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EX-21.1 - EXHIBIT 21.1 - QCR HOLDINGS INCc13725exv21w1.htm
EX-32.1 - EXHIBIT 32.1 - QCR HOLDINGS INCc13725exv32w1.htm
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EX-23.1 - EXHIBIT 23.1 - QCR HOLDINGS INCc13725exv23w1.htm
Table of Contents

 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010.
Commission file number: 0-22208
QCR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   42-1397595
(State of incorporation)   (I.R.S. Employer Identification No.)
3551 7th Street, Moline, Illinois 61265
(Address of principal executive offices)
(309) 736-3580
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common stock, $1.00 Par Value The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Exchange Act:
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The NASDAQ Global Market on June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $39,425,051.
As of February 28, 2011, the Registrant had outstanding 4,703,866 shares of common stock, $1.00 par value per share.
Documents incorporated by reference:
Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be held in May 2011.
 
 

 

 


 

QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
         
    Page  
    Number(s)  
 
       
       
 
       
    4-11  
 
       
    11-18  
 
       
    19  
 
       
    19  
 
       
    19  
 
       
    19  
 
       
       
 
       
    20-21  
 
       
    22  
 
       
    23-45  
 
       
    45-46  
 
       
    47-108  
 
       
    109  
 
       
    109  
 
       
    109  
 
       
       
 
       
    110  
 
       
    110  
 
       
    110  
 
       
    111  
 
       
    111  
 
       
       
 
       
    111-114  
 
       
    115-116  
 
       
 Exhibit 21.1
 Exhibit 23.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 Exhibit 99.1
 Exhibit 99.2

 

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Part I
Item 1.  
Business
General. QCR Holdings, Inc. (the “Company”) is a multi-bank holding company headquartered in Moline, Illinois, that was formed in February 1993 under the laws of the state of Delaware. The Company serves the Quad Cities, Cedar Rapids, and Rockford communities through the following three wholly-owned banking subsidiaries, which provide full-service commercial and consumer banking and trust and asset management services:
   
Quad City Bank and Trust Company (“Quad City Bank & Trust”), which is based in Bettendorf, Iowa, and commenced operations in 1994;
   
Cedar Rapids Bank and Trust Company (“Cedar Rapids Bank & Trust”), which is based in Cedar Rapids, Iowa, and commenced operations in 2001; and
   
Rockford Bank and Trust Company (“Rockford Bank & Trust”), which is based in Rockford, Illinois, and commenced operations in 2005.
The Company also engages in direct financing lease contracts through the 80% equity investment of Quad City Bank & Trust in m2 Lease Funds, LLC (“m2 Lease Funds”), based in Brookfield, Wisconsin, and in real estate holdings through its 91% equity investment in Velie Plantation Holding Company, LLC (“Velie Plantation Holding Company”), based in Moline, Illinois.
Quad City Bancard, Inc. (“Bancard”), previously a wholly-owned subsidiary of the Company, conducted the Company’s credit card issuing operation. Effective December 31, 2009, Bancard was dissolved and liquidated. The credit card issuing operation was merged in as a department of Quad City Bank & Trust.
During 2008, Bancard sold its merchant credit card acquiring business. The resulting gain on sale, net of taxes and related expenses, was approximately $3.0 million. The current and comparative financial results associated with the merchant credit card acquiring business have been reflected as discontinued operations throughout the annual report.
On December 31, 2008, the Company sold its Milwaukee, Wisconsin subsidiary, First Wisconsin Bank and Trust Company (“First Wisconsin Bank & Trust”), for $13.7 million which resulted in a pre-tax gain on sale of approximately $495 thousand. The current and comparative financial results associated with First Wisconsin Bank & Trust have been reflected as discontinued operations throughout the annual report.
Subsidiary Banks. Quad City Bank & Trust was capitalized on October 13, 1993, and commenced operations on January 7, 1994. Quad City Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. Quad City Bank & Trust provides full service commercial and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. Quad City Bank & Trust has the 80% equity investment in m2 Lease Funds. Quad City Bank & Trust, on a consolidated basis with m2 Lease Funds, had total segment assets of $1.03 billion and $975.8 million as of December 31, 2010 and 2009, respectively.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law. The Company commenced operations in Cedar Rapids in June 2001, operating as a branch of Quad City Bank & Trust. The Cedar Rapids branch operation then began functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its two facilities. The headquarters for Cedar Rapids Bank & Trust is located in downtown Cedar Rapids, and its first branch location is located in northern Cedar Rapids. Cedar Rapids Bank & Trust had total segment assets of $546.8 million and $542.7 million as of December 31, 2010 and 2009, respectively.

 

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Rockford Bank & Trust is an Illinois-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law. The Company commenced operations in Rockford, Illinois in September 2004, operating as a branch of Quad City Bank & Trust, and that operation began functioning under the Rockford Bank & Trust charter in January 2005. Rockford Bank & Trust provides full-service commercial and consumer banking and trust and asset management services to Rockford and adjacent communities through its original office located in downtown Rockford and its branch facility located on Guilford Road at Alpine Road in Rockford. Rockford Bank & Trust had total segment assets of $271.4 million and $265.8 million as of December 31, 2010 and 2009, respectively.
See Financial Statement Note 22 for additional business segment information.
Other Operating Subsidiaries. On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of m2 Lease Funds. John Engelbrecht, the President and Chief Executive Officer of m2 Lease Funds, retained 20% of the membership units. m2 Lease Funds, which is based in Brookfield, Wisconsin, is engaged in the business of leasing machinery and equipment to commercial and industrial businesses under direct financing lease contracts.
Beginning in 1998, the Company held a 20% equity investment in Velie Plantation Holding Company. In 2006, the Company acquired an additional 37% of the membership units bringing its total equity investment to 57%. During 2009, the Company acquired an additional 16% of the membership units to bring its total equity investment to 73%. And, during the fourth quarter of 2010, the Company acquired an additional 18% of the membership units to bring its total equity investment to 91%. Velie Plantation Holding Company is engaged in holding the real estate property known as the Velie Plantation Mansion in Moline, Illinois.
On January 1, 2008, Quad City Bank & Trust acquired 100% of the membership units of CMG Investment Advisors, LLC, which is an investment management and advisory company. During 2010, the operating subsidiary was renamed Quad City Investment Advisors, LLC.
Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 2010 and 2009:
                                 
                    Interest     Interest  
                    Rate as     Rate as  
                    of     of  
Name   Date Issued   Amount Issued     Interest Rate   12/31/10     12/31/09  
 
                               
QCR Holdings Statutory Trust II
  February 2004   $ 12,372,000     6.93%*     6.93 %     6.93 %
QCR Holdings Statutory Trust III
  February 2004     8,248,000     2.85% over 3-month LIBOR     3.15 %     3.10 %
QCR Holdings Statutory Trust IV
  May 2005     5,155,000     1.80% over 3-month LIBOR     2.09 %     2.08 %
QCR Holdings Statutory Trust V
  February 2006     10,310,000     6.62%**     6.62 %     6.62 %
     
*  
Rate is fixed until March 31, 2011, then becomes variable based on 3-month LIBOR plus 2.85%, reset quarterly.
 
**  
Rate is fixed until April 7, 2011, then becomes variable based on 3-month LIBOR plus 1.55%, reset quarterly.
Securities issued by Trust II mature in thirty years, but are callable at par anytime after seven years from issuance. Securities issued by Trust III, Trust IV, and Trust V mature in thirty years, but are callable at par anytime after five years from issuance.

 

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Other Ownership Interests. The Company invests limited amounts of its capital in stocks of financial institutions and mutual funds. In addition to its wholly-owned and majority-owned subsidiaries, the Company owns a 20% equity position in Nobel Real Estate Investors, LLC. In June 2005, Cedar Rapids Bank & Trust entered into a joint venture as a 50% owner of Cedar Rapids Mortgage Company, LLC.
The Company previously owned a 2.25% equity investment in Trisource Solutions, LLC (“Trisource”). On July 2, 2010, the Company exercised a put option and sold its equity investment back to the majority owner of Trisource for $750 thousand to be received in monthly installments through July 2012, with a final balloon payment to be made in August 2012. As a result, the gain (materially all of the sales proceeds) is deferred and recognized on a cash basis.
Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities, as described more fully in this Form 10-K. Its operating results also can be affected by trust fees, deposit service charge fees, gains on the sale of residential real estate and government guaranteed loans, earnings from bank-owned life insurance and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.
The Company and its subsidiaries collectively employed 350 and 343 full-time equivalents (“FTEs”) at December 31, 2010 and 2009, respectively.
The Board of Governors of the Federal Reserve System (the “Federal Reserve”) is the primary federal regulator of the Company and its subsidiaries. In addition, Quad City Bank & Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking and Rockford Bank & Trust is regulated by the State of Illinois Department of Financial and Professional Regulation. The FDIC, as administrator of the Deposit Insurance Fund, has regulatory authority over the subsidiary banks.
Lending/Leasing. The Company and its subsidiaries provide a broad range of commercial and retail lending and investment services to corporations, partnerships, individuals and government agencies. The subsidiary banks actively market their services to qualified lending and deposit clients. Officers actively solicit the business of new clients entering their market areas as well as long-standing members of the local business community. The Company has an established lending/leasing policy which includes a number of underwriting factors to be considered in making a loan/lease, including, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit history of the borrower.
In accordance with Iowa regulation, the legal lending limit to one borrower for Quad City Bank & Trust and Cedar Rapids Bank & Trust, calculated as 15% of aggregate capital, was $14.5 million and $8.5 million, respectively, as of December 31, 2010. In accordance with Illinois regulation, the legal lending limit to one borrower for Rockford Bank & Trust, calculated as 25% of aggregate capital, totaled $8.6 million as of December 31, 2010.
The Company recognizes the need to prevent excessive concentrations of credit exposure to any one borrower or group of related borrowers. As such, the Company has established an in-house lending limit, which is lower than each subsidiary bank’s legal lending limit, in an effort to manage individual borrower exposure levels.
The in-house lending limit is the maximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. Under the in-house limit, total credit exposure to a single borrowing entity or group of related entities will not exceed the following, subject to certain exceptions:
         
Quad City Bank & Trust:
  $7.5 million
Cedar Rapids Bank & Trust:
  $5.0 million
Rockford Bank & Trust:
  $3.0 million

 

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Table of Contents

On a consolidated basis, the in-house lending limit is $10.0 million and is the maximum amount of credit that all affiliated banks when combined will extend to a single borrowing entity or group of related entities.
As part of the loan monitoring activity at the three subsidiary banks, credit administration personnel interact closely with senior bank management. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks. To complement the in-house loan review, an independent third-party performs external loan reviews. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of these situations.
The Company recognizes that a diversified loan portfolio contributes to reducing risk in the overall loan/lease portfolio. The specific loan/lease portfolio mix is subject to change based on loan/lease demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan/lease portfolio to ensure appropriate diversification and concentration risk is maintained.
Specifically, each subsidiary bank’s total loans as a percentage of assets may not exceed 85%. In addition, following are established policy limits for the loan portfolio on a per loan type basis, reflected as a percentage of the subsidiary bank’s average gross loans:
         
Type of Loan   Maximum Percentage  
 
       
One-to-four family residential
    30 %
Multi-family
    15 %
Farmland
    5 %
Non-farm, nonresidential
    50 %
Construction and land development
    20 %
Commercial and industrial loans
    60 %
Loans to individuals
    10 %
Lease financing
    20 %
Bank stock loans
    15 %
All other loans
    10 %
The loan types above are as defined and reported in the subsidiary banks’ quarterly Reports of Condition and Income (also known as Call Reports).
The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 2010 and 2009. Residential real estate loans held for sale are included in residential real estate loans below.
                                                                                         
    Quad City     m2     Cedar Rapids     Rockford     Intercompany     Consolidated  
    Bank & Trust     Lease Funds     Bank & Trust     Bank & Trust     Elimination     Total  
    $     %     $     %     $     %     $     %     $     $     %  
    (dollars in thousands)  
As of December 31, 2010:
                                                                                       
 
 
Commercial and industrial loans
  $ 194,316       38 %   $       0 %   $ 117,236       32 %   $ 54,073       27 %   $     $ 365,625       31 %
Commercial real estate loans
    239,338       46 %           0 %     197,774       54 %     118,763       58 %     (2,158 )     553,717       47 %
Direct financing leases
          0 %     83,010       97 %           0 %           0 %           83,010       7 %
Residential real estate loans
    34,820       7 %           0 %     32,155       9 %     15,222       7 %           82,197       7 %
Installment and other consumer loans
    49,664       9 %           0 %     21,243       5 %     15,333       8 %           86,240       8 %
Deferred loan/lease origination costs, net of fees
    30       0 %     2,342       3 %     (628 )     0 %     6       0 %           1,750       0 %
 
                                                                 
 
  $ 518,168       100 %   $ 85,352       100 %   $ 367,780       100 %   $ 203,397       100 %   $ (2,158 )   $ 1,172,539       100 %
 
                                                                 
 
                                                                                       
As of December 31, 2009:
                                                                                       
 
 
Commercial and industrial loans
  $ 217,873       39 %   $       0 %   $ 148,420       39 %   $ 75,243       36 %   $     $ 441,536       35 %
Commercial real estate loans
    261,902       47 %           0 %     188,750       49 %     107,634       51 %     (2,279 )     556,007       45 %
Direct financing leases
          0 %     90,059       98 %           0 %           0 %           90,059       7 %
Residential real estate loans
    33,221       6 %           0 %     21,982       6 %     15,405       7 %           70,608       6 %
Installment and other consumer loans
    48,057       8 %           0 %     24,075       6 %     12,139       6 %           84,271       7 %
Deferred loan/lease origination costs, net of fees
    64       0 %     2,206       2 %     (427 )     0 %     (4 )     0 %           1,839       0 %
 
                                                                 
 
  $ 561,117       100 %   $ 92,265       100 %   $ 382,800       100 %   $ 210,417       100 %   $ (2,279 )   $ 1,244,320       100 %
 
                                                                 

 

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Proper pricing of loans is necessary to provide adequate return to the Company’s shareholders. Loan pricing, as established by the subsidiary banks’ Asset/Liability Committee, shall include consideration for the cost of funds, loan maturity and risk, origination and maintenance costs, appropriate shareholder return, competitive factors, and the economic environment. The portfolio contains a mix of loans with fixed and floating interest rates. Management attempts to maximize the use of interest rate floors on its variable rate loan portfolio. Refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk for more discussion on the Company’s management of interest rate risk.
Commercial and Industrial Lending
As noted above, the subsidiary banks are active commercial and industrial lenders. The current areas of emphasis include loans to small and mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes.
Loan approval is generally based on the following factors:
   
Ability and stability of current management of the borrower;
   
Stable earnings with positive financial trends;
   
Sufficient cash flow to support debt repayment;
   
Earnings projections based on reasonable assumptions;
   
Financial strength of the industry and business; and
   
Value and marketability of collateral.
For commercial and industrial loans, the Company assigns internal risk ratings which are largely dependent upon the aforementioned approval factors. The risk rating is reviewed annually, at a minimum, and on an as needed basis depending on the specific circumstances of the loan. See Financial Statement Note 1 for additional information including the internal risk rating scale.
As part of the underwriting process, management reviews current borrower financial statements. When appropriate, certain commercial and industrial loans may contain covenants requiring maintenance of financial performance ratios such as:
   
Minimum debt service coverage ratio;
   
Minimum current ratio;
   
Maximum debt to tangible net worth ratio; and/or
   
Minimum tangible net worth
Establishment of these financial performance ratios depends on a number of factors including risk rating and the specific industry.

 

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Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. Approved non-real estate collateral types and corresponding maximum advance percentages for each are listed below.
     
Approved Collateral Type   Maximum Advance %
 
   
Financial Instruments
   
U.S. Government Securities
  90% of market value
Securities of Federal Agencies
  90% of market value
Municipal Bonds rated by Moody’s As “A” or better
  80% of market value
Listed Stocks
  75% of market value
Mutual Funds
  75% of market value
Cash Value Life Insurance
  95%, less policy loans
Savings/Time Deposits (Bank)
  100% of current value
 
   
General Business
   
Accounts Receivable
  80% of eligible A/R
Inventory
  50% of value
Fixed Assets (Existing)
  50% of net book value, or 75% of orderly liquidation appraised value
Fixed Assets (New)
  80% of cost, or higher if cross-collateralized with other assets
Leasehold Improvements
  0%
The lending policy specifies maximum term limits for commercial and industrial loans. For term loans, the maximum term is 7 years. Generally, term loans range from 3 to 5 years. For lines of credit, the maximum term is 365 days.
In addition, the subsidiary banks often take personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.
Commercial Real Estate Lending
The subsidiary banks also make commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those standards and processes specific to real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The lending policy specifies maximum loan-to-value limits based on the category of commercial real estate (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities. Following is a listing of these limits as well as some of the other guidelines included in the lending policy for the major categories of commercial real estate loans:
         
        Maximum
Commercial Real Estate Loan Types   Maximum Advance Rate **   Term
 
       
Commercial Real Estate Loans on Improved Property *
  80%   7 years
Raw Land
  Lesser of 65% of ‘as is’ appraised value, or 90% of cost   12 months
Land Development
  Lesser of 90% of project cost, or 75% of appraised value   24 months
Commercial Construction Loans
  Lesser of 90% of project cost, or 80% of appraised value   365 days
     
*  
Generally, the debt service coverage ratio must be a minimum of 1.15x for non-owner occupied loans and 1.00x for owner-occupied loans. For loans greater than $500 thousand, the subsidiary banks sensitivity test this ratio for deteriorated economic conditions, major changes in interest rates, and/or significant increases in vacancy rates.
 
**  
These maximum rates are consistent with those established by regulatory authorities.

 

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The lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the subsidiary banks often take personal guarantees to help assure repayment.
In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Owner-occupied loans are generally considered to have less risk. As of December 31, 2010 and 2009, approximately 26% and 29%, respectively, of the commercial real estate loan portfolio was owner-occupied.
The Company’s lending policy limits non-owner occupied commercial real estate lending to 300% of total risk-based capital, and limits construction, land development, and other land loans to 100% of total risk-based capital. Exceeding these limits warrants the use of heightened risk management practices in accordance with regulatory guidelines.
Following is a listing of the significant industries within the Company’s commercial real estate loan portfolio as of December 31, 2010:
                 
    As of December 31,  
    2010  
    Amount     %  
    (dollars in thousands)  
 
               
Lessors of Nonresidential Buildings
  $ 154,427       28 %
Lessors of Residential Buildings
    52,582       9 %
Land Subdivision
    30,572       6 %
Lessors of Other Real Estate Property
    19,688       4 %
New Single Family Construction
    16,053       3 %
Other *
    280,395       50 %
 
           
 
               
Total Commercial Real Estate Loans
  $ 553,717       100 %
 
           
     
*  
“Other” consists of all other industries. None of these had concentrations greater than $15 million, or 2.7% of total commercial real estate loans.
Direct Financing Leasing
m2 Lease Funds leases machinery and equipment to commercial and industrial customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.
The following private and public sector business assets are generally acceptable to consider for lease funding:
   
Computer systems
   
Photocopy systems
   
Fire trucks
   
Specialized road maintenance equipment
   
Medical equipment
   
Commercial business furnishings
   
Vehicles classified as heavy equipment
   
Aircraft
   
Equipment classified as plant or office equipment
   
Marine boat lifts

 

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m2 Lease Funds will generally refrain from funding leases of the following type:
   
Leases collateralized by non-marketable items
   
Leases collateralized by consumer items, such as vehicles, household goods, recreational vehicles, boats, etc.
   
