 2009. Provision for loan/lease losses totaled $1.6 million for the first quarter of 2010, a decrease of $2.6 million from the prior quarter, and a decrease of $2.8 million from the first quarter of 2009. Partially offsetting these items were losses of $617 thousand on the decline in residual values of two equipment leases and net losses on sales of foreclosed assets totaling $343 thousand.
Net interest income, on a tax equivalent basis, increased $1.0 million, or nearly 9%, to $12.9 million for the quarter ended March 31, 2010, from $11.9 million for the first quarter of 2009. For the first quarter of 2010, average earning assets increased by $153.2 million, or 10%, and average interest-bearing liabilities increased by $84.0 million, or 6%, when compared with average balances for the first quarter of 2009. A comparison of yields, spread and margin from the first quarter of 2010 to the first quarter of 2009 is as follows (on a tax equivalent basis):
    The average yield on interest-earning assets decreased 57 basis points.
    The average cost of interest-bearing liabilities decreased 54 basis points.
    The net interest spread declined 3 basis points from 2.79% to 2.76%.
    The net interest margin declined 3 basis points from 3.10% to 3.07%.

 

20


Table of Contents

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
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:
                                                 
    For the three months ended March 31,  
    2010     2009  
            Interest     Average             Interest     Average  
    Average     Earned     Yield or     Average     Earned     Yield or  
    Balance     or Paid     Cost     Balance     or Paid     Cost  
    (dollars in thousands)  
ASSETS
                                               
Interest earning assets:
                                               
Federal funds sold
  $ 35,445     $ 21       0.24 %   $ 34,314     $ 19       0.22 %
Interest-bearing deposits at financial institutions
    28,917       145       2.01 %     15,529       19       0.49 %
Investment securities (1)
    372,233       2,798       3.01 %     255,284       2,993       4.69 %
Restricted investment securities
    15,575       105       2.70 %     14,204       13       0.37 %
Gross loans/leases receivable (2) (3)
    1,232,393       17,514       5.68 %     1,212,058       17,860       5.89 %
 
                                       
 
                                               
Total interest earning assets
  $ 1,684,563       20,583       4.89 %   $ 1,531,389       20,904       5.46 %
 
                                               
Noninterest-earning assets:
                                               
Cash and due from banks
  $ 28,762                     $ 30,013                  
Premises and equipment
    31,393                       30,954                  
Less allowance for estimated losses on loans/leases
    (22,778 )                     (19,092 )                
Other
    73,672                       76,906                  
 
                                           
 
                                               
Total assets
  $ 1,795,612                     $ 1,650,170                  
 
                                           
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand deposits
  $ 380,460       843       0.89 %   $ 330,558       932       1.13 %
Savings deposits
    40,668       27       0.27 %     66,825       203       1.22 %
Time deposits
    482,233       2,505       2.08 %     533,963       4,192       3.14 %
Short-term borrowings
    134,930       169       0.50 %     98,745       166       0.67 %
Federal Home Loan Bank advances
    222,355       2,244       4.04 %     212,210       2,261       4.26 %
Junior subordinated debentures
    36,085       479       5.31 %     36,085       518       5.74 %
Other borrowings
    141,161       1,389       3.94 %     75,482       754       4.00 %
 
                                       
 
                                               
Total interest-bearing liabilities
  $ 1,437,892       7,656       2.13 %   $ 1,353,868       9,026       2.67 %
 
                                               
Noninterest-bearing demand deposits
  $ 206,394                     $ 147,719                  
Other noninterest-bearing liabilities
    24,968                       22,633                  
Total liabilities
  $ 1,669,254                     $ 1,524,220                  
 
                                               
Stockholders’ equity
    126,358                       111,746                  
 
                                           
 
                                               
Total liabilities and stockholders’ equity
  $ 1,795,612                     $ 1,635,966                  
 
                                           
 
                                               
Net interest income
          $ 12,927                     $ 11,878          
 
                                           
 
                                               
Net interest spread
                    2.76 %                     2.79 %
 
                                           
 
                                               
Net interest margin
                    3.07 %                     3.10 %
 
                                           
 
                                               
Ratio of average interest earning assets to average interest-bearing liabilities
    117.16 %                     113.11 %                
 
                                           
     
(1)   Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate for each period presented.
 
