-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VoMhoSlRhwsCPr/IBC3ipRmAHf53/cSCQheEQGNdzq3gA6wgjfAdGYbuLgmoWI73 NSIRjKaUzvoFJT2lhDwVNw== 0000743530-05-000062.txt : 20051114 0000743530-05-000062.hdr.sgml : 20051111 20051114090113 ACCESSION NUMBER: 0000743530-05-000062 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QCR HOLDINGS INC CENTRAL INDEX KEY: 0000906465 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421397595 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22208 FILM NUMBER: 051196888 BUSINESS ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097363580 MAIL ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 FORMER COMPANY: FORMER CONFORMED NAME: QUAD CITY HOLDINGS INC DATE OF NAME CHANGE: 19930805 10-Q 1 qcrhold10q.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to __________________ Commission file number 0-22208 QCR HOLDINGS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 42-1397595 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer ID Number) incorporation or organization) 3551 7th Street, Suite 204, Moline, Illinois 61265 -------------------------------------------------- (Address of principal executive offices) (309) 736-3580 ---------------------------------------------------- (Registrant's telephone number, including area code) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 the past 90 days. Yes [ x ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of November 1, 2005, the Registrant had outstanding 4,529,786 shares of common stock, $1.00 par value per share. 1 QCR HOLDINGS, INC. AND SUBSIDIARIES INDEX Page Number Part I FINANCIAL INFORMATION Item 1 Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets, September 30, 2005 and December 31, 2004 3 Consolidated Statements of Income, For the Three Months Ended September 30, 2005 and 2004 4 Consolidated Statements of Income, For the Nine Months Ended September 30, 2005 and 2004 5 Consolidated Statements of Cash Flows, For the Nine Months Ended September 30, 2005 and 2004 6-7 Notes to Consolidated Financial Statements 8-13 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14-31 Item 3 Quantitative and Qualitative Disclosures 32 About Market Risk Item 4 Controls and Procedures 34 Part II OTHER INFORMATION Item 1 Legal Proceedings 35 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 35 Item 3 Defaults Upon Senior Securities 35 Item 4 Submission of Matters to a Vote of Security Holders 35 Item 5 Other Information 35 Item 6 Exhibits 35 Signatures 36 2 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, 2005 and December 31, 2004 September 30, December 31, 2005 2004 ------------------------------ ASSETS Cash and due from banks ................................... $ 26,487,583 $ 21,372,342 Federal funds sold ........................................ 4,170,000 2,890,000 Interest-bearing deposits at financial institutions ....... 1,571,653 3,857,563 Securities held to maturity, at amortized cost ............ 150,000 100,000 Securities available for sale, at fair value .............. 172,806,127 149,460,886 ------------------------------ 172,956,127 149,560,886 ------------------------------ Loans receivable held for sale ............................ 4,985,905 3,498,809 Loans/leases receivable held for investment ............... 717,110,798 644,852,018 Less: Allowance for estimated losses on loans/leases ...... (8,972,060) (9,261,991) ------------------------------ 713,124,643 639,088,836 ------------------------------ Premises and equipment, net ............................... 25,429,245 18,100,590 Goodwill .................................................. 3,359,963 0 Accrued interest receivable ............................... 5,066,799 4,072,762 Bank-owned life insurance ................................. 17,204,800 15,935,000 Other assets .............................................. 17,147,155 15,205,568 ------------------------------ Total assets ...................................... $ 986,517,968 $ 870,083,547 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing ..................................... $ 111,386,720 $ 109,361,817 Interest-bearing ........................................ 579,700,297 478,653,866 ------------------------------ Total deposits .................................... 691,087,017 588,015,683 ------------------------------ Short-term borrowings ..................................... 74,591,289 104,771,178 Federal Home Loan Bank advances ........................... 118,057,128 92,021,877 Other borrowings .......................................... 10,282,210 6,000,000 Junior subordinated debentures ............................ 25,775,000 20,620,000 Other liabilities ......................................... 12,430,827 7,881,009 ------------------------------ Total liabilities ................................. 932,223,471 819,309,747 ------------------------------ Minority interest in consolidated subsidiary .............. 594,078 -- STOCKHOLDERS' EQUITY Common stock, $1 par value; shares authorized 10,000,000 . 4,526,332 4,496,730 September 2005 - 4,526,332 shares issued and outstanding, December 2004 - 4,496,730 shares issued and outstanding, Additional paid-in capital ................................ 20,700,184 20,329,033 Retained earnings ......................................... 28,639,786 25,278,666 Accumulated other comprehensive (loss) income ............. (165,883) 669,371 ------------------------------ Total stockholders' equity ........................ 53,700,419 50,773,800 ------------------------------ Total liabilities and stockholders' equity ........ $ 986,517,968 $ 870,083,547 ==============================
See Notes to Consolidated Financial Statements 3 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended September 30 2005 2004 ------------------------- Interest and dividend income: Loans/leases, including fees ....................... $10,903,448 $ 8,560,941 Securities: Taxable .......................................... 1,352,176 1,040,293 Nontaxable ....................................... 142,434 139,886 Interest-bearing deposits at financial institutions 25,645 43,242 Federal funds sold ................................. 78,809 15,216 ------------------------- Total interest and dividend income ........... 12,502,512 9,799,578 ------------------------- Interest expense: Deposits ........................................... 3,457,112 1,708,404 Short-term borrowings .............................. 451,615 378,125 Federal Home Loan Bank advances .................... 1,134,213 915,142 Other borrowings ................................... 172,344 50,488 Junior subordinated debentures ..................... 427,066 316,196 ------------------------- Total interest expense ....................... 5,642,350 3,368,355 ------------------------- Net interest income .......................... 6,860,162 6,431,223 Provision for loan/leases losses ..................... 382,752 411,385 ------------------------- Net interest income after provision for loan/lease losses ............................ 6,477,410 6,019,838 ------------------------- Noninterest income: Merchant credit card fees, net of processing costs . 516,487 253,107 Trust department fees .............................. 676,444 616,506 Deposit service fees ............................... 387,445 421,223 Gains on sales of loans, net ....................... 274,616 242,896 Securities gains, net .............................. 12 -- Earnings on cash surrender value of life insurance . 174,183 167,977 Investment advisory and management fees ............ 176,254 128,760 Other .............................................. 303,094 189,088 ------------------------- Total noninterest income ..................... 2,508,535 2,019,557 ------------------------- Noninterest expenses: Salaries and employee benefits ..................... 4,219,355 3,458,437 Professional and data processing fees .............. 618,719 620,242 Advertising and marketing .......................... 330,204 232,654 Occupancy and equipment expense .................... 1,162,997 841,827 Stationery and supplies ............................ 163,448 124,915 Postage and telephone .............................. 222,642 169,626 Bank service charges ............................... 128,671 146,569 Insurance .......................................... 145,838 126,032 Loss on disposal of fixed assets ................... 332,283 0 Other .............................................. 265,590 192,972 ------------------------- Total noninterest expenses ................... 7,589,747 5,913,274 ------------------------- Minority interest in income of consolidated subsidiary ......................................... 20,651 -- Income before income taxes ................... 1,375,547 2,126,121 Federal and state income taxes ....................... 419,968 703,464 ------------------------- Net income ................................... $ 955,579 $ 1,422,657 ========================= Earnings per common share: Basic .............................................. $ 0.21 $ 0.33 Diluted ............................................ $ 0.21 $ 0.33 Weighted average common shares outstanding ......... 4,524,543 4,246,741 Weighted average common and common equivalent ...... 4,623,179 4,349,317 shares outstanding Comprehensive income ................................. $ 652,990 $ 2,147,990 =========================
See Notes to Consolidated Financial Statements 4 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Nine Months Ended September 30 2005 2004 ------------------------- Interest and dividend income: Loans/leases, including fees ................................. $30,307,908 $24,053,837 Securities: Taxable .................................................... 3,775,686 3,018,977 Nontaxable ................................................. 418,683 426,987 Interest-bearing deposits at financial institutions .......... 94,745 181,514 Federal funds sold ........................................... 124,349 22,795 ------------------------- Total interest and dividend income ..................... 34,721,371 27,704,110 ------------------------- Interest expense: Deposits ..................................................... 8,553,269 4,731,299 Short-term borrowings ........................................ 1,565,534 758,062 Federal Home Loan Bank advances .............................. 2,994,141 2,575,749 Other borrowings ............................................. 361,216 96,538 Junior subordinated debentures ............................... 1,141,714 1,316,489 ------------------------- Total interest expense ................................. 14,615,874 9,478,137 ------------------------- Net interest income .................................... 20,105,497 18,225,973 Provision for loan/lease losses ................................ 536,540 1,735,885 ------------------------- Net interest income after provision for loan/lease losses ...................................... 19,568,957 16,490,088 ------------------------- Noninterest income: Merchant credit card fees, net of processing costs 1,319,204 1,094,390 Trust department fees ........................................ 2,131,505 1,905,341 Deposit service fees ......................................... 1,165,008 1,238,331 Gains on sales of loans, net ................................. 879,788 910,749 Securities gains (losses), net ............................... 12 26,188 Earnings on cash surrender value of life insurance ........... 493,145 503,743 Investment advisory and management fees ...................... 516,108 390,391 Other ........................................................ 955,118 688,572 ------------------------- Total noninterest income ............................... 7,459,888 6,757,705 ------------------------- Noninterest expenses: Salaries and employee benefits ............................... 12,236,200 9,729,540 Professional and data processing fees ........................ 2,056,113 1,616,344 Advertising and marketing .................................... 897,967 733,644 Occupancy and equipment expense .............................. 3,161,196 2,363,577 Stationery and supplies ...................................... 475,464 394,107 Postage and telephone ........................................ 617,327 498,685 Bank service charges ......................................... 386,170 431,812 Insurance .................................................... 452,680 351,599 Loss on disposal of fixed assets ............................. 332,283 -- Loss on redemption of junior subordinated debentures ......... 747,490 Other ........................................................ 1,170,393 573,144 ------------------------- Total noninterest expenses ............................. 21,785,793 17,439,942 ------------------------- Minority interest in income of consolidated subsidiary ......... 20,651 -- Income before income taxes ............................. 5,222,401 5,807,851 Federal and state income taxes ................................. 1,680,549 1,878,065 ------------------------- Net income ............................................. $ 3,541,852 $ 3,929,786 ========================= Earnings per common share: Basic ........................................................ $ 0.78 $ 0.93 Diluted ...................................................... $ 0.77 $ 0.91 Weighted average common shares outstanding ................... 4,514,105 4,224,670 Weighted average common and common equivalent ................ 4,616,245 4,336,794 shares outstanding Cash dividends declared per common share ....................... $ 0.04 $ 0.04 ========================= Comprehensive income ........................................... $ 2,706,598 $ 3,255,330 =========================
See Notes to Consolidated Financial Statements 5 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30 2005 2004 ------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................ $ 3,541,852 $ 3,929,786 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................ 1,436,193 1,076,959 Provision for loan/lease losses ......................... 536,540 1,735,885 Amortization of offering costs on subordinated debentures 10,738 14,354 Loss on redemption of junior subordinated debentures .... -- 747,490 Minority interest in income of consolidated subsidiary .. 20,651 -- Amortization of premiums on securities, net ............. 415,157 795,404 Investment securities gains, net ........................ (12) (26,188) Loans originated for sale ............................... (74,614,426) (65,023,902) Proceeds on sales of loans .............................. 74,076,481 66,611,487 Net gains on sales of loans ............................. (879,788) (910,749) Tax benefit of nonqualified stock options exercised ..... 119,118 169,977 Increase in accrued interest receivable ................. (994,037) (365,955) Increase in other assets ................................ (1,274,347) (4,065,360) Increase in other liabilities ........................... 478,308 1,257,415 ------------------------------ Net cash (used in) provided by operating activities . $ 2,872,428 $ 5,946,603 ------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in federal funds sold ............. (1,280,000) 575,000 Net decrease in interest-bearing deposits at financial institutions .................................. 2,285,910 6,362,297 Activity in securities portfolio: Purchases ............................................... (62,049,794) (52,514,428) Calls and maturities .................................... 35,947,500 39,831,001 Paydowns ................................................ 961,574 1,444,332 Activity in bank-owned life insurance: Purchases ............................................... (776,634) (12,221,428) Increase in cash value .................................. (493,166) (481,364) Net loans/leases originated and held for investment ....... (41,602,375) (104,556,733) Purchase of premises and equipment ........................ (9,014,417) (4,470,826) Loss on disposal of fixed assets .......................... 332,283 -- Proceeds from sales of premises and equipment ............. -- 8,247 Payment for acquisition of m2 Lease Funds, LLC (Note 6) ... (4,984,372) -- ------------------------------ Net cash used in investing activities ............... $(80,673,491) $(126,023,902) ------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit accounts .......................... 103,071,333 17,721,260 Net (decrease) increase in short-term borrowings .......... (30,179,889) 78,278,821 Activity in Federal Home Loan Bank advances: Advances ................................................ 33,700,000 32,500,000 Payments ................................................ (7,664,749) (12,156,884) Net decrease in other borrowings .......................... (21,086,428) (3,000,000) Proceeds from issuance of junior subordinated debentures .. 5,155,000 20,620,000 Redemption of junior subordinated debentures .............. -- (12,000,000) Payment of cash dividends ................................. (360,598) (336,816) Payment of fractional shares on 3:2 stock split ........... -- (2,549) Proceeds from issuance of common stock, net ............... 281,635 189,847 ------------------------------ Net cash provided by financing activities ........... $ 82,916,304 $ 121,813,679 ------------------------------ Net increase in cash and due from banks ............. 5,115,241 1,736,380 Cash and due from banks, beginning .......................... 21,372,342 24,427,573 ------------------------------ Cash and due from banks, ending ............................. $ 26,487,583 $ 26,163,953 ============================== Supplemental disclosure of cash flow information, cash payments for: Interest .................................................. $ 13,886,062 $ 9,508,452 ============================== Income/franchise taxes .................................... $ 864,944 $ 1,763,478 ============================== Supplemental schedule of noncash investing activities: Change in accumulated other comprehensive income, unrealized losses on securities available for sale, net . $ (835,254) $ (674,456) ============================== Transfers of loans to other real estate owned ............. $ 53,800 $ 245,072 ==============================
See Notes to Consolidated Financial Statements 6 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30 (continued) 2005 ------------ Acquisition of m2 Lease funds, LLC, (Note 6) cash paid at settlement .............................................. $ 4,967,300 ============ Fair value of assets acquired and liabilities assumed: Cash and due from banks .................................... $ (17,072) Leases receivable held for investment, net ................. 31,536,676 Premises and equipment, net ................................ 82,714 Goodwill ................................................... 3,359,963 Other assets ............................................... 47,177 Other borrowings ........................................... (25,368,638) Other liabilities .......................................... (4,100,093) Minority interest .......................................... (573,427) ------------ $ 4,967,300 ============ 7 Part I Item 1 QCR HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include information or footnotes necessary for a fair presentation of financial position, results of operations and changes in financial condition in conformity with accounting principles generally accepted in the United States of America. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. Any differences appearing between numbers presented in financial statements and management's discussion and analysis are due to rounding. Results for the periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. Certain amounts in the prior period financial statements have been reclassified, with no effect on net income or stockholders' equity, to conform with the current period presentation. Principles of consolidation: The accompanying consolidated financial statements include the accounts of QCR Holdings, Inc. (the "Company"), a Delaware corporation, and its wholly owned subsidiaries, Quad City Bank and Trust Company ("Quad City Bank & Trust"), Cedar Rapids Bank and Trust Company ("Cedar Rapids Bank & Trust"), Rockford Bank and Trust Company ("Rockford Bank & Trust"), Quad City Bancard, Inc. ("Bancard"), and Quad City Liquidation Corporation ("QCLC"). Quad City Bank & Trust owns 80% of the equity interests of m2 Lease Funds, LLC ("m2 Lease Funds"). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company also wholly owns QCR Holdings Statutory Trust II ("Trust II"), QCR Holdings Statutory Trust III ("Trust III"), and QCR Holdings Statutory Trust IV ("Trust IV"). These three entities were established by the Company for the sole purpose of issuing trust preferred securities. As required by a ruling of the Securities and Exchange Commission in December 2003, the Company's equity investments in these entities are not consolidated, but are included in other assets on the consolidated balance sheet for $777 thousand in aggregate at September 30, 2005. In addition to these eight wholly owned subsidiaries, the Company has an aggregate investment of $305 thousand in three affiliated companies, Nobel Electronic Transfer, LLC, Nobel Real Estate Investors, LLC, and Velie Plantation Holding Company. The Company owns 20% equity positions in each of these affiliated companies. In June 2005, Cedar Rapids Bank & Trust entered into a joint venture as a 50% owner of Cedar Rapids Mortgage Company, LLC ("Cedar Rapids Mortgage Company"). 8 Stock-based compensation plans: The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------- 2005 2004 2005 2004 ----------------------------------------------------- Net income, as reported ............... $ 955,579 $1,422,657 $3,541,852 $3,929,786 Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects .. (42,977) (32,584) (131,707) (97,147) ----------------------------------------------------- Net income .................... $ 912,602 $1,390,073 $3,410,145 $3,832,639 ===================================================== Earnings per share: Basic: As reported ....................... $ 0.21 $ 0.33 $ 0.78 $ 0.93 Pro forma ......................... $ 0.20 $ 0.33 $ 0.76 $ 0.91 Diluted: As reported ....................... $ 0.21 $ 0.33 $ 0.77 $ 0.91 Pro forma ......................... $ 0.20 $ 0.32 $ 0.74 $ 0.89
In determining compensation cost using the fair value method prescribed in Statement No. 123, the value of each grant is estimated at the grant date with the following weighted-average assumptions for grants during the nine months ended September 30, 2005 and 2004: dividend rate of 0.36% to 0.44%; expected price volatility of 15.85% to 24.88%; risk-free interest rate based upon current rates at the date of grants (4.10% to 4.72% for stock options and 0.95% to 2.98% for the employee stock purchase plan); and expected lives of 10 years for stock options and 3 months to 6 months for the employee stock purchase plan. NOTE 2 - EARNINGS PER SHARE The following information was used in the computation of earnings per share on a basic and diluted basis. Three months ended Nine months ended, September 30, September 30, ------------------------------------------------- 2005 2004 2005 2004 ------------------------------------------------- Net income, basic and diluted Earnings .................................. $ 955,579 $1,422,657 $3,541,852 $3,929,786 ================================================= Weighted average common shares Outstanding ............................... 4,524,543 4,246,741 4,514,105 4,224,670 Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan .............. 98,636 102,576 102,140 112,124 ------------------------------------------------- Weighted average common and common equivalent shares outstanding ............................... 4,623,179 4,349,317 4,616,245 4,336,794 =================================================
9 NOTE 3 - BUSINESS SEGMENT INFORMATION Selected financial information on the Company's business segments is presented as follows for the three-month and nine-month periods ended September 30, 2005 and 2004, respectively. Three months ended Nine months ended September 30, September 30, ------------------------------------------------------------ 2005 2004 2005 2004 ------------------------------------------------------------ Revenue: Commercial banking: Quad City Bank & Trust .. $ 9,390,577 $ 8,249,805 $ 26,962,059 $ 24,062,719 Cedar Rapids Bank & Trust 3,713,301 2,574,642 10,384,391 6,911,314 Rockford Bank & Trust ... 331,920 -- 550,881 -- Credit card processing .... 589,243 304,111 1,507,358 1,236,846 Trust management .......... 676,444 616,505 2,131,505 1,905,341 Leasing services .......... 245,479 -- 245,479 -- All other ................. 64,083 74,072 399,586 345,595 ------------------------------------------------------------ Total revenue ....... $ 15,011,047 $ 11,819,135 $ 42,181,259 $ 34,461,815 ============================================================ Net income (loss): Commercial banking: Quad City Bank & Trust .. $ 1,353,352 $ 1,535,346 $ 4,142,049 $ 4,346,227 Cedar Rapids Bank & Trust 28,881 276,826 872,045 682,539 Rockford Bank & Trust ... (287,241) (133,879) (1,019,719) (183,700) Credit card processing .... 216,666 25,098 453,688 370,497 Trust management .......... 127,109 147,023 460,366 481,924 Leasing services .......... 91,776 -- 91,776 -- All other ................. (574,964) (427,757) (1,458,353) (1,767,701) ------------------------------------------------------------ Total net income .... $ 955,579 $ 1,422,657 $ 3,541,852 $ 3,929,786 ============================================================