Leases collateralized by used equipment, unless its remaining useful life can be readily determined
   
Leases with a repayment schedule exceeding 7 years
Residential Real Estate Lending
Generally, the subsidiary banks’ residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The lending policy establishes minimum appraisal and other credit guidelines.
As mentioned above, the subsidiary banks sell the majority of their residential real estate loans in the secondary market. The following table presents the originations and sales of residential real estate loans for the Company.
                         
    For the year ended December 31,  
    2010     2009     2008  
    (dollars in thousands)  
 
                       
Originations of residential real estate loans
  $ 164,572     $ 157,180     $ 116,662  
Sales of residential real estate loans
  $ 134,304     $ 141,619     $ 87,907  
Percentage of sales to originations
    82 %     90 %     75 %
Installment and Other Consumer Lending
The consumer lending department of each bank provides many types of consumer loans, including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The lending policy addresses specific credit guidelines by consumer loan type.
In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the lending policy described above. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are generally noted as such and specifically identified in loan/lease approval documents.
Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, and Rockford markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. The Company competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.

 

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Appendices. The commercial banking business is a highly regulated business. See Appendix A for a summary of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative statistical information relating to the business of the Company required to be presented pursuant to federal securities laws. Consistent with the information presented in Form 10-K, results are presented for the fiscal years ended December 31, 2010, 2009, 2008, 2007, and 2006 and have been reclassified, as appropriate, for discontinued operations.
Internet Site, Securities Filings and Governance Documents. The Company maintains Internet sites for itself and each of its three banking subsidiaries. The Company makes available free of charge through these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Also available are many of its corporate governance documents, including the Code of Conduct and Ethics Policy. The sites are www.qcrh.com, www.qcbt.com, www.crbt.com, and www.rkfdbank.com.
Item 1A.  
Risk Factors
In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:
Difficult market conditions have affected the financial industry and may adversely affect us in the future.
Dramatic declines in the U.S. housing market over the past few years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial banks and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital from private and government entities, to merge with larger and stronger financial institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial markets in general and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, erosion of consumer confidence, increased market volatility and widespread reduction of business activity in general. The resulting economic pressure on consumers and erosion of confidence in the financial markets has already adversely affected our industry and may adversely affect our business, financial condition and results of operations. We cannot predict whether the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and other financial institutions. In particular, we may face the following risks in connection with these events:
   
Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage and underwrite the loans become less predictive of future behaviors.
   
The models used to estimate losses inherent in the credit exposure require difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of the borrowers to repay their loans, which may no longer be capable of accurate estimation and which may, in turn, impact the reliability of the models.
   
Our ability to borrow from other financial institutions or to engage in sales of mortgage loans to third parties on favorable terms, or at all, could be adversely affected by further disruptions in the capital markets or other events, including deteriorating investor expectations.

 

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Competitive dynamics in the industry could change as a result of consolidation of financial services companies in connection with current market conditions.
   
We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.
   
We expect to face increased capital requirements, both at the Company level and each of its banking subsidiaries. In this regard, the Collins Amendment to the Dodd-Frank Act requires the federal banking agencies to establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies. Furthermore, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, recently announced an agreement to a strengthened set of capital requirements for internationally active banking organizations, known as Basel III. We expect U.S. banking authorities to follow the lead of Basel III and require all U.S. banking organizations to maintain significantly higher levels of capital, which may limit our ability to pursue business opportunities and adversely affect our results of operations and growth prospects.
   
We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the Deposit Insurance Fund, or DIF, and reduced the ratio of reserves to insured deposits. Furthermore, the recently enacted Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will necessitate increased assessments on depository institutions. Although the precise impact on us will not be clear until implementing rules are issued, any future increases in assessments applicable to us will decrease our earnings and could have a material adverse effect on the value of, or market for, our common stock.
If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
Our business is concentrated in and dependent upon the continued growth and welfare of the Quad Cities, Cedar Rapids, and Rockford markets.
We operate primarily in the Quad Cities, Cedar Rapids, and Rockford markets, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a particularly strong presence in Bettendorf, Cedar Rapids and Davenport, Iowa and Moline and Rockford, Illinois and their surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce demand for our products and services, affect the ability of our customers to repay their loans to us, increase the levels of our non-performing and problem loans, and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, deposits, investment maturities and calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from the Federal Reserve Bank or other correspondent banks, FHLB advances, wholesale and customer repurchase agreements, brokered time deposits, and the ability to borrow at the Federal Reserve Bank’s Discount Window. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as further disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

 

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Since mid-2007, the financial services industry and the credit markets generally have been materially and adversely affected by significant declines in asset values and by a lack of liquidity. The liquidity issues have been particularly acute for regional and community banks, as many of the larger financial institutions have significantly curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks. In addition, many of the larger correspondent lenders have reduced or even eliminated federal funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans/leases, invest in securities, meet our expenses, pay dividends to our shareholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
We face intense competition in all phases of our business from other banks and financial institutions.
The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services. Additionally, if the regulatory trend toward reducing restrictions on the interstate operations of financial institutions continues, we will continue to experience increased competition as a result.
Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and offer a broader range of financial services than we can offer.
Our community banking strategy relies heavily on our subsidiaries’ independent management teams, and the unexpected loss of key managers may adversely affect our operations.
We rely heavily on the success of our bank subsidiaries’ independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain the executive officers and current management teams of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we manage our existing portfolio and grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
The American Recovery and Reinvestment Act of 2010 that was signed into law in February 2010 includes extensive restrictions on our ability to pay retention awards, bonuses and other incentive compensation during the period in which we have any outstanding securities held by the U.S. Treasury that were issued under the Capital Purchase Program. Many of the restrictions may not be limited to our senior executives and could cover other employees whose contributions to revenue and performance can be significant. As long as we are subject to them, these limitations may adversely affect our ability to recruit and retain these key employees in addition to our senior executive officers, especially if we are competing for talent against institutions that are not subject to the same restrictions.

 

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We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
The Company and each of its banking subsidiaries are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations and we expect that the capital requirements imposed by the regulators will increase in the future. Our ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market condition, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. Our failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and preferred stock and to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition.
Interest rates and other conditions impact our results of operations.
Our profitability is in large part a function of the spread between the interest rates earned on investments and loans/leases and the interest rates paid on deposits and other interest bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan/lease terms or the mix of adjustable and fixed rate loans/leases in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures about Market Risk” included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with specific borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.
The majority of our subsidiary banks’ loan portfolios are invested in commercial and industrial and commercial real estate loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area’s largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to commercial and commercial real estate loans, our subsidiary banks are also active in residential mortgage and consumer lending. Should the economic climate fail to improve or worsen, our borrowers may experience financial difficulties, and the level of non-performing loans, charge-offs and delinquencies could rise, which could negatively impact our business.

 

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Commercial and industrial loans make up a large portion of our loan/lease portfolio.
Commercial and industrial loans/leases were $365.6 million, or approximately 31% of our total loan/lease portfolio, as of December 31, 2010. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal guarantee on commercial loans. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, a continued decline in the United States economy or a prolonged recovery period could harm or continue to harm the businesses of our commercial and industrial customers and reduce the value of the collateral securing these loans.
Our loan/lease portfolio has a significant concentration of commercial real estate loans, which involve risks specific to real estate values.
Commercial real estate lending comprises a significant portion of our lending business. Specifically, commercial real estate loans were $553.7 million, or approximately 47% of our total loan/lease portfolio, as of December 31, 2010. Of this amount, $144.0 million, or approximately 26%, is owner-occupied. The market value of real estate securing our commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located and in the past several years our market areas have experienced a general weakening in real estate valuations. Continued adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
The problems that have occurred in the residential real estate and mortgage markets throughout much of the United States have begun to spread to the commercial real estate market. In our market areas, we have generally experienced a downturn in credit performance by our commercial real estate loan customers, and in light of the uncertainty that exists in the economy and credit markets, there can be no guarantee that we will not experience further deterioration in the performance of commercial real estate and other real estate loans in the future. In such case, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results, financial condition and/or capital.
Our allowance for loan/lease losses may prove to be insufficient to absorb potential losses in our loan/lease portfolio.
We established our allowance for loan/lease losses in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2010, our allowance for loan/lease losses as a percentage of total gross loans/leases was 1.74% and as a percentage of total nonperforming loans/leases was approximately 49%. Because of the concentration of commercial and industrial and commercial real estate loans in our loan portfolio, which tend to be larger in amount than residential real estate loans, the movement of a small number of loans to nonperforming status can have a significant impact on this ratio. Although management believes that the allowance for loan/lease losses as of December 31, 2010 was adequate to absorb losses on any existing loans/leases that may become uncollectible, in light of the current economic environment, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance for loan/lease losses will prove sufficient to cover actual loan/lease losses in the future, particularly if economic conditions worsen beyond what management currently expects. Additional provisions to the allowance for loan/lease losses and loan/lease losses in excess of our allowance for loan/lease losses may adversely affect our business, financial condition and results of operations.

 

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Failure to pay interest on our debt or dividends on our preferred stock may adversely impact our ability to pay common stock dividends.
As of December 31, 2010, we had $36.1 million of junior subordinated debentures held by four business trusts that we control. Interest payments on the debentures, which totaled $1.9 million for 2010, must be paid before we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. As of December 31, 2010, the Company had 25,000 shares of non-cumulative perpetual preferred stock issued and outstanding. Although these non-cumulative preferred shares will accrue no dividends, dividends will be payable on the preferred shares if declared, but no dividends may be declared on the Company’s common stock unless and until dividends have been declared on the outstanding shares. Deferral, of either interest payments on the debentures or preferred dividends on the preferred shares, could cause a subsequent decline in the market price of our common stock because the Company would not be able to pay dividends on its common stock.
In addition, on February 13, 2009, we issued shares of cumulative perpetual senior preferred stock to Treasury as part of the Capital Purchase Program. The terms of the senior preferred stock restrict the payment of dividends on shares of our common stock. Without the prior consent of Treasury, we are prohibited from increasing common stock dividends for the first three years while Treasury holds the senior preferred stock. Further, we are prohibited from continuing to pay dividends on our common stock unless we have fully paid all required dividends on the senior preferred stock. Although we expect to be able to pay all required dividends on the senior preferred stock (and to continue to pay dividends on common stock at current levels), there is no guarantee that we will be able to do so.
Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.
The market value of investments in our securities portfolio has become increasingly volatile over the past year, and as of December 31, 2010, we had gross unrealized losses of $2.8 million in our investment portfolio (more than offset by gross unrealized gains of $3.9 million). The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we formally evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if our investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on our results of operations in the periods in which the write-offs occur.
Legislative and regulatory reforms applicable to the financial services industry may, if enacted or adopted, have a significant impact on our business, financial condition and results of operations.
On July 21, 2010, the Dodd-Frank Act was signed into law, which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act, together with the regulations to be developed thereunder, includes provisions affecting large and small financial institutions alike, including several provisions that will affect how community banks, thrifts and small bank and thrift holding companies will be regulated in the future.
The Dodd-Frank Act, among other things, imposes new capital requirements on bank holding companies; changes the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base, and permanently raises the current standard deposit insurance limit to $250,000; and expands the FDIC’s authority to raise insurance premiums. The legislation also calls for the FDIC to raise the ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions with assets of less than $10 billion. The Dodd-Frank Act also authorizes the Federal Reserve to limit interchange fees payable on debit card transactions, establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will have broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards, and contains provisions on mortgage-related matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. The Dodd-Frank Act also includes provisions that affect corporate governance and executive compensation at all publicly-traded companies.

 

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The Collins Amendment to the Dodd-Frank Act, among other things, eliminates certain trust preferred securities from Tier 1 capital, but certain trust preferred securities issued prior to May 19, 2010 by bank holding companies with total consolidated assets of $15 billion or less will continue to be includible in Tier 1 capital. This provision also requires the federal banking agencies to establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies. Regulations implementing the Collins Amendment must be issued within 18 months of July 21, 2010.
These provisions, or any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations. Our management is actively reviewing the provisions of the Dodd-Frank Act, many of which are to be phased-in over the next several months and years, and assessing its probable impact on our operations. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and us in particular, is uncertain at this time.
The U.S. Congress has also recently adopted additional consumer protection laws such as the Credit Card Accountability Responsibility and Disclosure Act of 2010, and the Federal Reserve has adopted numerous new regulations addressing banks’ credit card, overdraft and mortgage lending practices. Additional consumer protection legislation and regulatory activity is anticipated in the near future.
Such proposals and legislation, if finally adopted, would change banking laws and our operating environment and that of our subsidiaries in substantial and unpredictable ways. We cannot determine whether such proposals and legislation will be adopted, or the ultimate effect that such proposals and legislation, if enacted, or regulations issued to implement the same, would have upon our business, financial condition or results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
Changes in future rules applicable to participants in the Capital Purchase Program could adversely affect our business, results of operations and financial condition.
On February 13, 2009, we issued shares of perpetual senior preferred stock to Treasury as part of the Capital Purchase Program. The rules and policies applicable to recipients of capital under the Capital Purchase Program continue to evolve and their scope, timing and effect cannot be predicted. Any changes in these rules and policies could adversely affect our business, results of operations and financial condition.
Any redemption of the securities sold to the U.S. Treasury to avoid these restrictions would require prior Federal Reserve and Treasury approval. Based on guidelines issued by the Federal Reserve, institutions seeking to redeem Capital Purchase Program preferred stock must demonstrate an ability to access the long-term debt markets, successfully demonstrate access to public equity markets and meet a number of additional requirements and considerations before such institutions can redeem any securities sold to the Treasury.

 

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We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.
The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

 

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Item 1B.  
Unresolved Staff Comments
There are no unresolved staff comments.
 
Item 2.  
Properties
The following table is a listing of the Company’s operating facilities for its subsidiary banks:
               
    Facility        
    Square     Facility Owned or  
Facility Address   Footage     Leased  
 
             
Quad City Bank & Trust
             
 
             
2118 Middle Road in Bettendorf, IA
    6,700     Owned  
4500 Brady Street in Davenport, IA
    36,000     Owned  
3551 7th Street in Moline, IL
    30,000     Owned *
5405 Utica Ridge Road in Davenport, IA **
    7,400     Leased  
1700 Division Street in Davenport, IA
    12,000     Owned  
 
             
Cedar Rapids Bank & Trust
             
 
             
500 1st Avenue NE, Suite 100 in Cedar Rapids, IA
    36,000     Owned  
5400 Council Street in Cedar Rapids, IA
    5,900     Owned  
 
             
Rockford Bank & Trust
             
 
             
127 North Wyman Street in Rockford, IL
    7,800     Leased  
4571 Guilford Road in Rockford, IL
    20,000     Owned  
     
*  
The building is owned by Velie Plantation Holding Company, in which the Company has a 91% interest.
 
**  
Effective April 1, 2010, Quad City Bank & Trust moved its branch operations from 5515 Utica Ridge Road in Davenport, Iowa to 5405 Utica Ridge Road in Davenport, Iowa. The previous facility was also leased and had 6,000 square feet available.
The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company.
No individual real estate property or mortgage amounts to 10% or more of consolidated assets.
 
Item 3.  
Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
 
Item 4.  
[Removed and Reserved]

 

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Part II
Item 5.  
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. The common stock, par value $1.00 per share, of the Company is listed on The NASDAQ Global Market under the symbol “QCRH”. The stock began trading on NASDAQ on October 6, 1993. The Company transferred its listing from the NASDAQ Capital Market to the NASDAQ Global Market on March 1, 2010. As of December 31, 2010, there were 4,611,182 shares of common stock outstanding held by approximately 2,600 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by NASDAQ for the periods indicated.
                                                 
    2010 Sales Price     2009 Sales Price     2008 Sales Price  
    High     Low     High     Low     High     Low  
 
 
First quarter
  $ 10.000     $ 7.650     $ 11.930     $ 7.120     $ 17.020     $ 14.150  
Second quarter
    14.400       8.730       11.000       7.760       16.200       12.130  
Third quarter
    10.970       8.930       10.980       9.470       16.200       9.700  
Fourth quarter
    9.520       6.745       10.490       7.060       14.240       9.440  
Dividends on Common Stock. On May 12, 2010, the Company declared a cash dividend of $0.04 per share, or $183 thousand, which was paid on July 6, 2010, to stockholders of record as of June 21, 2010. On November 4, 2010, the Company declared a cash dividend of $0.04 per share, or $183 thousand, which was paid on January 7, 2011, to stockholders of record as of December 22, 2010. In the future, it is the Company’s intention to continue to consider the payment of dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital for continued growth, but believes that operating results have reached a level that can sustain dividends to stockholders as well.
The Company is heavily dependent on dividend payments from its subsidiary banks to make dividend payments on the Company’s preferred and common stock. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Iowa and Illinois law provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits.
The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.
The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debentures in four private placements. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. During the second quarter of 2010, the Company issued shares of non-cumulative convertible perpetual preferred stock. See Financial Statement Note 12 for additional detail on this issuance of preferred stock. Also, under the terms of this preferred stock, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances existed through the date of filing of this Form 10-K filed with the U.S. Securities and Exchange Commission.