(2)   Loan/lease fees are not material and are included in interest income from loans 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.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
Analysis of Changes of Interest Income/Interest Expense
For the three months ended March 31, 2010
                         
    Inc./(Dec.)     Components  
    from     of Change (1)  
    Prior Period     Rate     Volume  
    2010 vs. 2009  
    (dollars in thousands)  
INTEREST INCOME
                       
Federal funds sold
  $ 2     $ 1     $ 1  
Interest-bearing deposits at financial institutions
    126       98       28  
Investment securities (2)
    (195 )     (4,904 )     4,709  
Restricted investment securities
    92       91          
Gross loans/leases receivable (3) (4)
    (346 )     (1,864 )     1,518  
 
                 
 
                       
Total change in interest income
  $ (321 )   $ (6,578 )   $ 6,256  
 
                 
 
                       
INTEREST EXPENSE
                       
Interest-bearing demand deposits
  $ (89 )   $ (712 )   $ 623  
Savings deposits
    (176 )     (117 )     (59 )
Time deposits
    (1,687 )     (1,312 )     (375 )
Short-term borrowings
    3       (198 )     201  
Federal Home Loan Bank advances
    (17 )     (463 )     446  
Junior subordinated debentures
    (39 )     (39 )      
Other borrowings
    635       (78 )     713  
 
                 
 
                       
Total change in interest expense
  $ (1,370 )   $ (2,919 )   $ 1,549  
 
                 
 
                       
Total change in net interest income
  $ 1,049     $ (3,659 )   $ 4,707  
 
                 
     
(1)   The column “Inc./(Dec.) from Prior Period” 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 for each period presented.
 
(3)   Loan/lease fees are not material and 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.

 

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Table of Contents

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
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 estimated losses on loans/leases. The Company’s allowance for estimated losses on loans/leases methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for estimated 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, 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 state 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. Management may report a materially different amount for the provision for loan/lease losses in the statement of operations to change the allowance for estimated losses on loans/leases if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein, as well as the portion in the section entitled “Financial Condition” of this Management’s Discussion and Analysis that discusses the allowance for estimated losses on loans/leases. Although management believed the level of the allowance as of March 31, 2010 is 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 herein.

 

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Table of Contents

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income experienced a slight decline from $20.8 million for the first quarter of 2009 to $20.5 million for the first quarter of 2010. The Company grew its interest-earnings assets as the average balance increased $153.2 million, or 10%, from the first quarter of 2009 to the same quarter of 2010. Most notably, the average balance of the investment securities portfolio increased $117.0 million, or 46%, and the average balance of the loan/lease portfolio increased $20.3 million, or 2%. The impact of this growth on interest income was effectively offset as a result of the historically low interest rate environment. The Company’s average yield on interest earning assets decreased 57 basis points from 5.46% for the three months ended March 31, 2009 to 4.89% for the same period in 2010.
INTEREST EXPENSE
Interest expense decreased $1.3 million, or 15%, from $9.0 million for the first quarter of 2009 to $7.7 million for the same quarter of 2010. Although the Company saw an increase in the average balance of interest-bearing liabilities of $84.0 million, or 6%, from the first quarter of 2009 to the same quarter of 2010, the impact of this increase on interest expense was more than offset by the decline in the average cost of interest bearing liabilities. Specifically, the Company’s average cost of interest bearing liabilities was 2.13% for the first quarter of 2010, which was a decrease of 54 basis points when compared to 2.67% for the first quarter of 2009.
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 risk associated with the loans/leases in the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company’s provision for loan/lease losses totaled $1.6 million for the first quarter of 2010, a decrease of $2.6 million from the prior quarter, and a decrease of $2.8 million from the first quarter of 2009. The decreases are attributable to the slowing of growth in the overall loan/lease portfolio over the year and, specifically, the slowing of growth in the Company’s nonperforming loans/leases in the first quarter of 2010.
As a result, the Company’s allowance for loan/lease losses to gross loans/leases increased to 1.85% at March 31, 2010 from 1.81% at December 31, 2009, and from 1.76% at March 31, 2009.