NOTE 4 - COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company's subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the 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 subsidiary 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 September 30, 2005 and December 31, 2004, no amounts were recorded as liabilities for the banks' potential obligations under these guarantees. As of September 30, 2005 and December 31, 2004, commitments to extend credit aggregated were $286.8 million and $257.6 million, respectively. As of September 30, 2005 and December 31, 2004, standby, commercial and similar letters of credit aggregated were $15.3 million and $12.7 million, respectively. Management does not expect that all of these commitments will be funded. The Company has also executed contracts for the sale of mortgage loans in the secondary market in the amounts of $5.0 million and $3.5 million, at September 30, 2005 and December 31, 2004, respectively. These amounts are included in loans held for sale at the respective balance sheet dates. 10 Residential mortgage loans sold to investors in the secondary market are sold with varying recourse provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by the seller in situations such as breach of representation, warranty, or covenant, untimely document delivery, false or misleading statements, failure to obtain certain certificates or insurance, unmarketability, etc. Certain loan sales agreements also contain repurchase requirements based on payment-related defects that are defined in terms of the number of days/months since the purchase, the sequence number of the payment, and/or the number of days of payment delinquency. Based on the specific terms stated in the agreements of investors purchasing residential mortgage loans from the Company's subsidiary banks, the Company had $45.7 million and $35.6 million of sold residential mortgage loans with recourse provisions still in effect at September 30, 2005 and December 31, 2004, respectively. The subsidiary banks did not repurchase any loans from secondary market investors under the terms of loans sales agreements during the nine months ended September 30, 2005 or the year ended December 31, 2004. In the opinion of management, the risk of recourse to the subsidiary banks is not significant, and accordingly no liabilities have been established related to such. During 2004, Quad City Bank & Trust joined the Federal Home Loan Bank's (FHLB) Mortgage Partnership Finance (MPF) Program, which offers a "risk-sharing" alternative to selling residential mortgage loans to investors in the secondary market. Lenders funding mortgages through the MPF Program manage the credit risk of the loans they originate. The loans are subsequently funded by the FHLB and held within their portfolio, thereby managing the liquidity, interest rate, and prepayment risks of the loans. Lenders participating in the MPF Program receive monthly credit enhancement fees for managing the credit risk of the loans they originate. Any credit losses incurred on those loans will be absorbed first by private mortgage insurance, second by an allowance established by the FHLB, and third by withholding monthly credit enhancements due to the participating lender. At September 30, 2005, Quad City Bank & Trust had funded $13.5 million of mortgages through the FHLB's MPF Program with an attached credit exposure of $271 thousand. At December 31, 2004, Quad City Bank & Trust had funded $11.7 million of mortgages through the FHLB's MPF Program with an attached credit exposure of $240 thousand. In conjunction with its participation in this program, Quad City Bank & Trust had an allowance for credit losses on these off-balance sheet exposures of $47 thousand and $11 thousand at September 30, 2005 and December 31, 2004, respectively. Bancard is subject to the risk of cardholder chargebacks and its merchants being incapable of refunding the amount charged back. Management attempts to mitigate such risk by regular monitoring of merchant activity and in appropriate cases, holding cash reserves deposited by the merchant. In August of 2004, Bancard began making monthly provisions to an allowance for chargeback losses based on the month's dollar volume of merchant credit card activity. For the nine months ended September 30, 2005, monthly provisions were made totaling $43 thousand. An aggregate of $110 thousand from two reversals to a specific merchant reserve more than offset these provisions. At September 30, 2005 and December 31, 2004, Bancard had a merchant chargeback reserve of $97 thousand and $164 thousand, respectively. Management will continually monitor merchant credit card activity and Bancard's level of the allowance for chargeback losses. The Company also has a limited guarantee to MasterCard International, Incorporated, which is backed by a $750 thousand letter of credit from The Northern Trust Company. As of September 30, 2005 and December 31, 2004, there were no significant pending liabilities. NOTE 5 - JUNIOR SUBORDINATED DEBENTURES In June 1999, the Company issued 1,200,000 shares of 9.2% cumulative trust preferred securities through a newly formed subsidiary, Trust I, which used the proceeds from the sale of the trust preferred securities to purchase junior subordinated debentures of the Company. These securities were $12.0 million at December 31, 2003. In February 2004, the Company issued, in a private transaction, $12.0 million of fixed/floating rate capital securities and $8.0 million of floating rate capital securities through two newly formed subsidiaries, Trust II and Trust III, respectively. The securities issued by Trust II and Trust III mature in thirty years. The fixed/floating rate capital securities are callable at par after seven years, and the floating rate capital securities are callable at par after five years. The fixed/floating rate capital securities have a fixed rate of 6.93%, payable quarterly, for seven years, at which time they have a variable rate based on the three-month LIBOR, reset quarterly, and the floating rate capital securities have a variable rate based on the three-month LIBOR, reset quarterly, with the rate currently set at 6.34%. Trust II and Trust III used the proceeds from the sale of the trust preferred securities, along with the funds from their equity, to purchase junior subordinated debentures of the Company in the amounts of $12.4 million and $8.2 million, respectively. These securities were $20.0 million in aggregate at September 30, 2005. On June 30, 2004, the Company redeemed the $12.0 million of 9.2% cumulative trust preferred securities issued by Trust I in 1999. During 2004, the Company recognized a loss of $747 thousand on the redemption of these trust preferred securities at their earliest call date, which resulted from the one-time write-off of unamortized costs related to the original issuance of the securities in 1999. 11 On May 5, 2005, the Company announced the issuance of $5.0 million of floating rate capital securities of QCR Holdings Statutory Trust IV. The securities represent the undivided beneficial interest in Trust IV, which was established by the Company for the sole purpose of issuing the Trust Preferred Securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended and were not registered under the Act. The securities issued by Trust IV mature in thirty years, but are callable at par after five years. The Trust Preferred Securities have a variable rate based on the three-month LIBOR, reset quarterly, with the current rate set at 5.95%. Interest is payable quarterly. Trust IV used the $5.0 million of proceeds from the sale of the Trust Preferred Securities, in combination with $155 thousand of proceeds from its own equity, to purchase $5.2 million of junior subordinated debentures of the Company. The Company treats these issuances as Tier 1 capital for regulatory capital purposes, subject to current established limitations. The Company incurred no issuance costs as a result of the transaction. The Company used the net proceeds for general corporate purposes, including the paydown of its other borrowings. NOTE 6 - ACQUISITION On August 26, 2005, the Quad City Bank & Trust acquired 80% of the membership units of m2 Lease Funds, LLC ("m2 Lease Funds"). John Engelbrecht, the President and Chief Executive Officer of m2 Lease Funds, retained 20% of the membership units. Quad City Bank & Trust acquired assets and assumed liabilities totaling $31.6 million and $29.5 million, respectively, for a purchase price of $5.0 million, which resulted in goodwill of $3.4 million and minority interest of $573 thousand. The Company is in the process of finalizing the valuation of certain assets acquired; thus, the allocation of the purchase price is subject to adjustment. In accordance with the provisions of FAS Statement 142, goodwill is not being amortized, but will be evaluated annually for impairment. m2 Lease Funds, which is based in the Milwaukee, Wisconsin area, is engaged in the business of leasing machinery and equipment to commercial and industrial businesses under direct financing lease contracts. m2's operating results are included in the Company's Consolidated Statements of Income from August 26, 2005 through September 30, 2005. The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition: Cash and due from banks ....................................... $ (17,072) Leases receivable held for investment, net .................... 31,536,676 Premises and equipment, net ................................... 82,714 Goodwill ...................................................... 3,359,963 Other assets .................................................. 47,177 Total assets acquired ................................. 35,009,458 Other borrowings .............................................. (25,368,638) Other liabilities ............................................. (4,100,093) Minority interest ............................................. (573,427) ------------ Total liabilities assumed ............................. (30,042,158) ------------ Net assets acquired ................................... $ 4,967,300 ============ 12 NOTE 7 - RECENT ACCOUNTING DEVELOPMENTS In November 2003, the Emerging Issues Task Force (EITF) reached a consensus on certain disclosure requirements under EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". The new disclosure requirements apply to investment in debt and marketable equity securities that are accounted for under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Effective for fiscal years ending after December 15, 2003, companies were required to disclose information about debt or marketable equity securities with market values below carrying values. The Company previously implemented the disclosure requirements of EITF Issue No. 03-1. In March 2004, the EITF came to a consensus regarding EITF 03-1. Securities in scope are those subject to SFAS 115. The EITF adopted a three-step model that requires management to determine if impairment exists, decide whether it is other-than-temporary, and record other-than-temporary losses in earnings. In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments," which will apply to reporting periods beginning after December 15, 2005. The FSPs provide guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. The FSPs also include accounting considerations subsequent to the recognition of other-than-temporary impairment and requirements for certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In December 2004, FASB published Statement No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)") FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options and shares under employee stock purchase plans, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement. The Statement was originally effective at the beginning of the Company's third quarter in 2005, however, in April 2005 the adoption of a new rule, by the Securities and Exchange Commission, changed the dates for compliance with this standard. The Company will now be required to implement Statement No. 123(R) beginning January 1, 2006. As of the effective date, the Company will have the option of applying the Statement using a modified prospective application or a modified retrospective application. Under the prospective method compensation cost would be recognized for (1) all awards granted after the required effective date and for awards modified, cancelled, or repurchased after that date and (2) the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro forma disclosures under SFAS 123. Under the retrospective application method compensation cost would be recognized as in (1) above and (2) for prior periods would be restated consistent with the pro forma disclosures required for those periods by SFAS 123. The Company has not yet made a decision on which method of application it will elect. The impact of this Statement on the Company after the effective date and beyond will depend upon various factors, among them being the future compensation strategy. The SFAS 123 pro forma compensation costs presented in the footnotes to the financial statements have been calculated using a Black-Scholes option-pricing model and may not be indicative of amounts, which should be expected in future periods. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Quad City Bank & Trust and Cedar Rapids Bank & Trust are Iowa-chartered commercial banks, and Rockford Bank & Trust is an Illinois-chartered commercial bank. All are members of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation. Quad City Bank & Trust commenced operations in 1994 and provides full-service commercial and consumer banking, and trust and asset management services to the Quad City area and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. Quad City Bank & Trust also provides leasing services through its 80%-owned subsidiary, m2 Lease Funds, located in Milwaukee, Wisconsin. Cedar Rapids Bank & Trust commenced operations in 2001 and provides full-service commercial and consumer banking service to Cedar Rapids and adjacent communities through its new main office located on First Avenue in downtown Cedar Rapids, Iowa and its recently opened branch facility located on Council Street in northern Cedar Rapids. Cedar Rapids Bank & Trust also provides residential real estate mortgage lending services through its 50%-owned joint venture, Cedar Rapids Mortgage Company. Rockford Bank & Trust commenced operations in January 2005 and provides full-service commercial and consumer banking service to Rockford and adjacent communities through its office located in downtown Rockford. Bancard provides merchant and cardholder credit card processing services. Bancard currently provides credit card processing for its local merchants and agent banks and for cardholders of the Company's subsidiary banks. OVERVIEW Net income for the first nine months of 2005 was $3.5 million as compared to net income of $3.9 million for the same period in 2004, a decrease of $367 thousand, or 9%. Basic and diluted earnings per share for the first nine months of 2005 were $0.78 and $0.77, respectively, compared to $0.93 basic and $0.91 diluted earnings per share for the first nine months of 2004. For the nine months ended September 30, 2005, total gross revenue experienced an improvement of $7.7 million when compared to the same period in 2004. Contributing to this 22% improvement in total gross revenue for the Company were increases in total gross interest income of $7.0 million, or 25%, and in noninterest income of $702 thousand, or 10%. Also positively impacting earnings was a decline in the provision for loan losses of $1.2 million, or 69%. The first nine months of 2005 reflected a significant increase in noninterest expense of $4.3 million, or 25%, when compared to the same period in 2004, which included a first quarter loss of $747 thousand on the redemption of junior subordinated debentures. The increase in noninterest expense was predominately due to anticipated increases in both personnel and facilities costs, as the subsidiary banks opened four new banking locations during 2005 and to a related write-off of tenant improvements at a previously occupied facility. In summary, the solid growth in revenue experienced during the first nine months of 2005, in combination with the reduced provision for loan losses, did not offset the year-to-year increase in noninterest expense, which resulted primarily from four new banking locations, the one-time write-off of tenant improvements at a previously occupied facility, and the start-up of a new charter in the Rockford, Illinois market, causing net income through the first three quarters of 2005 to fall short of that in the comparable period of 2004. The Company continues to balance its focus on increasing long-term profitability and stockholder value through current expenditures investing in new facilities with a view towards growth. Net income for the third quarter of 2005 was $956 thousand as compared to net income of $1.4 million for the same period in 2004, a decrease of $467 thousand, or 33%. Basic and diluted earnings per share for the third quarter of 2005 were $0.21 and $0.21, respectively, compared to $0.33 basic and $0.33 diluted earnings per share for the third quarter of 2004. For the three months ended September 30, 2005, total revenue experienced an improvement of $3.2 million when compared to the same period in 2004. Contributing to this 27% improvement in revenue for the Company were increases in net interest income of $429 thousand, or 7%, and in noninterest income of $489 thousand, or 24%. Also positively impacting earnings was a slight decline in the provision for loan losses of $29 thousand, or 7%. The third quarter of 2005 reflected a significant increase in noninterest expense of $1.7 million, or 28%, when compared to the same period in 2004. The increase in noninterest expense was predominately due to anticipated increases in both personnel and facilities costs, as the subsidiary banks opened four new banking locations during 2005, along with a related write-off of tenant improvements at a previously occupied facility. In summary, despite the solid growth in revenue experienced during the third quarter of 2005, net income for the quarter fell significantly short of third quarter net income from one year ago. The $470 thousand of pretax start-up losses incurred by Rockford Bank & Trust during the quarter, in combination with the Company's overall year-to-year increase in noninterest expenses did not allow the Company to maintain third quarter net earnings from one year ago. 14 Net income for the third quarter of 2005 was down 24%, or $307 thousand from the previous quarter. Quarter-to-quarter total revenue increased by $1.0 million, or 7%, however, total expense increased by $1.5 million, or 13%. In the third quarter, there was a narrowing of the net interest spread and an $860 thousand increase in the Company's cost of funds from the second quarter. There was also a significant upward swing of $530 thousand from the second quarter to the third quarter in the level of provision for loan/lease losses. The provision for loan/lease losses for the third quarter was $383 thousand compared to a negative provision of $147 thousand for the second quarter of 2005. During the second quarter, the successful resolution of some large credits within Quad City Bank & Trust's loan portfolio resulted in reductions to both the provision expense and the level of allowance for loan losses. Both net interest income and noninterest income showed slight improvement from quarter-to-quarter. Net interest income increased by $103 thousand, or 2%, and noninterest income increased by 3%, or $74 thousand. The quarter-to-quarter aggregate increase in total net interest income and noninterest income of $177 thousand was more than offset by a combination of the increase in provision for loan/lease losses, and a $332 thousand write-off of Cedar Rapids Bank & Trust tenant improvements made to the GreatAmerica Building, which had previously served as that subsidiary's main office. Helping to mitigate this one-time increase in noninterest expense was the favorable settlement of a troubled loan at Quad City Bank & Trust, which resulted in the reimbursement of $234 thousand of legal expense incurred earlier in the year. The Company's operating results are derived largely from net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on borrowings and customer deposits. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The Company realized a 0.31% decrease in its net interest spread, declining from 3.22% for the three months ended September 30, 2004 to 2.91% for the three months ended September 30, 2005. The average yield on interest-earning assets increased 0.58% for the three months ended September 30, 2005 when compared to the same period ended September 30, 2004. At the same time, the average cost of interest-bearing liabilities increased 0.89%. The narrowing of the net interest spread resulted in a 0.24% reduction in the Company's net interest margin. For the three months ended September 30, 2005, the net interest margin was 3.22% compared to 3.46% for the same period in 2004. The net interest margin of 3.22% for the third quarter of 2005 was a decrease from that experienced in the second quarter of 2005, during which the net interest margin was 3.33%. The Company realized a 0.16% decrease in its net interest spread, declining from 3.14% for the nine months ended September 30, 2004 to 2.98% for the nine months ended September 30, 2005. The average yield on interest-earning assets increased 0.41% for the nine months ended September 30, 2005 when compared to the same period ended September 30, 2004. At the same time, the average cost of interest-bearing liabilities increased 0.57%. The narrowing of the net interest spread resulted in a 0.17% reduction in the Company's net interest margin. For the nine months ended September 30, 2005, the net interest margin was 3.27% compared to 3.44% for the same period in 2004. Management constantly monitors and manages net interest margin. From a profitability standpoint, an important challenge for the subsidiary banks is the maintenance of their net interest margins. Management continually addresses this issue with the use of alternative funding sources and pricing strategies. 15 Consolidated Average Balance Sheets and Analysis of Net Interest Earnings For 3 Months Ended September 30, --------------------------------------------------------------------------- 2005 2004 ------------------------------------- ---------------------------------- Interest Average Interest Average Average Earned Yield or Average Earned Yield or Balance or Paid Cost Balance or Paid Cost -------------------------------------------------------------------------- ASSETS Interest earnings assets: Federal funds sold .................. $ 8,981 $ 79 3.52% $ 7,521 $ 15 0.80% Interest-bearing deposits at financial institutions ............ 2,793 26 3.72% 7,606 43 2.26% Investment securities (1) ........... 157,555 1,565 3.97% 133,026 1,252 3.76% Gross loans/leases receivable (2) ... 692,539 10,903 6.30% 602,739 8,561 5.68% ----------------------- --------------------- Total interest earning assets 861,868 12,573 5.84% 750,892 9,871 5.26% Noninterest-earning assets: Cash and due from banks ............. 27,931 31,073 Premises and equipment .............. 24,680 14,748 Less allowance for estimated losses on loans/leases ................... (8,977) (9,813) Other ............................... 41,366 31,884 --------- --------- Total assets ................ $ 946,868 $ 818,784 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits .... $ 206,974 936 1.81% $ 174,157 344 0.79% Savings deposits .................... 26,299 91 1.38% 16,264 13 0.32% Time deposits ....................... 300,859 2,430 3.23% 225,214 1,351 2.40% Short-term borrowings ............... 79,263 452 2.28% 117,438 378 1.29% Federal Home Loan Bank advances ..... 116,000 1,134 3.91% 98,223 915 3.73% Junior subordinated debentures ...... 25,775 427 6.63% 20,620 316 6.13% Other borrowings .................... 15,922 172 4.32% 7,000 51 2.91% ----------------------- --------------------- Total interest-bearing liabilities ................. 771,092 5,642 2.93% 658,916 3,368 2.04% Noninterest-bearing demand .......... 107,509 111,102 Other noninterest-bearing liabilities ....................... 14,959 4,529 Total liabilities ................... 893,560 774,547 Stockholders' equity ................ 53,308 44,237 --------- --------- Total liabilities and stockholders' equity ........ $ 946,868 $ 818,784 ========= ========= Net interest income ................. $ 6,931 $ 6,503 ========= ========= Net interest spread ................. 2.91% 3.22% ====== ====== Net interest margin ................. 3.22% 3.46% ====== ====== Ratio of average interest earning assets to average interest- bearing liabilities ............... 111.77% 113.96% ========= ========= (1) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate for each period presented. (2) Loan/lease fees are not material and are included in interest income from loans/leases receivable.
16 Analysis of Changes of Interest Income/Interest Expense For the three months ended September 30, 2005 Inc./(Dec.) Components from of Change (1) ------------------- Prior Period Rate Volume ----------------------------------- 2005 vs. 2004 ----------------------------------- (Dollars in Thousands) INTEREST INCOME Federal funds sold ................................ $ 64 $ 60 $ 4 Interest-bearing deposits at financial institutions (17) 101 (118) Investment securities (2) ......................... 313 72 241 Gross loans/leases receivable (3) ................. 2,342 986 1,356 --------------------------------- Total change in interest income ........... $ 2,702 $ 1,219 $ 1,483 --------------------------------- INTEREST EXPENSE Interest-bearing demand deposits .................. $ 592 $ 517 $ 75 Savings deposits .................................. 78 66 12 Time deposits ..................................... 1,079 548 531 Short-term borrowings ............................. 74 743 (669) Federal Home Loan Bank advances ................... 219 47 172 Junior subordinated debentures .................... 111 27 84 Other borrowings .................................. 121 33 88 -------------------------------- Total change in interest expense .......... $ 2,274 $ 1,981 $ 293 -------------------------------- Total change in net interest income ............... $ 428 $ (762) $ 1,190 ================================= (1) The column "increase/decrease from prior period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. (2) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate for each period presented. (3) Loan/lease fees are not material and are included in interest income from loans/leases receivable.
17 Consolidated Average Balance Sheets and Analysis of Net Interest Earnings For 9 Months Ended September 30, ---------------------------------------------------------------------------------- 2005 2004 --------------------------------------- ---------------------------------- Interest Average Interest Average Average Earned Yield or Average Earned Yield or Balance or Paid Cost Balance or Paid Cost ---------------------------------------------------------------------------------- ASSETS Interest earnings assets: Federal funds sold .................. $ 5,584 124 2.96% $ 5,823 23 0.53% Interest-bearing deposits at financial institutions ............ 3,670 95 3.45% 10,114 181 2.39% Investment securities (1) ........... 153,225 4,407 3.83% 128,450 3,666 3.81% Gross loans/leases receivable (2) ... 667,113 30,308 6.06% 571,095 24,054 5.62% ----------------------- --------------------- Total interest earning assets 829,592 34,934 5.61% 715,482 27,924 5.20% Noninterest-earning assets: Cash and due from banks ............. 28,325 30,792 Premises and equipment .............. 22,196 13,566 Less allowance for estimated losses on loans/leases ................... (9,102) (9,487) Other ............................... 38,011 30,606 --------- --------- Total assets ................ $ 909,022 $ 780,959 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits .... $ 182,818 1,880 1.37% $ 172,091 985 0.76% Savings deposits .................... 20,024 121 0.81% 15,299 37 0.32% Time deposits ....................... 298,823 6,552 2.92% 213,048 3,709 2.32% Short-term borrowings ............... 99,570 1,566 2.10% 94,182 758 1.07% Federal Home Loan Bank advances ..... 104,350 2,994 3.83% 91,374 2,575 3.76% Junior subordinated debentures ...... 23,198 1,142 6.56% 24,183 1,317 7.26% Other borrowings .................... 11,391 361 4.23% 4,583 97 2.82% ----------------------- --------------------- Total interest-bearing liabilities ................. 740,174 14,616 2.63% 614,760 9,478 2.06% Noninterest-bearing demand .......... 106,580 113,953 Other noninterest-bearing liabilities ....................... 10,043 9,362 Total liabilities ................... 856,797 738,075 Stockholders' equity ................ 52,225 42,884 --------- --------- Total liabilities and stockholders' equity ........ $ 909,022 $ 780,959 ========= ========= Net interest income ................. $ 20,318 $ 18,446 ========= ========= Net interest spread ................. 2.98% 3.14% ====== ====== Net interest margin ................. 3.27% 3.44% ====== ====== Ratio of average interest earning assets to average interest- bearing liabilities ............... 112.08% 116.38% ========= ========= (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 not material and are included in interest income from loans/leases receivable.
