-----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, GLYpP/6aPwDTAr5SNI6AoD4fEp2Eens7KnUPe5lSZaUydLWMd8l5CJCIB+PJu3Qa tHhRsQqEv4OXKeG9AaW7Uw== 0000743530-06-000005.txt : 20060314 0000743530-06-000005.hdr.sgml : 20060314 20060313174725 ACCESSION NUMBER: 0000743530-06-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060314 DATE AS OF CHANGE: 20060313 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22208 FILM NUMBER: 06683084 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-K 1 qcrannual2005.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005. Commission file number: 0-22208 QCR HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 42-1397595 (State of incorporation) (I.R.S. Employer Identification No.) 3551 Seventh Street, Suite 204, Moline, Illinois 61265 (Address of principal executive offices) (309) 736-3580 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: None. Securities registered pursuant to Section 12(g)of the Exchange Act: Common stock, $1 Par Value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ x ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The Nasdaq SmallCap Market on June 30, 2005, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $86,474,472. Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of March 1, 2006, the Registrant had outstanding 4,537,711 shares of common stock, $1.00 par value per share. Documents incorporated by reference: Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be held in May 2006. 1 Part I Item 1. Business General. QCR Holdings, Inc. (the "Company") is a multi-bank holding company headquartered in Moline, Illinois that was formed in February 1993 under the laws of the state of Delaware. The Company serves the Quad City, Cedar Rapids, and Rockford communities through its three wholly owned banking subsidiaries, which provide full-service commercial and consumer banking and trust and asset management services: o Quad City Bank and Trust Company, ("Quad City Bank & Trust") which is based in Bettendorf, Iowa and commenced operations in 1994, o Cedar Rapids Bank and Trust Company, ("Cedar Rapids Bank & Trust") which is based in Cedar Rapids, Iowa and commenced operations in 2001, and o Rockford Bank and Trust Company, (Rockford Bank & Trust") which is based in Rockford, Illinois and commenced operations in 2005. The Company also engages in merchant credit card processing through its wholly owned subsidiary, Quad City Bancard, Inc. ("Bancard"), based in Moline, Illinois and in direct financing lease contracts through its 80% equity investment in M2 Lease Funds, LLC ("M2 Lease Funds"), based in the Milwaukee, Wisconsin area. Quad City Bank & Trust was capitalized on October 13, 1993 and commenced operations on January 7, 1994. Quad City Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation (the "FDIC"). Quad City Bank & Trust provides full service commercial and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. At December 31, 2005, Quad City Bank & Trust had total assets of $718.5 million. Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the FDIC. The Company commenced operations in Cedar Rapids in June 2001 operating as a branch of Quad City Bank & Trust. The Cedar Rapids branch operation then began functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its two new facilities, which were both completed in the summer of 2005. The headquarters for Cedar Rapids Bank & Trust is located in downtown Cedar Rapids, and its first branch location is located in northern Cedar Rapids. At December 31, 2005, Cedar Rapids Bank & Trust had total assets of $289.9 million. On January 3, 2005, Rockford Bank & Trust opened as the Company's third bank subsidiary. The Company commenced operations in Rockford, Illinois in September 2004 operating as a branch of Quad City Bank & Trust. Rockford Bank & Trust is an Illinois-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the FDIC. It provides full-service commercial and consumer banking to Rockford and adjacent communities through its original office located in downtown Rockford and its recently opened branch location in a temporary modular facility on Guilford Road at Alpine Road in Rockford. The Company plans to build a 20,000 square foot banking facility at a projected cost of $4.4 million with completion scheduled for October 2006. At December 31, 2005, Rockford Bank & Trust had total assets of $41.3 million. Bancard was capitalized in April 1995 as a Delaware corporation that provides merchant and cardholder credit card processing services. In October 2002, Bancard sold its independent sales organization ("ISO") related merchant credit card operations to iPayment, Inc. Until September 24, 2003, Bancard continued to process transactions for iPayment, Inc., and approximately 32,500 merchants. Since iPayment, Inc. discontinued processing with Bancard, processing volumes decreased significantly. Bancard does, however, continue to provide credit card processing for merchants and cardholders of the Company's subsidiary banks and agent banks. On August 26, 2005, the Quad City Bank & Trust acquired 80% of the membership units of M2 Lease Funds. John Engelbrecht, the President and Chief Executive Officer of M2 Lease Funds, retained 20% of the membership units. M2 Lease Funds, which is based in the Milwaukee, Wisconsin area, is engaged in the business of leasing machinery and equipment to commercial and industrial businesses under direct financing lease contracts. Quad City Bank & Trust acquired assets and assumed liabilities totaling $35.0 million and $30.0 million, respectively, for a purchase price of $5.0 million, which resulted in goodwill of $3.4 million and minority interest of $573 thousand. In accordance with the provisions of FAS Statement 142, goodwill is not being amortized, but will be evaluated annually for impairment. 