 

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Table of Contents

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
NON-INTEREST INCOME
The following table sets forth the various categories of non-interest income for the three months ended March 31, 2010 and 2009.
                                 
    Three Months Ended              
    March 31,     March 31,              
    2010     2009     $ Change     % Change  
 
Credit card issuing fees, net of processing costs
  $ 86,142     $ 245,865     $ (159,723 )     (65.0 )%
Trust department fees
    905,788       718,115       187,673       26.1  
Deposit service fees
    822,768       826,974       (4,206 )     (0.5 )
Gains on sales of loans, net
    168,954       411,911       (242,957 )     (59.0 )
Gain on sale of foreclosed asset
    21,167             21,167       (100.0 )
Earnings on bank-owned life insurance
    334,506       291,040       43,466       14.9  
Investment advisory and management fees, gross
    434,695       351,045       83,650       23.8  
Other
    421,330       811,091       (389,761 )     (48.1 )
 
                         
 
  $ 3,195,350     $ 3,656,041     $ (460,691 )     (12.6 )%
 
                         
Credit card issuing fees, net of processing costs, experienced a decrease of $160 thousand, or 65%, from the first quarter of 2009 to the same quarter of 2010. The decrease is primarily a result of one-time costs related to the conversion to a new third-party processor in the first quarter of 2010.
Trust department fees increased $188 thousand, or 26%, from the first quarter of 2009 to the first quarter of 2010. The majority of the trust department fees are determined based on the value of the investments within the managed trusts. As the national economy begins to show early signs of recovery from the recession, market values in many of these investments have experienced some recovery.
Gains on sales of loans, net, declined $243 thousand, or 59%, from the first quarter of 2009 to the first quarter of 2010. This consists primarily of sales of residential mortgages. The Company experienced increased loan origination and sales activity for these loan types in 2009 as a result of the reduction in interest rates and the resulting increase in residential mortgage refinancing transactions. The Company has experienced slowing of these refinancing transactions in the first quarter of 2010 as many customers executed a refinancing in 2009.
Investment advisory and management fees increased $84 thousand, or 24%, for the first quarter of 2010 compared to the same quarter of 2009. Similar to trust department fees, these fees are partially determined based on the value of the investments managed. With preliminary signs of economic recovery, market values of many of these investments have experienced increases during the first quarter of 2010.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
NON-INTEREST EXPENSE
The following table sets forth the various categories of non-interest expense for the three months ended March 31, 2010 and 2009.
                                 
    Three Months Ended              
    March 31,     March 31,              
    2010     2009     $ Change     % Change  
 
                               
Salaries and employee benefits
  $ 6,891,004     $ 6,764,610     $ 126,394       1.9 %
Professional and data processing fees
    1,157,398       1,153,489       3,909       0.3  
Advertising and marketing
    166,241       245,529       (79,288 )     (32.3 )
Occupancy and equipment expense
    1,371,346       1,321,092       50,254       3.8  
Stationery and supplies
    120,398       131,110       (10,712 )     (8.2 )
Postage and telephone
    262,740       227,765       34,975       15.4  
Bank service charges
    61,251       122,292       (61,041 )     (49.9 )
FDIC and other insurance
    803,526       619,195       184,331       29.8  
Loan/lease expense
    569,015       332,164       236,851       71.3  
Other-than-temporary impairment losses on securities
          14,355       (14,355 )     (100.0 )
Losses on lease residual values
    617,000             617,000       100.0  
Writedowns in value of foreclosed assets
    363,713             363,713       100.0  
Other
    422,003       180,898       241,105       133.3  
 