18 Analysis of Changes of Interest Income/Interest Expense For the nine months ended September 30, 2005 Components Inc./(Dec.) of Change (1) from --------------------- Prior Period Rate Volume ------------------------------------- 2005 vs. 2004 ------------------------------------- (Dollars in Thousands) INTEREST INCOME Federal funds sold ................................ $ 101 $ 102 $ (1) Interest-bearing deposits at financial institutions (86) 92 (178) Investment securities (2) ......................... 741 29 712 Gross loans/leases receivable (3) ................. 6,254 1,993 4,261 ----------------------------------- Total change in interest income ........... $ 7,010 $ 2,216 $ 4,794 ----------------------------------- INTEREST EXPENSE Interest-bearing demand deposits .................. $ 895 $ 830 $ 65 Savings deposits .................................. 84 70 14 Time deposits ..................................... 2,843 1,114 1,729 Short-term borrowings ............................. 808 762 46 Federal Home Loan Bank advances ................... 419 47 372 Junior subordinated debentures .................... (175) (123) (52) Other borrowings .................................. 264 66 198 ----------------------------------- Total change in interest expense .......... $ 5,138 $ 2,766 $ 2,372 ----------------------------------- Total change in net interest income ............... $ 1,872 $ (550) $ 2,422 =================================== (1) The column "increase/decrease from prior period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. (2) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate for each period presented. (3) Loan/lease fees are not material and are included in interest income from loans/leases receivable.
19 CRITICAL ACCOUNTING POLICY 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 losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. Management may report a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Management's Discussion and Analysis, which discusses the allowance for loan losses in the section entitled "Financial Condition." Although management believes the levels of the allowance as of both September 30, 2005 and December 31, 2004 were adequate to absorb losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Interest income increased by $2.7 million to $12.5 million for the three-month period ended September 30, 2005 when compared to $9.8 million for the quarter ended September 30, 2004. The increase of 28% in interest income was attributable to greater average, outstanding balances in interest earning assets, principally with respect to loans/leases receivable, in combination with an improved aggregate asset yield. The Company's average yield on interest earning assets was 5.84%, an increase of 0.58% for the three months ended September 30, 2005 when compared to the three months ended September 30, 2004. Interest expense increased by $2.3 million from $3.3 million for the three-month period ended September 30, 2004, to $5.6 million for the three-month period ended September 30, 2005. The 68% increase in interest expense was the result of a combination of greater average, outstanding balances in interest bearing liabilities, principally with respect to customers' time deposits in subsidiary banks, in combination with aggregate increased interest rates, principally with respect to customers' time deposits in subsidiary banks and short-term borrowings. The Company's average cost of interest bearing liabilities was 2.93% for the three months ended September 30, 2005, which was an increase of 0.89% when compared to the three months ended September 30, 2004. At September 30, 2005 and December 31, 2004, the Company had an allowance for estimated losses on loans of 1.24% and 1.43%, respectively. The provision for loan losses decreased by $28 thousand from $411 thousand for the three-month period ended September 30, 2004 to $383 thousand for the three-month period ended September 30, 2005. During the third quarter of 2005, management determined whether monthly provisions for loan losses were warranted based upon a number of factors, including the increase in loans and a detailed analysis of the loan portfolio. During the third quarter of 2005, net growth in the loan portfolio of $15.6 million warranted a $193 thousand provision to the allowance for loan losses, while downgrades within the portfolio contributed additional provisions of $190 thousand. During the third quarter of 2004, net growth in the loan portfolio was $33.9 million, which accounted for the entire provision for loan losses for that period. For the three months ended September 30, 2005, there were commercial loan charge-offs of $295 thousand, and there were commercial recoveries of $49 thousand. Consumer loan charge-offs and recoveries totaled $144 thousand and $23 thousand, respectively, during the quarter. Credit card loans accounted for 7% of the third quarter consumer gross charge-offs. Residential real estate loans had $139 thousand of charge-offs with no recoveries for the three months ended September 30, 2005. 20 Noninterest income of $2.5 million for the three-month period ended September 30, 2005 was a $489 thousand, or 24%, increase from the three-month period ended September 30, 2004. Noninterest income during the quarters in comparison consisted primarily of income from the merchant credit card operation, fees from the trust department, depository service fees, gains on the sale of residential real estate mortgage loans and other miscellaneous income. The quarter ended September 30, 2005, when compared to the same quarter in 2004, posted a $263 thousand increase in fees earned by the merchant credit card operations of Bancard. Trust department fees improved $60 thousand from the third quarter of 2004 to the third quarter of 2005. Deposit service fees were down $34 thousand from quarter to quarter. Gains on the sale of residential real estate mortgage loans, net, increased by $32 thousand for the quarter ended September 30, 2005 when compared to the same quarter in 2004. Additional variations in noninterest income consisted of a $47 thousand increase in investment advisory and management fees, a $6 thousand increase in earnings on cash surrender value of life insurance, and a $114 thousand increase in other noninterest income. Other noninterest income in each quarter consisted primarily of income from affiliated companies, earnings on other assets and Visa check card fees. Merchant credit card fees, net of processing costs, for the three months ended September 30, 2005 increased by 104% to $516 thousand from $253 thousand for the third quarter of 2004. In October 2002, the Company sold Bancard's ISO related merchant credit card operations to iPayment, Inc., and Bancard's core business focus was shifted to processing for its agent banks, cardholders, and local merchants. Through September 2003, Bancard continued to process ISO-related transactions for iPayment, Inc. for a fixed monthly service fee, which increased as the temporary processing period was extended. In September 2003, the transfer of the ISO-related Visa/Mastercard processing activity to iPayment, Inc. was completed and significantly reduced Bancard's exposure to risk of credit card loss that the ISO activity carried with it. Bancard had established and carried ISO-specific reserves, which provided coverage for this exposure. In March 2004, the Company recognized a recovery of $144 thousand from a reduction in these ISO-specific reserves. In September 2004, the Company recognized a recovery of $133 thousand from the elimination of the remaining balance in the ISO-specific reserves. For the third quarter of 2004, Bancard's ISO-related income was $134 thousand, and Bancard's core merchant credit card fees, net of processing costs were $119 thousand, which included specific provisions of $198 thousand that were made for local merchant chargeback losses. For the third quarter of 2005, Bancard's core merchant credit card fees, net of processing costs were $516 thousand, which was an improvement of $397 thousand, when compared to the third quarter of 2004. Making significant contributions to the 104% increase from quarter to quarter were a reversal during the third quarter of 2005 of $37 thousand from specific allocations within the allowance for local merchant chargeback losses and a $68 thousand recovery during the third quarter of 2005 of prior period expense. For the quarter ended September 30, 2005, trust department fees increased $60 thousand, or 10%, to $676 thousand from $616 thousand for the same quarter in 2004. There was continued development of existing trust relationships and the addition of new trust customers throughout the past twelve months, as well as an improvement in market values of securities held in trust accounts, when compared to one year ago. Each of these factors had a resulting impact on the calculation of trust department fees. Deposit service fees decreased $34 thousand, or 8%, to $387 thousand from $421 thousand for the three-month periods ended September 30, 2005 and June 30, 2004, respectively. This decrease was primarily a result of the reduction in service fees collected on the noninterest bearing demand deposit accounts at Quad City Bank & Trust. The balance of Quad City Bank & Trust's noninterest bearing demand deposits at September 30, 2005 decreased $11.6 million from September 30, 2004. The quarterly average balance of the Company's consolidated noninterest bearing demand deposits at September 30, 2005 decreased $3.6 million from September 30, 2004. Service charges and NSF (non-sufficient funds or overdraft) charges related to the Company's demand deposit accounts were the main components of deposit service fees. Gains on sales of loans, net, were $275 thousand for the three months ended September 30, 2005, which was an increase of $32 thousand, when compared to $243 thousand for the three months ended September 30, 2004. Loans originated for sale during the third quarter of 2005 were $29.6 million and during the third quarter of 2004 were $19.1 million. Proceeds on the sales of loans during the third quarters of 2005 and 2004 were $31.2 million and $20.6 million, respectively. During the third quarter of 2005, earnings on the cash surrender value of life insurance increased $6 thousand, or 4%, to $174 thousand from $168 thousand for the third quarter of 2004. In February 2004, the Company made significant investments in bank-owned life insurance (BOLI) on key executives at the two then existing subsidiary banks. Quad City Bank & Trust purchased $8.3 million of BOLI, and Cedar Rapids Bank & Trust made a purchase of $3.6 million of BOLI. During 2005, Rockford Bank & Trust purchased $777 thousand of BOLI. 21 Investment advisory and management fees increased $47 thousand from $129 thousand for the three months ended September 30, 2004 to $176 thousand for the three months ended September 30, 2005. The 37% increase from year to year was due to the increased volume of investment services provided by representatives of LPL Financial Services at the subsidiary banks, primarily at Quad City Bank & Trust. For the quarter ended September 30, 2005, other noninterest income increased $114 thousand, or 60%, to $289 thousand from $189 thousand for the same quarter in 2004. The increase was primarily due to the gain on a sale of other real estate owned (OREO) at Quad City Bank & Trust, in combination with an increase in income from affiliated companies. Visa check card fees, earnings on other assets, and ATM fees were also primary contributors to other noninterest income during the third quarter of 2005. Noninterest expenses for the three months ended September 30, 2005, were $7.6 million and for the three months ended September 30, 2004, were $5.9 million. For the third quarter of 2005, noninterest expenses for the new charter at Rockford Bank and Trust were $587 thousand. The significant components of noninterest expenses were salaries and benefits, occupancy and equipment expenses, and professional and data processing fees, for both quarters. The following table sets forth the various categories of noninterest expenses for the three months ended September 30, 2005 and 2004. Noninterest Expenses Three months ended September 30, ------------------------ 2005 2004 % change ------------------------------------ Salaries and employee benefits ........... $4,219,355 $3,458,437 22.0% Professional and data processing fees .... 618,719 620,242 (0.3)% Advertising and marketing ................ 330,204 232,654 41.9% Occupancy and equipment expense .......... 1,162,997 841,827 38.2% Stationery and supplies .................. 163,448 124,915 30.9% Postage and telephone .................... 222,642 169,626 31.3% Bank service charges ..................... 128,671 146,569 (12.2)% Insurance ................................ 145,838 126,032 15.7% Loss on disposal of fixed assets ......... 332,283 -- -- Other .................................... 265,590 192,972 37.6% ------------------------ Total noninterest expenses ....... $7,589,747 5,913,274 28.4% ======================== For the quarter ended September 30, 2005, total salaries and benefits increased to $4.2 million, which was up $761 thousand from the previous year's third quarter total of $3.5 million. The increase of 22% was primarily due to an increase in employees from 238 full time equivalents (FTEs) to 294 from year-to-year. The staffing of Rockford Bank & Trust created 14 FTEs and 23% of the increase in total salaries and benefits. In conjunction with Cedar Rapids Bank & Trust's move into their new main office facility, the Company took a one-time $332 thousand write-off of tenant improvements which had been made to the GreatAmerica Building, which had initially served as that subsidiary's main office. Occupancy and equipment expense increased $321 thousand, or 38%, from quarter to quarter. The increase was a proportionate reflection of the Company's investment in new facilities at the subsidiary banks, in combination with the related costs associated with additional furniture, fixtures and equipment, such as depreciation, maintenance, utilities, and property taxes. Other noninterest expense increased $73 thousand to $266 thousand for the third quarter of 2005 from $193 thousand for the third quarter of 2004. The increase was primarily the result of a combination of other loan expense at the subsidiary banks and cardholder program expense at Bancard. Advertising and marketing expense increased to $330 thousand for the third quarter of 2005 from $233 thousand for the third quarter in 2004. The 42% increase was predominately due to marketing coverage as Cedar Rapids Bank & Trust shifted operations to its two new facilities. For the quarter ended September 30, 2005, postage and telephone expense increased to $223 thousand, which was up $53 thousand from the previous year's quarter total of $170 thousand. The increase of 31% was primarily due to the Company's additional business resulting from its investment in four new facilities from September 30, 2004 to September 30, 2005. The provision for income taxes was $420 thousand for the three-month period ended September 30, 2005 compared to $703 thousand for the three-month period ended September 30, 2004 for a decrease of $283 thousand, or 40%. The decrease was the result of a decrease in income before income taxes of $730 thousand, or 34%, for the 2005 quarter when compared to the 2004 quarter. Primarily due to an increase in the proportionate share of tax-exempt income to total income from year to year, the Company experienced a decrease in the effective tax rate from 33.1% for the third quarter of 2004 to 30.1% for the third quarter of 2005. 22 NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Interest income increased by $7.0 million to $34.7 million for the nine-month period ended September 30, 2005 when compared to $27.7 million for the nine months ended September 30, 2004. The increase of 25% in interest income was attributable to greater average, outstanding balances in interest earning assets, principally with respect to loans/leases receivable, in combination with an improved aggregate asset yield. The Company's average yield on interest earning assets was 5.61%, an increase of 0.41% for the nine months ended September 30, 2005 when compared to the nine months ended September 30, 2004. Interest expense increased by $5.1 million from $9.5 million for the nine-month period ended September 30, 2004, to $14.6 million for the nine-month period ended September 30, 2005. The 54% increase in interest expense was the result of a combination of greater average, outstanding balances in interest bearing liabilities, principally with respect to customers' time deposits in subsidiary banks, in combination with aggregate increased interest rates, principally with respect to customers' time deposits and interest-bearing demand deposits in subsidiary banks. The Company's average cost of interest bearing liabilities was 2.63% for the nine months ended September 30, 2005, which was an increase of 0.57% when compared to the nine months ended September 30, 2004. At September 30, 2005 and December 31, 2004, the Company had an allowance for estimated losses on loans of 1.24% and 1.43%, respectively. The successful resolution of some large credits in Quad City Bank & Trust's loan portfolio, through payoff, credit upgrade, refinancing, or the acquisition of additional collateral or guarantees, contributed to a reduction to the level of allowance for loan losses required at that subsidiary bank. The provision for loan losses decreased by $1.2 million from $1.7 million for the nine-month period ended September 30, 2004 to $536 thousand for the nine-month period ended September 30, 2005. During the first nine months of 2005, management determined whether monthly provisions for loan losses were warranted based upon a number of factors, including the increase in loans and a detailed analysis of the loan portfolio. During the first nine months of 2005, net growth in the loan portfolio of $41.5 million warranted a $515 thousand provision to the allowance for loan losses. The net effect during the period, of provision reversals attributed to upgrades within the portfolio, and additional provisions resulting from downgrades within the portfolio, contributed an additional $21 thousand to the allowance. During the first nine months of 2004, net growth in the loan portfolio was $104.6 million. The $1.7 million provision to the allowance for loan losses was attributed 97%, or $1.6 million, to net growth in the loan portfolio, and 3%, or $58 thousand, to net downgrades within the portfolio. For the nine months ended September 30, 2005, there were commercial loan charge-offs of $1.1 million, and there were commercial recoveries of $205 thousand. The charge-off of a single, nonperforming loan at Quad City Bank & Trust for $727 thousand accounted for 66% of the gross commercial charge-offs. Consumer loan charge-offs and recoveries totaled $284 thousand and $76 thousand, respectively, during the period. Credit card loans accounted for 45% of the consumer net charge-offs for the first nine months of 2005. Residential real estate loans had charge-offs of $154 thousand and no recoveries for the nine months ended September 30, 2005. Noninterest income of $7.5 million for the nine-month period ended September 30, 2005 was a $702 thousand, or 10%, increase from $6.8 million for the nine-month period ended September 30, 2004. Noninterest income during each of the periods in comparison consisted primarily of income from the merchant credit card operation, fees from the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous income. The nine months ended September 30, 2005, when compared to the same period in 2004, posted a $225 thousand increase in fees earned by the merchant credit card operations of Bancard. Trust department fees improved $226 thousand from the first nine months of 2004 to the comparable period in 2005. Deposit service fees were down $73 thousand from period to period. Gains on the sale of residential real estate mortgage loans, net, decreased by $31 thousand for the nine months ended September 30, 2005 when compared to the same period in 2004. Additional variations in noninterest income consisted of a $126 thousand increase in investment advisory and management fees, a $266 thousand increase in other noninterest income, and an $11 thousand decrease in earnings on cash surrender value of life insurance. Other noninterest income in each period consisted primarily of income from affiliated companies, earnings on other assets, and Visa check card fees. 23 Merchant credit card fees, net of processing costs for the nine months ended September 30, 2005 increased by 21% to $1.3 million from $1.1 million for the first nine months of 2004. In October 2002, the Company sold Bancard's ISO related merchant credit card operations to iPayment, Inc., and Bancard's core business focus was shifted to processing for its agent banks, cardholders, and local merchants. Through September 2003, Bancard continued to process ISO-related transactions for iPayment, Inc. for a fixed monthly service fee, which increased as the temporary processing period was extended. In September 2003, the transfer of the ISO-related Visa/Mastercard processing activity to iPayment, Inc. was completed and significantly reduced Bancard's exposure to risk of credit card loss that the ISO activity carried with it. Bancard had established and carried ISO-specific reserves, which provided coverage for this exposure. In the first and third quarters of 2004, the Company recognized aggregate recoveries of $277 thousand from a reduction in these ISO-specific reserves. For the first nine months of 2004, Bancard's ISO-related income was $327 thousand, and Bancard's core merchant credit card fees, net of processing costs were $767 thousand, which included specific provisions of $198 thousand that were made for local merchant chargeback losses. For the first nine months of 2005, Bancard's core merchant credit card fees, net of processing costs were $1.3 million, which was an improvement of $555 thousand when compared to the first nine months of 2004. Significantly contributing to the 72% increase from year to year were aggregate reversals during 2005 of $110 thousand from specific allocations within the allowance for local merchant chargeback losses, and $118 thousand in recoveries during 2005 of prior period expenses. For the nine months ended September 30, 2005, trust department fees increased $226 thousand, or 12%, to $2.1 million from $1.9 million for the same period in 2004. There was continued development of existing trust relationships and the addition of new trust customers throughout the past twelve months, as well as an improvement in market values of securities held in trust accounts, when compared to one year ago. Each of these factors had a resulting impact on the calculation of trust department fees. Deposit service fees decreased $73 thousand, or 6%, remaining at $1.2 million for the nine-month period ended September 30, 2005, as for the comparable period in 2004. This decrease was primarily a result of the reduction in service fees collected on the noninterest bearing demand deposit accounts at Quad City Bank & Trust. The year-to-date average balance of consolidated noninterest bearing demand deposits at September 30, 2005 decreased $7.4 million from September 30, 2004. Service charges and NSF (non-sufficient funds or overdraft) charges related to demand deposit accounts were the main components of deposit service fees. Gains on sales of loans, net, were $880 thousand for the nine months ended September 30, 2005, which was a decrease of $31 thousand, or 3%, when compared to $911 thousand for the nine months ended September 30, 2004. Loans originated for sale during the first nine months of 2005 were $74.6 million and during the first nine months of 2004 were $65.0 million. Proceeds on the sales of loans during the first three quarters of 2005 and 2004 were $74.1 million and $66.6 million, respectively. During the first nine months of 2005, earnings on the cash surrender value of life insurance decreased $11 thousand, or 2%, to $493 thousand from $504 thousand for the first nine months of 2004. In February 2004, the Company made significant investments in bank-owned life insurance (BOLI) on key executives at the two then existing subsidiary banks. Quad City Bank & Trust purchased $8.3 million of BOLI, and Cedar Rapids Bank & Trust made a purchase of $3.6 million of BOLI. During 2005, Rockford Bank & Trust purchased $777 thousand of BOLI. Investment advisory and management fees increased $126 thousand from $390 thousand for the nine months ended September 30, 2004 to $516 thousand for the nine months ended September 30, 2005. The 32% increase from year to year was due to the increased volume of investment services provided by representatives of LPL Financial Services at the subsidiary banks, primarily at Quad City Bank & Trust. For the nine months ended September 30, 2005, other noninterest income increased $266 thousand, or 39%, to $955 thousand from $689 thousand for the same period in 2004. The increase was primarily due to income from affiliated companies. During the first quarter of 2005, one of the Company's affiliated companies, Nobel Electronic Transfer, LLC, completed a large, one-time sales transaction, which contributed $219 thousand to other noninterest income. Income from affiliated companies, earnings on other assets, Visa check card fees, and ATM fees were primary contributors to other noninterest income during the first nine months of 2005. Noninterest expenses for the nine months ended September 30, 2005, were $21.8 million and for the nine months ended September 30, 2004, were $17.4 million. For the first nine months of 2005, noninterest expenses for the new charter at Rockford Bank and Trust were $1.7 million. The significant components of noninterest expenses were salaries and benefits, occupancy and equipment expenses, and professional and data processing fees, for both periods. During the first quarter of 2004, there was also a loss of $747 thousand associated with the redemption of junior subordinated debentures at their earliest call date of June 30, 2004. 24 The following table sets forth the various categories of noninterest expenses for the nine months ended September 30, 2005 and 2004. Noninterest Expenses Nine months ended September 30, ------------------------- 2005 2004 % change ------------------------------------------ Salaries and employee benefits ..................... $12,236,200 $ 9,729,540 25.8% Professional and data processing fees .............. 2,056,113 1,616,344 27.2% Advertising and marketing .......................... 897,967 733,644 22.4% Occupancy and equipment expense .................... 3,161,196 2,363,577 33.8% Stationery and supplies ............................ 475,464 394,107 20.6% Postage and telephone .............................. 617,327 498,685 23.8% Bank service charges ............................... 386,170 431,812 (10.6)% Insurance .......................................... 452,680 351,599 28.8% Loss on disposal of fixed assets ................... 332,283 -- -- Loss on redemption of junior subordinated debentures -- 747,490 (100.0%) Other .............................................. 1,170,393 573,144 104.2% ------------------------- Total noninterest expenses ................. $21,785,793 17,439,942 24.9% =========================