 

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In addition, as a result of the Company’s issuance of the preferred stock to the U.S. Treasury on February 13, 2009 under the Capital Purchase Program, the ability of the Company to declare or pay dividends on its common stock is subject to restrictions, including the restriction on increasing dividends from the last semi-annual cash dividend declared prior to October 14, 2008, which was $0.04 per share. This restriction will terminate on the earlier of (a) the third anniversary of the date of issuance of the preferred stock and (b) the date on which the preferred stock has been redeemed in whole or the U.S. Treasury has transferred all of the preferred stock to one or more third parties. Further, the ability of the Company to declare or pay dividends on its common stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends on the preferred stock issued to the U.S. Treasury.
Purchase of Equity Securities by the Company. There were no purchases of common stock by the Company for the years ended December 31, 2010 and 2009. On December 31, 2008, the Company repurchased 121,246 shares of its common stock. The common stock was repurchased at $13.25 per share for a total cost of $1,606,510.
Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2005 and ending December 31, 2010, a comparison of cumulative total returns for the Company, the NASDAQ Composite Index and the SNL Bank NASDAQ Index prepared by SNL Securities, Charlottesville, Virginia. The graph was prepared at the Company’s request by SNL Securities. The information assumes that $100 was invested at the closing price in December 31, 2005 in the common stock of the Company and each index, and that all dividends were reinvested.
QCR Holdings, Inc.
(PERFORMANCE GRAPH)
                                                 
    Period Ending  
Index   12/31/05     12/31/06     12/31/07     12/31/08     12/31/09     12/31/10  
QCR Holdings, Inc.
  $ 100.00     $ 90.05     $ 73.04     $ 51.59     $ 43.46     $ 37.48  
NASDAQ Composite
    100.00       110.39       122.15       73.32       106.57       125.91  
SNL Bank NASDAQ
    100.00       112.27       88.14       64.01       51.93       61.27  

 

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Item 6.  
Selected Financial Data
The following “Selected Financial Data” of the Company is derived in part from, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto. See Item 8 “Financial Statements.” Results for past periods are not necessarily indicative of results to be expected for any future period.
                                         
    Years Ended December 31,  
    2010     2009     2008     2007     2006  
 
 
STATEMENT OF INCOME DATA
                                       
 
                                       
Continuing Operations:
                                       
Interest income
  $ 80,097     $ 85,611     $ 85,147     $ 82,491     $ 68,803  
Interest expense
    30,233       34,949       40,524       48,139       38,907  
 
                             
Net interest income
    49,864       50,662       44,623       34,352       29,896  
Provision for loan/lease losses
    7,464       16,976       9,222       2,336       3,284  
Non-interest income
    15,406       15,547       13,931       13,499       10,998  
Non-interest expense
    48,549       46,937       42,334       35,734       34,063  
Income tax expense
    2,449       247       1,735       2,893       724  
 
                             
Income from continuing operations
    6,808       2,049       5,263       6,888       2,823  
 
                                       
Discontinued Operations:
                                       
Income (loss) from discontinued operations, before taxes
                2,580       (1,221 )     378  
Income tax expense (benefit)
                846       (498 )     133  
 
                             
Income (loss) from discontinued operations
                1,734       (723 )     245  
 
                                       
Net income
    6,808       2,049       6,997       6,165       3,068  
Less: net income attributable to noncontrolling interests
    221       277       288       388       266  
 
                             
Net income attributable to QCR Holdings, Inc.
    6,587       1,772       6,709       5,777       2,802  
Less: preferred stock dividends and discount accretion
    4,128       3,844       1,785       1,072       164  
 
                             
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
    2,459       (2,072 )     4,924       4,705       2,638  
 
                             
 
                                       
PER COMMON SHARE DATA
                                       
 
                                       
Income (loss) from continuing operations — BASIC (1)
  $ 0.54     $ (0.46 )   $ 0.69     $ 1.19     $ 0.52  
Income (loss) from discontinued operations — BASIC (1)
                0.38       (0.16 )     0.05  
Net income (loss) — BASIC (1)
    0.54       (0.46 )     1.07       1.03       0.57  
Income (loss) from continuing operations — DILUTED (1)
    0.53       (0.46 )     0.69       1.18       0.52  
Income (loss) from discontinued operations — DILUTED (1)
                0.37       (0.16 )     0.05  
Net income (loss) — DILUTED (1)
    0.53       (0.46 )     1.06       1.02       0.57  
Cash dividends declared
    0.08       0.08       0.08       0.08       0.08  
Dividend payout ratio
    14.81 %     (17.39) %     7.48 %     7.77 %     14.04 %
 
                                       
BALANCE SHEET DATA
                                       
 
                                       
Total assets
  $ 1,836,635     $ 1,779,646     $ 1,605,629     $ 1,476,564     $ 1,271,675  
Securities
    424,847       370,520       256,076       220,557       194,774  
Total loans/leases
    1,172,539       1,244,320       1,214,690       1,056,988       960,747  
Allowance for estimated losses on loans/leases
    20,365       22,505       17,809       11,315       10,612  
Deposits
    1,114,816       1,089,323       1,058,959       884,005       875,447  
Borrowings
    566,060       542,895       431,820       435,786       303,390  
Stockholders’ equity:
                                       
Preferred
    62,214       58,578       20,158       20,158       12,884  
Common
    70,357       67,017       72,337       67,629       59,361  
 
                                       
KEY RATIOS
                                       
 
                                       
Return on average assets (2)
    0.36 %     0.10 %     0.43 %     0.43 %     0.24 %
Return on average common stockholders’ equity (3)
    3.58       (2.97 )     7.07       7.40       4.65  
Return on average total stockholder’s equity (2)
    5.03       1.43       7.47       7.55       4.77  
Net interest margin, tax equivalent yield (4)
    2.92       3.14       3.27       2.86       2.87  
Efficiency ratio (5)
    74.38       70.89       72.30       74.68       83.30  
Loans to deposits
    105.18       114.23       114.71       119.57       109.74  
Nonperforming assets to total assets
    2.73       2.27       1.58       0.51       0.58  
Allowance for estimated losses on loans/leases to total loans/leases
    1.74       1.81       1.47       1.07       1.10  
Net charge-offs to average loans/leases
    0.79       1.00       0.24       0.16       0.18  
Average total stockholders’ equity to average total assets
    7.13       7.18       5.78       5.66       5.09  
     
(1)  
Income (loss) amounts are attributable to QCR Holdings, Inc.
 
(2)  
Numerator is net income attributable to QCR Holdings, Inc.
 
(3)  
Numerator is net income (loss) available to QCR Holdings, Inc. common stockholders
 
(4)  
Interest earned and yields on nontaxable investments ar determined on a tax equivalent basis using a 34% tax rate
 
(5)  
Non-interest expenses divided by the sum of net interest income before provision for loan/lease losses and non-interest income

 

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Item 7.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides additional information regarding our operations for the twelve-month periods ending December 31, 2010, 2009, and 2008, and our financial condition at December 31, 2010 and 2009. This discussion should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.
OVERVIEW
The Company was formed in February 1993 for the purpose of organizing Quad City Bank & Trust. Over the past eighteen years, the Company has grown to include two additional banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2010, the Company had $1.84 billion in consolidated assets, including $1.17 billion in total loans/leases and $1.11 billion in deposits.
The Company recognized net income of $6.8 million for the year ended December 31, 2010, and net income attributable to QCR Holdings, Inc. of $6.6 million which excludes the net income attributable to noncontrolling interests of $221 thousand. After preferred stock dividends and discount accretion of $4.1 million, the Company reported net income available to common stockholders of $2.5 million, or diluted earnings per share of $0.53. For the same period in 2009, the Company recognized net income of $2.0 million, and net income attributable to QCR Holdings, Inc. of $1.8 million which excludes the net income attributable to noncontrolling interests of $277 thousand. After preferred stock dividends and discount accretion of $3.8 million, the Company reported a net loss available to common stockholders of $2.1 million, or diluted loss per share of $0.46. By comparison, for 2008, the Company recognized net income of $7.0 million, and net income attributable to QCR Holdings, Inc. of $6.7 million which excludes the net income attributable to noncontrolling interests of $288 thousand. After preferred stock dividends of $1.7 million, the Company reported net income available to common stockholders of $4.9 million, or diluted earnings per share of $1.06. As previously reported, the Company sold its merchant credit card acquiring business and its Milwaukee, Wisconsin bank subsidiary in 2008. As a result, the Company recognized income from discontinued operations totaling $1.7 million for the year ended December 31, 2008.
Following is a table that represents the various net income (loss) measurements for the years ended December 31, 2010, 2009, and 2008.
                         
    Year Ended December 31,  
    2010     2009     2008  
 
 
Net income
  $ 6,807,726     $ 2,048,831     $ 6,997,294  
Less: Net income attributable to noncontrolling interests
    221,047       276,923       288,436  
 
                 
Net income attributable to QCR Holdings, Inc.
  $ 6,586,679     $ 1,771,908     $ 6,708,858  
 
                 
 
                       
Amounts attributable to QCR Holdings, Inc.:
                       
Income from continuing operations
  $ 6,586,679     $ 1,771,908     $ 4,974,627  
Income from discontinued operations
                1,734,231  
 
                 
Net income
  $ 6,586,679     $ 1,771,908     $ 6,708,858  
 
                       
Less: Preferred stock dividends and discount accretion
    4,128,104       3,843,924       1,784,500  
 
                 
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
  $ 2,458,575     $ (2,072,016 )   $ 4,924,358  
 
                 
 
                       
Diluted earnings (loss) per common share:
                       
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
  $ 0.53     $ (0.46 )   $ 0.69  
Income from discontinued operations attributable to QCR Holdings, Inc.
                0.37  
 
                 
Net income (loss) attributable to QCR Holdings, Inc.
  $ 0.53     $ (0.46 )   $ 1.06  
 
                 

 

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For 2010, income from continuing operations attributable to QCR Holdings, Inc. was $6.6 million, or diluted earnings per share of $0.53, compared to income from continuing operations of $1.8 million, or diluted loss per share of $0.46, for 2009. Net interest income declined slightly year-over-year. Excluding a one-time positive adjustment to interest income related to the resolution of a contingency related to a certain credit for $1.3 million in 2009, net interest income increased $475 thousand, or 1%, year-over-year. Similarly, noninterest income declined slightly year-over-year; however, excluding one-time gains on sales of securities of $1.5 million in 2009, noninterest income grew $1.3 million, or 10%, year-over-year. Noninterest expense increased $1.6 million, or 3%, as a result of increased health insurance costs across the employee base and $617 thousand of losses on lease residual values. More than offsetting these items, the Company’s provision for loan/lease losses decreased $9.5 million.
For 2009, income from continuing operations attributable to QCR Holdings, Inc. was $1.8 million, or diluted loss per share of $0.46, compared to $5.0 million, or diluted earnings per share of $0.69, for 2008. The Company experienced an increase in net interest income year-over-year of $6.2 million, or 14%. Additionally, the Company sold securities during the year which realized gains totaling $1.5 million. More than offsetting these items, the Company’s provision for loan/lease losses increased $7.8 million, or 84%, from $9.2 million for the year ended December 31, 2008 to $17.0 million for the year ended December 31, 2009. Significant increases in FDIC insurance expense and loan/lease expense related to nonperforming assets were the primary contributors to an increase in noninterest expense of $4.4 million, or 10%.
As noted above, the Company’s net interest income declined slightly in 2010 compared to 2009. Specifically, on a tax equivalent basis, net interest income totaled $50.3 million for 2010 compared to $51.1 million for 2009. Excluding the one-time positive adjustment to interest income in 2009, declines in interest income were effectively offset by declines in interest expense. For 2010, average earning assets increased by $94.9 million, or 6%, and average interest-bearing liabilities increased by $46.9 million, or 3%, when compared with average balances for 2009. A comparison of yields, spreads and margins from 2010 to 2009 shows the following (on a tax equivalent basis):
   
The average yield on interest-earning assets decreased 61 basis points from 5.29% to 4.68%.
   
The average cost of interest-bearing liabilities decreased 41 basis points from 2.49% to 2.08%.
   
The net interest spread declined 20 basis points from 2.80% to 2.60%.
   
The net interest margin declined 22 basis points from 3.14% to 2.92%.
The Company’s net interest income grew significantly in 2009 compared to 2008. Specifically, on a tax equivalent basis, net interest income grew $6.0 million, or 13%, from $45.1 million to $51.1 million. Of this increase, as mentioned above, $1.3 million was attributable to the recognition of interest income for cash interest payments previously received on a commercial loan which had been deferred pending the resolution of a contingency which was resolved in the third quarter of 2009. For 2009, average earning assets increased by $247.8 million, or 18%, and average interest-bearing liabilities increased by $159.0 million, or 13%, when compared with average balances for 2008. A comparison of yields, spreads and margins from 2009 to 2008 shows the following (on a tax equivalent basis):
   
The average yield on interest-earning assets decreased 92 basis points from 6.21% to 5.29%.
   
The average cost of interest-bearing liabilities decreased 76 basis points from 3.25% to 2.49%.
   
The net interest spread declined 16 basis points from 2.96% to 2.80%.
   
The net interest margin declined 13 basis points from 3.27% to 3.14%.
The Company’s management closely monitors and manages net interest margin. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and majority-owned leasing company is the improvement of their net interest margins. Management continually addresses this issue with pricing and other balance sheet management strategies including, but not limited to, the use of alternative funding sources.

 

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The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories, as well as the components of change in net interest income, are presented in the following tables:
                                                                         
    Years Ended December 31,  
    2010     2009     2008  
            Interest     Average             Interest     Average             Interest     Average  
    Average     Earned     Yield or     Average     Earned     Yield or     Average     Earned     Yield or  
    Balance     or Paid     Cost     Balance     or Paid     Cost     Balance     or Paid     Cost  
    (dollars in thousands)  
 
 
ASSETS
                                                                       
Interest earnings assets:
                                                                       
Federal funds sold
  $ 63,430     $ 174       0.27 %   $ 45,850     $ 134       0.29 %   $ 5,631     $ 100       1.78 %
Interest-bearing deposits at financial institutions
    31,002       411       1.33       31,090       313       1.01       5,313       165       3.11  
Investment securities (1)
    400,224       11,457       2.86       312,043       12,180       3.90       230,342       12,279       5.33  
Restricted investment securities
    16,750       497       2.97       14,595       303       2.08       12,709       495       3.89  
Gross loans/leases receivable (2) (3) (4)
    1,209,587       67,999       5.62       1,222,493       73,145       5.98       1,124,255       72,566       6.45  
 
                                                           
 
                                                                       
Total interest earning assets
  $ 1,720,993       80,538       4.68     $ 1,626,071       86,075       5.29     $ 1,378,250       85,605       6.21  
 
                                                                       
Noninterest-earning assets:
                                                                       
Cash and due from banks
  $ 34,559                     $ 30,521                     $ 32,651                  
Premises and equipment, net
    31,557                       30,868                       31,535                  
Less allowance for estimated losses on loans/leases
    (21,678 )                     (21,831 )                     (13,770 )                
Other
    73,887                       59,018                       124,082                  
 
                                                                 
 
                                                                       
Total assets
  $ 1,839,318                     $ 1,724,647                     $ 1,552,748                  
 
                                                                 
 
                                                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                                       
Interest-bearing liabilities:
                                                                       
Interest-bearing demand deposits
  $ 388,207       3,674       0.95 %   $ 366,687       3,834       1.05 %   $ 299,417       5,709       1.91 %
Savings deposits
    37,495       97       0.26       48,596       323       0.66       57,955       806       1.39  
Time deposits
    465,160       8,911       1.92       511,359       14,217       2.78       443,122       17,379       3.92  
Short-term borrowings
    142,197       628       0.44       113,614       712       0.63       154,456       2,962       1.92  
Federal Home Loan Bank advances
    233,384       9,247       3.96       212,494       9,082       4.27       193,119       8,525       4.41  
Junior subordinated debentures
    36,085       1,945       5.39       36,085       2,016       5.59       36,085       2,389       6.62  
Other borrowings (4)
    150,430       5,732       3.81       117,271       4,765       4.06       62,975       2,754       4.37  
 
                                                           
 
                                                                       
Total interest-bearing liabilities
  $ 1,452,958       30,234       2.08     $ 1,406,106       34,949       2.49     $ 1,247,129       40,524       3.25  
 
                                                                       
Noninterest-bearing demand deposits
  $ 231,604                     $ 171,968                     $ 135,860                  
Other noninterest-bearing liabilities
    23,690                       22,759                       79,956                  
 
                                                                 
Total liabilities
  $ 1,708,252                     $ 1,600,833                     $ 1,462,945                  
 
                                                                       
Stockholders’ equity
    131,066                       123,814                       89,803                  
 
                                                                 
 
                                                                       
Total liabilities and stockholders’ equity
  $ 1,839,318                     $ 1,724,647                     $ 1,552,748                  
 
                                                                 
 
                                                                       
Net interest income
          $ 50,304                     $ 51,126                     $ 45,081          
 
                                                                 
 
                                                                       
Net interest spread
                    2.60 %                     2.80 %                     2.96 %
 
                                                                 
 
                                                                       
Net interest margin
                    2.92 %                     3.14 %                     3.27 %
 
                                                                 
 
                                                                       
Ratio of average interest earning assets to average interest- bearing liabilities
    118.45 %                     115.64 %                     110.51 %                
 
                                                                 
     
(1)  
Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented.
 
(2)  
Loan/lease fees are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
 
(3)  
Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
 
(4)  
In accordance with ASC 860, effective January 1, 2010, the Company accounts for some participations sold, including sales of government-guaranteed portions of loans during the recourse period, as secured borrowings. As such, these amounts are included in the average balance for gross loans/leases receivable and other borrowings. For the twelve months ended December 31, 2010, this totalled $9.6 million.

 

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For the years ended December 31, 2010, 2009 and 2008
                         
    Inc./(Dec.)     Components  
    from     of Change (1)  
    Prior Year     Rate     Volume  
    2010 vs. 2009  
    (dollars in thousands)  
INTEREST INCOME
                       
Federal funds sold
  $ 40     $ (8 )   $ 48  
Interest-bearing deposits at other financial institutions
    98       99       (1 )
Investment securities (2)
    (723 )     (3,693 )     2,970  
Restricted investment securities
    194       144       50  
Gross loans/leases receivable (3) (4) (5)
    (5,146 )     (4,381 )     (765 )
 
                 
 
                       
Total change in interest income
  $ (5,537 )   $ (7,839 )   $ 2,302  
 
                 
 
                       
INTEREST EXPENSE
                       
Interest-bearing demand deposits
  $ (160 )   $ (377 )   $ 217  
Savings deposits
    (226 )     (164 )     (62 )
Time deposits
    (5,306 )     (4,112 )     (1,194 )
Short-term borrowings
    (84 )     (239 )     155  
Federal Home Loan Bank advances
    165       (691 )     856  
Junior subordinated debentures
    (71 )     (71 )      
Other borrowings (5)
    967       (311 )     1,278  
 
                 
 
                       
Total change in interest expense
  $ (4,715 )   $ (5,965 )   $ 1,250  
 
                 
 
                       
Total change in net interest income
  $ (822 )   $ (1,874 )   $ 1,052  
 
                 
                         
    Inc./(Dec.)     Components  
    from     of Change (1)  
    Prior Year     Rate     Volume  
    2009 vs. 2008  
    (dollars in thousands)  
INTEREST INCOME
                       
Federal funds sold
  $ 34     $ (147 )   $ 181  
Interest-bearing deposits at other financial institutions
    148       (178 )     326  
Investment securities (2)
    (99 )     (3,790 )     3,691  
Restricted investment securities
    (192 )     (257 )     65  
Gross loans/leases receivable (3) (4)
    579       (5,510 )     6,089  
 
                 
 
                       
Total change in interest income
  $ 470     $ (9,882 )   $ 10,352  
 
                 
 
                       
INTEREST EXPENSE
                       
Interest-bearing demand deposits
  $ (1,875 )   $ (2,965 )   $ 1,090  
Savings deposits
    (483 )     (369 )     (114 )
Time deposits
    (3,162 )     (5,568 )     2,406  
Short-term borrowings
    (2,250 )     (1,616 )     (634 )
Federal Home Loan Bank advances
    557       (277 )     834  
Junior subordinated debentures
    (373 )     (373 )      
Other borrowings
    2,011       (208 )     2,219  
 
                 
 
                       
Total change in interest expense
  $ (5,575 )   $ (11,376 )   $ 5,801  
 
                 
 
                       
Total change in net interest income
  $ 6,045     $ 1,494     $ 4,551  
 
                 
     
(1)  
The column “Inc/(Dec) from Prior Year” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.
 
(2)  
Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented.
 