                         
 
  $ 12,805,635     $ 11,112,499     $ 1,693,136       15.2 %
 
                         
Salaries and employee benefits, which is the largest component of non-interest expense, increased slightly from the first quarter of 2009 to the same quarter of 2010. This modest increase is largely the result of increases in health insurance-related employee benefits for the majority of the Company’s employees. The Company’s employee base has stabilized over the past year as full-time equivalents have remained relatively flat.
FDIC and other insurance expense increased $184 thousand, or 30%, for the first quarter of 2010 compared to the same quarter of 2009. The increase was primarily the result of the FDIC’s new premium pricing system and the base assessment methodology for deposit insurance coverage which was fully implemented in the second quarter of 2009. Management expects FDIC assessment will continue to be higher than historical levels.
Loan/lease expense increased $237 thousand, or 71%, from the first quarter of 2009 to the first quarter of 2010. In conjunction with the increase in nonperforming assets over the past year, the Company has incurred increased carrying costs and workout expenses related to these nonperforming assets.
During the first quarter of 2010, the Company recognized losses in residual values for two direct financing equipment leases. The sharp declines in value were isolated and attributable to changes in unique market conditions during the quarter related to the specific equipment. Management continues to perform periodic and specific reviews of its residual values.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
INCOME TAXES
The provision for income taxes totaled $392 thousand for the first quarter of 2010 compared to a benefit of $294 thousand for the same quarter in 2009. The increase was the result of an increase in income as the Company earned $1.6 million before income taxes for the three months ended March 31, 2010 compared to a net loss before income taxes of $58 thousand for the same period in 2009.
FINANCIAL CONDITION
Total assets of the Company increased by $52.7 million, or 3%, to $1.83 billion at March 31, 2010 from $1.78 billion at December 31, 2009. The growth resulted primarily from the net increase in the Company’s federal funds sold position and its securities available for sale portfolio, funded by increases in deposits.
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. Securities increased by $17.2 million, or 5%, over the first quarter of 2010. The increase was the result of continued weakened loan/lease demand and the Company’s increased focus on liquidity. The Company’s securities available for sale portfolio consists largely of U.S. government sponsored agency securities. Residential mortgage-backed securities represents less than 1% of the entire portfolio as of March 31, 2010. The Company has not invested in corporate mortgage-backed securities. See Note 2 for additional information regarding the Company’s securities portfolio.
Gross loans/leases receivable experienced a slight decline of $5.8 million, or less than 1%, during the first quarter of 2010. The Company originated $61.2 million of new loans/leases to new and existing customers during the quarter; however, this was outpaced by payments and maturities as the Company’s markets continued to experience weakened loan/lease demand.
Consistent with the intention of the Treasury Capital Purchase Program (“TCPP”), the Company is committed to providing transparency surrounding its utilization of the proceeds from participation in the TCPP including its lending activities and support of the existing communities served. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the table on the following page along with a rollforward of activity for the three months ended March 31, 2010.
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 below.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
QCR HOLDINGS, INC. AND SUBSIDIARIES
ROLLFORWARD OF LENDING/LEASING ACTIVITY
For the three months ended March 31, 2010
                                                 
    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, 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
    33,220             21,983       15,405             70,608  
Installment and other consumer loans
    48,057             24,075       12,139             84,271  
 
                                   
 
    561,052       90,059       383,228       210,421       (2,279 )     1,242,481  
Plus deferred loan/lease origination costs, net of fees
    64       2,207       (428 )     (4 )             1,839  
 
                                   
Gross loans/leases receivable
  $ 561,116     $ 92,266     $ 382,800     $ 210,417     $ (2,279 )   $ 1,244,320  
 
                                               
ORIGINATION OF NEW LOANS/LEASES:
                                               
 
                                               