For the nine months ended September 30, 2005, total salaries and benefits increased to $12.2 million, which was up $2.5 million from the previous year's period total of $9.7 million. The increase of 26% was primarily due to the Company's increase in compensation and benefits related to an increase in employees from 238 full time equivalents (FTEs) to 294 from year-to-year. The staffing of Rockford Bank & Trust created 14 FTEs and 34% of the increase in total salaries and benefits. Occupancy and equipment expense increased $798 thousand, or 34%, from year to year. The increase was a proportionate reflection of the Company's investment in new facilities at the subsidiary banks, in combination with the related costs associated with additional furniture, fixtures and equipment, such as depreciation, maintenance, utilities, and property taxes. In conjunction with Cedar Rapids Bank & Trust's move into their new main office facility, the Company took a one-time $332 thousand write-off of tenant improvements which had been made to the GreatAmerica Building, which had initially served as that subsidiary's main office. Other noninterest expense increased $597 thousand to $1.2 million for the first nine months of 2005 from $573 thousand for the first nine months of 2004. The increase was primarily the result of $303 thousand of write-downs on property values of other real estate owned (OREO) at Quad City Bank & Trust, $114 thousand of other expense incurred on OREO property, $92 thousand of cardholder program expense at Bancard and other loan expense at the subsidiary banks. Professional and data processing fees experienced a 27% increase from $1.6 million for the first nine months of 2004 to $2.0 million for the comparable period in 2005. The $440 thousand increase was primarily the result of legal and other professional fees related to the organization of Rockford Bank & Trust, consulting fees incurred in conjunction with Sarbanes-Oxley compliance work, and increased legal fees incurred at the subsidiary banks. For the nine months ended September 30, 2005, advertising and marketing expense increased to $898 thousand from $734 thousand for the first nine months of 2004. The $164 thousand increase was predominately due to the addition of Rockford Bank & Trust, in combination with special promotional events at Cedar Rapids Bank & Trust revolving around the openings of the two new facilities. The provision for income taxes was $1.7 million for the nine-month period ended September 30, 2005 compared to $1.9 million for the nine-month period ended September 30, 2004 for a decrease of $198 thousand, or 11%. The decrease was the result of a decrease in income before income taxes of $565 thousand, or 10%, for the 2005 period when compared to the 2004 period. FINANCIAL CONDITION Total assets of the Company increased by $116.4 million, or 13%, to $986.5 million at September 30, 2005 from $870.1 million at December 31, 2004. The growth resulted primarily from the Company's acquisition of m2 Lease Funds, the net increase in the loan/lease portfolio and the net increase in the securities portfolio, funded by interest-bearing deposits and Federal Home Loan Bank advances. Cash and due from banks increased by $5.1 million, or 24%, to $26.5 million at September 30, 2005 from $21.4 million at December 31, 2004. Cash and due from banks represented both cash maintained at its subsidiary banks, as well as funds that the Company and its banks had deposited in other banks in the form of non-interest bearing demand deposits. 25 Federal funds sold are inter-bank funds with daily liquidity. At September 30, 2005, the subsidiary banks had $4.2 million invested in such funds. This amount increased by $1.3 million, or 44%, from $2.9 million at December 31, 2004. The increase was primarily a result of an increased demand for Federal funds purchases by Quad City Bank & Trust's downstream correspondent banks. Interest bearing deposits at financial institutions decreased by $2.3 million, or 59%, to $1.6 million at September 30, 2005 from $3.9 million at December 31, 2004. Included in interest bearing deposits at financial institutions are demand accounts, money market accounts, and certificates of deposit. The decrease was the result of decreases in money market accounts of $1.3 million and maturities of certificates of deposit totaling $727 thousand, in combination with a decrease in demand account balances of $286 thousand. Securities increased by $23.4 million, or 16%, to $173.0 million at September 30, 2005 from $149.6 million at December 31, 2004. The increase was the result of a number of transactions in the securities portfolio. Paydowns of $962 thousand were received on mortgage-backed securities, and the amortization of premiums, net of the accretion of discounts, was $415 thousand. Maturities and calls of securities occurred in the amount of $35.9 million, and the portfolio experienced a decrease in the fair value of securities, classified as available for sale, of $1.3 million. These portfolio decreases were offset by the purchase of an additional $62.0 million of securities, classified as available for sale. Total gross loans/leases receivable increased by $73.7 million, or 11%, to $722.1 million at September 30, 2005 from $648.4 million at December 31, 2004. The increase was the result of originations, renewals, additional disbursements or purchases of $415.5 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $1.3 million, and loan repayments or sales of loans of $373.9 million. The 11% increase in total gross loans/leases receivable was also a result of Quad City Bank & Trust's acquisition of m2 Lease Funds on August 26, 2005. At the acquisition date, m2 Lease Funds brought $32.0 million in leases into the Company's portfolio, and subsequently contributed $1.4 million of lease originations since acquisition. During the nine months ended September 30, 2005, Quad City Bank & Trust contributed $259.0 million, or 62%, Cedar Rapids Bank & Trust contributed $132.7 million, or 32%, and Rockford Bank & Trust contributed $23.8 million, or 6%, of the Company's loan originations, renewals, additional disbursements or purchases. The mix of loan/lease types within the Company's loan/lease portfolio at September 30, 2005 reflected 83% commercial, 8% real estate and 9% consumer loans. 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. The allowance for estimated losses on loans/leases was $9.0 million at September 30, 2005 compared to $9.3 million at December 31, 2004, a decrease of $290 thousand, or 3%. The allowance for estimated losses on loans/leases was determined based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmental guarantees and other factors that, in management's judgement, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed monthly utilizing the percentage allocation method. In addition, specific reviews were completed each month on all loans risk-rated as "criticized" credits. The adequacy of the allowance for estimated losses on loans/leases was monitored by the loan review staff, and reported to management and the board of directors. The acquisition of m2 Lease Funds during the third quarter of 2005 brought an additional $433 thousand to the allowance for estimated losses on loans/leases. Although management believes that the allowance for estimated losses on loans/leases at September 30, 2005 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan/lease losses in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Company could experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks with the intention to improve the overall quality of the Company's loan/lease portfolio. Net charge-offs for the nine months ended September 30 were $1.3 million in 2005 and $245 thousand in 2004. One measure of the adequacy of the allowance for estimated losses on loans/leases is the ratio of the allowance to the gross loan/lease portfolio. The allowance for estimated losses on loans/leases as a percentage of gross loans/leases was 1.24% at September 30, 2005, 1.43% at December 31, 2004 and 1.62% at September 30, 2004. 26 At September 30, 2005, total nonperforming assets were $6.8 million compared to $10.7 million at December 31, 2004. The $3.9 million decrease was the result of a $2.3 million decrease in nonaccrual loans, a decrease of $949 thousand in other real estate owned, and a decrease of $551 thousand in accruing loans past due 90 days or more. Nonaccrual loans were $5.3 million at September 30, 2005 compared to $7.6 million at December 31, 2004, a decrease of $2.3 million. The decrease in nonaccrual loans was comprised of a decrease in commercial loans of $2.0 million and real estate loans of $350 thousand, and an increase in consumer loans of $17 thousand. Five large commercial lending relationships at Quad City Bank & Trust and Cedar Rapids Bank & Trust, with an aggregate outstanding balance of $4.1 million, comprised 77% of the nonaccrual loans at September 30, 2005. The existence of either a strong collateral position, a governmental guarantee, or an improved payment status on several of the nonperformers significantly reduces the Company's exposure to loss. The subsidiary banks continue to work for resolutions with all of these customers. Management is continually monitoring the Company's loan/lease portfolio and the level of the allowance for loan/lease losses. The allowance for loan/lease losses to total loans/leases was 1.24% at September 30, 2005. Management's efforts are ongoing to improve the overall quality of the loan/lease portfolio. Nonaccrual loans represented less than one percent of the Company's held for investment loan/lease portfolio at September 30, 2005. From December 31, 2004 to September 30, 2005, accruing loans past due 90 days or more decreased from $1.1 million to $582 thousand. Four significant lending relationships at Quad City Bank & Trust and Cedar Rapids Bank & Trust comprised $419 thousand, or 72%, of this balance at September 30, 2005. Premises and equipment increased by $7.3 million, or 40%, to $25.4 million at September 30, 2005 from $18.1 million at December 31, 2004. During the nine-month period there were purchases of additional land, furniture, fixtures and equipment and leasehold improvements of $9.0 million, which were partially offset by both depreciation expense of $1.4 million and a one-time $332 thousand write-off of Cedar Rapids Bank & Trust tenant improvements made to the GreatAmerica Building, which had initially served as that subsidiary's main office. In September 2003, the Company announced plans for a fifth Quad City Bank & Trust banking facility, to be located in west Davenport at Five Points. Total costs were approximately $3.6 million, when the facility was completed and began operations in March 2005. In February 2004, Cedar Rapids Bank & Trust announced plans to build a facility in downtown Cedar Rapids. The Bank's main office was relocated to this site on July 5, 2005. Costs for this facility during the first nine months of 2005 were $3.8 million, and total costs for this project to date are $6.5 million. Total costs for this facility were projected to be $6.9 million. Cedar Rapids Bank & Trust also completed construction of a branch office located on Council Street, which opened for business on June 2, 2005. The Company has incurred costs for this project of $1.7 million during the first nine months of 2005 and $2.4 million to date. Total costs for this facility were projected to be $2.3 million. During the first nine months of 2005, costs associated with the establishment of the full-service banking facility in leased space in downtown Rockford, which opened as the Company's third bank charter on January 3rd, were $246 thousand, and total costs were $459 thousand. Rockford Bank & Trust is moving forward with plans for a second banking facility, which will initially be located in a leased, modular building, subject to zoning and regulatory approval. During the first nine months of 2005, this project's costs totalled $1.2 million. On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of m2 Lease Funds, LLC ("m2 Lease Funds"). The purchase price of $5.0 million resulted in $3.4 million in goodwill. Accrued interest receivable on loans, securities and interest-bearing deposits with financial institutions increased by $994 thousand, or 24%, to $5.1 million at September 30, 2005 from $4.1 million at December 31, 2004. Bank-owned life insurance (BOLI) increased by $1.3 million from $15.9 million at December 31, 2004 to $17.2 million at September 30, 2005. Banks may generally buy BOLI as a financing or cost recovery vehicle for pre-and post-retirement employee benefits. During 2004, the subsidiary banks purchased $8.0 million of insurance to finance the expenses associated with the establishment of supplemental retirement benefits plans for the executive officers. In addition, the subsidiary banks purchased life insurance totaling $4.2 million on the lives of a number of senior management personnel for the purpose of funding the expenses of new deferred compensation arrangements for senior officers. During the first quarter of 2005, Rockford Bank & Trust purchased $777 thousand of BOLI. These purchases in 2004, combined with the previously purchased bank-owned life insurance, resulted in Quad City Bank & Trust holding investments in bank-owned life insurance policies near the regulatory maximum of 25% of capital. Benefit expense associated with both the supplemental retirement benefits and deferred compensation arrangements was $132 thousand and $125 thousand, respectively, for the nine months ended September 30, 2005. The banks monitor the risks associated with these holdings, including diversification, lending-limit, concentration, interest rate risk, credit risk, and liquidity. Earnings on BOLI totaled $493 thousand for the first nine months of 2005. 27 Other assets increased by $1.9 million, or 13%, to $17.1 million at September 30, 2005 from $15.2 million at December 31, 2004. Other assets included $8.3 million of equity in Federal Reserve Bank and Federal Home Loan Bank stock, $3.1 million of deferred tax assets, $976 thousand in net other real estate owned (OREO), $1.1 million in investments in unconsolidated companies, $612 thousand of accrued trust department fees, $406 thousand of unamortized prepaid trust preferred securities offering expenses, $492 thousand of prepaid Visa/Mastercard processing charges, other miscellaneous receivables, and various prepaid expenses. During the second half of 2004, the Company accumulated OREO from four credit relationships at the subsidiary banks, which totaled $1.9 million at December 31, 2004. During the first quarter of 2005, one of these OREO properties was sold for $301 thousand at a minimal gain. During the third quarter of 2005, a second OREO property was sold for $521 thousand, which resulted in a gain of $41 thousand. During the first nine months of 2005, three of the remaining property values were written down $303 thousand in the aggregate. Deposits increased by $103.1 million, or 18%, to $691.1 million at September 30, 2005 from $588.0 million at December 31, 2004. The increase resulted from a $92.1 million aggregate net increase in money market, savings, and total transaction accounts, in combination with an $11.0 million net increase in interest-bearing certificates of deposit. The subsidiary banks experienced a net increase in brokered certificates of deposit of $6.1 million during the first nine months of 2005. Short-term borrowings decreased $30.2 million, or 29%, from $104.8 million at December 31, 2004 to $74.6 million at September 30, 2005. The subsidiary banks offer short-term repurchase agreements to some of their major customers. Also, on occasion, the subsidiary banks purchase Federal funds for short-term funding needs from the Federal Reserve Bank, or from their correspondent banks. As a result of the $95.4 million increase in deposits during the third quarter of 2005, there was a reduction in the subsidiary banks' dependence on short-term borrowings to fund asset growth. Short-term borrowings were comprised of customer repurchase agreements of $54.4 million and $47.6 million at September 30, 2005 and December 31, 2004, respectively, as well as federal funds purchased of $20.2 million at September 30, 2005 and $57.2 million at December 31, 2004. Federal Home Loan Bank advances increased by $26.1 million, or 28%, to $118.1 million at September 30, 2005 from $92.0 million at December 31, 2004. As a result of their memberships in either the FHLB of Des Moines or Chicago, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. FHLB advances are utilized for loan matching as a hedge against the possibility of rising interest rates, and when these advances provide a less costly or more readily available source of funds than customer deposits. Other borrowings increased $4.3 million, or 71%, from $6.0 million at December 31, 2004 to $10.3 million at September 30, 2005. In June 2004, the Company drew an advance of $7.0 million on a line of credit at an upstream correspondent bank as partial funding for the early redemption of $12.0 million in trust preferred securities, which had been issued in 1999. In December 2004, the Company made a payment to reduce the balance by $1.0 million. In January 2005, the Company drew an additional $5.0 million advance as partial funding for the initial capitalization of Rockford Bank & Trust. In May 2005, with proceeds from the issuance of the trust preferred securities of Trust IV, the Company made a payment to reduce the balance on the line of credit by $5.0 million. In September 2005, the Company drew an advance of $4.0 million to provide $2.5 million of additional capital to Quad City Bank & Trust and $1.5 million of additional capital to Cedar Rapids Bank & Trust for capital maintenance purposes at each of the subsidiaries. Junior subordinated debentures increased $5.2 million, or 25%, to $25.8 million at September 30, 2005 from $20.6 million at December 31, 2004. In June 1999, the Company issued $12.0 million of trust preferred securities through a newly formed subsidiary, Trust I. The Company redeemed these securities on June 30, 2004. In February 2004, the Company formed two new subsidiaries and issued, in a private transaction, $12.0 million of fixed rate trust preferred securities and $8.0 million of floating rate trust preferred securities of Trust II and Trust III, respectively. Trust II and Trust III used the proceeds from the sale of the trust preferred securities, along with the funds from their equity, to purchase junior subordinated debentures of the Company in the amounts of $12.4 million and $8.2 million, respectively. On May 5, 2005, the Company announced the issuance of $5.0 million of floating rate capital securities of QCR Holdings Statutory Trust IV. Trust IV used the $5.0 million of proceeds from the sale of the Trust Preferred Securities, in combination with $155 thousand of proceeds from its equity, to purchase $5.2 million of junior subordinated debentures of the Company. 28 Other liabilities were $12.4 million at September 30, 2005, up $4.5 million, or 58%, from $7.9 million at December 31, 2004. Other liabilities were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At September 30, 2005, the most significant components of other liabilities were $3.4 million of accrued expenses, $3.1 million of accounts payable for leases, $2.4 million of miscellaneous accounts payable, and $2.3 million of interest payable. Common stock, at both September 30, 2005 and December 31, 2004, was $4.5 million. The slight increase of $30 thousand was the result of stock issued from the net exercise of stock options and stock purchased under the employee stock purchase plan. Additional paid-in capital totaled $20.7 million at September 30, 2005, up $371 thousand, or 2%, from $20.3 million at December 31, 2004. The increase resulted from the proceeds received in excess of the $1.00 per share par value for the 29,602 shares of common stock issued as the result of the net exercise of stock options and stock purchased under the employee stock purchase plan. Retained earnings increased by $3.3 million, or 13%, to $28.6 million at September 30, 2005 from $25.3 million at December 31, 2004. The increase reflected net income for the nine-month period net of $180 thousand, representing the four-cent per share dividend, which was declared in May and paid in July 2005. Unrealized losses on securities available for sale, net of related income taxes, totaled $166 thousand at September 30, 2005 as compared to unrealized gains of $669 thousand at December 31, 2004. The negative turnaround of $835 thousand was attributable to decreases during the period in fair value of the securities identified as available for sale, primarily due to the rise in interest rates. LIQUIDITY 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 liquidity of the Company primarily depends upon cash flows from operating, investing, and financing activities. Net cash used in operating activities, consisting primarily of originations of loans for sale, was $2.9 million for the nine months ended September 30, 2005 compared to $5.9 million net cash provided by operating activities, consisting primarily of proceeds on the sales of loans, for the same period in 2004. Net cash used in investing activities, consisting principally of purchases of available for sale securities, was $80.7 million for the nine months ended September 30, 2005 and $126.0 million, consisting primarily of loan originations to be held for investment, for the nine months ended September 30, 2004. Net cash provided by financing activities, consisting primarily of increased deposit accounts at the subsidiary banks, for the nine months ended September 30, 2005 was $82.9 million, and for the same period in 2004 was $121.8 million, consisting principally of funds from short-term borrowings. The Company has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. At September 30, 2005, the subsidiary banks had fourteen lines of credit totaling $104.5 million, of which $13.0 million was secured and $91.5 million was unsecured. At September 30, 2005, Quad City Bank & Trust had drawn $20.2 million of their available balance of $83.0 million, and Cedar Rapids Bank & Trust had drawn none of their available balance of $21.5 million. At December 31, 2004, the subsidiary banks had fourteen lines of credit totaling $99.5 million, of which $13.0 million was secured and $86.5 million was unsecured. At December 31, 2004, Quad City Bank & Trust had drawn $21.1 million of their available balance of $83.0 million, and Cedar Rapids Bank & Trust had drawn none of their available balance of $16.5 million. As of both September 30, 2005 and December 31, 2004, the Company had two unsecured revolving credit notes totaling $15.0 million in aggregate, replacing a single note of $15.0 million previously held. The Company had a 364-day revolving note, which matures December 29, 2005, for $10.0 million and had a balance outstanding of $5.0 million at September 30, 2005 and $6.0 million at December 31, 2004. The Company also had a 3-year revolving note, which matures December 30, 2007, for $5.0 million and carried no balance as of December 31, 2004. On January 3, 2005, the 3-year note was fully drawn as partial funding for the capitalization of Rockford Bank & Trust. For both notes, interest is payable monthly at the Federal Funds rate plus 1% per annum, as defined in the credit agreements. As of December 31, 2004, the interest rate on the 364-day note was 3.23%. At September 30, 2005, the interest rate on both notes was 4.73%. 29 On February 18, 2004, the Company issued $12.0 million of fixed/floating rate capital securities and $8.0 million of floating rate capital securities. The securities represent undivided beneficial interests in Trust II and Trust III, which were established by the Company for the purpose of issuing the trust preferred securities. The securities issued by Trust II and Trust III mature in thirty years. The fixed/floating rate capital securities are callable at par after seven years, and the floating rate capital securities are callable at par after five years. The fixed/floating rate capital securities have a fixed rate of 6.93%, payable quarterly, for seven years, at which time they have a variable rate based on the three-month LIBOR, reset quarterly, and the floating rate capital securities have a variable rate based on the three-month LIBOR, reset quarterly, with the rate currently set at 6.34%. Trust II and Trust III used the proceeds from the sale of the trust preferred securities, along with the funds from their equity, to purchase junior subordinated debentures of the Company in the amounts of $8.2 million and $12.4 million, respectively. The Company incurred issuance costs of $429 thousand, which are being amortized over the lives of the securities. The Company used the net proceeds for general corporate purposes, which included a net paydown of $3.0 million on the balance of the Company's unsecured revolving credit note, an infusion of $3.0 million to Cedar Rapids Bank & Trust for capital maintenance purposes, and an infusion of $1.0 million to Quad City Bank & Trust for capital maintenance purposes. Management's primary use for the balance of the proceeds was the redemption, in June 2004, of the $12.0 million of 9.2% cumulative trust preferred securities issued by Trust I in 1999. Based on this intended redemption, $747 thousand of unamortized issuance costs related to the trust preferred securities of Trust I were expensed in March 2004. On May 5, 2005, the Company announced the issuance of $5.0 million of floating rate capital securities of QCR Holdings Statutory Trust IV. The securities represent the undivided beneficial interest in Trust IV, which was established by the Company for the sole purpose of issuing the Trust Preferred Securities. The securities issued by Trust IV mature in thirty years, but are callable at par after five years. The Trust Preferred Securities have a variable rate based on the three-month LIBOR, reset quarterly, with the current rate set at 5.95%. Interest is payable quarterly. Trust IV used the $5.0 million of proceeds from the sale of the Trust Preferred Securities, in combination with $155 thousand of proceeds from its own equity, to purchase $5.2 million of junior subordinated debentures of the Company. The Company will treat these new issuances as Tier 1 capital for regulatory capital purposes, subject to current established limitations. The Company incurred no issuance costs as a result of the transaction. The Company used its net proceeds for general corporate purposes, including the paydown of its other borrowings. On April 28, 2005, the Company declared a cash dividend of $0.04 per share, or $180 thousand, which was paid on July 6, 2005, to stockholders of record on June 15, 2005. On October 27, 2005, the Company declared a cash dividend of $0.04 per share, or $181 thousand, which will be paid on January 6, 2006, to stockholders of record on December 23, 2005. It is the Company's intention 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, however it believes that operating results have reached a level that can sustain dividends to stockholders as well. RECENT REGULATORY DEVELOPMENTS Effective April 11, 2005, the Board of Governors of the Federal Reserve System amended the risk-based capital standards for bank holding companies to allow the continued inclusion of outstanding and prospective issuances of trust preferred securities in the Tier 1 capital of bank holding companies, subject to stricter standards. The new regulations limit the amount of trust preferred securities (combined with all other restricted core capital elements) that a bank holding company may include as Tier 1 capital to 25% of the sum of all core capital elements, net of goodwill less any associated deferred tax liability. Amounts in excess of the limits described above generally may be included in Tier 2 capital. The regulations also provide a transition period for bank holding companies to conform their capital structures to the revised quantitative limits. These limits will first become applicable to bank holding companies beginning on March 31, 2009. With the addition of goodwill to the Company's balance sheet, in conjunction with the acquisition of m2 Lease Funds, these new regulatory limits have had a slight impact on the Company's tier 1 leverage ratio for the third quarter of 2005. At September 30, 2005, the Company's tier 1 leverage ratio was 7.14%. At December 31, 2004, the Company's tier 1 leverage ratio was 7.81%. 30 SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. This document 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. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following: o The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. o 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. o The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. o The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of the Board of Governors of the Federal Reserve System. o The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. o The inability of the Company to obtain new customers and to retain existing customers. o The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. o Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. o The ability of the Company to develop and maintain secure and reliable electronic systems. o The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. o Consumer spending and saving habits which may change in a manner that affects the Company's business adversely. o Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. o The costs, effects and outcomes of existing or future litigation. o Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board. o 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. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. 