(3)  
Loan/lease fees are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
 
(4)  
Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
 
(5)  
In accordance with ASC 860, effective January 1, 2010, the Company accounts for some participations sold, including sales of government-guaranteed portions of loans during the recourse period, as secured borrowings. As such, these amounts are included in the average balance for gross loans/leases receivable and other borrowings. For the twelve months ended December 31, 2010, this totalled $9.6 million.

 

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The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, gains from the sales of residential real estate loans and government guaranteed loans, earnings on bank-owned life insurance, and other income. More than offsetting these items, the Company incurs noninterest expenses which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense, and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.
CRITICAL ACCOUNTING POLICIES
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan/lease losses (also referred to as “allowance for estimated losses on loans/leases”). The Company’s allowance for loan/lease losses methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan/lease loss that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest, and in particular, the economic health of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan/lease portfolio, it enhances its methodology accordingly. Management may report a materially different amount for the provision for loan/lease losses in the statement of operations to change the allowance for loan/lease losses if its assessment of the above factors were different. The discussion regarding the Company’s allowance for loan/lease losses should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this Form 10-K, as well as the portion of this Management’s Discussion and Analysis section entitled “Financial Condition — Allowance for Estimated Losses on Loans/Leases.” Although management believes the level of the allowance as of December 31, 2010 was adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
The Company’s assessment of other-than-temporary impairment of its available-for-sale securities portfolio is another critical accounting policy as a result of the level of judgment required by management. Available-for-sale securities are evaluated to determine whether declines in fair value below their cost are other-than-temporary. In estimating other-than-temporary impairment losses management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the Company to not sell the security prior to recovery and whether it is not more-likely-than-not that the Company will be required to sell the security prior to recovery. The discussion regarding the Company’s assessment of other-than-temporary impairment should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this Form 10-K.

 

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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, and 2008
Overview. Net income attributable to QCR Holdings, Inc. for 2010 was $6.6 million, or diluted earnings per share of $0.53 after preferred stock dividends and discount accretion of $4.1 million, compared to $1.8 million, or diluted loss per share of $0.46 after preferred stock dividends of $3.8 million, for 2009. Net interest income declined slightly year-over-year. Excluding a one-time positive adjustment to interest income related to the resolution of a contingency related to a certain credit for $1.3 million in 2009, net interest income increased $475 thousand, or 1%, year-over-year. Similarly, noninterest income declined slightly year-over-year; however, excluding one-time gains on sales of securities of $1.5 million, noninterest income grew $1.3 million, or 10%, year-over-year. Noninterest expense increased $1.6 million, or 3%, as a result of increased health insurance cost across the employee base and $617 thousand of losses on lease residual values. More than offsetting these items, the Company’s provision for loan/lease losses decreased $9.5 million.
Net income attributable to QCR Holdings, Inc. for 2009 was $1.8 million, or diluted loss per share of $0.46 after preferred stock dividends and discount accretion of $3.8 million, compared to $6.7 million, or diluted earnings per share of $1.06 after preferred stock dividends of $1.8 million, for 2008. During 2008, the Company sold its merchant credit card acquiring business and Milwaukee banking subsidiary resulting in income from discontinued operations, net of taxes, of $1.7 million, or $0.37 per share (on a diluted basis). The Company improved its net interest income by $6.2 million, or 14%, from $44.2 million for 2008 to $50.4 million for 2009. More than offsetting this increase, the Company’s provision for loan/lease losses for 2009 increased $7.8 million, or 84%, from 2008. Additionally, FDIC and other insurance expense increased $2.3 million, or 175%, during 2009. Loan/lease expenses related to carrying higher levels of nonperforming assets increased $1.2 million, or 164%, on a year-over-year basis.
Interest income. Interest income decreased $5.5 million, or 6%, from $85.6 million for 2009 to $80.1 million for 2010. The Company grew its interest-earning assets as the average balance increased $94.9 million, or 6%, year-over-year. Most notably, the average balance of gross loans/leases declined slightly, while the average balance of investment securities portfolio grew $88.2 million, or 28%. This continued shift in interest-earning asset mix is the result of the Company’s strong liquidity position and sources of funding coupled with weak loan/lease demand. The impact of the net growth overall on interest income was more than offset by the shift in interest-earning asset mix and the historically low interest rate environment.
Interest income increased $464 thousand, or 1%, from $85.1 million for 2008 to $85.6 million for 2009. Excluding the impact of the $1.3 million positive one-time adjustment to interest income in the third quarter of 2009, interest income decreased $809 thousand, or 1%. As a result of the economic recession and a historically low interest rate environment in 2009, the decline in the rates earned on interest-earning assets outpaced the increase in interest income from the growth realized across all interest-earning asset types.
Interest expense. Interest expense decreased $4.7 million, or 13%, from $34.9 million for 2009 to $30.2 million for 2010. The Company was successful in leveraging the historically low interest environment and its strong core deposit portfolio as it continued to manage down its cost of deposits. Including non-interest bearing deposits, the average cost of deposits declined 54 basis points from 1.67% for 2009 down to 1.13% for 2010. The Company has placed an emphasis on shifting the mix of deposits from brokered and other time deposits to non-maturity demand deposits.
Interest expense decreased $5.6 million, or 14%, from $40.5 million for 2008 to $34.9 million for 2009. With the economic recession and historically low levels of interest rates for 2009, the Company’s ability to manage the cost of interest-bearing liabilities more than offset the impact of increased volume on interest expense. Specifically, the average cost on interest bearing liabilities decreased 76 basis points from 3.25% for 2008 down to 2.49% for 2009.

 

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Provision for loan/lease losses. The provision for loan/lease losses is established based on a number of factors, including the Company’s historical loss experience, delinquencies and charge-off trends, the local and national economy and the risk associated with the loans/leases in the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company had an allowance for estimated losses on loans/leases of 1.74% of total gross loans/leases at December 31, 2010, compared to 1.81% of total gross loans/leases at December 31, 2009, and compared to approximately 1.47% of total gross loans/leases at December 31, 2008.
The Company’s provision for loan/lease losses declined sharply from $17.0 million for 2009 to $7.5 million for 2010. The decline was the result of the following:
   
The Company experienced strengthening in its core loan portfolio as the level of classified and criticized loans declined throughout the year (see table and further discussion in the Allowance for Estimated Losses on Loans/Leases section). This trend contributed to a reduction in nonperforming loans/leases in the fourth quarter of 2010.
   
Despite the decline in the fourth quarter, nonperforming loans/leases experienced a net increase during 2010. The majority of the additions consisted of commercial credits which management thoroughly reviewed and identified a strong collateral position that didn’t require significant additional specific reserves, or the Company had already reserved adequate amounts in the prior years while the loan/lease was still performing.
   
The Company’s loan/lease portfolio declined $71.8 million, or 6%, in 2010.
The Company’s provision for loan/lease losses increased significantly from $9.2 million for 2008 to $17.0 million for 2009. This increase was the result of the following:
   
The Company’s nonperforming loans/leases grew $8.9 million, or 43%, from $21.1 million at December 31, 2008 to $30.0 million at December 31, 2009. Management determined that the majority of these nonperforming loans/leases required specific reserves.
   
Due to the economic recession and related uncertainty as to the severity and duration of its impact on the national and local economies at that time, the Company continued to increase the qualitative factors impacting the allowance for estimate losses on loans/leases.
   
The Company grew its loan/lease portfolio 2% during 2009 as gross loans/leases increased $29.6 million.

 

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Noninterest income. The following tables set forth the various categories of noninterest income for the years ended December 31, 2010, 2009 and 2008.
                                 
    Years Ended              
    December 31,     December 31,              
    2010     2009     $ Change     % Change  
 
                               
Trust department fees
  $ 3,290,844     $ 2,883,482     $ 407,362       14.1 %
Investment advisory and management fees, gross
    1,812,903       1,507,557       305,346       20.3  
Deposit service fees
    3,478,743       3,319,967       158,776       4.8  
Gains on sales of loans, net
    3,169,514       1,677,312       1,492,202       89.0  
Securities gains, net
          1,488,391       (1,488,391 )     (100.0 )
Gains (losses) on sales of other real estate owned
    (835,163 )     177,736       (1,012,899 )     (569.9 )
Earnings on bank-owned life insurance
    1,331,085       1,243,324       87,761       7.1  
Credit card fees, net of processing costs
    259,590       930,435       (670,845 )     (72.1 )
Other
    2,898,372       2,318,843       579,529       25.0  
 
                         
 
  $ 15,405,888     $ 15,547,047     $ (141,159 )     (0.9 )%
 
                         
                                 
    Years Ended              
    December 31,     December 31,              
    2009     2008     $ Change     % Change  
 
                               
Trust department fees
  $ 2,883,482     $ 3,333,812     $ (450,330 )     (13.5 )%
Investment advisory and management fees, gross
    1,507,557       1,975,236       (467,679 )     (23.7 )
Deposit service fees
    3,319,967       3,134,869       185,098       5.9  
Gains on sales of loans, net
    1,677,312       1,068,545       608,767       57.0  
Securities gains, net
    1,488,391       199,500       1,288,891       646.1  
Gains on sales of other real estate owned
    177,736       394,103       (216,367 )     (54.9 )
Earnings on bank-owned life insurance
    1,243,324       1,016,864       226,460       22.3  
Credit card fees, net of processing costs
    930,435       987,769       (57,334 )     (5.8 )
Other
    2,318,843       1,820,373       498,470       27.4  
 
                         
 
  $ 15,547,047     $ 13,931,071     $ 1,615,976       11.6 %
 
                         
Trust department fees continue to be a significant contributor to noninterest income. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. Total trust assets under administration were $1.06 billion at December 31, 2010 compared to $1.22 billion at December 31, 2009 and compared to $815.5 million at December 31, 2008. The decline in total trust assets during 2010 was intentional and consisted of assets held in safekeeping by Quad City Bank & Trust that were outsourced. Management determined outsourcing allowed for enhanced service to the clients and increased profitability for the Company. The majority of the trust department fees are determined based on the value of the investments within the fully managed trusts. As the national economy continued to recover from the recession, market values in many of these investments have experienced some recovery during 2010.
Investment advisory and management fees decreased 23.7% in 2009 over 2008 which was largely offset by a 20.3% increase in 2010 compared to 2009. Similar to trust department fees, these fees are largely determined based on the value of the investments managed. With the early stages of economic recovery, market values of many of these investments have experienced increases during 2010.

 

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Deposit service fees have increased steadily over the past two years. The Company has placed an emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits. With this shift in mix, the Company has increased the number of demand deposit accounts which tend to be lower in interest cost and higher in service fees.
Gains on sales of loans, net, increased significantly in 2009, and even more so in 2010. The gains are recognized on sales of residential mortgages and the government guaranteed portions of small business loans. Regarding the sales of residential mortgages, the Company experienced increased loan origination and sales activity for these loan types in the 2009 and 2010 as a result of reductions in interest rates and the resulting increases in residential mortgage refinancing transactions. The Company sells the majority of the residential mortgages it originates. In 2010, the Company increased its small business lending by taking advantage of programs offered by the Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”). A strong market for selling the government guaranteed portions of these loans existed in 2010. In some cases, it is more beneficial for the Company to sell the government guaranteed portion at a premium. The Company recognized gains on sales of the government guaranteed portions of SBA and USDA loans totaling $1.5 million for 2010.
In 2009, the Company identified several U.S. government-sponsored agency securities with favorable market positions which were sold at pre-tax gains totaling $1.5 million.
The Company recognized net losses on sales of foreclosed assets during 2010. By comparison, the Company recognized net gains on sales of foreclosed assets for the same periods in 2009 and 2008. These amounts tend to fluctuate depending on the individual property or equipment being sold.
The Company has experienced significant declines in credit card issuing fees, net of processing costs, during 2010. The Company converted to a new third-party processor in the first quarter of 2010. The decreases are primarily the result of increased recurring costs of this new third-party processor, one-time costs related to the conversion, and increased legal costs related to new regulation within the credit card industry. The processor provides enhanced service which has increased capacity, efficiencies, and future revenue opportunities as well as decreased the Company’s exposure to fraud. It also has allowed significant reductions in current salaries and benefits expense in the credit card services area. Management will continue to evaluate the profitability of this business segment.

 

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Noninterest expenses. The following tables set forth the various categories of noninterest expenses for the years ended December 31, 2010, 2009 and 2008.
                                 
    Years Ended              
    December 31,     December 31,              
    2010     2009     $ Change     % Change  
 
                               
Salaries and employee benefits
  $ 27,843,127     $ 26,882,185     $ 960,942       3.6 %
Occupancy and equipment expense
    5,472,248       5,372,101       100,147       1.9  
Professional and data processing fees
    4,524,519       4,664,656       (140,137 )     (3.0 )
FDIC and other insurance
    3,528,267       3,626,027       (97,760 )     (2.7 )
Loan/lease expense
    1,657,552       1,997,583       (340,031 )     (17.0 )
Advertising and marketing
    1,053,909       991,243       62,666       6.3  
Postage and telephone
    1,004,176       1,060,690       (56,514 )     (5.3 )
Stationery and supplies
    491,252       528,959       (37,707 )     (7.1 )
Bank service charges
    420,252       306,473       113,779       37.1  
Other-than-temporary impairment losses on securities
    113,800       206,369       (92,569 )     (44.9 )
Losses on lease residual values
    617,000             617,000       100.0  
Other
    1,822,961       1,300,740       522,221       40.1  
 
                         
 
  $ 48,549,063     $ 46,937,026     $ 1,612,037       3.4 %
 
                         
                                 
    Years Ended              
    December 31,     December 31,              
    2009     2008     $ Change     % Change  
 
                               
Salaries and employee benefits
  $ 26,882,185     $ 26,124,160     $ 758,025       2.9 %
Occupancy and equipment expense
    5,372,101       5,091,545       280,556       5.5  
Professional and data processing fees
    4,664,656       4,729,226       (64,570 )     (1.4 )
FDIC and other insurance
    3,626,027       1,316,710       2,309,317       175.4  
Loan/lease expense
    1,997,583       757,315       1,240,268       163.8  
Advertising and marketing
    991,243       1,296,651       (305,408 )     (23.6 )
Postage and telephone
    1,060,690       933,508       127,182       13.6  
Stationery and supplies
    528,959       518,639       10,320       2.0  
Bank service charges
    306,473       403,790       (97,317 )     (24.1 )
Other-than-temporary impairment losses on securities
    206,369             206,369       100.0  
Other
    1,300,740       1,162,145       138,595       11.9  
 
                         
 
  $ 46,937,026     $ 42,333,689     $ 4,603,337       10.9 %
 
                         
Salaries and employee benefits, which is the largest component of non-interest expense, increased 2.9% and 3.6% in 2009 and 2010, respectively. For 2010, the modest increase was largely the result of increases in health insurance-related employee benefits for the majority of the Company’s employees as the Company did not generally increase salaries across the employee base as of January 1, 2010. Additionally, the Company did slightly expand its employee base from 343 FTEs at December 31, 2009 to 350 FTEs at December 31, 2010. The majority of this modest growth occurred in the fourth quarter. For 2009, the slight increase was primarily the result of customary annual salary and benefits increases for the majority of the Company’s employees. The Company’s employee base stabilized in 2009 as FTEs declined slightly.

 

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Professional and data processing fees declined slightly in 2010 and 2009. In 2009, the Company renegotiated its contract with its core data processor and realized recurring cost savings. Partially offsetting, the Company incurred elevated expenses for consulting and legal services related to increased regulatory activity.
FDIC and other insurance expense experienced a significant increase in 2009, followed by a slight decline in 2010. The reasons for the increase in 2009 were twofold and both related to expenses for FDIC insurance. First, the FDIC introduced its new premium pricing system and assessment methodology for deposit insurance coverage for all depository institutions in 2007. The system was further modified in 2009. The result was increased premium cost for the subsidiary banks. Second, the FDIC required a one-time special assessment from all insured depository institutions, including the subsidiary banks, for the second quarter of 2009 which amounted to $794 thousand of additional expense. For 2010, the decline was largely related to the aforementioned one-time special assessment in the second quarter of 2009. For the remainder of 2009 and all of 2010, the FDIC has not required additional one-time special assessments. Management expects FDIC assessments will continue to be higher than historical levels.
Loan/lease expense increased significantly in 2009, and declined 17% during 2010. For 2009, the Company incurred increased carrying costs and workout expenses related to the elevated level of nonperforming assets. In the fourth quarter of 2010, the Company experienced declining levels of nonperforming assets as some of the larger nonperforming assets were sold and additions to nonperforming assets slowed. Despite the decline in 2010, the levels of loan/lease expense continue to be elevated compared to historical levels.
During the Company’s periodic review of the investment portfolio in the third quarter of 2010, management identified a single issue trust preferred security that experienced a decline in fair value determined to be other-than-temporary. As a result, the Company wrote down the value of this security and recognized a loss totaling $114 thousand. The Company does not own any other trust preferred securities. For 2009, the Company’s periodic evaluation identified 11 publicly-traded equity investment securities owned by the Holding Company that experienced declines in fair value determined to be other-than-temporary. As a result, the Company wrote down the value of these securities and recognized losses in the amount of $206 thousand.
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. Specifically, one of the affected leases related to auto-industry equipment. During the first quarter, several like equipment dealers declared bankruptcy which led to disruption in the specific market. As a result, pricing for new like equipment declined sharply. Similarly, for the other affected lease, the underlying equipment was a commercial printer. The commercial printing industry has experienced some challenges and pricing for this particular equipment experienced sharp declines during the first quarter. In both cases, management determined the amount of the loss by comparing the recorded estimated residual value of the affected leases to the estimated value at the end of the lease term, as adjusted for the declined pricing for new like equipment. Management continues to perform periodic and specific reviews of its residual values, and has identified modest residual risk remaining in the lease portfolio.
Income tax expense. The provision for income taxes from continuing operations was $2.4 million for the year ended December 31, 2010 compared to $247 thousand for the year ended December 31, 2009 for an increase of $2.2 million. The increase was the result of significant growth in income from continuing operations before income taxes of $6.9 million in 2010 compared to 2009. Additionally, primarily due to an increase in the proportionate share of taxable income to total income year-over-year, the Company experienced an increase in the effective tax rate from 10.8% for 2009 to 26.5% for 2010.
The provision for income taxes from continuing operations was $247 thousand for the year ended December 31, 2009 compared to $1.7 million for the year ended December 31, 2008 for a decrease of $1.5 million. The decrease was the result of a decrease in income from continuing operations before income taxes of $4.7 million, or 67%, for 2009 when compared to 2008. Additionally, primarily due to a decrease in the proportionate share of taxable income to total income from year to year, the Company experienced a decrease in the effective tax rate from 24.8% for 2008 to 10.8% for 2009.