Commercial and industrial loans
    9,287             6,906       3,514             19,707  
Commercial real estate loans
    10,348             5,869       1,137             17,354  
Direct financing leases
          6,633                         6,633  
Residential real estate loans
    9,016             4,293       2,102             15,411  
Installment and other consumer loans
    796             419       839             2,054  
 
                                   
 
  $ 29,447     $ 6,633     $ 17,487     $ 7,592     $     $ 61,159  
 
                                               
PAYMENTS/MATURITIES/SALES/CHARGE-OFFS, NET OF ADVANCES OR RENEWALS ON EXISTING LOANS/LEASES:
                                               
 
                                               
Commercial and industrial loans
    (15,195 )           (22,948 )     2,857             (35,286 )
Commercial real estate loans
    (4,909 )           5,958       (2,408 )     36       (1,323 )
Direct financing leases
          (8,318 )                       (8,318 )
Residential real estate loans
    (9,135 )           (4,211 )     (3,399 )           (16,745 )
Installment and other consumer loans
    (2,039 )           (3,213 )     84             (5,168 )
 
                                   
 
  $ (31,278 )   $ (8,318 )   $ (24,414 )   $ (2,866 )   $ 36       (66,840 )
 
                                               
BALANCE AS OF MARCH 31, 2010:
                                               
 
                                               
Commercial and industrial loans
    211,965             132,378       81,614             425,957  
Commercial real estate loans
    267,341             200,577       106,363       (2,243 )     572,038  
Direct financing leases
          88,374                         88,374  
Residential real estate loans
    33,101             22,065       14,108             69,274  
Installment and other consumer loans
    46,814             21,281       13,062             81,157  
 
                                   
 
    559,221       88,374       376,301       215,147       (2,243 )     1,236,800  
Plus deferred loan/lease origination costs, net of fees
    48       2,142       (443 )     8             1,754  
 
                                   
Gross loans/leases receivable
  $ 559,269     $ 90,516     $ 375,858     $ 215,155     $ (2,243 )     1,238,554  
 
                                   

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
Changes in the allowance for estimated losses on loans/leases for the three months ended March 31, 2010 and 2009 are presented as follows:
                 
    Three months ended  
    March 31, 2010     March 31, 2009  
    (dollars in thousands)  
 
               
Balance, beginning
  $ 22,505     $ 17,809  
Provisions charged to expense
    1,603       4,359  
Loans/leases charged off
    (1,373 )     (1,466 )
Recoveries on loans/leases previously charged off
    150       471  
 
           
Balance, ending
  $ 22,885     $ 21,173  
 
           
The allowance for estimated losses on loans/leases was $22.9 million at March 31, 2010 compared to $22.5 million at December 31, 2009, an increase of $381 thousand, or 2%. The allowance for estimated losses on loans/leases was determined based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmental guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase/decrease 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 loans risk-rated less than “fair quality” and carrying aggregate exposure in excess of $100 thousand. The adequacy of the allowance for estimated losses on loans/leases was monitored by the loan review staff, and reported to management and the board of directors. The Company’s allowance for estimated losses on loans/leases to gross loans/leases increased to 1.85% at March 31, 2010 from 1.81% at December 31, 2009.
Although management believed that the allowance for estimated losses on loans/leases at March 31, 2010 was at a level adequate to absorb 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 further 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.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
The table below presents the amounts of nonperforming assets.
                         