31 Part I Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company realizes income principally from the spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volumes and yields, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Additionally, because of the terms and conditions on many of the investments and the loan and deposit accounts, a change in interest rates could also affect the projected maturities in the securities and loan portfolios and/or the deposit base, which could alter the Company's sensitivity to future changes in interest rates. Accordingly, management considers interest rate risk to be a significant market risk. Interest rate risk management focuses on maintaining consistent growth in net interest income within policy limits approved by the board of directors, while taking into consideration, among other factors, the Company's overall credit, operating income, operating cost, and capital profile. The subsidiary banks' ALM/Investment Committees, which includes senior management representatives and members of the board of directors, monitor and manage interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in 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 over a one year horizon, assuming no balance sheet growth and a 200 basis point upward 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 a parallel and pro rata shift in interest rates over a twelve-month period. Application of the simulation model analysis at June 30, 2005 demonstrated a 3.23% decrease in interest income with a 200 basis point increase in interest rates, and a 3.67% decrease in interest income with a 100 basis point decrease in interest rates. Both simulations are within the board-established policy limits of a 10% decline in value. 32 Part I Item 4 CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2005. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed and submitted under the Securities Exchange Act of 1934 was recorded, processed, summarized and reported as and when required. Limitations on the Effectiveness of Controls. It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. There are inherent limitations to the effectiveness of all control systems, including the possibility of human error and the circumvention or overriding of the controls and procedures. Therefore, even effective systems of controls and procedures can provide only reasonable assurances of achieving their control objectives. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Changes in Internal Control over Financial Reporting. The Company is currently undergoing a comprehensive effort to ensure compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002. As a result, enhancements to the Company's internal controls over financial reporting are being or have been implemented. During the second quarter of 2005, the Company implemented a comprehensive Reconciliation and Account Certification Policy, which guides a semi-centralized process up through the Company ending with a consolidated reporting package for the Chief Financial Officer. At September 30, 2005, the Company had not fully completed its evaluation nor had all control enhancements been completed. Other than changes as described above, there have been no changes to the Company's internal control over financial reporting during the period covered by this report that have materially effected, or are reasonably likely to affect the Company's internal control over financial reporting. 33 Part II QCR HOLDINGS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1 Legal Proceedings There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. Item 2 Unregistered Sales of Equity Securities and Use of Proceeds None Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information None Item 6 Exhibits (a) Exhibits 10.1 Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht dated August 26, 2005 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 34 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QCR HOLDINGS, INC. (Registrant) Date November 11, 2005 /s/ Michael A. Bauer ------------------------------ Michael A. Bauer, Chairman Date November 11, 2005 /s/ Douglas M. Hultquist ------------------------------ Douglas M. Hultquist, President, Chief Executive Officer Date November 11, 2005 /s/ Todd A. Gipple ------------------------------ Todd A. Gipple, Executive Vice President, Chief Financial Officer 35 EX-10 2 qcramendedm2.txt Exhibit 10.1 SECOND AMENDED AND RESTATED OPERATING AGREEMENT OF M2 LEASE FUNDS LLC THIS SECOND AMENDED AND RESTATED OPERATING AGREEMENT (the "Agreement") of M2 Lease Funds LLC (the "Company") is made as of August 26, 2005 by and between Quad City Bank and Trust Company ("QCBT") and John Engelbrecht ("Engelbrecht") (collectively, the "Members," and individually, a "Member"). Capitalized terms used in this Agreement without definition shall have the meanings assigned to them in Exhibit A attached to this Agreement. W I T N E S S E T H: WHEREAS, certain current and former members of the Company and the Company are parties to that certain Operating Agreement dated as of January 6, 1998 (the "Original Agreement"); WHEREAS, the Original Agreement was amended and restated in its entirety on January 13, 2005, the ("First Amended Agreement") when the Company sold and issued certain units to State Financial Services Corporation ("SFSC"); WHEREAS, pursuant to that certain Unit Purchase Agreement dated August 12, 2005 by and between Engelbrecht and SFSC, Engelbrecht purchased all of SFSC's ownership interest in the Company; WHEREAS, pursuant to that certain Unit Purchase Agreement by and among QCBT and Engelbrecht (the "Unit Purchase Agreement"), QCBT purchased as of the date hereof an eighty percent (80%) ownership interest in the Company; WHEREAS, as of the date hereof Engelbrecht has retained a twenty percent (20%) ownership interest in the Company; and WHEREAS, the Members now desire to set forth the terms and conditions of their agreements and understandings in this Agreement, which shall replace and supercede the First Amended Agreement, effective as of the date hereof. NOW, THEREFORE, in consideration of the promises set forth herein, the parties hereto do mutually promise and agree as follows: ARTICLE I General Provisions Section 1.1. Name. The name of the Company is "M2 Lease Funds LLC". Section 1.2. Registered Office and Agent. (a) Office and Agent. The principal place of business of the Company and the Company's registered office shall be a location near Brookfield, Wisconsin, and the Company's registered agent shall be F&L Service Corp. (b) Changes. The Board of Directors shall appoint a new registered agent and change the registered office, if appropriate, if: (i) the then current registered agent resigns or (ii) the Board of Directors determines to make an appointment or change in the registered agent. (c) Filing upon Change. Upon the appointment of a new registered agent or the change of the registered office, the Board of Directors shall file or cause the filing of the document required by section 183.0105 of the WLLCL as appropriate to the circumstances. Section 1.3. Purpose. The purpose of the Company is to conduct any lawful business permitted under the WLLCL. ARTICLE II Capital Contributions Section 2.1. Capital Contribution and Units. Exhibit C attached to this Agreement sets forth each Member's capital contributions made to date, the number of Units (the "Units") held by each Member and the current Capital Account balance of each Member opposite such Member's respective name therein. Section 2.2. Additional Capital Contributions. The Members shall not be required to make any additional capital contributions or loans to the Company. The provisions set forth in this Section 2.2 shall not affect QCBT's funding obligations set forth in Section 6.9, below. 1 Section 2.3. Return of Capital. No Member is entitled to withdraw or resign from the Company, to receive a return of any part of the Member's capital contribution, to receive any distribution, or to receive a repayment of any balance in the Member's Capital Account, as defined in Section 3.1, below, except as expressly provided in this Agreement. No Member has the right to demand that distributions be in kind. No Member will be paid interest on any capital contribution or on the Member's Capital Account. ARTICLE III Capital Accounts Section 3.1. Capital Accounts. There shall be established and maintained with respect to each Member a capital account ("Capital Account") (each Member's current Capital Account balance is set forth in Exhibit C) in accordance with the following: (a) Credits. Each Member's Capital Account shall be increased by (1) the Member's Capital Contributions, (2) the Member's allocable share of Profits pursuant to Article V, below, and (3) the amount of any debt of the Company that is assumed by the Member or that is secured by any property distributed to the Member. (b) Debits. Each Member's Capital Account shall be decreased by (1) the amount of cash and the Asset Value of any property distributed to the Member, (2) the Member's allocable share of Losses pursuant to Article V, below, and (3) the amount of any debt of the Member that is assumed by the Company or secured by any property contributed by the Member to the Company. (c) Transfers. In the event any Member assigns all or any part of the Member's Units in accordance with the terms of this Agreement, the Transferee shall succeed to the Capital Account of the Transferor to the extent the Capital Account relates to the transferred Units. Section 3.2. Interpretation. The provisions of Section 3.1, above, and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with section 1.704-1(b) of the Treasury Regulations, the terms and requirements of which are incorporated in this Agreement by reference, and shall be interpreted and applied in a manner consistent with those terms and requirements. ARTICLE IV Distributions Section 4.1. Current Distributions. (a) Current Tax Distributions. To the extent permitted by law and consistent with the Company's obligations to its creditors as determined by the Board of Directors, the Company shall make Tax Distributions on or before the Tax Distribution Dates. The aggregate amount of the Tax Distribution made with respect to any given Tax Distribution Date shall be the product of (i) the Company's estimated federal taxable income under the provisions of the Internal Revenue Code (the "Code"), for the Fiscal Period ending on the last day of the calendar month immediately preceding the Tax Distribution Date and commencing on the first day of the calendar month that includes the immediately previous Tax Distribution Date, multiplied by (ii) the applicable Tax Rate. Notwithstanding the foregoing, to the extent the Company has had an estimated federal taxable Loss for any prior Fiscal Period in that Fiscal Year, the amount in clause (i), above, shall be reduced by that portion of the Loss remaining after reducing taxable income for prior Fiscal Periods in the Fiscal Year for the Loss. Each Member shall receive a Tax Distribution proportional to the amount of federal taxable income to be allocated to the Member pursuant to Article V, below. (b) Additional Tax Distributions. In the event any income tax return of the Company, as a result of an audit or otherwise, reflects items of income, gain, loss, or deduction that are different from the amounts estimated pursuant to Section 4.1(a), above, with respect to a Fiscal Year in a manner that results in additional income or gain of the Company being allocated to the Members, an additional Tax Distribution shall be made under the principles of Section 4.1(a), above, to the Members (or former Members except SFSC) who are allocated the additional income or gain, except that (i) the last day of the calendar month in which the adjustment occurs shall be treated as a Tax Distribution Date, (ii) the amount of the additional income or gain shall be treated as the Company's federal taxable income, and (iii) the applicable Tax Rate shall be that which applied for the Fiscal Period to which the additional income or gain relates. 2 (c) Equalizing Distribution. If the Company makes a distribution (or payment in the case of a former Member) pursuant to Section 4.1(a) or 4.1(b) which is not in proportion with the number of Units held by each Member (a "Nonprorata Tax Distribution"), the Company shall, before making any distribution in proportion with Units pursuant to Section 4.1(d), make distributions to its Members ("Equalizing Distributions") to the extent that and in proportion such that after taking into account the cumulative total of the Nonprorata Tax Distributions and Equalizing Distributions made pursuant to this Section 4.1(c), the cumulative total of distributions received by each Member is equal to the cumulative total of distributions such Member would have received if all Tax Distributions and Equalizing Distributions made pursuant to Sections 4.1(a), (b) and this Section 4.1(c) were made in proportion to Units held at the time of the Nonprorata Tax Distribution. Interest shall accrue on such unpaid Equalizing Distributions from the date of any such Nonprorata Tax Distribution to the date of payment of such corresponding Equalizing Distribution at a floating rate equal to the prime rate published from time to time in The Wall Street Journal, Midwest Edition. Any interest paid on the Equalizing Distributions shall constitute a "guaranteed payment" within the meaning of Code Section 707(c). (d) Cash Available for Distribution. When and as approved by the Board of Directors, Cash Available for Distribution shall be distributed to the Members in proportion to the number of Units held during the Fiscal Period to which the distribution relates, provided, however, unless Unanimous Consent of the Members is obtained, the Company shall not make a distribution other than Tax Distributions such that the Tangible Equity Ratio is reduced below 10:1. Section 4.2. Liquidating Distributions. In the event the Company is liquidated pursuant to Article IX, below, the assets to be distributed pursuant to Section 9.5(d)(iii), below, shall be distributed to the Members in accordance with their Capital Account balances, after making the adjustments for allocations under Article V, below, up to and including the date of the liquidating distribution. ARTICLE V Allocation of Profits and Losses Section 5.1. Allocation of Profits and Losses. Except as provided in Sections 5.2, 5.3, and 5.4, below, Profits and Losses shall be allocated among the Members in proportion to the number of Units held during the Fiscal Period. Section 5.2. Regulatory Allocations. This Agreement shall be deemed to contain provisions relating to "minimum gain chargeback," "nonrecourse deductions," "qualified income offset," "gross income allocations," and any other provision required to be contained in this Agreement pursuant to the Treasury Regulations promulgated under section 704(b) of the Code (the "Regulatory Allocations"), other than any requirement that a Member be required to contribute to the Company an amount equal to any deficit in the Member's capital account. No allocation of Loss shall be made to a Member if the allocation would result in a negative balance in the Member's Capital Account in excess of the amount the Member is obligated to restore or is deemed obligated to restore pursuant to the penultimate sentences of Section 1.704-2(g)(1) and (i)(5) of the Treasury Regulations. In the event there is a negative balance in the Member's Capital Account in excess of the amount(s) set forth above, the Member shall be allocated income and gain in the amount of that excess as quickly as possible to decrease such negative balance so that it equals the amount set forth in the preceding sentence. Any Loss that cannot be allocated to a Member pursuant to the restrictions contained in this paragraph shall be allocated to other Members. The Regulatory Allocations are intended to comply with the Treasury Regulations promulgated under section 704(b) of the Code. The other provisions of this Article V notwithstanding, the Regulatory Allocations shall be taken into account in allocating other Profits, Losses, and items of income, gain, and deduction among the Members so that, to the extent possible, the net amount of the allocations of other Profits, Losses, and other items and the Regulatory Allocations to each Member shall equal the net amount that would have been allocated to each such Member if the Regulatory Allocations had not occurred. Section 5.3. Other Allocation Rules. (a) Transfer of Units. If a Member transfers all or any portion of the Member's Units pursuant to this Agreement during any Fiscal Period, the Profits (or Losses) allocated to the Members for each such Fiscal Period shall be allocated among the Members in proportion to their respective Units from time to time during the Fiscal Period, in accordance with section 706 of the Code, using any convention permitted by law and selected by the Board of Directors or Officers. (b) Determination of Allocable Amounts. The Profits, Losses, or any other items allocable to any Fiscal Period shall be determined on a daily, monthly, or other basis, as determined by the Board of Directors or Officers, using any permissible method under section 706 of the Code and the Treasury Regulations under that section. 3 Section 5.4. Tax Allocations. (a) Capital Contributions. In accordance with section 704(c) of the Code and the Treasury Regulations under that section, income, gain, loss, and deduction with respect to any contribution to the Company's capital shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the property's adjusted basis to the Company for federal income tax purposes and its initial Asset Value. (b) Adjustment of Asset Value. If the Asset Value of any Company asset is adjusted, subsequent allocations of income, gain, loss, and deduction with respect to the asset shall take account of any variation between the asset's adjusted basis for federal income tax purposes and its Asset Value as so adjusted in the same manner as under section 704(c) of the Code and the Treasury Regulations under that section. (c) Elections. Except as otherwise provided herein, any elections or other decisions relating to the allocations shall be made by the Board of Directors or Officers in any manner that reasonably reflects the purpose and intent of this Agreement. In accordance with Section 704(c) of the Code and the Treasury Regulations promulgated thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for income tax purposes, be allocated among the Members so as to take into account any variation between the adjusted basis of such property to the Company for federal and state income tax purposes and its Asset Value using the "traditional method with curative allocations" of making Section 704(c) allocations. Upon the request of QCBT, the Company shall make a Section 754 election. (d) Imputed Amounts. To the extent the Company has interest income or deductions with respect to any obligation of or to a Member pursuant to section 483, sections 1271-1288, or section 7872 of the Code, the interest income or deductions shall be specially allocated to the Member to whom the obligation relates. To the extent a Member has income imputed to him or it and the Company receives a deduction for such imputed income, such deduction shall be specially allocated to such Member who has imputed income. ARTICLE VI Management of the Company and Actions by Members Section 6.1. Authority and Powers of the Board of Directors. (a) Authority and Powers in General. Except to the extent otherwise provided in this Agreement, the business of the Company shall be managed by the Board of Directors, and no Member shall have any right or power to take part in the management or control of the Company or its business. Each Director shall be considered a manager under sections 183.0102(13) and 183.0401(2) of the WLLCL, provided the rights and responsibilities of the Directors as managers shall be limited as expressly set forth in this Agreement. Except as such authority may be so limited, the Board of Directors shall have full and complete authority to manage the business of the Company, to make all decisions regarding those matters, and to perform all other acts customary or incident to the management of the Company's business. Members have the right to vote only on those matters expressly set forth in this Agreement or as required by the WLLCL. The Board of Directors shall be elected by the Members in accordance with Section 6.2, below. (b) Certain Authority and Powers. Without limiting the generality of Section 6.1(a), above, the Board of Directors shall have the authority to: (i) Establish reserves and thereafter maintain such reserves in such amounts as the Board of Directors deems appropriate; (ii) Directly or through the Company's subsidiaries, subdivide, improve, develop, and lease all or any part of the Company's property; (iii) Borrow money and procure temporary, permanent, conventional, or other financing on such terms and conditions, at such rates of interest, and from such parties as the Board of Directors determines, and, in connection with such loans, if security is required for the loans, mortgage or grant a security interest, directly or through the Company's subsidiaries, in any portion of the Company's assets; 4 (iv) After giving notice to the Members, bring, defend, settle, compromise, or otherwise participate in any and all actions, proceedings, or investigations, whether at law, in equity, or before any governmental authority or agency, and whether brought against the Company or the Members, related to the business of the Company or the enforcement or protection of interests in or of the Company; (v) Insure the Company's activities and property; (vi) Enter into agreements with Persons for property management services, property improvement or development, other real estate services, and all other contracts or agreements, including, without limitation, as partner, joint venturer, shareholder, or otherwise, that the Board of Directors deems consistent with the Company's purpose, and pay from the Company's funds the consideration required under such contracts or agreements; (vii) Pay out of the Company's funds all fees and expenses incurred in the organization and operation of the Company; (viii)Authorize the execution of all documents, instruments, and agreements reasonably deemed by the Board of Directors to be needed for the performance of its duties and the exercise of its powers under this Agreement, including those relating to obtaining tax incremental financing, if available; (ix) Appoint a registered agent or change the registered office pursuant to Section 1.2 above; (x) Retain attorneys, accountants, and other professionals in the course of performing the Board of Directors' duties; (xi) Offer for sale to third parties Units and cause this Agreement to be amended to admit as Members the purchasers of such Units at the fair value of such Units as reasonably determined by the Board of Directors in good faith and on such other terms and conditions as the Board of Directors, in its reasonable judgment, deems appropriate; and (xiii)Do all other acts as the Board of Directors, in its sole and unrestricted discretion, determines are necessary or advisable to carry out the business of the Company. Section 6.2. Composition of the Board of Directors. (a) Number, Election, Tenure, and Qualifications of Directors. The number of Directors of the Company shall initially be seven (7), but shall in no case be greater than seven (7). While Engelbrecht is a Member hereunder, he shall be entitled to designate two (2) Directors. Directors shall be elected by Majority Consent. Directors need not be Members of the Company. Each Director shall hold office until the occurrence of an event set forth in subsection (b), below. (b) Withdrawal of Director. An individual shall cease to be a Director upon the earliest to occur of any of the following: (i) the individual's voluntary resignation, which shall be effective upon delivery of a written notice from the individual to the Company unless the notice specifies a later effective date; (ii) the individual's removal by Majority Consent; (iii) the individual's seventy-second (72nd) birthday); or (iv) the individual's death, incapacity, or inability to act as a Director for any reason. (c) Vacancy. If a Director ceases to be a Director for any reason, the remaining Director or Directors, if any, shall continue to act as such. Upon withdrawal of a Director, the Members or Engelbrecht, as applicable, shall, as promptly as practicable, choose a substitute Director as provided in Section 6.2(a), above. If the Company at any time lacks Directors, the Members shall perform the duties of the Board of Directors by Majority Consent unless and until the Members elect by Majority Consent a substitute Director or Directors. In this case, the Members will be Managers under sections 183.0102(13) and 183.0401(2) of the WLLCL. The lack of Directors shall not cause a dissolution or termination of the Company. Section 6.3. Manner of Acting by Board of Directors. Any actions of the Board of Directors shall be taken in the manner set forth below. (a) Manner of Acting. The consent of the Board of Directors to any act or failure to act may be given by the affirmative vote of a majority of the Directors at a meeting at which a quorum of the Board of Directors (as defined in subsection (e), below), participate in person or by telephone or other electronic means, or in a writing signed by all Directors. 5 (b) Records. The Company shall keep written records of all actions taken by the Board of Directors. (c) Meetings. Meetings of the Board of Directors may be called by the president of the Company or by any two Directors. Meetings not held by electronic means shall be held at the Company's principal place of business or at such other place as may be designated by the Person(s) calling the meeting. The president, and in the president's absence, any Director chosen by the Directors present, shall act as chairperson of the meeting. The secretary of the Company will act as secretary of all meetings of the Board of Directors, but in the secretary's absence, the presiding Officer may appoint any Director or other Person present to act as secretary of the meeting. (d) Notice. No matter shall be voted upon at a meeting of the Board of Directors unless at least 48 hours' notice of the matter to be voted on is given or such notice is waived by any Director not receiving it. A Director shall be deemed to have waived notice of any matter acted upon at any meeting that the Director attends or in which the Director participates unless at the beginning of the meeting, or promptly upon commencement of the Director's participation in the meeting, the Director objects to the consideration of the matter because of lack of proper notice. Written records kept pursuant to Section 6.3(b), above, of a meeting at which a Director was present, or in which the Director participated, shall be prima facie evidence that the Director was duly notified of the matters voted upon at the meeting or that the Director waived the notice requirement unless the Director's objection as required by this Section 6.3(d) is noted in the records. No prior notice shall be required for any action taken by written consent of the Directors. (e) Quorum. At any meeting of Directors, a majority of the number of Directors shall constitute a quorum of the Board of Directors, but a majority of the Directors present (though less than a quorum) may adjourn a meeting from time to time without further notice. (f) Voting. Each Director shall be entitled to one vote. Any Director abstaining from voting on a given matter shall be deemed to have voted in the same manner as the majority, if any, of the Directors not abstaining from voting on that issue. Any Director having a personal stake in the outcome of an issue (other than the economic stake inuring to the Director solely as a result of the Units held by the Director or the Director's employer) shall abstain from voting on the issue unless all Directors have such a personal stake. (g) Expenses. All reasonable and customary out-of-pocket expenses incurred by a Director in connection with the Company's business shall be paid by the Company or be reimbursed to the Director by the Company. Section 6.4. Officers. (a) Number of Officers. The Board of Directors may fill the offices of president, vice-president, secretary, and treasurer. The Board of Directors may appoint such other Officers and assistant Officers as it deems necessary. If specifically authorized by the Board of Directors, an Officer may appoint one or more Officers or assistant Officers. The same individual may simultaneously hold more than one office in the Company. (b) Appointment and Term of Office. The Officers of the Company shall be appointed by the Board of Directors for a term as determined by the Board of Directors. If no term is specified, they shall hold office until they are removed or they resign, or until their successor is appointed. The designation of a specified term does not grant to the Officer any contract rights, and the Board of Directors may remove the Officer at any time prior to the termination of the term. Such a removal shall be without prejudice to the contract rights, if any, of the Person so removed. 