 

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Discontinued Operations. The Company did not recognize any income or loss from discontinued operations for the years ended December 31, 2010 and 2009.
Income from discontinued operations for the year ended December 31, 2008 totaled $1.7 million. As previously mentioned, the Company sold its merchant credit card acquiring business and First Wisconsin Bank & Trust during 2008. The gains on sales more than offset the operating loss by First Wisconsin Bank & Trust.
FINANCIAL CONDITION
Overview. Total assets grew $57.0 million, or 3%, to $1.84 billion at December 31, 2010, from $1.78 billion at December 31, 2009. The growth resulted primarily from an increase in its securities available for sale portfolio and a net increase in the Company’s federal funds sold position offset by a net decline in loans/leases. This net growth was funded primarily by non-interest bearing deposits and Federal Home Loan Bank advances offset by a decline in brokered and other time deposits.
Total assets of the Company increased by $174.0 million, or 11%, to $1.78 billion at December 31, 2009, from $1.61 billion at December 31, 2008. The growth primarily resulted from an increase in the securities and loans/leases portfolios funded by increases in noninterest-bearing deposits and customer repurchase agreements, wholesale repurchase agreements, and the issuance of preferred stock.
Investment Securities. The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on asset-liability position and maximizing return. The Company’s securities available for sale portfolio consists largely of U.S. government sponsored agency securities. Residential mortgage-backed securities represents less than 1% of the entire portfolio as of December 31, 2010 and 2009, respectively. The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities.
The securities portfolio grew $54.3 million, or 15%, to $424.8 million at December 31, 2010, from $370.5 million at December 31, 2009. The increase was the result of continued weak loan/lease demand and the Company’s continued focus on liquidity.
Securities increased $114.4 million, or 45%, to $370.5 million at December 31, 2009, from $256.1 million at December 31, 2008. The increase was largely the result of increased collateral needs for the customer and wholesale repurchase agreements at the subsidiary banks.
See Note 4 to the consolidated financial statements for additional information regarding the Company’s investment securities.
Loans/Leases. The Company’s loan/lease portfolio declined $71.8 million, or 6%, from $1.24 billion at December 31, 2009, to $1.17 billion at December 31, 2010. The Company originated $382.3 million of new loans/leases to new and existing customers during 2010; however, this was outpaced by payments and maturities as the Company’s markets continued to experience weak loan/lease demand.
For 2009, total loans/leases grew $29.6 million, or 2%. The Company originated $407.8 million of new loans/leases to new and existing customers during 2009, which was partially offset by payments and maturities.
Consistent with the intention of the U.S. Treasury’s Capital Purchase Program, the Company is committed to providing transparency surrounding its utilization of the proceeds from participation in the Capital Purchase Program, including its lending activities and support of the existing communities served. A summary of activity for the year ended December 31, 2010 is presented in the table on the following page.

 

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The majority of residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with long term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans in the following table.
                                                 
    For the twelve months ended December 31, 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
    33,221             21,982       15,405             70,608  
Installment and other consumer loans
    48,057             24,075       12,139             84,271  
 
                                   
 
    561,053       90,059       383,227       210,421       (2,279 )     1,242,481  
Plus deferred loan/lease origination costs, net of fees
    64       2,206       (427 )     (4 )           1,839  
 
                                   
Gross loans/leases receivable
  $ 561,117     $ 92,265     $ 382,800     $ 210,417     $ (2,279 )   $ 1,244,320  
 
                                               
ORIGINATION OF NEW LOANS/LEASES:
                                               
 
                                               
Commercial and industrial loans
    48,867             43,909       11,809             104,585  
Commercial real estate loans
    38,182             37,737       16,817             92,736  
Direct financing leases
          25,360                         25,360  
Residential real estate loans
    75,531             42,992       16,144             134,667  
Installment and other consumer loans
    15,340             4,904       4,730             24,974  
 
                                   
 
  $ 177,920     $ 25,360     $ 129,542     $ 49,500     $     $ 382,322  
 
                                               
PAYMENTS/MATURITIES/SALES/CHARGE-OFFS, NET OF ADVANCES OR RENEWALS ON EXISTING LOANS/LEASES:
                                               
 
                                               
Commercial and industrial loans
    (72,424 )           (75,093 )     (32,979 )           (180,496 )
Commercial real estate loans
    (60,746 )           (28,713 )     (5,688 )     121       (95,026 )
Direct financing leases
          (32,409 )                       (32,409 )
Residential real estate loans
    (73,932 )           (32,819 )     (16,327 )           (123,078 )
Installment and other consumer loans
    (13,733 )           (7,736 )     (1,536 )           (23,005 )
 
                                   
 
  $ (220,835 )   $ (32,409 )   $ (144,361 )   $ (56,530 )   $ 121     $ (454,014 )
 
                                               
BALANCE AS OF DECEMBER 31, 2010:
                                               
 
                                               
Commercial and industrial loans
    194,316             117,236       54,073             365,625  
Commercial real estate loans
    239,338             197,774       118,763       (2,158 )     553,717  
Direct financing leases
          83,010                         83,010  
Residential real estate loans
    34,820             32,155       15,222             82,197  
Installment and other consumer loans
    49,664             21,243       15,333             86,240  
 
                                   
 
    518,138       83,010       368,408       203,391       (2,158 )     1,170,789  
Plus deferred loan/lease origination costs, net of fees
    30       2,342       (628 )     6             1,750  
 
                                   
Gross loans/leases receivable
  $ 518,168     $ 85,352     $ 367,780     $ 203,397     $ (2,158 )   $ 1,172,539  
 
                                   
The mix of loan/lease types within the Company’s loan/lease portfolio is presented in the following table.
                                                                                 
    As of December 31,  
    2010     2009     2008     2007     2006  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  
    (dollars in thousands)  
 
                                                                               
Commercial and industrial loans
  $ 365,625       31 %   $ 441,536       36 %   $ 439,117       36 %   $ 353,401       33 %   $ 396,599       41 %
Commercial real estate loans
    553,717       47 %     556,007       45 %     526,669       43 %     472,284       45 %     350,339       37 %
Direct financing leases
    83,010       7 %     90,059       7 %     79,408       7 %     67,224       6 %     52,628       5 %
Residential real estate loans
    82,197       7 %     70,608       6 %     79,228       7 %     83,328       8 %     81,634       9 %
Installment and other consumer loans
    86,240       8 %     84,271       6 %     88,540       7 %     79,220       8 %     78,058       8 %
 
                                                             
 
                                                                               
Total loans/leases
  $ 1,170,789       100 %   $ 1,242,481       100 %   $ 1,212,962       100 %   $ 1,055,457       100 %   $ 959,258       100 %
 
                                                                               
Plus deferred loan/lease origination costs, net of fees
    1,750               1,839               1,727               1,531               1,489          
Less allowance for estimated losses on loans/leases
    (20,365 )             (22,505 )             (17,809 )             (11,315 )             (10,612 )        
 
                                                                     
 
                                                                               
Net loans/leases
  $ 1,152,174             $ 1,221,815             $ 1,196,880             $ 1,045,673             $ 950,135          
 
                                                                     

 

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The following table sets forth the remaining maturities by loan/lease type as of December 31, 2010. Maturities are based on contractual dates.
                                         
                            Maturities After One Year  
    Due in one     Due after one     Due after     Predetermined     Adjustable  
    year or less     through 5 years     5 years     interest rates     interest rates  
    (dollars in thousands)  
 
                                       
Commercial and industrial loans
  $ 147,097     $ 181,714     $ 36,814     $ 126,870     $ 91,658  
Commercial real estate loans
    125,326       335,830       92,561       331,708       96,683  
Direct financing leases
    2,794       70,381       9,835       80,216        
Residential real estate loans
    2,095       407       79,695       37,131       42,971  
Installment and other consumer loans
    27,604       50,326       8,310       31,081       27,555  
 
                             
 
  $ 304,916     $ 638,658     $ 227,215     $ 607,006     $ 258,867  
 
                             
Allowance for Estimated Losses on Loans/Leases. The allowance for estimated losses on loans/leases was $20.4 million at December 31, 2010, which is a decrease of $2.1 million, or 10%, from $22.5 million at December 31, 2009. For 2009, the allowance for estimated loss on loans/leases increased $4.7 million, or 26%, from $17.8 million at December 31, 2008. The following table summarizes the activity in the allowance for estimated losses on loans/leases.
                                         
    Years ended December 31,  
    2010     2009     2008     2007     2006  
    (dollars in thousands)  
Average amount of loans/leases outstanding, before allowance for estimated losses on loans/leases
  $ 1,209,587     $ 1,222,493     $ 1,124,255     $ 1,001,633     $ 855,872  
 
                                       
Allowance for estimated losses on loans/leases:
                                       
Balance, beginning of fiscal period
  $ 22,505     $ 17,809     $ 11,315     $ 10,612     $ 8,884  
Charge-offs:
                                       
Commercial and industrial
    (2,609 )     (7,510 )     (1,205 )     (754 )     (1,245 )
Commercial real estate
    (5,922 )     (2,824 )     (805 )     (300 )     (95 )
Direct financing leases
    (999 )     (1,255 )     (264 )     (527 )     (75 )
Residential real estate
    (35 )     (314 )     (326 )     (174 )     (45 )
Installment and other consumer
    (1,135 )     (2,104 )     (1,085 )     (469 )     (460 )
 
                             
Subtotal charge-offs
    (10,700 )     (14,007 )     (3,685 )     (2,224 )     (1,920 )
 
                             
 
                                       
Recoveries:
                                       
Commercial and industrial
    380       344       313       160       260  
Commercial real estate
    381       98       420       167       2  
Direct financing leases
    163       52                    
Residential real estate
          40       81       173       52  
Installment and other consumer
    172       1,193       143       91       50  
 
                             
Subtotal recoveries
    1,096       1,727       957       591       364  
 
                             
 
                                       
Net charge-offs
    (9,604 )     (12,280 )     (2,728 )     (1,633 )     (1,556 )
Provision charged to expense
    7,464       16,976       9,222       2,336       3,284  
 
                             
Balance, end of fiscal year
  $ 20,365     $ 22,505     $ 17,809     $ 11,315     $ 10,612  
 
                             
 
                                       
Ratio of net charge-offs to average loans/leases outstanding
    0.79 %     1.00 %     0.24 %     0.16 %     0.18 %
The adequacy of the allowance for estimated losses on loans/leases was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on 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 credits 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 credit administration staff and reported to management and the board of directors.

 

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During the year ended December 31, 2010, the Company’s two newest subsidiary banks, Cedar Rapids Bank & Trust and Rockford Bank & Trust, decreased the duration for the historical charge-off experience used in the quantitative factor from five years to three years. Based on the growth of the loan portfolios of Cedar Rapids Bank & Trust and Rockford Bank & Trust over the past several years, management determined decreasing the duration appropriately addressed the credit risk within the current portfolios.
The Company experienced strengthening in its core loan portfolio as the level of criticized and classified loans declined throughout the year, as reported in the following table.
                                 
    As of December 31,              
Internally Assigned Risk Rating *   2010     2009     $ Change     % Change  
    (dollars in thousands)                  
 
                               
Special Mention (Rating 6)
  $ 43,551     $ 53,665     $ (10,114 )     (19 )%
Substandard (Rating 7) — Performing
    42,498       87,892       (45,394 )     (52 )
Substandard (Rating 7) — Nonperforming
    32,612       22,885       9,727       43  
Doubtful (Rating 8)
    21       1,203       (1,182 )     (98 )
 
                         
 
  $ 118,682     $ 165,645     $ (46,963 )     (28 )
 
                         
 
                               
Criticized Loans **
  $ 118,682     $ 165,645     $ (46,963 )     (28 )%
Classified Loans ***
    75,131       111,980       (36,849 )     (33 )
     
*  
Amounts above exclude the government guaranteed portion, if any. The Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.
 
**  
Criticized loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.
 
***  
Classified loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 7, or 8, regardless of performance.
The declining trend in criticized and classified loans contributed to a reduction in nonperforming loans/leases in the fourth quarter of 2010. Furthermore, the majority of the additions to nonperforming loans/leases consisted of commercial credits which management thoroughly reviewed and identified a strong collateral position that didn’t require significant additional specific reserves, or the Company had already reserved adequate amounts in the prior years while the loan/lease was still performing. As a direct result, the allowance for estimated losses on loans/leases as a percentage of total gross loans/leases was 1.74% at December 31, 2010, which was a decline from 1.81% at December 31, 2009. By comparison, the allowance for estimated losses on loans/leases as a percentage of total gross loans/leases was 1.47% at December 31, 2008.

 

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The following table presents the allowance for estimated losses on loans/leases by type and the percentage of type to total loans/leases.
                                                                                 
    As of December 31,  
    2010     2009     2008     2007     2006  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  
    (dollars in thousands)  
 
                                                                               
Commercial and industrial loans
    7,549       31 %     6,239       35 %     8,260       36 %     4,697       33 %     4,465       41 %
Commercial real estate loans
    9,087       47 %     11,147       45 %     6,255       43 %     4,064       45 %     3,943       37 %
Direct financing leases
    1,531       7 %     1,681       7 %     1,402       7 %     874       6 %     805       5 %
Residential real estate loans
    748       7 %     737       6 %     690       7 %     580       8 %     463       9 %
Installment and other consumer loans
    1,450       8 %     2,407       7 %     1,195       7 %     1,090       8 %     920       8 %
Unallocated
        NA       294     NA       7     NA       10     NA       16     NA  
 
                                                           
 
  $ 20,365       100 %   $ 22,505       100 %   $ 17,809       100 %   $ 11,315       100 %   $ 10,612       100 %
 
                                                           
     
%  
- Represents the percentage of the certain type of loan/lease to total loans/leases
Although management believes that the allowance for estimated losses on loans/leases at December 31, 2010 was at a level adequate to absorb probable losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan/lease losses in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require additional increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.
See Note 5 of the consolidated financial statements for additional information on the Company’s allowance for estimated losses on loans/leases.
Nonperforming Assets. The table below presents the amounts of nonperforming assets.
                                         
    As of December 31,  
    2010     2009     2008     2007     2006  
    (dollars in thousands)  
 
                                       
Nonaccrual loans/leases (1) (2)
  $ 37,427     $ 28,742     $ 20,828     $ 6,488     $ 6,538  
Accruing loans/leases past due 90 days or more
    320       89       222       500       755  
Troubled debt restructures — accruing
    3,405       1,201                    
Other real estate owned
    8,535       9,286       3,857       496       93  
Other repossessed assets
    366       1,071       450              
 
                             
 
  $ 50,053     $ 40,389     $ 25,357     $ 7,484     $ 7,386  
 
                             
 
                                       
Nonperforming loans/leases to total loans/leases
    3.51 %     2.41 %     1.73 %     0.66 %     0.76 %
Nonperforming assets to total loans/leases plus reposessed property
    4.24 %     3.22 %     2.08 %     0.71 %     0.77 %
Nonperforming assets to total assets
    2.73 %     2.27 %     1.58 %     0.51 %     0.58 %
Texas ratio (3)
    33.57 %     27.47 %     23.69 %     7.95 %     9.44 %
     
(1)  
Includes government guaranteed portion
 
(2)  
Includes troubled debt restructures of $12.6 million at December 31, 2010 and none for the other periods presented
 
(3)  
Texas Ratio = Nonperforming Assets (excluding Other Repossessed Assets) / Tangible Equity plus Allowance for Estimated Losses on Loans/Leases. Texas Ratio is a non-GAAP financial measure. Management included as this is considered by many investors and analysts to be a metric with which to analyze and evaluate asset quality. Other companies may calculate this ratio differently.

 

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The large majority of the Company’s nonperforming assets consist of nonaccrual loans/leases and other real estate owned. For nonaccrual loans/leases, management has thoroughly reviewed these loans/leases and has provided specific reserves as appropriate. Other real estate owned is carried at the lower of carrying amount or fair value less costs to sell.
The policy of the Company is to place a loan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected; or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. A loan/lease is well secured if it is secured by collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status.
The Company experienced an increase in nonperforming assets of $9.7 million, or 24%, from $40.4 million at December 31, 2009, to $50.1 million at December 31, 2010. For 2009, nonperforming assets grew $15.0 million, or 59%, from $25.4 million at December 31, 2008. The growth of nonperforming assets slowed in 2010. Despite the net increase over the course of 2010, the Company’s nonperforming assets declined in the fourth quarter.
Deposits. Deposits grew $25.5 million, or 2%, during 2010. For 2009, deposits increased by $30.4 million, or 3%. The table below presents the composition of the Company’s deposit portfolio.
                         
    As of December 31,  
    2010     2009     2008  
    (dollars in thousands)  
 
                       
Noninterest bearing demand deposits
  $ 276,827     $ 207,844     $ 161,126  
Interest bearing demand deposits
    424,819       393,732       355,990  
Savings deposits
    35,805       34,620       31,756  
Time deposits
    312,010       382,373       386,097  
Brokered time deposits
    65,355       70,754       123,990  
 
                 
 
  $ 1,114,816     $ 1,089,323     $ 1,058,959  
 
                 
The Company continued to grow noninterest bearing demand deposits during 2010 with an increase of $69.0 million, or 33%. For 2009, this growth was consistent at $46.7 million, or 29%. A large part of this growth is attributable to a strong focus on growing the correspondent banking business at Quad City Bank & Trust. During 2010, Quad City Bank & Trust grew its noninterest bearing correspondent bank deposits $25.2 million, or 45%, to $80.8 million. These increases and the Company’s overall strong liquidity position have allowed the Company to reduce the level of brokered and other time deposits which drives the reduction in the Company’s average cost of deposits.
Short-term Borrowings. The subsidiary banks offer overnight repurchase agreements to some of their major customers. Also, the subsidiary banks purchase Federal funds for short-term funding needs from the Federal Reserve Bank, or from their correspondent banks. The table below presents the composition of the Company’s short-term borrowings.
                         
    As of December 31,  
    2010     2009     2008  
    (dollars in thousands)  
 
                       
Overnight repurchase agreements with customers
  $ 118,904     $ 94,090     $ 68,107  
Federal funds purchased
    22,250       56,810       33,350  
 
                 
 
  $ 141,154     $ 150,900     $ 101,457  
 
                 

 

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See Note 8 of the consolidated financial statements for additional information on the Company’s short-term borrowings.
FHLB Advances and Other Borrowings. As a result of their memberships in the FHLB of Des Moines and Chicago, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. The subsidiary banks utilized FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provided a less costly source of funds than customer deposits. FHLB advances increased $22.9 million, or 11%, during 2010. For 2009, FHLB advances decreased slightly $2.8 million, or 1%. The table below presents details of the Company’s FHLB advances.
                 
    As of December 31,  
    2010     2009  
    (dollars in thousands)  
 
               
Amount Due
  $ 238,750     $ 215,850  
Weighted Average Interest Rate at Year-End
    3.84 %     4.14 %
See Note 9 to the consolidated financial statements for additional information regarding FHLB advances.
Other borrowings consist largely of wholesale structured repurchase agreements which the subsidiary banks utilize as an alternative funding source to FHLB advances and customer deposits. The table below presents the composition of the Company’s other borrowings.
                 
    As of December 31,  
    2010     2009  
    (dollars in thousands)  
 
               
Wholesale repurchase agreements
  $ 135,000     $ 135,000  
364-day revolving note
    2,500       5,000  
Series A subordinated notes
    2,624        
Secured borrowings — loan participations sold
    9,936        
Other
    10       60  
 
           
 
  $ 150,070     $ 140,060  
 
           
As a result of a change in accounting rules, effective January 1, 2010, the Company recorded $9.9 million of secured borrowings and $561 thousand of deferred gains related to sales of the government guaranteed portion of certain loans as of December 31, 2010. 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.
Additional information regarding other borrowings is described in Note 10 to the consolidated financial statements.