    As of March 31,     As of December 31,     As of December 31,  
    2010     2009     2008  
    (dollars in thousands)  
 
                       
Nonaccrual loans/leases (1)
  $ 33,296     $ 28,742     $ 20,828  
Accruing loans/leases past due 90 days or more
    57       89       222  
Troubled debt restructures
    154       1,201        
Other real estate owned
    8,972       9,286       3,857  
Other repossessed assets
    440       1,071       450  
 
                 
 
  $ 42,919     $ 40,389     $ 25,357  
 
                 
 
                       
Nonperforming loans/leases to total loans/leases
    2.71 %     2.41 %     1.73 %
Nonperforming assets to total loans/leases plus reposessed property
    3.44 %     3.22 %     2.08 %
Nonperforming assets to total assets
    2.34 %     2.27 %     1.58 %
Texas ratio (2)
    29.13 %     27.47 %     23.67 %
     
(1)   Includes government guaranteed portion
 
(2)   Texas Ratio = Nonperforming Assets (excluding Other Repossessed Assets) / Tangible Equity plus Allowance for Estimated Losses on Loans/Leases
Nonperforming assets at March 31, 2010 were $42.9 million, up $2.5 million, or 6%, from $40.4 million at December 31, 2009. The large majority of the nonperforming assets consists of nonaccrual loans/leases and other real estate owned. For those nonaccrual loans/leases and all other classified assets, management has thoroughly reviewed these loans/leases and has provided specific reserves as appropriate. As previously noted, the Company’s allowance for estimated losses on loans/leases to gross loans/leases increased to 1.85% at March 31, 2010 from 1.81% at December 31, 2009, and from 1.47% at December 31, 2008.
Bank-owned life insurance increased $2.9 million, or 10%, during the first quarter of 2010. The Company has earned a yield (unadjusted for tax effect) on bank-owned life insurance of 4.33% and 4.23% for the three months ended March 31, 2010 and 2009, respectively.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
Deposits increased by $60.0 million, or 6%, during the first quarter of 2010. The table below presents the composition of the Company’s deposit portfolio.
                         
    As of March 31,     As of December 31,     As of December 31,  
    2010     2009     2008  
    (dollars in thousands)  
 
                       
Non-interest bearing demand deposits
  $ 208,659     $ 207,844     $ 161,126  
Interest bearing demand deposits
    386,124       393,732       355,990  
Savings deposits
    34,957       34,195       31,756  
Time deposits
    428,638       382,798       386,097  
Brokered time deposits
    90,911       70,754       123,990  
 
                 
 
  $ 1,149,289     $ 1,089,323     $ 1,058,959  
 
                 
The Company has been successful in shifting the deposit mix over the past year with increases in non-interest bearing deposits and a net decline in brokered time deposits. While brokered time deposits increased in the first quarter of 2010, this was the result of management’s efforts to extend the duration of liabilities in the low interest rate environment in order to help mitigate the inherent risk to rising interest rates.
Short-term borrowings decreased $34.6 million, or 23%, from $150.9 million at December 31, 2009 to $116.3 million at March 31, 2010. The subsidiary banks offer short-term repurchase agreements to some of their significant 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 March 31,     As of December 31,  
    2010     2009  
    (dollars in thousands)  
 
               
Overnight repurchase agreements with customers
  $ 101,703     $ 94,090  
Federal funds purchased
    14,561       56,810  
 
           
 