6 (c) President. The president shall be the principal and chief executive officer of the Company and, subject to the control of the Board of Directors, shall in general supervise and control all of the business and affairs of the Company. The president may sign certificates, deeds, mortgages, bonds, contracts, or other instruments that are necessary to be executed in the course of the Company's regular business or that the Board of Directors has authorized to be executed, except in cases in which the execution of such instruments shall be expressly delegated by the Board of Directors to some other Officer or agent of the Company, or shall be required by law to be otherwise executed. Except as otherwise provided by the Board of Directors, the president may authorize any vice-president or other Officer or agent of the Company to sign, execute, and acknowledge such documents or instruments in the president's place. The president, in general, shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time. While Engelbrecht is an employee of the Company, the Board of Directors shall elect and retain him as the president and chief executive officer. (d) Vice-Presidents. In the absence of the president or in the event of the president's death or inability or refusal to act, the vice-president, if one has been elected (or in the event that there is more than one, the vice-presidents in the order designated by the Board of Directors, or in the absence of designation, then in the order of their appointment) and upon approval by the Board of Directors, shall perform the duties of the president, and when so acting, shall have all the powers of, and be subject to all the restrictions on, the president. Any vice-president shall perform such duties as from time to time may be assigned to that vice-president by the president or the Board of Directors. (e) Secretary. The secretary shall: (i) keep the minutes of the proceedings of the Board of Directors in one or more books provided for that purpose; (ii) see that all notices are duly given in accordance with the provisions of Section 6.3(d), above, and 6.7(d), below; (iii) be custodian of the Company records; (iv) when requested or required, authenticate any Company records; (v) keep a register of each Member's address; and (vi) in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to the secretary by the president or the Board of Directors. (f) Treasurer. The treasurer shall: (i) have charge and custody of and be responsible for all Company funds and securities; (ii) receive and give receipts for moneys due and payable to the Company from any source whatsoever, and deposit all such moneys in the Company's name in such bank, trust company, or other depository as shall be selected by the Board of Directors; and (iii) in general perform all of the duties incident to the office of treasurer and such other duties as from time to time may be assigned to the treasurer by the president or the Board of Directors. (g) Assistant Secretaries and Assistant Treasurers. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or the treasurer, respectively, or by the president or the Board of Directors. Section 6.5. Restrictions on Authority of the Board of Directors and Officers. (a) Absolute Restrictions. The Board of Directors shall not have the authority to: (i) Do any act in contravention of applicable law; (ii) Possess Company property, or assign rights in specific Company property, for other than a purpose of the Company; or (iii) Perform any act that would subject the Members to liability in any jurisdiction except as expressly provided in this Agreement and except for liability for any income taxes attributable to the business of the Company. (b) Restrictions Without Unanimous Consent. Without Unanimous Consent of the Members, the Board of Directors shall not have the authority to: (i) Do any act that is in contravention of this Agreement or that would make it impossible to carry on the activities of the Company; (ii) Enter into a merger transaction involving the Company in which the Members do not hold a majority of the economic and voting interests of the surviving entity; 7 (iii) Amend the Articles of Organization or amend or revoke this Agreement; (iv) Make an assignment for the benefit of creditors; (v) File or cause to be filed a voluntary or involuntary petition in bankruptcy; (vi) Consent to the appointment of a trustee, receiver or liquidator for all or any substantial part of the assets of the Company; (vii) Change or modify the accounting methods used by the Company; or (viii)Decrease the current limit on the credit authority afforded to Engelbrecht, unless otherwise required by applicable law or regulation. Section 6.6. Powers of Members. Except in any situation in which powers are exclusively reserved to the Members in nonwaivable provisions of the WLLCL (in the sense that the arrangement may not be changed pursuant to an operating agreement of a limited liability company), or as expressly provided in this Agreement, the Members shall not have the power to manage or control the affairs of the Company or to bind or obligate the Company in any manner. Section 6.7. Actions by Members. Any actions of the Members shall be taken in the manner set forth below, unless expressly provided otherwise in this Agreement: (a) Manner of Acting. Except as otherwise provided in this Agreement, the consent of the Members to any act or failure to act may be given by Majority Consent at a meeting at which a quorum of Members (as defined in subsection (f) of this Section 6.7) participate in person or by telephone or other electronic means. Alternatively, the Members may act by unanimous written consent without the need for a meeting. Notwithstanding the foregoing, the Unanimous Consent of the Members shall be required to take any actions set forth in Section 6.5(b) above. (b) Records. The Company shall keep written records of all actions taken by the Members. (c) Meetings. Meetings of the Members may be called by the president, by any Director, or by Majority Consent. Meetings not held by electronic means shall be held at the Company's principal place of business or at such other place as may be designated by Majority Consent. (d) Notice. No matter shall be voted upon at a meeting of Members unless at least five days' notice of the matter to be voted on is given or such notice is waived by any Member who is entitled to vote and who has not received notice. A Member shall be deemed to have waived notice of any matter acted upon at any meeting that the Member attends or in which the Member participates unless at the beginning of the meeting or promptly upon commencement of the Member's participation in the meeting the Member objects to the consideration of the matter because of lack of proper notice. No prior notice shall be required for any action taken by written consent of the Members. (e) Record Date. For the purpose of determining the Members entitled to receive notice of any meeting of the Members, or the Members entitled to vote or take any other action, the Board of Directors may fix in advance a date as the record date. The record date shall not be more than 10 days before the date on which the particular action requiring such a determination of Members is to be taken. If no record date is so fixed by the Board of Directors, the record date shall be at the close of business on: (i) with respect to any meeting of Members, the day before the first notice is delivered to Members, and (ii) with respect to any action taken in writing without a meeting, the date the first Member signs the consent pursuant to which such action is taken. (f) Quorum. At any meeting of the Members, Members holding sufficient Units to give Majority Consent to the action taken at any meeting, represented in person or by proxy, shall constitute a quorum of the Members at the meeting. If a quorum is not present at any meeting, a majority of the Members present may adjourn the meeting from time to time without further notice. At any adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. (g) Voting. Each Unit shall be entitled to one vote. Each Member holding Units shall vote all of the Units held by that Member in the same manner as to any given matter submitted for a vote. 8 (h) Proxies. At all meetings of Members, a Member may vote by proxy executed in writing by the Member or by the Member's duly authorized attorney-in-fact. Proxies shall be filed with the president or secretary of the Company before or at the time of the meeting. No proxies shall be valid after six months from the date of execution, unless expressly provided otherwise in the proxy. Section 6.8. Indemnification of Board of Directors, Officers, and Members. (a) Liability of Board of Directors, Officers, and Members. No Director, Officer, or Member shall be liable to the Company for any loss or damage suffered by the Company on account of any action taken or omitted to be taken by the Person serving as a Director, Officer, or Member, that the Person in good faith believed to be in or not opposed to the Company's best interests, and with respect to any criminal action or proceeding, that the Person had no reasonable cause to believe was unlawful. In addition, no Director, Officer, or Member shall be liable to the Company for any loss or damage suffered by the Company on account of any action taken or omitted to be taken in reliance upon advice of counsel for the Company or upon statements made or information furnished by Officers or employees of the Company that the Director, Officer, or Member had reasonable grounds to believe to be true. The foregoing shall not be exclusive of other rights and defenses to which the Director, Officer, or Member may be entitled as a matter of law. (b) Successful Defense. The Company shall indemnify a Person serving as a Director, Officer, or Member to the extent the Person has been successful on the merits or otherwise in the defense of a claim, action, dispute, or issue such that the Person has no liability for all Expenses incurred in connection with the claim, action, dispute, or issue, if the Person was a party due to the Person's role as a Director, Officer, or Member. Indemnification under this subsection (b) shall be made within 10 days of receipt by the Company of a written demand for indemnification. (c) Other Cases. In cases not included under subsection (b), above, the Company shall indemnify the Director, Officer, or Member against Liability and Expenses incurred by the Person in connection with a claim, action, dispute, or issue, if the Person was a party due to the Person's role as a Director, Officer, or Member, unless it shall have been concluded that the Person breached or failed to perform a duty owed to the Company (using the procedure set out in Section 6.8(d), below), which breach or failure constitutes: (i) A willful failure to deal fairly with the Company in connection with a matter in which the person has a material conflict of interest; (ii) A violation of criminal law, unless the Person had reasonable cause to believe the Person's conduct was lawful or no reasonable cause to believe the conduct was unlawful; (iii) A transaction from which the Person derived an improper personal profit; or (iv) Willful misconduct. Indemnification required under this subsection (c) shall be made upon the last to occur of (i) 30 days from the Company's receipt of a written demand for indemnification or (ii) the determination set forth in Section 6.8(d), below. (d) Means of Determining Whether Indemnification Is Prohibited. Unless otherwise provided by a written agreement between the Director, Officer, or Member seeking indemnification and the Company, the denial of indemnification under Section 6.8(c), above, shall be determined by the Board of Directors. Any Director seeking indemnification shall not be entitled to vote on this matter unless all Directors are seeking indemnification, in which event the Members shall decide the right to indemnification by Unanimous Consent. If the Board of Directors or Members determines that a Director, Officer, or Member seeking indemnification under Section 6.8(c), above, is not entitled to indemnification, and the Director, Officer, or Member does not agree with the determination, the matter shall be determined by arbitration pursuant to Section 11.7, below. (e) Effect of Termination of Proceeding. The termination of a claim, action, dispute, or issue by judgment, order, settlement, or conviction, or upon a plea of no contest or an equivalent plea creates a presumption that indemnification of the Director, Officer, or Member is not required under this Section 6.8. 9 (f) Request for Indemnification and Assignment of Claims Required. To seek indemnification, the Director, Officer, or Member shall make a written request to the Company. As a precondition to any right to receive indemnification, the writing shall contain a declaration that the Company shall have the right to exercise all rights and remedies available to the Director, Officer, or Member against any other Person, arising out of, or related to, the claim, action, dispute, or issue that resulted in the Liability and Expenses for which the Director, Officer, or Member seeks indemnification, and that the Director, Officer, or Member is deemed to have assigned to the Company all such rights and remedies. (g) Allowance of Expenses as Incurred. Upon written request by the Director, Officer, or Member, the Company shall pay or reimburse the Person's reasonable expenses incurred as a party to a claim, action, dispute, or issue if the Person provides the Company with all of the following: (i) A written affirmation of the Person's good faith belief that the Person has not breached or failed to perform the Person's duties to the Company; and (ii) A written undertaking, executed personally or on the Person's behalf, to repay the allowance without interest to the extent that it is ultimately determined in accordance with Section 6.8(d), above, that indemnification under this Section 6.8 is prohibited. The undertaking under this subsection (g) shall be accepted without reference to the Person's ability to repay the allowance. The undertaking shall be unsecured. (h) Insurance. The Company shall purchase and maintain customary directors' and officers' insurance on behalf of any Person who is a Director, Officer, or Member against any Liability asserted against or incurred by the Person in any such capacity or arising out of the Person's status as such, regardless of whether the Company is required or authorized to indemnify or allow Expenses to the Person under this Section 6.8, provided further that such insurance shall provide coverage in excess of $1,000,000. (i) Severability. If this Section 6.8 or any portion of this Section 6.8 is invalidated on any ground by any court of competent jurisdiction, the Company shall indemnify the Director, Officer, or Member as to Liabilities and Expenses, paid in settlement with respect to any claim, action, dispute, or issue to the full extent permitted by any applicable portion of this Section 6.8 that is not invalidated or by applicable law. (j) Continuation of Indemnification. The indemnification provided by this Section 6.8 shall be the exclusive indemnification available from the Company to its Directors, Officers, and Members, and shall continue as to a Person who has ceased to be a Director, Officer, or Member, and shall inure to the benefit of the heirs, successors, executors, and administrators of any such Person. Section 6.9. Funding Operations. To the extent not limited or precluded by applicable law or regulation, QCBT agrees that from time to time it shall provide funding for operations of the Company at QCBT's discretion and subject to QCBT's lending policies in effect from time to time at a rate equal to the Federal Home Loan Bank Rate for a comparable duration as posted by the Federal Home Loan Bank of Chicago on the last day of the month. ARTICLE VII Transfer of Units Section 7.1. General Restrictions on Transfers. Except in accordance with the terms of this Agreement and subject to Article VIII of this Agreement, Engelbrecht may not Transfer all or any portion of his Units without the consent of the Board of Directors. Notwithstanding anything contained herein, QCBT may transfer Units to an Affiliate without the approval or consent of any other Member (a "QCBT Affiliate Transfer"), provided, however, that QCBT adheres to Article VIII. In the event of a QCBT Affiliate Transfer, QCBT's Affiliate shall become a party to this Agreement. Any Transfer, attempted Transfer, or purported Transfer in violation of this Agreement's terms and conditions shall be null and void. 10 Section 7.2. Third-Party Transfers. (a) Notice of Transfer. Except in the case of an Involuntary Transfer subject to Section 7.3, below or a Disposition (as defined in Section 7.6, below), a Transferor must send a Notice of Transfer to the Company, and the applicable provisions of this Section 7.2 must be complied with, before a Transfer will be effective. The Notice of Transfer shall contain (i) the Units proposed to be Transferred, (ii) the identity of the Transferee, (iii) the terms upon which the Transfer is proposed to be made, and (iv) the date of the proposed Transfer. The secretary shall deliver a copy of each Notice of Transfer to each Member promptly upon receipt of the notice. (b) Option to Purchase. A Transferor may not Transfer the Transferor's Units pursuant to Section 7.2(c), below, without first offering to sell the Units to the Company and the other Members. The Company shall have 30 days from the date of receipt of the Notice of Transfer to exercise the option to purchase contained in this Section 7.2(b) by providing written notice of the exercise of the option to the Transferor. If the option is exercised, the Transferor shall be obligated to sell, and the Company shall be obligated to purchase, all or a portion of the Transferor's Units upon the same terms, conditions, and price as offered by the Transferee and described in the Notice of Transfer. In the event the Company does not exercise its option to purchase all of the Units being offered, the president shall call a meeting of all of the Members (other than the Transferor). The meeting shall be held at the Company's regular office, or such other location as determined by the eligible Members, not less than 15 days nor more than 30 days after the expiration of the offer to the Company. The president shall make successive offers of the Units not accepted by the Company to those Persons present or legally represented at the meeting, including the president, in accordance with the following procedures. The successive offers shall continue until either all of the Units so offered are accepted or it is determined by successive offerings that all of the Units so offered will not be accepted. If the offer of sale is not accepted by the Company and the other Members with respect to all of the Units offered for sale, then none of the acceptances shall be effective, and the Transferor may Transfer the Units pursuant to Section 7.2(c), below. If the Company or other Members accept the offer of sale, such Sale must be completed within one hundred and twenty (120) days of acceptance. At the meeting, the president shall offer the Units to the Persons who are present or are legally represented at the meeting, including the president, in the following manner: (i) The president shall offer to each Member present or legally represented at the meeting, and each may accept, only that proportion of the Units being offered by the president as corresponds to that Member's share of the Units held by all of the Members present or legally represented at the meeting; and (ii) If all the Units offered for sale are not accepted in accordance with the procedures set forth in clause (i), above, the president shall thereafter make successive offerings to the Members present or legally represented at the meeting who did not previously refuse to accept all of the Units offered to them at the meeting. During each offering, the president shall offer to each such Member only that proportion of the Units not previously accepted as corresponds to that Member's share of the Units held by all of the Members to whom the successive offerings are being made. (c) Transfer to Third Party. If the Company or the Members have not elected to purchase the Units pursuant to section 7.2(b), above, the Transferor may Transfer all (but not less than all) of the Transferor's Units pursuant to this Section 7.2(c), at which time the Transfer will be effective and the Transferee will become a Member. (i) The Transferor may Transfer all (but not less than all) of the Units identified in the Notice of Transfer to the third party designated in the Notice of Transfer at the same price and on the same terms of payment specified in the Notice of Transfer, provided that the Transfer is made within 120 days after the date of the Notice of Transfer. (ii) The Transferee must, as part of the closing of the Transfer, sign a counterpart to this Agreement agreeing for the benefit of the other Members to be bound by this Agreement to the same extent as if the Transferee had been an original party to this Agreement and the Transferee shall be subject to the same transfer restrictions contained in this Article VII that are applicable to the Transferor. 11 (iii) The Transferee must, as part of the closing of the Transfer, take all actions and execute all instruments required by the Company in order for the Transfer to comply with any applicable federal or state laws and regulations relating to the Transfer of a Unit or with this Agreement. If the Units proposed to be Transferred pursuant to the Notice of Transfer are not Transferred within the applicable periods and in accordance with the foregoing provisions of this Section 7.2(c), the Units shall again be subject to the restrictions of this Article VII. Section 7.3. Involuntary Transfer. An Involuntary Transfer to a Person other than the Company or another Member will be effective only after the applicable provisions of this Section 7.3 have been complied with. The creditor, receiver, trust or trustee, estate, beneficiary, or other Person to whom Units are Transferred by Involuntary Transfer (the "Involuntary Transferee") will have only the rights provided in this Section 7.3. "Involuntary Transfer" means any Transfer of Units by operation of law or in any proceeding, including a Transfer resulting from the dissociation of a Member, by or in which a Member would, but for the provisions of this Section 7.3, be involuntarily deprived of any interest in or to the Member's Units, including, without limitation, (a) a Transfer on death or bankruptcy, (b) any foreclosure of a security interest in the Units, (c) any seizure under levy of attachment or execution, or (d) any Transfer to a state or to a public office or agency pursuant to any statute pertaining to escheat, abandoned property, or forfeiture. (a) Notice to Company. The Transferor and the Involuntary Transferee shall each immediately deliver a written notice to the Company describing the event giving rise to the Involuntary Transfer; the date on which the event occurred; the reason or reasons for the Involuntary Transfer; the name, address, and capacity of the Involuntary Transferee; and the Units involved (a "Notice of Involuntary Transfer"). (b) Effect of Involuntary Transfer. Upon the receipt of the Notice of Involuntary Transfer, the Involuntary Transferee shall have the rights of an assignee of the Transferor's Units as set out in section 183.0704(1)(b) of the WLLCL. Unless and until the Involuntary Transferee is admitted as a member by the Board of Directors, the Units held by the Involuntary Transferee shall have no voting rights such that the determination of Majority Consent shall be made by excluding the Units held by the Involuntary Transferee for all purposes. Section 7.4. Marital or Community Property and Divorce. (a) Marital or Community Property Rights. For purposes of this Agreement, any reference to Units shall include all interests in the Units now or hereafter acquired by the spouse of a Member or the spouse of a Transferee as a result of (1) community or marital property laws including community or marital property, deferred marital property, or augmented marital property, or (2) a property division or other award or Transfer upon dissolution of marriage. The creation of an interest in Units by operation of any applicable community or marital property law shall not be deemed a Transfer so long as the Units in which an interest is created continue to satisfy the following two conditions: (i) The Units are registered in the name of the Member or Transferee; and (ii) The Units are controlled by the Member or Transferee. (b) Involuntary Transfer. If the conditions set forth in either Section 7.4(a)(i) or Section 7.4(a)(ii), above, cease to be satisfied for any reason (including without limitation the death of the spouse of a Member or the spouse of a Transferee or the dissolution of the marriage), the resulting Transfer shall be considered an Involuntary Transfer subject to the provisions of Section 7.3, above. (c) Member to Vote. Each Member shall vote with respect to all matters that come before the Members until the Transfer, if any, of the Units to the Member's spouse pursuant to Section 7.4(b), above. By signing a spousal consent and acknowledgment, if a spouse is married to a Member at the time that Member becomes a Member, or by becoming the spouse of a Member, the spouse, without further act or deed, grants to the Member an irrevocable and absolute proxy and power of attorney (the proxy and power being coupled with an interest) to (i) take such actions on the spouse's behalf without any further deed than the taking of the action by the Member with respect to the Units otherwise held by the Member, and (ii) sign any document evidencing the action for or on behalf of the spouse relating to the Units. 12 Section 7.5. Redemption of Units Held by Engelbrecht. Upon the earlier to occur of (i) the termination of Engelbrecht's employment with the Company for any reason or; (ii) the seventh (7th) anniversary of the date hereof, either Engelbrecht or the Company can issue a notice (a "Put/Call Notice") to redeem Engelbrecht's Units in the Company. Upon the delivery of a Put/Call Notice, the Company shall have the obligation to redeem and Engelbrecht shall have the obligation to sell, all, but not less than all, of Engelbrecht's Units. (a) Termination - For Cause by the Company or Voluntarily by Engelbrecht. The purchase price for Engelbrecht's Units for termination by the Company for Cause or by Engelbrecht voluntarily shall be an amount equal to a percentage of the Book Value (as determined in accordance with Exhibit B) subject to adjustments as set forth in Section 7.5(c) and in accordance with the table below: Date of Termination Percentage of Book Value - --------------------------------------------------------------------------------------------------------------------- Prior to first anniversary of the date hereof 25% of the Book Value thereof On or after first anniversary but prior to second 25% of the Book Value thereof anniversary of the date hereof On or after second anniversary but prior to third 50% of the Book Value thereof anniversary of the date hereof On or after third anniversary but prior to fourth 50% of the Book Value thereof anniversary of the date hereof On or after fourth anniversary but prior to fifth 75% the Book Value thereof anniversary of the date hereof On or after fifth anniversary but prior to sixth 75% of the Book Value thereof anniversary of the date hereof On or after sixth anniversary but prior to seventh 75% of the Book Value thereof anniversary of the date hereof After seventh anniversary of the date hereof, if 100% of the Book Value thereof terminated for Cause After seventh anniversary of the date hereof, if 200% of the Book Value thereof (subject to reduction as Engelbrecht leaves voluntarily detailed in Section 7.5(c)(iii) below).