 

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Stockholders’ Equity. The table below presents the composition of the Company’s stockholders’ equity, including the common and preferred equity components.
                 
    As of December 31,  
    2010     2009  
    (dollars in thousands)  
 
               
Common stock
  $ 4,732     $ 4,675  
Additional paid in capital — common
    24,328       23,656  
Retained earnings
    40,551       38,458  
Accumulated other comprehensive income
    704       136  
Noncontrolling interests
    1,648       1,700  
Less: Treasury stock
    (1,606 )     (1,606 )
 
           
Total common stockholders’ equity
    70,357       67,019  
 
               
Preferred stock
    63       39  
Additional paid in capital — preferred
    62,151       58,539  
 
           
Total preferred stockholders’ equity
    62,214       58,578  
 
           
 
               
Total stockholders’ equity
  $ 132,571     $ 125,597  
 
           
Stockholders’ equity increased $6.9 million, or 6%, during 2010. The majority of this increase resulted from the issuance of Series E Non-Cumulative Perpetual Preferred Stock on June 30, 2010, for an aggregate purchase price of $25.0 million. The issuance involved the exchange of $20.9 million, or all of the Series B and Series C Non-Cumulative Perpetual Preferred Stock, and $4.1 million of new capital from cash investors. The transaction provided $3.2 million, net of issuance costs, of new capital to the Company. See Note 12 to the consolidated financial statements for additional detail on this issuance. Additionally, net income attributable to QCR Holdings, Inc. of $6.8 million increased retained earnings; however, this was partially offset by declaration and accrual of preferred stock dividends and discount accretion totaling $4.1 million, and declaration of common stock dividends of $366 thousand. Specifically regarding the preferred stock dividends, the following details the dividend payments in 2010:
   
$536 thousand for two quarterly dividends on the outstanding shares of Series B Non-Cumulative Perpetual Preferred Stock at a stated rate of 8.00% (this has been discontinued with the exchange of this preferred stock as disclosed in Note 12),
   
$356 thousand for two quarterly dividends on the outstanding shares of Series C Non-Cumulative Perpetual Preferred Stock at a stated rate of 9.50% (this has been discontinued with the exchange of this preferred stock as disclosed in Note 12),
   
$2.4 million for four quarterly dividends on the outstanding shares of Series D Cumulative Perpetual Preferred Stock at a stated rate of 5.00%, including the related discount accretion, and
   
$876 thousand for the first two quarterly dividends on the outstanding shares of Series E Non-Cumulative Perpetual Preferred Stock at a stated dividend rate of 7.00%.
It is the Company’s intention to consider the payment of common stock dividends on a semi-annual basis.
For 2009, stockholders’ equity increased $33.1 million, or 36%. The majority of this increase resulted from the Company’s participation in the Capital Purchase Program whereby the Company issued $38.1 million, net of issuance costs, of cumulative perpetual preferred stock to the U.S. Treasury. Additionally, net income attributable to QCR Holdings, Inc. of $1.8 million increased retained earnings; however, this was more than offset by declaration and accrual of preferred stock dividends and discount accretion totaling $3.8 million, and declaration of common stock dividends of $363 thousand.
See Note 12 to the consolidated financial statements for additional information regarding the Company’s preferred stock.

 

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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 $143.7 million at December 31, 2010, $71.8 million at December 31, 2009, and $56.3 million at December 31, 2008. The Company’s on balance sheet liquidity position has grown significantly over the past two years.
The subsidiary banks have a variety of sources of short-term liquidity available to them, including Federal funds purchased from correspondent banks, FHLB advances, structured wholesale repurchase agreements, brokered certificates of deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, and loan participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio. At December 31, 2010, the subsidiary banks had 16 lines of credit totaling $153.5 million, of which $55.0 million was secured and $98.5 million was unsecured. At December 31, 2010, the entire $153.5 million was available. At December 31, 2009, the subsidiary banks had 20 lines of credit with upstream correspondent banks totaling $156.1 million, of which $26.6 million was secured and $129.5 million was unsecured. At December 31, 2009, $135.1 million was available. Additionally, the Company has a single $20.0 million secured revolving credit note with a maturity of April 1, 2011. As of December 31, 2010, the Company had $17.5 million available as the note carried an outstanding balance of $2.5 million. See Note 10 to the consolidated financial statements for additional information regarding the lines of credit and revolving credit note.
Throughout its history, the Company has secured additional capital through various resources, including approximately $36.1 million through the issuance of trust preferred securities and $62.0 million through the issuance of preferred stock. See Financial Statement Notes 11 and 12 for information on the issuance of trust preferred securities, and preferred stock, respectively.
As of December 31, 2010 and 2009, the Company and subsidiary banks remained “well-capitalized” in accordance with regulatory capital requirements administered by the federal banking authorities. See Financial Statement Note 16 for detail of the capital amounts and ratios for the Company and subsidiary banks.
COMMITMENTS, CONTINGENCIES, CONTRACTUAL OBLIGATIONS, AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management’s credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.

 

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Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year, or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the banks would be required to fund the commitments. The maximum potential amount of future payments the banks could be required to make is represented by the contractual amount. If the commitment is funded, the banks would be entitled to seek recovery from the customer. At December 31, 2010 and 2009, no amounts had been recorded as liabilities for the banks’ potential obligations under these guarantees.
As of December 31, 2010 and 2009, commitments to extend credit aggregated $474.8 million and $476.5 million, respectively. As of December 31, 2010 and 2009, standby letters of credit aggregated $11.5 million and $17.8 million, respectively. Management does not expect that all of these commitments will be funded.
Additional information regarding commitments, contingencies, and off-balance sheet arrangements is described in Note 18 of the consolidated financial statements.
The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following table presents, as of December 31, 2010, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
                                             
    Financial   Payments Due by Period  
    Statement           One Year                    
Description   Note Reference   Total     or Less     2 - 3 Years     4 - 5 Years     After 5 Years  
        (dollars in thousands)  
 
                                           
Deposits without a stated maturity
  N/A   $ 737,451     $ 737,451     $     $     $  
Certificates of deposit
  7     377,365       282,000       63,154       32,211        
Short-term borrowings
  8     141,154       141,154                    
FHLB advances
  9     238,750       19,000       73,750       17,500       128,500  
Other borrowings
  10     150,071       17,447             45,000       87,624  
Junior subordinated debentures
  11     36,085                         36,085  
Rental commitments
  6     1,935       327       656       403       549  
Operating contracts
  N/A     10,549       4,535       4,300       1,714        
 
                                 
Total contractual cash obligations
      $ 1,693,360     $ 1,201,914     $ 141,860     $ 96,828     $ 252,758  
 
                                 
Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The Company had no purchase obligations at December 31, 2010. The Company’s operating contract obligations represent short and long-term lease payments for data processing equipment and services, software, and other equipment and professional services.

 

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IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and the accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2009, 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 year ended December 31, 2010.
In January 2010, 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. The adoption of the exception is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2011, FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (which was adopted by the Company effective December 31, 2010), for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The new disclosures are not expected to have a material impact on the consolidated financial statements.

 

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FORWARD LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A. of Part I of this Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:
   
The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.
   
The costs, effects and outcomes of existing or future litigation.
   
Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board.
   
The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Item 7A.  
Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company’s net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net 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.

 

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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.
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, 300, 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 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. Effective with the modeling for the second quarter of 2010, the Company added an interest rate scenario where interest rates experience a parallel and instantaneous shift upward 300 basis points. 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 and the newly added 300 basis point upward shifts and the 100 basis point downward shift.
Application of the simulation model analysis at December 31, 2010 demonstrated the following:
                 
    NET INTEREST INCOME EXPOSURE in YEAR 1  
INTEREST RATE SCENARIO   As of December 31, 2010     As of December 31, 2009  
 
               
100 basis point downward shift
    -1.9 %     -0.9 %
200 basis point upward shift
    -3.0 %     -5.1 %
300 basis point upward shift *
    -1.6 %     N/A  
     
*  
Began modeling in the second quarter of 2010.
The simulation is within the board-established policy limit of a 10% decline in value for all three 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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Item 8.  
Financial Statements
QCR Holdings, Inc.
Index to Consolidated Financial Statements

 

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(MC GLADREY LOGO)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
QCR Holdings, Inc.
We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting as of December 31, 2010. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QCR Holdings, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
March 7, 2011
     
McGladrey is the brand under which RSM McGladrey, Inc. and McGladrey & Pullen, LLP serve clients’ business needs.
The two firms operate as separate legal entities in an alternative practice structure.
  Member of RSM International network, a network of
independent accounting, tax and consulting firms.

 

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QCR Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
December 31, 2010 and 2009
                 
    2010     2009  
Assets
               
Cash and due from banks
  $ 42,030,806     $ 35,878,046  
Federal funds sold
    61,960,000       6,598,333  
Interest-bearing deposits at financial institutions
    39,745,611       29,329,413  
 
               
Securities held to maturity, at amortized cost (Note 4)
    300,000       350,000  
Securities available for sale, at fair value (Note 4)
    424,546,767       370,170,459  
 
           
 
    424,846,767       370,520,459  
 
           
 
               
Loans receivable, held for sale (Note 5)
    14,084,859       6,135,130  
Loans/leases receivable, held for investment (Note 5)
    1,158,453,744       1,238,184,436  
 
           
 
    1,172,538,603       1,244,319,566  
Less allowance for estimated losses on loans/leases (Note 5)
    (20,364,656 )     (22,504,734 )
 
           
 
    1,152,173,947       1,221,814,832  
 
           
 
               
Premises and equipment, net (Note 6)
    31,118,744       31,454,893  
Goodwill
    3,222,688       3,222,688  
Accrued interest receivable
    6,435,989       7,565,513  
Bank-owned life insurance
    33,565,390       29,694,077  
Prepaid FDIC insurance
    5,361,314       7,801,076  
Restricted investment securities
    16,668,700       15,210,100  
Other real estate owned, net
    8,534,711       9,286,371  
Other assets
    10,970,549       11,270,306  
 
           
Total assets
  $ 1,836,635,216     $ 1,779,646,107  
 
           
 
 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Deposits:
               
Noninterest-bearing
  $ 276,827,205     $ 207,843,554  
Interest-bearing
    837,988,652       881,479,172  
 
           
Total deposits (Note 7)
    1,114,815,857       1,089,322,726  
 
               
Short-term borrowings (Note 8)
    141,154,499       150,899,571  
Federal Home Loan Bank advances (Note 9)
    238,750,000       215,850,000  
Other borrowings (Note 10)
    150,070,785       140,059,841  
Junior subordinated debentures (Note 11)
    36,085,000       36,085,000  
Other liabilities
    23,188,367       21,834,093  
 
           
Total liabilities
    1,704,064,508       1,654,051,231  
 
           
Commitments and Contingencies (Note 18)
               
 
               
Stockholders’ Equity (Note 16):
               
Preferred stock (Note 12), $1 par value, shares authorized 250,000
December 2010 — 63,237 shares issued and outstanding
December 2009 — 38,805 shares issued and outstanding
    63,237       38,805  
Common stock, $1 par value; shares authorized 20,000,000
December 2010 — 4,732,428 shares issued and 4,611,182 outstanding
December 2009 — 4,674,536 shares issued and 4,553,290 outstanding
    4,732,428       4,674,536  
Additional paid-in capital
    86,478,269       82,194,330  
Retained earnings
    40,550,900       38,458,477  
Accumulated other comprehensive income
    704,165       135,608  
Noncontrolling interests
    1,648,219       1,699,630  
 
           
 
    134,177,218       127,201,386  
Treasury stock, December 2010 and 2009 — 121,246 common shares, at cost
    1,606,510       1,606,510  
 
           
Total stockholders’ equity
    132,570,708       125,594,876  
 
           
Total liabilities and stockholders’ equity
  $ 1,836,635,216     $ 1,779,646,107  
 
           
See Notes to Consolidated Financial Statements.

 

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QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2010, 2009, and 2008
                         
    2010     2009     2008  
Interest and dividend income:
                       
Loans/leases, including fees
  $ 67,999,191     $ 73,145,289     $ 72,565,834  
Securities:
                       
Taxable
    10,109,083       10,748,012       10,878,219  
Nontaxable
    907,085       967,940       942,667  
Interest-bearing deposits at financial institutions
    411,079       313,113       165,312  
Restricted investment securities
    497,214       302,756       495,158  
Federal funds sold
    173,714       133,723       99,814  
 
                 
Total interest and dividend income
    80,097,366       85,610,833       85,147,004  
 
                 
 
                       
Interest expense:
                       
Deposits
    12,681,625       18,374,065       23,894,324  
Short-term borrowings
    628,255       711,801       2,962,169  
Federal Home Loan Bank advances
    9,246,562       9,082,039       8,524,772  
Other borrowings
    5,732,142       4,764,812       2,754,097  
Junior subordinated debentures
    1,945,014       2,016,449       2,388,574  
 
                 
Total interest expense
    30,233,598       34,949,166       40,523,936  
 
                 
 
                       
Net interest income
    49,863,768       50,661,667       44,623,068  
Provision for loan/lease losses (Note 5)
    7,463,618       16,975,517       9,221,670  
 
                 
Net interest income after provision for loan/lease losses
    42,400,150       33,686,150       35,401,398  
 
                 
 
                       
Noninterest income:
                       
Trust department fees
    3,290,844       2,883,482       3,333,812  
Investment advisory and management fees, gross
    1,812,903       1,507,557       1,975,236  
Deposit service fees
    3,478,743       3,319,967       3,134,869  
Gains on sales of loans, net
    3,169,514       1,677,312       1,068,545  
Securities gains, net
          1,488,391       199,500  
Gains (losses) on sales of other real estate owned
    (835,163 )     177,736       394,103  
Earnings on bank-owned life insurance
    1,331,085       1,243,324       1,016,864  
Credit card fees, net of processing costs
    259,590       930,435       987,769  
Other
    2,898,372       2,318,843       1,820,373  
 
                 
Total noninterest income
    15,405,888       15,547,047       13,931,071  
 
                 
 
                       
Noninterest expenses:
                       
Salaries and employee benefits
    27,843,127       26,882,185       26,124,160  
Occupancy and equipment expense
    5,472,248       5,372,101       5,091,545  
Professional and data processing fees
    4,524,519       4,664,656       4,729,226  
FDIC and other insurance
    3,528,267       3,626,027       1,316,710  
Loan/lease expense
    1,657,552       1,997,583       757,315  
Advertising and marketing
    1,053,909       991,243       1,296,651  
Postage and telephone
    1,004,176       1,060,690       933,508  
Stationery and supplies
    491,252       528,959       518,639  
Bank service charges
    420,252       306,473       403,790  
Other-than-temporary impairment losses on securities
    113,800       206,369        
Losses on lease residual values
    617,000              
Other
    1,822,961       1,300,740       1,162,145  
 
                 
Total noninterest expenses
    48,549,063       46,937,026       42,333,689  
 
                 
 
                       
Income from continuing operations before income taxes
    9,256,975       2,296,171       6,998,780  
Federal and state income tax expense from continuing operations (Note 13)
    2,449,249       247,340       1,735,717  
 
                 
Income from continuing operations
    6,807,726       2,048,831       5,263,063  
 
                 
(Continued)

 

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QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2010, 2009, and 2008
                         
    2010     2009     2008  
 
                       
Discontinued operations (Note 2)
                       
Operating income from merchant credit card acquiring business
                361,160  
Gain on sale of merchant credit card acquiring business
                4,645,213  
Operating loss from First Wisconsin Bank & Trust
                (2,921,371 )
Gain on sale of First Wisconsin Bank & Trust
                494,664  
 
                 
Income from discontinued operations before income taxes
                2,579,666  
Federal and state income tax expense from discontinued operations
                845,435  
 
                 
Income from discontinued operations
  $     $     $ 1,734,231  
 
                 
 
                       
Net income
  $ 6,807,726     $ 2,048,831     $ 6,997,294  
Less: net income attributable to noncontrolling interests
    221,047       276,923       288,436  
 
                 
Net income attributable to QCR Holdings, Inc.
  $ 6,586,679     $ 1,771,908     $ 6,708,858  
 
                 
 
                       
Amounts attributable to QCR Holdings, Inc.:
                       
Income from continuing operations
  $ 6,586,679     $ 1,771,908     $ 4,974,627  
Income from discontinued operations
                1,734,231  
 
                 
Net income
  $ 6,586,679     $ 1,771,908     $ 6,708,858  
 
                       
Less: preferred stock dividends and discount accretion
  $ 4,128,104     $ 3,843,924       1,784,500  
 
                 
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
  $ 2,458,575     $ (2,072,016 )   $ 4,924,358  
 
                 
 
                       
Basic earnings (loss) per common share (Note 17):
                       
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
  $ 0.54     $ (0.46 )   $ 0.69  
Income from discontinued operations attributable to QCR Holdings, Inc.
                0.38  
 
                 
Net income (loss) attributable to QCR Holdings, Inc.
  $ 0.54     $ (0.46 )   $ 1.07  
 
                 
 
                       
Diluted earnings (loss) per common share (Note 17):
                       
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
  $ 0.53     $ (0.46 )   $ 0.69  
Income from discontined operations attributable to QCR Holdings, Inc.
                0.37  
 
                 
Net income (loss) attributable to QCR Holdings, Inc.
  $ 0.53     $ (0.46 )   $ 1.06  
 
                 
 
                       
Weighted average common shares outstanding
    4,593,096       4,540,792       4,617,057  
Weighted average common and common equivalent shares outstanding
    4,618,242       4,540,792       4,634,537  
 
                       
Cash dividends declared per common share
  $ 0.08     $ 0.08     $ 0.08  
 
                 
See Notes to Consolidated Financial Statements.