  $ 116,264     $ 150,900  
 
           
FHLB advances increased by $15.1 million, or 7%, to $231.0 million at March 31, 2010 from $215.9 million at December 31, 2009. As a result of their memberships in either the FHLB of Des Moines or Chicago, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. FHLB advances are utilized for loan matching as a hedge against the possibility of rising interest rates, and when these advances provide a less costly or more readily available source of funds than customer deposits.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
Other borrowings increased $12.2 million, or 9%, from $140.0 million at December 31, 2009 to $152.2 million at March 31, 2010. Other borrowings consist largely of structured wholesale repurchase agreements which are utilized as an alternative funding source to FHLB advances and customer deposits. As a result of a change in accounting rules, effective January 1, 2010, the Company recorded $9.5 million of secured borrowings and $312 thousand of deferred gains related to sales of the government guaranteed portion of certain loans. These secured borrowings do not bear interest and will mature within 90 days of the sales, at which time the sales will be fully recognized for accounting purposes. In addition, during the first quarter of 2010, the Company issued Series A Subordinated Notes in the amount of $2.7 million. See Note 7 for additional detail on the Subordinated Notes.
Stockholders’ equity increased $2.3 million, or 2%, from $125.6 million as of December 31, 2009 to $127.9 million as of March 31, 2010. Net income of $1.2 million for the first three months of 2010 increased retained earnings; however, this was partially offset by declaration and accrual of preferred stock dividends and discount accretion totaling $1.0 million. Specifically regarding the preferred stock dividends, following is the detail:
    $268 thousand for the quarterly dividend on the outstanding shares of Series B Non-Cumulative Perpetual Preferred Stock at a stated rate of 8.00%,
    $178 thousand for the quarterly dividend on the outstanding shares of Series C Non-Cumulative Perpetual Preferred Stock at a stated rate of 9.50%, and
    $587 thousand for the quarterly dividend on the outstanding shares of Series D Cumulative Perpetual Preferred Stock at a stated rate of 5.00%, including the related discount accretion.
It is the Company’s intention to consider the payment of common stock dividends on a semi-annual basis.
Lastly, the available for sale portion of the securities portfolio experienced an increase in fair value of $1.6 million, net of tax, for the first quarter of 2010 as a result of fluctuation in certain market rates at the end of the quarter.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
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 $111.1 million as of March 31, 2010. This was an increase of $39.3 million, or 55%, from $71.8 million as of December 31, 2009.
The Company has a variety of sources of short-term liquidity available, including federal funds purchased from correspondent banks, FHLB advances, structured wholesale repurchase agreements, brokered certificates of deposit, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, and loan participations or sales. At March 31, 2010, the subsidiary banks had 19 lines of credit totaling $143.5 million, of which $35.0 million was secured and $108.5 million was unsecured. At March 31, 2010, all of the $143.5 million was available. Additionally, the Company has a single $20.0 million secured revolving line of credit with a maturity date of April 1, 2011. As of March 31, 2010, the Company had $15.0 million available as the line of credit carried an outstanding balance of $5.0 million.
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 TCPP.
In the second quarter of 2010, the Company intends to offer up to $25.0 million of shares of a new series of convertible preferred stock in a private offering. As consideration for shares of the new preferred stock, the Company will accept cash or shares of its Series B Non-Cumulative Perpetual Preferred Stock and Series C Non-Cumulative Perpetual Preferred Stock.

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
The Company and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The most recent notification from the FDIC categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notifications that management believes have changed each institution’s categories. The Company and the subsidiary banks’ actual capital amounts and ratios as of March 31, 2010 and December 31, 2009 are presented in the following tables (dollars in thousands):
                                                 
                                    To Be Well  
                                    Capitalized Under  
                    For Capital     Prompt Corrective  
    Actual     Adequacy Purposes     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As of March 31, 2010:
                                               
Company:
                                               
Total risk-based capital
  $ 177,963       12.74 %   $ 111,548     > 8.0 %     N/A       N/A  
Tier 1 risk-based capital
    156,146       11.18 %     55,774     > 4.0       N/A       N/A  
Leverage ratio
    156,146       8.71 %     71,693     > 4.0       N/A       N/A  
Quad City Bank & Trust:
                                               
Total risk-based capital
  $ 95,681       12.26 %   $ 62,424     > 8.0 %   $ 78,031     > 10.00 %
Tier 1 risk-based capital
    85,904       11.01 %     31,212     > 4.0       46,818     > 6.00 %
Leverage ratio
    85,904       8.75 %     39,289     > 4.0       49,111     > 5.00 %
Cedar Rapids Bank & Trust:
                                               
Total risk-based capital
  $ 53,399       13.39 %   $ 31,893     > 8.0 %   $ 39,867     > 10.00 %
Tier 1 risk-based capital
    48,384       12.14 %     15,947     > 4.0       23,920     > 6.00 %
Leverage ratio
    48,384       8.90 %     21,738     > 4.0       27,172     > 5.00 %
Rockford Bank & Trust:
                                               