(b) Termination - Without Cause by the Company or by Death or Disability. The purchase price for Engelbrecht's Units for termination by the Company without Cause or by reason of death or Disability shall be an amount equal to a percentage of Book Value (as determined in accordance with Exhibit B) subject to adjustment as set forth in Section 7.5(c) and in accordance with the Table below: 13 Date of Termination Percentage of Book Value - ------------------------------------------------------------------------------------------- Prior to fifth anniversary of the date hereof 150% of the Book Value thereof On or after the fifth anniversary, but prior to sixth 160% of the Book Value thereof anniversary of the date hereof On or after sixth anniversary, but prior to seventh 180% of the Book Value thereof anniversary of the date hereof On or after seventh anniversary of the date hereof 200% of the Book Value thereof.
(c) Other Redemption Matters. (i) Payment for Engelbrecht's ownership interest as required by this Section 7.5 shall be in cash at the closing thereof, which shall take place within thirty (30) days from termination. (ii) If QCR Holdings, Inc. ("QCR") or QCBT has undergone a Change of Control within the two (2) years preceding Engelbrecht's termination by the Company without Cause, the purchase price shall not be less than 200% of the Book Value thereof. (iii) The Book Value percentage for a voluntary termination by Engelbrecht after the 7th year anniversary of the closing (200%) shall be reduced each year that the Company fails to meet the Projections. The reduction would equal the percentage by which the Company missed the Projections, capped at 10% per year, and further capped at a total reduction of 50% for all 7 years. For example, if the Company missed the Projections by more than 10% in 5 separate years, the Book Value percentage would be adjusted from 200% to 150%. As further example, if the Company missed the Projection by 5% in three separate years, the Book Value percentage would be adjusted from 200% to 185%. (iv) In the event the Company, for whatever reason, fails to redeem Engelbrecht's Units as provided in this Section 7.5, QCBT agrees to purchase the Units pursuant to the terms in this Section 7.5. (v) If Engelbrecht would be due an Equalizing Distribution in the event an Equalizing Distribution would be required to be paid pursuant to Section 4.1(c) before a distribution could be made pursuant to Section 4.1(d), then the full amount of such Equalizing Distribution (together with accrued interest) shall be paid to Engelbrecht at closing in addition to the purchase price calculated above. (vi) If any Adjustment Transaction, any agreement requiring an Adjustment Transaction which is enforceable by a third party or an option or similar right to require an Adjustment Transaction occurs, is entered into or is granted at any time within thirty-six (36) months following the closing of a redemption pursuant to Section 7.5(b) (the "Original Sale"), then (A) the Company shall give Engelbrecht or his estate prompt written notice stating in reasonable detail the particulars thereof; (B) the purchase price per Unit for the equity interest which was purchased in the Original Sale shall be increased by the excess, if any, of the Adjusted Price over such price; and (C) such increase in the purchase price shall be paid by the Company to Engelbrecht or his estate. Any adjustment pursuant to this Section 7.5(c)(vi) shall be paid immediately after the Adjustment Transaction as to which such adjustment relates by the Company to Engelbrecht. 14 Section 7.6. Right of Co-Sale. Notwithstanding the foregoing to the contrary, in the event that holders of more than fifty percent (50%) of the Units (the "Selling Members") seeks to Transfer, in one or a series of related transactions, a majority of the outstanding Units of the Company to Unrelated Purchaser(s) (a "Disposition"): (a) Each other Member (the "Minority Unitholders") is hereby given the right and option, to be exercised in a writing delivered to the Selling Members within ten (10) business days after receiving written notice of such Transfer from the Selling Members (which notice shall contain the amount and class of Units proposed to be Transferred, the identity of the Transferee, the terms on which the Transfer is proposed to be made, and the date of the proposed Transfer), to Transfer to the Unrelated Purchaser(s), on the same terms and conditions as applicable to the Selling Members, such portion of their Units as the portion of the Units being Transferred by the Selling Members bears to the entire number of Units owned prior thereto by the Selling Members (a "Proportionate Share"). The price per Unit at which the Minority Unitholders may participate shall take into account differences in Capital Accounts attributable to the Units and shall be determined as follows: (a) the value of the Company shall be calculated by determining the Company value necessary to provide the Selling Member an amount equal to the amount paid for the Transferred Units in the Disposition if the Company were liquidated in accordance with Article IX; and (b) each Unit shall be valued at the amount the holder of such Unit would receive attributable to such Unit if the Company was sold for the amount calculated in clause (a) and the Company was liquidated in accordance with Article IX. Notwithstanding anything contained in this Section 7.6 to the contrary, in no event shall Engelbrecht's Proportionate Share be less than what he would otherwise receive pursuant to a Put/Call Notice delivered pursuant to Section 7.5, above, appropriately prorated in the event less than all of Engelbrecht's Units are Transferred pursuant to this Section 7.6. (b) In the event any Member declines to exercise his, her or its rights as provided in Section 7.6(a), above, the Selling Members are hereby given the right and option, to be exercised by written notice to such declining Member(s) within five (5) business days after the expiration of the option set forth in Section 7.6(a), above, to require the declining Member(s) to Transfer to the Unrelated Purchaser(s), on the same terms and conditions as applicable to the Selling Members, a Proportionate Share at the purchase price determined using the method set forth in Section 7.6(a), above. A failure by the Unrelated Purchaser(s) to consummate such Transfer of the Units of each of the other Members simultaneously with the sale by the Selling Members on the terms and conditions required pursuant to the foregoing, above, shall prohibit the Selling Members from Transferring any Units to such Unrelated Purchaser(s). Section 7.7. Sale of Assets. In the event that the Company decides to sell, transfer or otherwise dispose of greater than 1/3rd of all of the assets of the Company or its subsidiaries, whether in one or a series of related transactions, the Company must send a notice to Engelbrecht detailing the proposed transfer and the terms upon which the transfer is proposed to be made. Engelbrecht shall have thirty (30) days from the date of receipt of the notice from the Company to exercise the option to purchase such assets in accordance with the proposed sale or transfer. If Engelbrecht elects to exercise its right of first refusal, such acquisition shall be completed within one hundred and twenty (120) days of his acceptance. Section 7.8. Specific Performance. The parties declare that it may be impossible to measure in money the damages that will accrue to any party by reason of a failure to perform any of the obligations under this Article VII, and the parties agree that this Article VII shall be specifically enforced. Therefore, if any Member or Transferee institutes any action or proceeding to enforce the provisions of this Article VII, any Person, including the Company, against whom the action or proceeding is brought waives the claim or defense that the party has or may have an adequate remedy at law. The Person shall not urge in any such action or proceeding the claim or defense that a remedy at law exists, and the Person shall consent to the remedy of specific performance of this Agreement. ARTICLE VIII Absolute Restrictions on Transfers No Transfer of any Units may be made if, in the opinion of the Company's legal counsel, the transfer or assignment will violate any applicable federal or state securities laws. Before making any Transfer of any Units, the Transferor must notify the Company in writing, and the president shall, if the president believes there is a material risk of violating this Article VIII, obtain an opinion from the Company's legal counsel confirming whether the proposed Transfer will cause such a violation of securities laws. Legal fees shall be the Transferor's responsibility. 15 ARTICLE IX Dissociation, Dissolution, and Liquidation Section 9.1. Effect of Dissociation. The dissociation of a Member pursuant to section 183.0802 of the WLLCL will not entitle a Member to a distribution in redemption of the member's Units. An event of dissociation under section 183.0802(1)(d)-(k) of the WLLCL will be treated as an Involuntary Transfer pursuant to Section 7.3 of this Agreement. Section 9.2. Events Causing Dissolution. The Company shall be dissolved upon (a) the approval of the dissolution by the Members by Unanimous Consent, or (b) the entry of a decree of judicial dissolution pursuant to section 183.0902 of the WLLCL. The Company shall not be dissolved upon the occurrence of any other event, including the dissociation of a Member under the WLLCL. Section 9.3. Filing and Notice. Upon dissolution of the Company under Section 9.2, above, the president or the Liquidating Trustee (as set forth in Section 9.5(a), below) shall promptly, upon appointment, execute and file on the Company's behalf Articles of Dissolution as provided in section 183.0906 of the WLLCL. The president or the Liquidating Trustee shall also notify the Company's known claimants as provided in section 183.0907 of the WLLCL and publish a notice of the Company's dissolution as provided in section 183.0908 of the WLLCL, except as otherwise determined by the Board of Directors. Section 9.4. Termination. Dissolution of the Company shall be effective on the date on which the event under Section 9.2, above, occurs, but the Company shall not terminate until Articles of Dissolution have been duly filed under the WLLCL, the Company's affairs have been wound up, and the Company's assets have been distributed as provided in Section 9.5, below. Notwithstanding the dissolution of the Company, prior to the liquidation and termination of the Company, the business of the Company and the affairs of its Members, as such, shall continue to be governed by this Agreement. Section 9.5. Distribution of Assets Upon Termination. (a) Upon the dissolution of the Company pursuant to Section 9.2, above, the president (or if there is no president or the president refuses to serve, a person approved by the Board of Directors as the liquidating trustee of the Company (the "Liquidating Trustee")) shall proceed diligently to wind up the Company's affairs and distribute its assets in accordance with the provisions of Section 9.5(d), below. (b) All salable assets of the Company may be sold in connection with any dissolution at public or private sale or at such price and upon such terms as the president or the Liquidating Trustee, as the case may be, may deem advisable. A Member or any entity in which a Member is in any way interested may purchase assets at the sale. The president or the Liquidating Trustee, as the case may be, in that Person's sole and absolute discretion, may in accordance with Section 9.5(d), below, distribute the Company's assets in kind based on their fair market value. (c) The Company's Profits and Losses shall be determined as of the end of the period of winding up in accordance with the provisions of this Agreement and shall be credited or charged to the Members' respective Capital Accounts. (d) Upon the dissolution and winding up of the Company, the Company's assets shall be distributed in the following order of priority to the extent available: (i) First, to creditors of the Company in satisfaction of any debts and liabilities of the Company, whether by payment or by the establishment of any reserve that the president or the Liquidating Trustee deems, in that Person's sole discretion, necessary (with the balance remaining in any such reserve, after the expiration of such period of time as the president or the Liquidating Trustee, as the case may be, deems advisable, and after payment of any such liabilities and obligations, to be distributed in the manner set forth in this Section 9.5(d)); and (ii) Second, to the Members, in accordance with Section 4.2, above. All distributions pursuant to this Section 9.5(d) shall be made no later than the latter of (i) the end of the Fiscal Year during which the liquidation of the Company occurs or (ii) 90 days after the date of that liquidation. Section 9.6. Limitation on Liability. Each Member shall look solely to the Company's assets for all distributions from the Company and the return of the Member's Capital Contribution to the Company and shall have no recourse (upon dissolution or otherwise) against any Director, Officer, or Member, or any of their respective affiliates. 16 ARTICLE X Books and Records Section 10.1. Books and Records. The Company's books and records shall be maintained at the Company's principal office or at any other place designated by the Board of Directors and shall be available for inspection and copying by any Member or any Member's duly authorized representative(s), at the Member's own expense, during normal business hours. Section 10.2. Company Funds. The Company's funds may be deposited in such banking institutions as the Board of Directors determines, and withdrawals shall be made only in the regular course of the Company's business on such signature or signatures as the Board of Directors determines. All deposits and other funds not needed in the operation of the business may be invested in certificates of deposit, short-term money market instruments, money market funds, government securities, or similar investments as the Board of Directors determines. Section 10.3. Availability of Information. The Company shall keep at its principal office and place of business, and each Member shall have the right to inspect and copy, all of the following: (a) a current list of the full name and last-known business address of each Member or former Member set forth in alphabetical order, the date on which each Member or former Member became a Member, and, if applicable, the date on which any former Member ceased to be a Member; (b) a copy of the Articles of Organization and all amendments to the Articles; (c) copies of the Company's federal, state, and local income tax returns and financial statements, if any, for its four most recent years; and (d) copies of this Agreement and any effective written amendments to this Agreement. Section 10.4. Tax Returns. The Board of Directors shall cause to be prepared and shall file (after review and approval of the Members in their reasonable judgment) on or before the due date (or any extension of the due date) any federal, state, or local tax returns required to be filed by the Company. The Board of Directors shall cause the Company to pay any taxes payable by the Company out of Company funds. The Board of Directors shall appoint an officer to serve as the Company's "tax matters partner" as defined for purposes of the Code. Section 10.5. Reports. Within 75 days after the end of each Fiscal Year, the Board of Directors shall send to each Person who was a Member at any time during the Fiscal Year then ended (a) a balance sheet as of the end of the Fiscal Year, (b) statements of income, Members' equity, changes in financial position, and a cash flow statement for the Fiscal Year then ended, and (c) such tax information as is necessary or appropriate for the preparation by the Members of their individual federal and state income tax returns. ARTICLE XI Miscellaneous Section 11.1. Amendments to Agreement. No amendment or modification of this Agreement shall be valid unless made in writing and approved by Unanimous Consent. Section 11.2. Engelbrecht Guarantee. The parties agree that Engelbrecht shall guarantee twenty percent (20%) of any loan made to the Company by QCBT or its Affiliates pursuant to a guarantee in the form attached to this Agreement as Exhibit D. Section 11.3. Appointment of President as Attorney-in-Fact. The Members appoint the president as their true and lawful attorney-in-fact with full authority in their name to execute, deliver, file, and record at the appropriate public offices such documents as may be necessary or appropriate to carry out the provisions of this Agreement, including but not limited to all certificates and other instruments (including counterparts of this Agreement), and any amendment of this Agreement, that the president deems appropriate to qualify or continue the Company as a limited liability company in the jurisdictions in which the Company conducts business or in which such qualification or continuation is, in the president's opinion, necessary to protect the Members' limited liability. Section 11.4. Integration. This Agreement supersedes all prior oral or written agreements or understandings between the parties to this Agreement regarding the subject matter of this Agreement. Section 11.5. Binding Provisions. The agreements and covenants contained in this Agreement inure solely to the benefit of the parties to this Agreement. The agreements and covenants contained in this Agreement shall be binding on the heirs, executors, administrators, personal representatives, successors, and assigns of the respective parties to this Agreement. 17 Section 11.6. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the state of Wisconsin, without giving effect to the principles of conflicts of laws. Section 11.7. Separability of Provisions. Each provision of this Agreement shall be considered separable, and if for any reason any provision or provisions of this Agreement are determined to be invalid or contrary to any existing or future law, the invalidity shall not affect or impair the operation of those portions of this Agreement that are valid. Section 11.8. Notice. Any notice required or permitted to be given pursuant to this Agreement shall be valid only if in writing and shall be deemed to have been duly given (a) when personally delivered, (b) when transmitted by fax if confirmation of receipt is printed out on the sending fax machine, or (c) three days after being mailed by certified mail, postage prepaid, addressed to the Person receiving notice at the address contained in the Company's records, unless that Person otherwise notifies the Company in accordance with this Section 11.7 of a change of address. Section 11.9. Counterparts. This Agreement may be executed in counterparts, all of which taken together shall constitute the same agreement. [Remainder left intentionally blank]\ 18 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date set forth above. QUAD CITY BANK AND TRUST COMPANY By: /s/ Douglas M. Hultquist Address: 3551 7th Street, Suite 100 ------------------------------ Moline, IL 61265 Douglas M. Hultquist, Chairman /s/ John Englebrecht Address: 17500 Mariner Court ------------------------------ Brookfield, WI 53045 John Engelbrecht Spousal Consent and Acknowledgment I acknowledge that I have read the foregoing Agreement and that I understand its contents. I am aware that by its provisions my spouse agrees to limit the transferability of and the voting rights attendant upon his Units of M2 Lease Funds LLC held by him on this date, or hereafter acquired, upon the occurrence of certain events. I am further aware that included in such limitations shall be any interest I have in the Units (including without limitation any right or interest by operation of the Wisconsin Marital Property Law, chapter 766 of the Wisconsin Statutes, or by operation of any other law) and the interest of any of my heirs, legatees, or other transferees. I consent to and approve the provisions of the Agreement, and agree that the Units and my interest in them are subject to the provisions of the Agreement, and direct the personal representative of my estate to promptly comply with all of the provisions of the Agreement, including without limitation Article VII. I further agree that I will take no action at any time to hinder the operation of the Agreement as to the Units or any interest that I or my transferees have in it. Date: August 26, 2005 Spouse: /s/ Janet Engelbrecht --------------------------- Janet Engelbrecht 19 EXHIBIT A DEFINITIONS For purposes of this Agreement, the following terms shall have the meanings set forth below and any derivatives of the terms shall have correlative meanings: Adjusted Price means the quotient of (a) the sum of (i) the Transaction Price multiplied by the number of Units outstanding on the date of the Adjustment Transaction plus (ii) the total consideration paid in the Original Sale divided by (b) the sum of (x) the number of Units sold in the Original Sale, plus (y) the number of Units outstanding on the date of the Adjustment Transaction (appropriately adjusted to reverse any sale or redemption of Units, capital contribution, split, dividend, recapitalization or similar event between the date of the Original Sale and the Adjustment Transaction). Adjustment Transaction means (a) any purchase of more than 50% of the outstanding Units by any person who is not a Member or an Affiliate of a Member; (b) any transaction or contract or series of transactions or contracts resulting in Units ordinarily representing the right to elect a majority of the Board of Directors of the Company being owned or controlled by any person other than a Member or an Affiliate of a Member or by a group of persons acting in concert any of whom are not a Member or an Affiliate of a Member; (c) any issuance or sale by the Company of securities or other rights or instruments having the right to require the issuance or sale of Units constituting more than 50% of the outstanding Units immediately following such issuance or sale of such Units; (d) any sale by the Company of all, or substantially all, of its assets; (e) any liquidation or dissolution of the Company; or (f) any transaction or combination of the transaction having substantially the same effect as any of the foregoing. Agreement means this operating agreement of the Company. Asset Value means as of the date of this Agreement, the fair market value of such asset pursuant to Schedule 2.2 of the Unit Purchase Agreement, and as of any date thereafter, with respect to any asset, the asset's adjusted basis for federal income tax purposes as of such date, except as follows: (1) The initial Asset Value of any asset contributed by a Member to the Company after the date hereof shall be the gross fair market value of the asset, as reasonably determined by the Board of Directors; (2) The Asset Values of all assets of the Company shall be adjusted to equal their respective gross fair market values, as reasonably determined by the Board of Directors, as of the following times: (a) the acquisition of additional Units by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of the Company's property as consideration for Units if the Board of Directors reasonably determines that the adjustment is necessary or appropriate to reflect the relative economic interests of the Members; and (c) the liquidation of the Company within the meaning of section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations; (3) The Asset Value of any Company asset distributed to any Member shall be the gross fair market value of the asset on the date of distribution reasonably determined by the Board of Directors; (4) The Asset Value of the Company's assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of the assets pursuant to section 734(b) or section 743(b) of the Code, but only to the extent required by section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations; provided, however, that Asset Values shall not be adjusted pursuant to this clause (4) to the extent the Board of Directors reasonably determines that an adjustment pursuant to clause (2), above, is necessary or appropriate in connection with a transaction that otherwise would result in an adjustment pursuant to this clause (4); and (5) If the Asset Value of an asset has been determined or adjusted pursuant to clause (1), (2), or (4), above, the Asset Value shall thereafter be adjusted by the depreciation taken into account with respect to that asset for purposes of computing Profits and Losses. Board of Directors means the persons elected as directors of the Company pursuant to Section 6.2 of this Agreement. Book Value shall have the meaning set forth in Exhibit B. Book Value Statement shall have the meaning set forth in Exhibit B. Capital Account shall have the meaning set forth in Section 3.1 of this Agreement. 