 

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QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2010, 2009, and 2008
                                                                 
                                    Accumulated                    
                    Additional             Other                    
    Preferred     Common     Paid-In     Retained     Comprehensive     Noncontrolling     Treasury        
    Stock     Stock     Capital     Earnings     Income     Interests     Stock     Total  
Balance, December 31, 2007
  $ 568     $ 4,597,744     $ 42,317,374     $ 36,338,566     $ 2,811,540     $ 1,720,863     $     $ 87,786,655  
Comprehensive income:
                                                               
Net income
                      6,708,858             288,436             6,997,294  
Other comprehensive income, net of tax (Note 3)
                            816,820                   816,820  
 
                                                             
Comprehensive income
                                                            7,814,114  
 
                                                             
Common cash dividends declared, $0.08 per share
                      (369,620 )                       (369,620 )
Preferred cash dividends declared
                      (1,784,500 )                       (1,784,500 )
Proceeds from issuance of 22,767 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 15)
          22,767       246,037                               268,804  
Proceeds from issuance of 7,305 shares of common stock as a result of stock options exercised (Note 15)
          7,305       82,410                               89,715  
Exchange of 1,933 shares of common stock in connection with options exercised (Note 15)
          (1,933 )     (27,284 )                             (29,217 )
Tax benefit of nonqualified stock options exercised
                1,611                               1,611  
Stock-based compensation expense
                475,120                               475,120  
Restricted stock award
          5,000       (5,000 )                              
Other adjustments to noncontrolling interests
                                  (151,001 )           (151,001 )
Purchase of 121,246 shares of common stock for the treasury
                                        (1,606,510 )     (1,606,510 )
 
                                               
Balance, December 31, 2008
  $ 568     $ 4,630,883     $ 43,090,268     $ 40,893,304     $ 3,628,360     $ 1,858,298     $ (1,606,510 )   $ 92,495,171  
Comprehensive income:
                                                               
Net income
                      1,771,908             276,923             2,048,831  
Other comprehensive loss, net of tax (Note 3)
                            (3,492,752 )                 (3,492,752 )
 
                                                             
Comprehensive loss
                                                            (1,443,921 )
 
                                                             
Common cash dividends declared, $0.08 per share
                      (362,811 )                       (362,811 )
Preferred cash dividends declared and accrued
                      (3,467,989 )                       (3,467,989 )
Discount accretion on cumulative preferred stock
                375,935       (375,935 )                        
Proceeds from issuance of 38,237 shares of preferred stock and common stock warrant
    38,237             38,014,586                               38,052,823  
Proceeds from issuance of 28,575 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 15)
          28,575       205,585                               234,160  
Exchange of 830 shares of common stock in connection with payroll taxes for restricted stock (Note 15)
          (830 )     (6,889 )                             (7,719 )
Stock-based compensation expense
                609,713                               609,713  
Restricted stock awards
          15,908       (15,908 )                              
Purchase of noncontrolling interests
                (78,960 )                 (231,040 )           (310,000 )
Other adjustments to noncontrolling interests
                                  (204,551 )           (204,551 )
 
                                               
Balance, December 31, 2009
  $ 38,805     $ 4,674,536     $ 82,194,330     $ 38,458,477     $ 135,608     $ 1,699,630     $ (1,606,510 )   $ 125,594,876  
Comprehensive income:
                                                               
Net income
                      6,586,679             221,047             6,807,726  
Other comprehensive income, net of tax (Note 3)
                            568,557                   568,557  
 
                                                             
Comprehensive income
                                                            7,376,283  
 
                                                             
Common cash dividends declared, $0.08 per share
                      (366,152 )                       (366,152 )
Preferred cash dividends declared and accrued
                      (3,679,100 )                       (3,679,100 )
Discount accretion on cumulative preferred stock
                449,004       (449,004 )                        
Exchange of 268 shares of Series B Non-Cumulative Perpetual Preferred Stock for 13,400 shares of Series E Non-Cumulative Perpetual Convertible Preferred Stock
    13,132             (13,132 )                              
Exchange of 300 shares of Series C Non-Cumulative Perpetual Preferred Stock for 7,500 shares of Series E Non-Cumulative Perpetual Convertible Preferred Stock
    7,200             (7,200 )                              
Proceeds from issuance of 4,100 shares of Series E Non-Cumulative Perpetual Convertible Preferred Stock
    4,100             3,183,133                               3,187,233  
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 28,907 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 15)
          28,907       192,362                               221,269  
Proceeds from issuance of 5,754 shares of common stock as a result of stock options exercised (Note 15)
          5,754       37,621                               43,375  
Exchange of 367 shares of common stock in connection with payroll taxes for restricted stock (Note 15)
          (367 )     (2,730 )                             (3,097 )
Stock-based compensation expense
                533,271                               533,271  
Restricted stock awards
          23,598       (23,598 )                              
Purchase of noncontrolling interests
                (149,032 )                 (270,968 )           (420,000 )
Other adjustments to noncontrolling interests
                                  (1,490 )           (1,490 )
 
                                               
Balance, December 31, 2010
  $ 63,237     $ 4,732,428     $ 86,478,269     $ 40,550,900     $ 704,165     $ 1,648,219     $ (1,606,510 )   $ 132,570,708  
 
                                               
See Notes to Consolidated Financial Statements.

 

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QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009, and 2008
                         
    2010     2009     2008  
Cash Flows from Operating Activities:
                       
Net income
  $ 6,807,726     $ 2,048,831     $ 6,997,294  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    2,533,597       2,780,190       2,624,433  
Provision for loan/lease losses related to continuing operations
    7,463,618       16,975,517       9,221,670  
Provision for loan/lease losses related to discontinuing operations
                1,699,112  
Deferred income taxes
    1,256,004       2,758,856       (1,816,719 )
Amortization of offering costs on subordinated debentures
    14,317       14,317       14,317  
Stock-based compensation expense
    488,112       512,963       298,921  
Losses (gains) on sales of other real estate owned, net
    835,163       (177,736 )     (394,103 )
Gain on sale of merchant credit card acquiring business
                (4,645,213 )
Gain on sale of First Wisconsin Bank & Trust
                (494,664 )
Amortization of premiums on securities, net
    3,411,202       2,044,767       133,819  
Securities gains, net
          (1,488,391 )     (199,500 )
Other-than-temporary impairment losses on securities
    113,800       206,369        
Loans originated for sale
    (172,623,744 )     (140,376,155 )     (88,775,395 )
Proceeds on sales of loans
    167,843,529       143,295,985       88,975,272  
Gains on sales of loans, net
    (3,169,514 )     (1,677,312 )     (1,068,545 )
Losses on lease residual values
    617,000              
Decrease (increase) in accrued interest receivable
    1,129,524       270,322       (350,007 )
Decrease (increase) in prepaid FDIC insurance
    2,439,762       (7,801,076 )      
Increase in cash value of bank-owned life insurance
    (1,331,085 )     (1,243,324 )     (1,016,864 )
Increase in other assets
    (1,320,430 )     (3,339,319 )     (602,870 )
Increase (decrease) in other liabilities
    1,406,270       (660,397 )     (2,810,645 )
 
                 
Net cash provided by operating activities
    17,914,851       14,144,407       7,790,313  
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Net (increase) decrease in federal funds sold
    (55,361,667 )     14,097,565       (31,775,898 )
Net (increase) decrease in interest-bearing deposits at financial institutions
    (10,416,198 )     (27,215,509 )     2,980,577  
Proceeds from sales of other real estate owned
    6,038,825       1,358,351       1,376,007  
Proceeds from sale of merchant credit card acquiring business, net
                4,732,009  
Proceeds from sale of First Wisconsin Bank & Trust, net
                13,324,553  
Activity in securities portfolio:
                       
Purchases
    (383,018,764 )     (316,260,882 )     (140,985,829 )
Calls, maturities and redemptions
    325,649,238       169,176,856       102,733,654  
Paydowns
    435,149       406,998       736,057  
Sales
          25,966,885       285,000  
Purchases of restricted investment securities
    (1,458,600 )     (1,150,500 )     (2,512,500 )
Activity in bank-owned life insurance:
                       
Purchases
    (3,150,000 )     (1,000,002 )      
Surrender of policy
    609,772              
Net (decrease) increase in loans/leases originated and held for investment
    63,387,668       (50,077,380 )     (195,569,104 )
Purchase of premises and equipment
    (2,197,448 )     (2,845,816 )     (2,258,536 )
Net increase in cash related to discontinued operations, held for sale
                (1,789,295 )
 
                 
Net cash used in investing activities
    (59,482,025 )     (187,543,434 )     (248,723,305 )
 
                 
(Continued)

 

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QCR Holdings, Inc.
and Subsidiaries


Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2010, 2009, and 2008
                         
    2010     2009     2008  
Cash Flows from Financing Activities:
                       
Net increase in deposit accounts
  $ 25,493,131     $ 30,364,128     $ 227,545,345  
Net (decrease) increase in short-term borrowings
    (9,745,072 )     49,442,621       (68,160,318 )
Activity in Federal Home Loan Bank advances:
                       
Advances
    36,000,000       11,500,000       68,145,000  
Payments
    (13,100,000 )     (14,345,000 )     (18,265,006 )
Net increase in other borrowings
    7,395,184       64,477,207       27,892,512  
Tax benefit of nonqualified stock options exercised
                1,611  
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 on common and preferred stock
    (4,052,089 )     (3,595,221 )     (1,974,870 )
Proceeds from issuance of Series E Noncumulatieve Convertible Perpetual Preferred Stock, net
    3,187,233              
Proceeds from issuance of Series D Cumulative Perpetual Preferred Stock and common stock warrant, net
          38,052,823        
Proceeds from issuance of common stock, net
    261,547       226,441       329,302  
Purchase of noncontrolling interests
    (420,000 )     (310,000 )      
Purchase of treasury stock
                (1,606,510 )
 
                 
Net cash provided by financing activities
    47,719,934       175,812,999       233,907,066  
 
                 
 
                       
Net increase (decrease) in cash and due from banks
    6,152,760       2,413,972       (7,025,926 )
Cash and due from banks, beginning
    35,878,046       33,464,074       40,490,000  
 
                 
Cash and due from banks, ending
  $ 42,030,806     $ 35,878,046     $ 33,464,074  
 
                 
 
                       
Supplemental Disclosures of Cash Flow Information, cash payments for:
                       
Interest
  $ 31,017,369     $ 36,536,869     $ 40,526,554  
Income and franchise taxes
    3,236,558       2,557,505       2,306,448  
 
                       
Supplemental Schedule of Noncash Investing Activities:
                       
Change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net
    568,557       (3,492,752 )     816,820  
Exchange of shares of common stock in connection with payroll taxes for restricted stock and options exercised
    (3,097 )     (7,719 )     (29,217 )
Transfers of loans to other real estate owned
    6,122,328       6,924,975       4,467,520  
 
                       
Proceeds from sale of First Wisconsin Bank & Trust, net
  $     $     $ 13,324,553  
Assets sold:
                       
Cash and due from banks
                2,495,185  
Federal funds sold
                17,700,000  
Interest-bearing deposits at financial institutions
                1,567  
Securities available for sale, at fair value
                18,460,320  
Loans/leases receivable held for investment
                80,169,171  
Less: Allowance for estimated losses on loans/leases
                (1,122,496 )
Premises and equipment, net
                468,522  
Goodwill
                 
Intangilbe assets
                887,542  
Accrued interest receivable
                478,729  
Bank-owned life insurance
                2,453,660  
Other assets
                882,028  
 
                 
Total Assets
  $     $     $ 122,874,228  
 
                 
Liabilities sold:
                       
Noninteresting-bearing deposits
  $     $     $ 8,943,882  
Interest-bearing deposits
                89,070,083  
Short-term borrowings
                13,578,572  
Other liabilities
                (368,528 )
 
                 
Total liabilities
  $     $     $ 111,224,009  
 
                       
Accrued expenses related to sale of First Wisconsin Bank & Trust
                1,179,670  
 
                 
Gain on sale of First Wisconsin Bank & Trust
  $     $     $ 494,664  
 
                 
See Notes to Consolidated Financial Statements.

 

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QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
QCR Holdings, Inc. (the “Company”) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (“Quad City Bank & Trust”), Cedar Rapids Bank and Trust Company (“Cedar Rapids Bank & Trust”), Rockford Bank and Trust Company (“Rockford Bank & Trust”), m2 Lease Funds, LLC (“m2 Lease Funds”), Velie Plantation Holding Company, LLC (“Velie Plantation Holding Company”), QCR Holdings Statutory Trust II (“Trust II”), QCR Holdings Statutory Trust III (“Trust III”), QCR Holdings Statutory Trust IV (“Trust IV”), and QCR Holdings Statutory Trust V (“Trust V”). Quad City Bank & Trust is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. Cedar Rapids Bank & Trust is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities. Rockford Bank & Trust is a commercial bank that serves Rockford, Illinois, and adjacent communities.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are chartered and regulated by the state of Iowa, and Rockford Bank & Trust is chartered and regulated by the state of Illinois. All three subsidiary banks are insured and subject to regulation by the Federal Deposit Insurance Corporation (“FDIC”), and are members of and regulated by the Federal Reserve System. m2 Lease Funds, which is an 80% owned subsidiary, based in the Milwaukee, Wisconsin area, is engaged in the business of direct financing lease contracts. Velie Plantation Holding Company, LLC, which is a 91% owned subsidiary, is engaged in holding the real estate property known as the Velie Plantation Mansion in Moline, Illinois. The Velie Plantation Mansion is the location for the Company’s headquarters. Trust II, Trust III, Trust IV and Trust V were formed for the purpose of issuing various trust preferred securities (see Note 11).
Quad City Bancard, Inc. (“Bancard”), previously a wholly-owned subsidiary of the Company, conducted the Company’s credit card issuing operation and prior to the August 28, 2008 sale of the business, the Company’s merchant acquiring operations. Effective December 31, 2009, Bancard was liquidated. The credit card issuing operation was merged into the correspondent banking department of Quad City Bank & Trust in 2009.
As noted above, during 2008 Bancard sold its merchant credit card acquiring business. The current and comparative results related to the merchant credit card acquiring business have been reflected as discontinued operations (see Note 2)
On December 31, 2008, the Company sold its Wisconsin-chartered bank, First Wisconsin Bank & Trust Company (“First Wisconsin Bank & Trust”). The comparative results related to First Wisconsin Bank & Trust have been reflected as discontinued operations (see Note 2).
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for estimated losses on loans/leases, other-than-temporary impairment of securities, and the fair value of financial instruments.
Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, except Trust II, Trust III, Trust IV and Trust V, which do not meet the criteria for consolidation. All material intercompany accounts and transactions have been eliminated in consolidation. The results of discontinued operations have been reported separately in the consolidated financial statements.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and non-interest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, and short-term and other borrowings are treated as net increases or decreases.
Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $846,000 and $270,000 as of December 31, 2010 and 2009, respectively.
Investment securities: Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities available for sale are carried at fair value. Unrealized gains or losses, net of taxes, are reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
All securities are evaluated to determine whether declines in fair value below their amortized cost are other-than-temporary.
In estimating other-than-temporary impairment losses on available for sale debt securities, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the Company to not sell the security prior to recovery and whether it is not more-likely-than-not that it will be required to sell the security prior to recovery. If the Company does not intend to sell the security, and it is not more-likely-than-not the entity will be required to sell the security before recovery of its amortized cost basis, the Company will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion would be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
In estimating other-than-temporary impairment losses on available for sale equity securities management considers factors (1), (2) and (3) above as well as whether the Company has the intent and the ability to hold the security until its recovery. If the Company (a) intends to sell an impaired equity security and does not expect the fair value of the security to fully recover before the expected time of sale, or (b) does not have the ability to hold the security until its recovery, the security is deemed other-than-temporarily impaired and the impairment is charged to earnings. The Company recognizes an impairment loss through earnings if based upon other factors the loss is deemed to be other-than-temporary even if the decision to sell has not been made.
Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.
In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses (also known as “allowance for estimated losses on loans/leases”) and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. A portfolio segment is defined by the ASU as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. A class of financing receivable is defined by the ASU as a further disaggregation of a portfolio segment based on risk characteristics and the entity’s method for monitoring and assessing credit risk. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU was effective for interim and annual reporting periods ending on or after December 15, 2010. Accordingly, the Company has included the new disclosures throughout these financial statements (see Note 1 and Note 5).
The Company’s portfolio segments are as follows:
   
Commercial and industrial
   
Commercial real estate
   
Residential real estate
   
Installment and other consumer
Direct financing leases would be considered a segment within the overall loan/lease portfolio. The accounting policies for direct financing leases are disclosed below.
The Company’s classes of loans receivable are as follows:
   
Commercial and industrial
   
Owner-occupied commercial real estate
   
Commercial construction, land development, and other land loans that are not owner-occupied commercial real estate
   
Other non-owner-occupied commercial real estate
   
Residential real estate
   
Installment and other consumer
Direct financing leases would be considered a class of financing receivable within the overall loan/lease portfolio. The accounting policies for direct financing leases are disclosed below.
Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 31 days or greater.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist:
   
It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan,
   
When full repayment of principal and interest is not expected,
   
When the loan is graded “doubtful”
   
When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future, or
   
When foreclosure action is initiated.
When a loan is placed on nonaccrual status, income recognition is ceased. Previously recorded but uncollected amounts of interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Generally, cash collected on nonaccrual loans is applied to principal. Should full collection of principal be expected, cash collected on nonaccrual loans can be recognized as interest income.
For all classes of loans receivable, nonaccrual loans may be restored to accrual status provided the following criteria are met:
   
The loan is current, and all principal and interest amounts contractually due have been made,
   
All principal and interest amounts contractually due, including past due payments, are reasonably assured of repayment within a reasonable period, and
   
There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms:
   
Six months of repayment performance for contractual monthly payments, or
 
   
One year of repayment performance for contractual quarterly or semi-annual payments
Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment. Lease income is recognized on the interest method. Residual is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends. The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other than temporary. If the decline in estimated unguaranteed residual value is judged to be other than temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.
The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company defers and amortizes fees and certain incremental direct costs over the contractual term of the lease as an adjustment to the yield. These initial direct leasing costs generally approximate 4% of the leased asset’s cost. The unamortized direct costs are recorded as a reduction of unearned lease income.
Troubled debt restructures: Troubled debt restructuring exists when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company is attempting to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.
The following criteria, related to granting a concession, together or separately, create a troubled debt restructure:
   
A modification of terms of a debt such as one or a combination of:
   
The reduction of the stated interest rate.
 
   
The extension of the maturity date or dates at a stated interest rate lower than the current market rate for the new debt with similar risk.
 
   
The reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
 
   
The reduction of accrued interest.
   
A transfer from the borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan.
   
The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position.
Allowance for estimated losses on loans/leases: For all portfolio segments, the allowance for estimated losses on loans/leases is established as losses are estimated to have occurred through a provision for loan/lease losses charged to earnings. Loan/lease losses, for all portfolio segments, are charged against the allowance when management believes the uncollectability of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
For all portfolio segments, the allowance for estimated losses on loans/leases is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans/leases in light of historical experience, the nature and volume of the loan/lease portfolio, adverse situations that may affect the borrower’s/lessee’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
A discussion of the risk characteristics and the allowance for estimated losses on loans by each portfolio segment follows:
For commercial and industrial loans, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of commercial and industrial loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:
   
Ability and stability of current management of the borrower;
 
   
Stable earnings with positive financial trends;
 
   
Sufficient cash flow to support debt repayment;
 
   
Earnings projections based on reasonable assumptions;
 
   
Financial strength of the industry and business; and
 
   
Value and marketability of collateral.
Collateral for commercial and industrial loans generally includes accounts receivable, inventory, equipment and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.
The lending policy specifies maximum term limits for commercial and industrial loans. For term loans, the maximum term is 7 years. Generally, term loans range from 3 to 5 years. For lines of credit, the maximum term is 365 days.
In addition, the Company often takes personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those standards and processes specific to real estate loans. Collateral for commercial real estate loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The lending policy specifies maximum loan-to-value limits based on the category of commercial real estate (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.
The lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the Company often takes personal guarantees to help assure repayment.
In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Owner-occupied loans are generally considered to have less risk. As of December 31, 2010 and 2009, approximately 26% and 29%, respectively, of the commercial real estate loan portfolio was owner-occupied.
The Company’s lending policy limits non-owner occupied commercial real estate lending to 300% of total risk-based capital, and limits construction, land development, and other land loans to 100% of total risk-based capital. Exceeding these limits warrants the use of heightened risk management practices in accordance with regulatory guidelines.