Total risk-based capital
  $ 33,358       15.42 %   $ 17,308     > 8.0 %   $ 21,634     > 10.00 %
Tier 1 risk-based capital
    30,641       14.16 %     8,654     > 4.0       12,981     > 6.00 %
Leverage ratio
    30,641       11.43 %     10,722     > 4.0       13,403     > 5.00 %

 

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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
                                                 
                                    To Be Well  
                                    Capitalized Under  
                    For Capital     Prompt Corrective  
    Actual     Adequacy Purposes     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As of December 31, 2009:
                                               
Company:
                                               
Total risk-based capital
  $ 174,696       12.52 %   $ 111,668     > 8.0 %     N/A       N/A  
Tier 1 risk-based capital
    155,464       11.14 %     55,834     > 4.0       N/A       N/A  
Leverage ratio
    155,464       8.73 %     71,212     > 4.0       N/A       N/A  
Quad City Bank & Trust:
                                               
Total risk-based capital
  $ 94,957       12.26 %   $ 61,973     > 8.0 %   $ 77,466     > 10.00 %
Tier 1 risk-based capital
    85,250       11.00 %     30,987     > 4.0       46,480     > 6.00 %
Leverage ratio
    85,250       8.55 %     39,891     > 4.0       49,864     > 5.00 %
Cedar Rapids Bank & Trust:
                                               
Total risk-based capital
  $ 53,179       13.14 %   $ 32,386     > 8.0 %   $ 40,483     > 10.00 %
Tier 1 risk-based capital
    48,092       11.88 %     16,193     > 4.0       24,290     > 6.00 %
Leverage ratio
    48,092       8.93 %     21,552     > 4.0       26,940     > 5.00 %
Rockford Bank & Trust:
                                               
Total risk-based capital
  $ 30,402       13.92 %   $ 17,470     > 8.0 %   $ 21,838     > 10.00 %
Tier 1 risk-based capital
    27,660       12.67 %     8,735     > 4.0       13,103     > 6.00 %
Leverage ratio
    27,660       10.56 %     10,475     > 4.0       13,094     > 5.00 %

 

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Table of Contents

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. 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 which could have a material adverse effect on the Company’s operations and future prospects are detailed in the “Risk Factors” section included under Item 1.A. of Part I of the Company’s Form 10-K and Item 1.A. of Part II of this report. In addition to the risk factors described in those sections, there are other factors that may impact any public company, including the Company, which could have a material adverse effect on the Company’s operations and future prospects of the Company and its subsidiaries.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

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Table of Contents

Part I
Item 3
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 interest income.
In an attempt to manage the Company’s 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 of directors 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 of directors 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.

 

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Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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 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.

 

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Table of Contents

Part I
Item 4
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of March 31, 2010. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.
Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

 

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Table of Contents

Part II
QCR HOLDINGS, INC.
AND SUBSIDIARIES
PART II — OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 1.A. Risk Factors
There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company’s 2009 Annual Report on Form 10-K. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 [RESERVED]
Item 5 Other Information
None

 

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Part II
PART II — OTHER INFORMATION — continued
Item 6 Exhibits
         
  4.1    
Form of Subordinated Note for Series A Subordinated Notes (incorporated herein by reference to Exhibit 4.1 of Registrant’s Form 8-K filed on March 22, 2010).
       
 
  4.2    
Form of Warrant to Purchase Common Stock (incorporated herein by reference to Exhibit 4.2 of Registrant’s Form 8-K filed on March 22, 2010).
       
 
  31.1    
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
       
 
  31.2    
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
       
 
  32.1    
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  QCR HOLDINGS, INC.
(Registrant)
 
 
Date May 7, 2010  /s/ Douglas M. Hultquist    
  Douglas M. Hultquist, President   
  Chief Executive Officer   
     
Date May 7, 2010  /s/ Todd A. Gipple    
  Todd A. Gipple, Executive Vice President   
  Chief Operating Officer
Chief Financial Officer 
 

 

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