20 Cash Available for Distribution means Cash Flow less Tax Distributions. Cash Flow means cash funds provided from the operation of the Company's business, without deduction for depreciation, but after deducting cash funds used to pay all other expenses, debt payments, capital improvements and replacements, and amounts set aside for the restoration or creation of reserves by the Board of Directors. Cause means (a) the definition of "Cause" contained in Section 9(c) of that certain Employment Agreement between Engelbrecht and the Company, or (b) if no such agreement exists, it means any of the following: (1) The willful and continued failure of Engelbrecht to substantially perform his duties as the president or chief executive officer (other than as a result of physical or mental illness or injury) after the Board delivers to Engelbrecht a written demand for substantial performance that specifically identifies the manner in which the Board believes that Engelbrecht has willfully failed to substantially perform his duties and after Engelbrecht has failed to resume substantial performance of his duties on a continuous basis within ten (10) calendar days of receiving such demand; (2) Engelbrecht having been convicted of a felony (as evidenced by binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion of all right of appeal) or such other crime or legal violation which disqualifies Engelbrecht from serving as an officer or director of Lease Funds or otherwise substantially impairs his ability to perform his duties or responsibilities; (3) A knowing, material violation by Engelbrecht of any applicable material law or regulation respecting the business of the Company that has had, or is reasonably expected to have, a material adverse effect upon the Company, any of the Company's members or QCBT; or (4) If Engelbrecht is removed and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued by any regulatory authority with jurisdiction over the Company, any of the Company's members or QCBT. Change of Control means the following: (a) The consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of thirty-three percent (33%) or more of the combined voting power of the then outstanding voting securities of QCR or QCBT; or (b) The individuals who, as of the date hereof, are members of the Board of Directors of QCR (the "QCR Board") cease for any reason to constitute a majority of the QCR Board, unless the election, or nomination for election by the stockholders, of any new director was approved by a vote of a majority of the QCR Board, and such new director shall, for purposes of this Agreement, be considered as a member of the QCR Board; or (c) Consummation by QCR or QCBT of (i) a merger or consolidation if the stockholders, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the entity resulting from such merger or consolidation, in substantially the same proportion as their ownership of the combined voting power of the voting securities of QCR or QCBT outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution or an agreement for the sale or other disposition of two-thirds or more of the consolidated assets of QCR or QCBT. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because thirty-three percent (33%) or more of the combined voting power of the then outstanding securities of QCR or QCBT is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of QCR or QCBT in substantially the same proportion as their ownership of stock of QCR or QCBT immediately prior to such acquisition. Code means the Internal Revenue Code of 1986, as amended (or any corresponding provisions of succeeding law). 21 Company means M2 Lease Funds LLC. Depreciation means, for each Fiscal Period of the Company, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset of the Company for such Fiscal Period under the Code, except that if the Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Period, Depreciation shall be an amount that bears the same ratio to such beginning Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Period bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Fiscal Period is zero, Depreciation shall be determined with reference to such beginning Asset Value using any reasonable method consistent with the purpose and intent hereof. Director means a member of the Board of Directors. Disability means (a) if Engelbrecht is party to an employment, management or other similar agreement with the Company and such agreement includes a definition of "Disability," the definition contained therein, or (b) if no such agreement exists, it means the inability of Engelbrecht, due to a physical or mental impairment, to perform the essential functions of Engelbrecht's job with the Company for a period of more than six (6) consecutive months, with or without a reasonable accommodation. A determination of Disability shall be made by the Board of Directors in consultation with a physician satisfactory to the Company, and Engelbrecht shall cooperate with the efforts to make such determination. Any such determination by the Board of Directors shall be final, conclusive and binding upon all interested parties Disposition has the meaning set forth in Section 7.6. Engelbrecht shall have the meaning listed in the preamble. Equalizing Distributions shall have the meaning set forth in Section 4.1(c). Expenses means fees, costs, charges, disbursements, reasonable attorney fees, and any other reasonable expenses incurred in connection with a proceeding giving rise to a request for indemnification. First Amended Agreement shall have the meaning listed in the preamble. Fiscal Period means a portion of a Fiscal Year. Fiscal Year means any 12-month period selected by the Company from time to time as its fiscal year, provided that in the year of the formation, sale, or liquidation of the Company, a Fiscal Year may be less than a 12-month period. Involuntary Transfer and Involuntary Transferee shall have the meanings set forth in Section 7.3 of this Agreement. Liability means the obligation to pay any judgment, settlement, penalty, assessment, forfeiture, or fine whatsoever, including any excise tax assessed with respect to an employee benefit plan. Liquidating Trustee shall have the meaning set forth in Section 9.5(a). Majority Consent means the consent, determined in accordance with Section 6.7 of this Agreement, of holders of more than 50% of the Units at the time of the consent, unless otherwise expressly provided in the Agreement; provided, however, that for purposes of consenting pursuant to Article VII of this Agreement, "Majority Consent" means the consent of the holders of a majority of the Units at the time of the consent, excluding the Units that are being transferred, and provided, further, that the Units of Involuntary Transferees who have not been admitted as Members to the Company shall be excluded for all purposes in determining Majority Consent. Member means any Person listed in the preamble to this Agreement until such time as the Person is no longer a Member in accordance with this Agreement and any additional Person who is admitted as a Member to the Company in accordance with this Agreement. Minority Unit shall have the meaning set forth in Section 7.6(a). Notice of Involuntary Transfer shall have the meaning set forth in Section 7.3(a). Notice of Transfer shall have the meaning set forth in Section 7.2(a) of this Agreement. Officer means a Person appointed as an officer pursuant to Section 6.4 of this Agreement. 22 Original Agreement shall have the meaning set forth in the preamble of this Agreement. Original Sale shall have the meaning set forth in Section 7.5(c)(vi). Percentage Interest for purposes of Book Value as determined in accordance with Exhibit B shall mean twenty percent (20%), which percentage shall appropriately be adjusted in the event Engelbrecht Transfers any Units or new Members are admitted to the Company of whom approval of admission has been given by Engelbrecht (such approval shall be for purposes of calculating Book Value only and in no event shall be construed as affecting the rights of the parties hereto concerning the subject matter hereof). Person means an individual, a general partnership, a limited partnership, a domestic or foreign limited liability company, a trust, an estate, an association, a corporation, or any other legal or commercial entity. Profits and Losses mean, for each Fiscal Period, an amount equal to the Company's taxable income and loss for the Fiscal Period, determined in accordance with section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to section 703(a)(1) of the Code shall be included in taxable income and loss), with the following adjustments: (1) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses pursuant to this definition shall be added to the taxable income or loss; (2) Any expenditures of the Company described in section 705(a)(2)(B) of the Code or treated as section 705(a)(2)(B) expenditures described in section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations, and not otherwise taken into account in computing Profits and Losses pursuant to this definition, shall be subtracted from the taxable income or loss; (3) In the event the Asset Value of any Company asset is adjusted pursuant to the definition of Asset Value, the amount of the adjustment shall be taken into account as gain or loss from the disposition of the asset for purposes of computing Profits and Losses; (4) Gain or loss resulting from any disposition of any property by the Company with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Asset Value of the property disposed of, notwithstanding that the property's adjusted tax basis differs from its Asset Value; (5) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing the taxable income or loss, there shall be taken into account Depreciation for the Fiscal Year or other period; (6) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to section 734(b) or section 743(b) of the Code is required pursuant to section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations to be taken into account in determining Capital Accounts as a result of a distribution other than in complete liquidation of a Member's Units, the amount of the adjustment shall be treated as an item of gain (if the adjustment increases the asset's basis) or loss (if the adjustment decreases the asset's basis) from the disposition of the asset and shall be taken into account for purposes of computing Profits and Losses; and (7) Notwithstanding any other provisions of this definition, any items that are specially allocated pursuant to Sections 5.2 and 5.4 of this Agreement shall not be taken into account in computing Profits or Losses. The amounts of the items of income, gain, loss, and deduction available to be specially allocated pursuant to Sections 5.2 and 5.4 of this Agreement shall be determined by applying rules analogous to those set forth in this definition as appropriate. Projections means the projections for the Company attached as Exhibit A to the Employment Agreement between the Company and Engelbrecht. Proportionate Share shall have the meaning set forth in Section 7.6(a). Put/Call Notice shall have the meaning set forth in Section 7.5. QCBT shall have the meaning listed in the preamble of this Agreement. QCBT Affiliate Transfer shall have the meaning set forth in Section 7.1. QCBT shall have the meaning set forth in Section 7.4(c)(ii). 23 SFSC shall have the meaning set forth in the preamble of this Agreement. Selling Members shall have the meaning set forth in Section 7.6. Tangible Equity Ratio means the ratio of all Company assets on the financial statements to the tangible equity. Tax Distribution means the amount distributed to Members pursuant to Section 4.1(a) and (b) of this Agreement. Tax Distribution Dates means, except as provided in Section 4.1(b) of this Agreement, January 15, April 15, June 15, and September 15 of each Fiscal Year commencing with September 15, 2005. Tax Rate means the highest combined marginal income tax rate for federal and Wisconsin purposes for the Fiscal Period at issue applicable to corporations subject to tax under Subchapter C of the Code, assuming in determining the tax rate that state taxes are deductible for federal purposes. In determining the Tax Rate, a separate Tax Rate shall be determined for ordinary income, long-term capital gains and Section 1231 gains, respectively, if the Company has such types of income and if the tax rates for such types of income are different. Transaction Price means (1) in a case of an Adjustment Transaction described in clauses (a), (b) or (e) of the definition of Adjustment Transaction, the highest price per unit (including the fair market value of any non-cash consideration) received in that Adjustment Transaction for Units; or (2) in the case of an Adjustment Transaction which is described in clause (c) of the definition of Adjustment Transaction, the sum (computed on a per unit basis) of the amount paid for such securities or any other rights or instruments plus the total additional consideration, if any, payable upon the issuance or sale of the Units issuable pursuant thereto; or (3) in the event of an Adjustment Transaction described in clause (d) of the definition of Adjustment Transaction, the book value of the Company (computed on a per unit basis) immediately after consummation of, and after giving effect to, such Adjustment Transaction; or (4) in the event of any Adjustment Transaction described in clause (f) of the definition of Adjustment Transaction, an equitable amount per unit determined in accordance with the foregoing principals. Transfer means to sell, assign, give, bequeath, pledge, or otherwise encumber, divest, dispose of, or transfer ownership or control of all of, any part of, or any interest in a Unit to any Person, whether voluntarily or by operation of law, whether inter vivos or upon death. Transferee means any Person who proposes to acquire any or all of a Transferor's Units, or a Person acquiring Units pursuant to the provisions of Article VII of this Agreement. Transferor means any Person who proposes to transfer or acquire any or all of a then Member's Units pursuant to this Agreement. Treasury Regulations or Regulations means the regulations adopted from time to time by the Department of the Treasury under the Code, and any references to "partners" or "partnership" in the Regulations shall refer, as appropriate, to Members and the Company, respectively. Unanimous Consent means the consent of all Members of the Company. Unit means an interest in the Company received in exchange for a capital contribution of $39,353.62 per Unit or, as regards the acquisition of Units at a later date, such other amount as is determined by the Board of Directors. Unit Purchase Agreement shall have the meaning set forth in the preamble of this Agreement. WLLCL means the Wisconsin Limited Liability Company Law. 24 EXHIBIT B BOOK VALUE CALCULATION I. Book Value shall mean an amount equal to the net book value of assets minus liabilities of the Company as of the close of the month immediately preceding the date of a Put/Call Notice (the "Determination Date") multiplied by Engelbrecht's Percentage Interest, using the following valuation methods: 1. Except as set forth below in this Exhibit B, Book Value shall be valued and computed in accordance with GAAP heretofor applied by the Company as of the date of this Agreement, and shall not be computed for tax purposes. 2. Regardless of accounting standard changes, modifications to the Company's accounting policies, modification to the Company's lease agreements or other like changes, all leases by the Company shall constitute capital or financing leases, not operating leases, and as such be treated under the direct financing method of accounting. 3. Liabilities and assets shall include year-end adjustments as of the Determination Date required by GAAP. 4. Book Value shall include an adjustment for the amount by which amounts paid to Affiliates of the Members in any transaction(s) exceeds the fair market value of such transactions. 5. The Book Value as of the date of this Agreement using the foregoing methods is $1,377,377.78, which reflects mark-up to Book Value in connection with QCBT's acquisition of 80% of the equity interest from Engelbrecht on the date of this Agreement. 6. Book Value shall be reduced by the amount of any Equalizing Distribution (plus related interest) which must be paid pursuant to Section 4.1(c) before a distribution could be made pursuant to Section 4.1(d). II. Closing. Unless there is a dispute regarding the Book Value calculation, the Closing shall take place within thirty (30) days of a Put/Call Notice. For purposes of determining the Book Value, within twenty (20) days following a Put/Call Notice, the Company shall prepare and deliver to Engelbrecht a statement of Book Value (a "Book Value Statement") prepared in accordance with this Exhibit B, accompanied by sufficient detail to determine the calculation of Book Value, and a report by Company's independent accountant reflecting the Book Value. Engelbrecht shall have ten (10) days after the receipt of the Book Value Statement to make a written objection to the calculation. The parties shall attempt in good faith to reach an agreement with respect to any matters in dispute. If the parties are unable to resolve the disagreements with respect to the determination of the Book Value within thirty (30) days following an objection by Engelbrecht, then the parties shall refer such differences to Ernst & Young or such other national accounting firm mutually agreed upon by the parties (the "CPA Firm"), who shall, acting as experts and not as arbitrators, determine in accordance with this Agreement and Exhibit B, and only with respect to the differences so submitted, the Book Value. The parties shall direct the CPA Firm to use its best efforts to render its determination within thirty (30) days after such submission. The CPA Firm's determination will be conclusive and binding upon the parties, shall not be subject to further review or approval and judgment therein may be entered in any circuit court or any court of competent jurisdiction. The fees and disbursements of the CPA Firm shall be paid by the non-prevailing party, as determined by the CPA Firm. The Company shall make readily available to the CPA Firm all relevant books and records and workpapers related to the Company's operations and all other items reasonably requested by the CPA Firm. The Closing shall take place with five (5) days of the CPA's determination. 25 EXHIBIT C CAPITAL ACCOUNT Member Capital Contribution Capital Account Number of Units - --------------------------------------------------------------------------------------------- QCBT 80% of the fair market value $5,509,511.22 140 of the Company's assets net of the Company's liabilities John Engelbrecht 20% of the fair market value $1,377,377.78 35 of the Company's assets Net of the Company's liabilities
26 EXHIBIT D GUARANTY THIS GUARANTY is made and entered into as of the ____ day of August, 2005, by John Engelbrecht ("Guarantor") for the benefit of Quad City Bank and Trust Company, an Iowa corporation ("QCBT"). W I T N E S S E T H: WHEREAS, Guarantor and QCBT entered into that certain Second Amended and Restated Operating Agreement of M2 Lease Funds LLC (the "Obligor") dated August __, 2005 (the "Operating Agreement"); WHEREAS, Section 11.2 of the Operating Agreement requires that Guarantor execute and deliver to QCBT a guaranty to secure up to twenty percent (20%) of any loan made to the Obligor by QCBT or its affiliates on terms and conditions mutually acceptable to Guarantor and QCBT; WHEREAS, the Obligor has promised to pay QCBT the principal amount, plus interest, of any amounts lent by QCBT to Obligor (the "Indebtedness"); WHEREAS, Guarantor and QCBT have agreed that this Guaranty will require Guarantor to secure the bottom twenty percent (20%) of the Indebtedness as described in more detail below. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor does hereby covenant and agree with QCBT as follows: 1. Guaranty. Subject to the limitations, terms and conditions of Section 3, below, Guarantor hereby irrevocably guaranties the full and prompt payment and performance of all obligations of Indebtedness (individually, an "Obligation" and collectively, the "Obligations"). This is a Guaranty of collection and, accordingly, if Obligor shall default in the payment or performance of any of the Obligations when and as the same shall become due, whether at the stated dates thereof, by acceleration or otherwise, QCBT shall have the right to proceed against Guarantor only as provided in Section 3 below. 2. Unconditional Guaranty. No act or thing need occur to establish the liability of Guarantor hereunder, and except as expressly provided in Section 3, below, no act or thing shall in any way exonerate such Guarantor hereunder or modify, reduce, limit or release such Guarantor's liability hereunder, including without limitation, the death or incompetence of such Guarantor. 3. Limited Guaranty. Notwithstanding any contrary provision of this Guaranty, Guarantor shall not be obligated to make any payment hereunder until all attempts to collect from Obligor, with due diligence and using reasonable means, have failed to satisfy the Obligations in full. Such attempts shall include the exhaustion of all rights and remedies at law and in equity that QCBT may have against Obligor and the collateral, if any, securing the Note. Guarantor's liability hereunder shall be limited to the lesser of (i) the unpaid portion of the Obligations, after exhaustion of all rights and remedies against Obligor and collateral securing the Indebtedness as provided above, and (ii) 20% of the outstanding principal balance of the Indebtedness. 4. Waiver. To the extent not prohibited by law, Guarantor expressly waives notice of the acceptance of this Guaranty, default under any Obligation, and presentment, demand, notice and protest. Subject to Section 3 above, this Guaranty shall be unconditional, absolute, and irrevocable, irrespective of (a) the existence of any security given to secure the Obligations, (b) impossibility or the illegality of performance on the part of Obligor under any documents governing or involving the Obligations, (c) the sale or other transfer of all or any portion of any collateral securing the Obligations, (d) any defense that may arise by reason of the incapacity or lack of authority of Obligor or Guarantor, or (e) any other circumstances, occurrences or conditions, which are similar or dissimilar to any of the foregoing, which might otherwise constitute a legal or equitable defense, discharge or release of a guarantor. Further, Guarantor agrees that QCBT may, at any time and from time to time, with or without consideration, (i) extend time for payment or performance or grant other forbearances to Obligor, and/or (ii) agree to the substitution, exchange or release of all or any part of any collateral securing the Obligations, without notice to, or further consent from, Guarantor. Any such action shall not in any way affect or diminish the liability of Guarantor under this Guaranty. 27 5. No Warranties or Representations. Guarantor acknowledges and agrees that QCBT has not made any warranties or representations with respect to, does not assume any responsibility to Guarantor for, and does not have any duty to provide information to Guarantor regarding, the collectibility or enforceability of any of the Obligations. Guarantor has independently determined the collectibility and enforceability of the Obligations and until the Obligations are paid and performed in full, Guarantor will independently and without reliance on QCBT continue to make such determinations. 6. Costs of Collection. Guarantor agrees to pay all costs and expenses, including without limitation, all court costs and reasonable attorneys' fees and expenses, paid or incurred by QCBT in endeavoring to collect all or any part of the Obligations after the same become due and owing from, or in prosecuting any action against, Guarantor. 7. Binding Effect. Guarantor agrees that this Guaranty shall be binding upon Guarantor and his heirs, legal and personal representatives and assigns, and shall inure to the benefit of and may be enforced by QCBT and its successors and assigns. Guarantor acknowledges QBCT's acceptance hereof and reliance hereon. 8. Governing Law. THIS GUARANTY HAS BEEN EXECUTED, DELIVERED AND ACCEPTED AT, AND SHALL BE DEEMED TO HAVE BEEN MADE AT, MILWAUKEE, WISCONSIN, AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE INTERNAL (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) LAWS AND DECISIONS OF THE STATE OF WISCONSIN, AND GUARANTOR AGREES TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT WITHIN MILWAUKEE COUNTY, WISCONSIN, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON GUARANTOR. GUARANTOR WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS AND WAIVES ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER. NOTHING IN THIS SECTION 8 SHALL AFFECT THE RIGHT OF QCBT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF QCBT TO BRING ANY ACTION OR PROCEEDING AGAINST GUARANTOR OR HIS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 9. Enforceability. If any term, covenant or condition of this Guaranty, or the application thereof to any person, entity or circumstance, shall, to any extent, be invalid or unenforceable, all other provisions of this Guaranty, or the application of such term, covenant or condition to persons or entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term, covenant and condition herein shall be valid and enforced to the fullest extent permitted by law. 10. Entire Agreement. This Guaranty is intended by Guarantor as a final expression of this Guaranty and is a complete and exclusive statement of its terms, there being no conditions to the full effectiveness of this Guaranty. This Guaranty may not be supplemented or amended except in a writing signed by Guarantor. IN WITNESS WHEREOF, Guarantor has executed this Guaranty. /s/ John Engelbrecht ---------------------- John Engelbrecht 28 EX-31 3 qcrexhibit311.txt Exhibit 31.1 I, Douglas M. Hultquist, certify that: 1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2005 /s/ Douglas M. Hultquist ------------------------ Douglas M. Hultquist Chief Executive Officer 1 EX-31 4 qcrexhibit312.txt Exhibit 31.2 I, Todd A. Gipple, certify that: 1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2005 /s/ Todd A. Gipple ----------------------- Todd A. Gipple Chief Financial Officer 1 EX-32 5 qcrexhibit321.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of QCR Holdings, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Douglas M. Hultquist, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Douglas M. Hultquist - ------------------------ Douglas M. Hultquist Chief Executive Officer November 11, 2005 1 EX-32 6 qcrexhibit322.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of QCR Holdings, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Todd A. Gipple, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Todd A. Gipple - ----------------------- Todd A. Gipple Chief Financial Officer November 11, 2005 1 -----END PRIVACY-ENHANCED MESSAGE-----