 

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QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the lending policy described above and below. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are clearly noted as such and specifically identified in loan/lease approval documents.
For commercial and industrial and commercial real estate loans, the allowance for estimated losses on loans consists of specific and general components.
The specific component relates to loans that are classified as impaired, as defined below. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.
For commercial and industrial loans and all classes of commercial real estate loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
The general component consists of quantitative and qualitative factors and covers non-impaired loans. The quantitative factors are based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. See below for a detailed description of the Company’s internal risk rating scale. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
For commercial and industrial and commercial real estate loans, the Company utilizes the following internal risk rating scale:
1. Highest Quality — loans of the highest quality with no credit risk, including those fully secured by subsidiary bank certificates of deposit and U.S. government securities.
2. Superior Quality — loans with very strong credit quality. Borrowers have exceptionally strong earnings, liquidity, capital, cash flow coverage, and management ability. Includes loans secured by high quality, marketable securities, certificates of deposit from other institutions, and cash value of life insurance. Also includes loans supported by U.S. government, state, or municipal guarantees.
3. Satisfactory Quality — loans with satisfactory credit quality. Established borrowers with satisfactory financial condition, including credit quality, earnings, liquidity, capital and cash flow coverage. Management is capable and experienced. Collateral coverage and guarantor support, if applicable, are more than adequate. Includes loans secured by personal assets and business assets including equipment, accounts receivable, inventory, and real estate.

 

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QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
4. Fair Quality — loans with moderate but still acceptable credit quality. The primary repayment source remains adequate; however, management’s ability to maintain consistent profitability is unproven or uncertain. Borrowers exhibit acceptable leverage and liquidity. May include new businesses with inexperienced management or unproven performance records in relation to peer, or borrowers operating in highly cyclical or deteriorating industries.
5. Early Warning — loans where the borrowers have generally performed as agreed, however unfavorable financial trends exist or are anticipated. Earnings may be erratic, with marginal cash flow or declining sales. Borrowers reflect leveraged financial condition and/or marginal liquidity. Management may be new and a track record of performance has yet to be developed. Financial information may be incomplete, and reliance on secondary repayment sources may be increasing.
6. Special Mention — loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.
7. Substandard — loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if applicable. These loans have a well-defined weakness or weaknesses which jeopardize repayment according to the contractual terms. There is distinct loss potential if the weaknesses are not corrected. Includes loans with insufficient cash flow coverage which are collateral dependent, other real estate owned, and repossessed assets.
8. Doubtful — loans which have all the weaknesses inherent in a Substandard loan, with the added characteristic that existing weaknesses make full principal collection, on the basis of current facts, conditions and values, highly doubtful. The possibility of loss is extremely high, but because of pending factors, recognition of a loss is deferred until a more exact status can be determined. All doubtful loans will be placed on non-accrual, with all payments, including principal and interest, applied to principal reduction.
For term commercial and industrial and commercial real estate loans or credit relationships with aggregate exposure greater than $1,000,000, a loan review will be required within 15 months of the most recent credit review. The review shall be completed in enough detail to, at a minimum, validate the risk rating. Additionally, the review shall include an analysis of debt service requirements, covenant compliance, if applicable, and collateral adequacy. The frequency of the review is generally accelerated for loans with poor risk ratings.
The Company’s Loan Quality area will perform a documentation review of a sampling of commercial and industrial and commercial real estate loans, the primary purpose of which is to ensure the credit is properly documented and closed in accordance with approval authorities and conditions. A review will also be performed by the Company’s Internal Audit Department of a sampling of commercial and industrial and commercial real estate loans, according to an approved schedule. Validation of the risk rating is part of Internal Audit’s review. Additionally, over the past several years, the Company has contracted an independent outside third party to review a sampling of commercial and industrial and commercial real estate loans. Validation of the risk rating is part of this review as well.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company leases machinery and equipment to commercial and industrial customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.
For direct financing leases, the allowance for estimated lease losses consists of specific and general components.
The specific component relates to leases that are classified as impaired, as defined for commercial loans above. For those leases that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired lease is lower than the carrying value of that lease.
The general component consists of quantitative and qualitative factors and covers nonimpaired leases. The quantitative factors are based on historical charge-off experience for the entire lease portfolio. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss data.
Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The lending policy establishes minimum appraisal and other credit guidelines.
The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The lending policy addresses specific credit guidelines by consumer loan type.
For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans are collectively evaluated for impairment. The Company applies a quantitative factor based on historical charge-off experience in total for each of these segments. Accordingly, the Company generally does not separately identify individual residential real estate loans, and/or installment or other consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
During the year ended December 31, 2010, the Company’s two newest subsidiary banks, Cedar Rapids Bank & Trust and Rockford Bank & Trust, decreased the duration for the historical charge-off experience used in the quantitative factor from five years to three years. Based on the growth of the loan portfolios of Cedar Rapids Bank & Trust and Rockford Bank & Trust over the past several years, management determined decreasing the duration allowed for a more accurate assessment of the credit risk within the current portfolios.
Troubled debt restructures are considered impaired loans/leases and are subject to the same allowance methodology as described above for impaired loans/leases by portfolio segment.
Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In addition, for transfers of a portion of financial assets (for example, participations of loan receivables), the transfer must meet the definition of a “participating interest” in order to account for the transfer as a sale. Following are the characteristics of a “participating interest”:
   
Pro-rata ownership in an entire financial asset.
   
From the date of the transfer, all cash flows received from entire financial assets are divided proportionately among the participating interest holders in an amount equal to their share of ownership.
   
The rights of each participating interest holder have the same priority, and no participating interest holder’s interest is subordinated to the interest of another participating interest holder. That is, no participating interest holder is entitled to receive cash before any other participating interest holder under its contractual rights as a participating interest holder.
   
No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset.
Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets.
Goodwill: The Company has recorded goodwill from the purchase of 80% of m2 Lease Funds. The goodwill is not being amortized, but is evaluated at least annually for impairment. An impairment charge is recognized when the calculated fair value of the reporting unit, including goodwill, is less than its carrying amount. Based on the annual analysis completed as of July 31, 2010, the Company believes that no goodwill impairment existed.
Bank-owned life insurance: Bank-owned life insurance is carried at cash surrender value with increases/decreases reflected as income/expense in the statement of operations.
Prepaid FDIC insurance: In November 2009, the FDIC adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessment for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. The payment, which was made in December 2009, was recorded as a prepaid asset and is being amortized over the assessment period.
Restricted investment securities: 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 restricted stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value, rather than recognizing temporary declines in value. There have been no other-than-temporary write-downs recorded on these securities.
Other real estate owned: Real estate acquired through, or in lieu of, loan foreclosures, is held for sale and initially recorded at fair value less cost to sell, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Subsequent write-downs to fair value are charged to earnings.

 

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QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Treasury stock: Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price. When treasury stock is reissued, any difference between the sales proceeds, or fair value when issued for business combinations, and the cost is recognized as a charge or credit to additional paid-in capital.
Stock-based compensation plans: At December 31, 2010, the Company has four stock-based employee compensation plans, which are described more fully in Note 15.
The Company accounts for stock-based compensation with measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation over the requisite service period for awards expected to vest.
As discussed in Note 15, during the years ended December 31, 2010, 2009, and 2008, the Company recognized stock-based compensation expense related to stock options, stock purchases, and stock appreciation rights of $488,112, $512,963, and $298,921, respectively. As required, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with the following assumptions for the indicated periods:
             
    2010   2009   2008
 
           
Dividend yield
  .89% to .90%   .78% to 1.04%   0.49% to 0.68%
Expected volatility
  26.72% to 26.88%   24.70% to 38.72%   23.58% to 25.13%
Risk-free interest rate
  3.86% to 4.21%   3.27% to 4.12%   3.27% to 4.34%
Expected life of option grants
  6 years   6 years   6 years
Weighted-average grant date fair value
  $2.89   $2.71   $5.05
The Company also uses the Black-Scholes option pricing model to estimate the fair value of stock purchase grants with the following assumptions for the indicated periods:
             
    2010   2009   2008
 
           
Dividend yield
  .85% to .96%   .80%   0.56% to 0.64%
Expected volatility
  39.56% to 56.43%   28.80% to 34.14%   19.40% to 23.91%
Risk-free interest rate
  .13% to .29%   .22% to .36%   1.98% to 3.41%
Expected life of option grants
  3 to 6 months   3 to 6 months   3 to 6 months
Weighted-average grant date fair value
  $1.81   $1.64   $2.00
The fair value is amortized on a straight-line basis over the vesting periods of the grants and will be adjusted for subsequent changes in estimated forfeitures. The expected dividend yield assumption is based on the Company’s current expectations about its anticipated dividend policy. Expected volatility is based on historical volatility of the Company’s common stock price. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of grants is derived using the “simplified” method and represents the period of time that options are expected to be outstanding. Historical data is used to estimate forfeitures used in the model. Two separate groups of employees (employees subject to broad based grants, and executive employees and directors) are used.
As of December 31, 2010, there was $412,234 of unrecognized compensation cost related to share based payments, which is expected to be recognized over a weighted average period of 2.5 years.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 41,990 options that were in-the-money at December 31, 2010. The aggregate intrinsic value at December 31, 2010 was $6,870 on both options outstanding and exercisable. During the years ended December 31, 2010 and 2008, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $16,639 and $19,352, respectively, and determined as of the date of the option exercise. No options were exercised during 2009.
Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company.
Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.
Trust assets: Trust assets held by the subsidiary banks in a fiduciary, agency, or custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not included in the accompanying consolidated financial statements since such items are not assets of the subsidiary banks.
Earnings per common share: See Note 17 for a complete description and calculation of basic and diluted earnings per common share.
Reclassifications: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders’ equity, to conform with the current period presentation.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
New accounting pronouncements: In June 2009, 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 year ended December 31, 2010.
In January 2010, 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. The adoption of the exception is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2011, FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (which was adopted by the Company effective December 31, 2010), for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The new disclosures are not expected to have a material impact on the consolidated financial statements.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Discontinued Operations
Sale of Merchant Credit Card Acquiring Business. On August 29, 2008, the Company’s subsidiary, Quad City Bancard, Inc., sold its merchant credit card acquiring business for $5.2 million and recorded an after-tax gain of approximately $3.0 million. Consequently, the business related to merchant credit card acquiring has been accounted for as discontinued operations. The assets and liabilities related to the merchant credit card acquiring business were not significant as of December 31, 2008.
The results from discontinued operations of the merchant credit card acquiring business for the year ending December 31, 2008 is presented in the following table. There was no 2010 or 2009 activity.
         
    2008  
 
 
Credit card fees, net of processing costs
  $ 693,445  
Non-interest expense
    332,285  
 
     
Income from discontinued operations, excluding gain on sale, before income taxes
  $ 361,160  
Gain on sale of discontinued operations before income taxes
    4,645,213  
 
     
Income from discontinued operations, before income taxes
  $ 5,006,373  
Income tax expense
    1,775,716  
 
     
Income from discontinued operations, net of taxes
  $ 3,230,657  
 
     
Sale of First Wisconsin Bank & Trust. On December 31, 2008, the Company sold First Wisconsin Bank & Trust, its wholly-owned commercial banking subsidiary which served the Milwaukee, Wisconsin market. The transaction involved the sale of 100% of the stock of First Wisconsin Bank & Trust for $13.7 million and resulted in a pre-tax gain on sale of approximately $495,000. The activity related to First Wisconsin Bank & Trust is accounted for as discontinued operations.
The assets and liabilities of First Wisconsin Bank & Trust as of December 31, 2008 are presented as a supplemental disclosure in the Consolidated Statement of Cash Flows.
The results from discontinued operations of First Wisconsin Bank & Trust for the year ending December 31, 2008 is presented in the following table. There was no 2010 or 2009 activity.
         
    2008  
 
 
Interest income
  $ 5,292,678  
Interest expense
    2,853,182  
 
     
Net interest income
    2,439,496  
Provision for loan losses
    1,699,112  
 
     
Net interest income after provision for loan losses
    740,384  
Noninterest income
    515,432  
Noninterest expense
    4,177,187  
 
     
Loss from discontinued operations, excluding gain on sale, before income taxes
    (2,921,371 )
Gain on sale of discontinued operations before income taxes
    494,664  
 
     
 
    (2,426,707 )
Income tax benefit
    (930,281 )
 
     
Loss from discontinued operations, net of taxes
  $ (1,496,426 )
 
     

 

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QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income and other comprehensive income (loss), which for the Company is comprised entirely of unrealized gains and losses on securities available for sale.
Other comprehensive income (loss) for the years ended December 31, 2010, 2009, and 2008 is comprised as follows:
                         
            Tax        
    Before     Expense     Net  
    Tax     (Benefit)     of Tax  
 
                       
Year ended December 31, 2010:
                       
Unrealized gains on securities available for sale:
                       
Unrealized holding gains arising during the period
  $ 803,133     $ 305,140     $ 497,993  
Less reclassification adjustment for losses included in net income
    (113,800 )     (43,236 )     (70,564 )
 
                 
Other comprehensive income
  $ 916,933     $ 348,376     $ 568,557  
 
                 
 
                       
Year ended December 31, 2009:
                       
Unrealized gains (losses) on securities available for sale:
                       
Unrealized holding (losses) arising during the period
  $ (3,953,187 )   $ (1,293,749 )   $ (2,659,438 )
Less reclassification adjustment for net gains included in net income
    1,282,022       448,708       833,314  
 
                 
Other comprehensive loss
  $ (5,235,209 )   $ (1,742,457 )   $ (3,492,752 )
 
                 
 
                       
Year ended December 31, 2008:
                       
Unrealized gains on securities available for sale:
                       
Unrealized holding gains arising during the period
  $ 1,100,541     $ 154,046     $ 946,495  
Less reclassification adjustment for gains included in net income
    199,500       69,825       129,675  
 
                 
Other comprehensive income
  $ 901,041     $ 84,221     $ 816,820  
 
                 

 

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QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment Securities
The amortized cost and fair value of investment securities as of December 31, 2010 and 2009 are summarized as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     (Losses)     Value  
December 31, 2010:
                               
Securities held to maturity, other bonds
  $ 300,000     $     $     $ 300,000  
 
                       
 
                               
Securities available for sale:
                               
U.S. govt. sponsored agency securities
  $ 401,711,432     $ 3,218,843     $ (2,704,919 )   $ 402,225,356  
Municipal securities
    20,134,611       579,215       (110,346 )     20,603,480  
Residential mortgage-backed securities
    64,912       5,526             70,438  
Trust preferred securities
    86,200             (8,200 )     78,000  
Other securities
    1,414,661       168,331       (13,499 )     1,569,493  
 
                       
 
  $ 423,411,816     $ 3,971,915     $ (2,836,964 )   $ 424,546,767  
 
                       
 
                               
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  
Municipal securities
    22,005,875       922,942       (79,025 )     22,849,792  
Residential mortgage-backed securities
    481,460       14,847             496,307  
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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QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment Securities (Continued)
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2010 and 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  
December 31, 2010:
                                               
Securities available for sale:
                                               
U.S. govt. sponsored agency securities
  $ 159,302,061     $ (2,704,919 )   $     $     $ 159,302,061     $ (2,704,919 )
Municipal securities
    4,333,786       (47,884 )     678,378       (62,462 )     5,012,164       (110,346 )
Trust preferred securities
    86,200       (8,200 )                 86,200       (8,200 )
Other securities
    226,250       (12,671 )     2,872       (828 )     229,122       (13,499 )
 
                                   
 
  $ 163,948,297     $ (2,773,674 )   $ 681,250     $ (63,290 )   $ 164,629,547     $ (2,836,964 )
 
                                   
 
                                               
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 December 31, 2010, the investment portfolio included 323 securities. Of this number, 102 securities have current unrealized losses with aggregate depreciation of less than 2% from the amortized cost basis. Of these 102, 4 have had unrealized losses for twelve months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company does not intend to sell these securities and/or it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. At December 31, 2010 and 2009, the Company’s equity securities represent less than 1% of the total portfolio.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment Securities (Continued)
For the year ended December 31, 2010, the Company’s evaluation determined the decline in fair value for one individual issue trust preferred security was other-than-temporary. As a result, the Company wrote down the value of this security and recognized a loss in the amount of $113,800. The Company does not have any other investments in trust preferred securities. The Company did not recognize other-than-temporary impairment on any debt securities for the year ended December 31, 2009 and 2008.
The Company did not recognize other-than-temporary impairment on any equity securities for the years ended December 31, 2010 and 2008.
For the year ended December 31, 2009, the Company’s evaluation determined that 11 publicly-traded equity securities experienced declines in fair value that were other-than-temporary. As a result, the Company wrote down the value of these securities and recognized losses in the amount of $206,369.
All sales of securities, as applicable, for the years ended December 31, 2010, 2009 and 2008, respectively, were from securities identified as available for sale. Information on proceeds received, as well as the gains from the sale of those securities is as follows:
                         
    2010     2009     2008  
 
                       
Proceeds from sales of securities
  $     $ 25,966,885     $ 285,000  
Gross gains from sales of securities
          1,488,391       199,500  
The amortized cost and fair value of securities as of December 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
  $ 100,000     $ 100,000  
Due after one year through five years
    150,000       150,000  
Due after five years
    50,000       50,000  
 
           
 
  $ 300,000     $ 300,000  
 
           
 
               
Securities available for sale:
               
Due in one year or less
  $ 13,261,194     $ 13,324,629  
Due after one year through five years
    79,615,491       79,961,562  
Due after five years
    329,055,558       329,620,645  
 
           
 
  $ 421,932,243     $ 422,906,836  
Residential mortgage-backed securities
    64,912       70,438  
Other securities
    1,414,661       1,569,493  
 
           
 
  $ 423,411,816     $ 424,546,767  
 
           
As of December 31, 2010 and 2009, investment securities with a carrying value of $401,044,051 and $365,266,357, respectively, were pledged on Federal Home Loan Bank advances, customer and wholesale repurchase agreements, and for other purposes as required or permitted by law.

 

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Table of Contents

QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Loans/Leases Receivable
The composition of the loan/lease portfolio as of December 31, 2010 and 2009 is presented as follows:
                 
    2010     2009  
 
               
Commercial and industrial loans
  $ 365,625,271     $ 441,535,998  
Commercial real estate loans
    553,717,264       556,006,759  
Direct financing leases *
    83,009,647       90,058,839  
Residential real estate loans **
    82,196,622       70,608,131  
Installment and other consumer loans
    86,239,944       84,270,687  
 
           
 
    1,170,788,748       1,242,480,414  
Plus deferred loan/lease orgination costs, net of fees
    1,749,855       1,839,152  
 
           
 
    1,172,538,603       1,244,319,566  
Less allowance for estimated losses on loans/leases
    (20,364,656 )     (22,504,734 )
 
           
 
  $ 1,152,173,947     $ 1,221,814,832  
 
           
 
               
* Direct financing leases:
               
Net minimum lease payments to be received
  $ 94,921,417     $ 103,596,980  
Estimated unguaranteed residual values of leases assets
    1,204,865       2,100,265  
Unearned lease/residual income
    (13,116,635