2 In February 2004, the Company issued $12,000,000 of fixed/floating rate trust preferred securities (fixed at a rate of 6.93% for 7 years and floating rate for 23 years) and $8,000,000 of floating rate trust preferred securities through two newly formed subsidiaries, QCR Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust III"), respectively. Trust II and Trust III are each 100% owned non-consolidated subsidiaries of the Company. Trust II and Trust III each 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 $8,248,000 and $12,372,000, respectively. On May 5, 2005, the Company issued $5,000,000 of floating rate capital securities through a newly formed subsidiary, QCR Holdings Statutory Trust IV ("Trust IV"). Trust IV is a 100% owned non-consolidated subsidiary of the Company. Trust IV used the proceeds from the sale of the trust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in the amount of $5,155,000. On February 24, 2006, the Company issued $10,000,000 of fixed/floating rate capital securities through a newly formed subsidiary, QCR Holdings Statutory Trust V ("Trust V"). Trust V is a 100% owned non-consolidated subsidiary of the Company. Trust V used the proceeds from the sale of the trust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in the amount of $10,310,000. The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust, Rockford Bank & Trust and Bancard, and 100% of the common securities of Trust II, Trust III, Trust IV, and Trust V. The Company also holds an 80% equity interest in M2 Lease Funds. In addition to such ownership, the Company invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with the subsidiary banks. In addition, to its wholly-owned and majority-owned subsidiaries, the Company has an aggregate investment of $308 thousand in three associated companies, Nobel Electronic Transfer, LLC, Nobel Real Estate Investors, LLC, and Velie Plantation Holding Company, LLC. 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"). The Company and its subsidiaries collectively employed 305 individuals at December 31, 2005. No one customer accounts for more than 10% of revenues, loans or deposits. Business. The Company's principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits and borrowings. Its operating results are affected by merchant credit card fees, trust fees, deposit service charge fees, fees from the sale of residential real estate loans and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, insurance, and other administrative expenses. The Company's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities, as described more fully in this form 10-K. Competition. The Company currently operates in the highly competitive Quad City, Cedar Rapids, and Rockford markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. Additionally, the Company competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits. These competitive trends are likely to continue and may increase as a result of the continuing reduction on restrictions on the interstate operations of financial institutions. Under the Gramm-Leach-Bliley Act of 1999, effective in March 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") is the primary regulator of the Company and its subsidiaries. In addition, Quad City Bank & Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and the FDIC. Rockford Bank & Trust is regulated by the State of Illinois Department of Financial and Professional Regulation ("the Illinois DFPR") and the FDIC. 3 Lending. The Company and its subsidiaries provide a broad range of commercial and retail lending and investment services to corporations, partnerships, individuals and government agencies. The subsidiary banks actively market their services to qualified lending customers. Lending officers actively solicit the business of new borrowers entering their market areas as well as long-standing members of the local business community. The subsidiary banks have established lending policies which include a number of underwriting factors to be considered in making a loan, including location, loan-to-value ratio, cash flow, interest rate and the credit history of the borrower. Quad City Bank & Trust's current legal lending limit is approximately $9.4 million. As of December 31, 2005, commercial loans made up approximately 80% of the loan portfolio, while residential mortgages comprised approximately 10% and consumer loans comprised approximately 10%. Cedar Rapids Bank & Trust's current corporate lending limit is approximately $3.5 million. As of December 31, 2005, commercial loans made up approximately 88% of the loan portfolio, while residential mortgages comprised approximately 5% and consumer loans comprised approximately 7%. Rockford Bank & Trust's current corporate lending limit is approximately $2.3 million. As of December 31, 2005, commercial loans made up approximately 83% of the loan portfolio, while residential mortgages comprised approximately 9% and consumer loans comprised approximately 8%. As part of the loan monitoring activity at the three subsidiary banks, credit administration personnel interact closely with senior bank management. The Company has also instituted a separate loan review function to analyze credits of the subsidiary banks. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of these situations. As noted above, the subsidiary banks are active commercial lenders. The areas of emphasis include loans to wholesalers, manufacturers, building contractors, developers, business services companies and retailers. The banks provide a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of facilities, equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, the subsidiary banks often take personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. A significant portion of the subsidiary banks' commercial business loans has floating interest rates or reprice within one year. The banks also make commercial real estate loans. Collateral for these loans generally includes the underlying real estate and improvement3, and may include additional assets of the borrower. Residential mortgage lending continues to be a focal point for the banks, and they sell the majority of their real estate loans in the secondary market. During the year ended December 31, 2005, the subsidiary banks originated $122.1 million of real estate loans and sold $99.6 million, or 82%, of these loans. During the year ended December 31, 2004, the subsidiary banks originated $124.6 million of real estate loans and sold $83.5 million, or 67%, of these loans. During the year ended December 31, 2003, the subsidiary banks originated $268.8 million of real estate loans and sold $241.6 million, or 90%, of these loans. Generally, the subsidiary banks' residential mortgage loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature in one to five years, and then retain these loans in their portfolios. The subsidiary banks' real estate loan portfolios, net of loans held for sale, were approximately $56.9 million at December 31, 2005. Servicing rights are not presently retained on the loans sold in the secondary market. The consumer lending departments of each bank provide a,l types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. Change in Fiscal Years. In August 2002, the Company's board of directors elected to change the Company's fiscal year end from June 30 to December 31. Due to this change, the Company filed a Form 10-K for the transition period from July 1, 2002 to December 31, 2002 and now holds its annual meetings in May of each year instead of October. The 2006 annual meeting will be held on May 3, 2006. The Company's subsidiaries have also changed their fiscal years, aligning their financial reporting with that of the Company. Throughout this document, references to fiscal 2005 are for the year ended December 31, 2005, and references to fiscal 2004 are for the year ended December 31, 2004, and references to fiscal 2003 are for the year ended December 31, 2003. References to the transition period are for the six months ended December 31, 2002. References to fiscal 2002 are for the year ended June 30, 2002. In most instances, results are shown for the fiscal years ended December 31, 2005, 2004, and 2003, along with the six-month transition period and the previous fiscal year ended June 30, 2002. 4 Appendices. The commercial banking business is a highly regulated business. See Appendix A for a summary of the federal and state statutes and regulations, which are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks. See Appendix B for tables and schedules that show selected comparative statistical information required pursuant to the securities laws, relating to the business of the Company. Consistent with the information presented in Form 10-K, results are presented for the fiscal years ended December 31, 2005, 2004 and 2003, along with the six-month transition period ended December 31, 2002, and the previous two fiscal years ended June 30. A second presentation shows comparative financial information restated in calendar year periods for 2000, 2001 and 2002 consistent with the Company's current fiscal year. Internet Site. The Company maintains Internet sites for itself and its three banking subsidiaries and the Company makes available free of charge through these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Also available are many of our corporate governance documents, including our Code of Ethics. The sites are www.qcrh.com, www.qcbt.com, www.crbt.com, and www.rfrdbank.com. Item 1.A. Risk Factors In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors: Our business is concentrated in and dependent upon the continued growth and welfare of the Quad City, Cedar Rapids and Rockford markets. We operate primarily in the Quad City, Cedar Rapids and Rockford markets, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a particularly strong presence in Bettendorf, Cedar Rapids and Davenport, Iowa and Moline, Illinois and their surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers' business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets. We face intense competition in all phases of our business from other banks and financial institutions. The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services. Additionally, if the regulatory trend toward reducing restrictions on the interstate operations of financial institutions continues, we will continue to experience increased competition as a result. Increased competition in our markets may also result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to relax our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets and larger lending limits and offer a broader range of financial services than we can offer. Our community banking strategy relies heavily on our subsidiaries' independent management teams, and the unexpected loss of key managers may adversely affect our operations. 5 We rely heavily on the success of our bank subsidiaries' independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain executive officers, the current management teams, branch managers and loan officers of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations. Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. However, we may at some point need to raise additional capital to support our continued growth. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth, branching, de novo bank formations and/or acquisitions could be materially impaired. We may experience difficulties in managing our growth and our growth strategy involves risks that may negatively impact our net income. As part of our general growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by undertaking additional de novo bank formations or branch openings. Based on our experience, we believe that it generally takes several years for new banking facilities to achieve overall profitability, due to the impact of organization and overhead expenses and the start-up phase of generating loans and deposits. To the extent that we undertake additional branching and de novo bank and business formations, we are likely to continue to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management's time and attention and general disruption to our business. In addition to branching and de novo bank formations, we may acquire banks and related businesses that we believe provide a strategic fit with our business. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses will involve similar risks to those commonly associated with branching and de novo bank formations, but may also involve additional risks, including: o potential exposure to unknown or contingent liabilities of banks and businesses we acquire; o exposure to potential asset quality issues of the acquired bank or related business; o difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; and o the possible loss of key employees and customers of the banks and businesses we acquire. Interest rates and other conditions impact our results of operations. Our profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at "Quantitative and Qualitative Disclosures About Market Risk" included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations. We must effectively manage our credit risk. 6 There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks. The majority of our subsidiary banks' loan/lease portfolios are invested in commercial loans/leases, and we focus on lending to small to medium-sized businesses. The size of the loans/leases we can offer to commercial customers is less than the size of the loans/leases that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area's largest businesses. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans/leases and tend to make loans/leases to larger businesses. Collateral for these loans/leases generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to commercial loans/leases, our subsidiary banks are also active in residential mortgage and consumer lending. Commercial and industrial loans/leases make up a large portion of our loan/lease portfolio. Commercial and industrial loans/leases were $359.4 million, or approximately 48% of our total loan/lease portfolio as of December 31, 2005. Our commercial loans/leases are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receiv!ble, inventory, or equipment. Credit support provided by the borrower for most of these loans/leases and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans/leases may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Our loan/lease portfolio has a significant concentration of commercial real estate loans, which involve risks specific to real estate value. Commercial real estate lending comprised a significant portion of our loan/lease portfolio, $269.7 million or approximately 36%, as of December 31, 2005. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Although a significant portion of such loans are secured by real estate as a secondary form of collateral, adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition. Our allowance for loan/lease losses may prove to be insufficient to absorb potential losses in our loan/lease portfolio. We established our allowance for loan/lease losses in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2005, our allowance for loan/lease losses as a percentage of total loans/leases was 1.17% and as a percentage of total non-performing loans/leases was approximately 254%. Although management believes that the allowance for loan/lease losses is adequate to absorb losses on any existing loans/leases that may become uncollectible, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance for loan/lease losses will prove sufficient to cover actual loan/lease losses in the future. Loan/lease losses in excess of our reserves may adversely affect our business, financial condition and results of operations. Additional information regarding our allowance for loan/lease losses and the methodology we use to determine an appropriate level of reserves is located in the "Management's Discussion and Analysis" section included under Item 5 of Part II of this Form 10-K. 7 Our Bancard operation faces other risks. Bancard, our credit card processing subsidiary, is subject to certain risks, which could have a negative impact on its operations. Primarily, for Bancard these risks are competition, credit risks and the possibility that merchants' willingness to accept credit cards will decline. Many of Bancard's competitors have greater financial, technological, marketing and personnel resources than Bancard and there can be no assurance that Bancard will be able to compete effectively with such entities. Bancard is also subject to credit risks. When a billing dispute arises between a cardholder and a merchant, and if the dispute is not resolved in favor of the merchant, the transaction is charged back to the merchant. If Bancard is unable to collect such chargeback from the merchant's account, and if the merchant refuses or is unable to reimburse Bancard for the chargeback due to bankruptcy or other reasons, Bancard bears the loss for the amount of the refund paid to the cardholder. Bancard, in general, handles processing for smaller, less seasoned merchants, which may present greater risk of loss. Although Bancard maintains a reserve against these losses, there is no assurance that it will be adequate. Additionally, VISA and MasterCard have the ability to increase the "interchange" rates charged to merchants for credit card transactions. There can be no assurance that merchants will continue to accept credit cards as payment if they feel rates are too high. Bancard is also subject to an approval process by the VISA and MasterCard credit card associations. In the event Bancard fails to comply with these standards, Bancard's designation as a certified processor could be suspended or terminated. There can be no assurance that VISA or MasterCard will maintain Bancard's registrations or that the current VISA or MasterCard rules allowing Bancard to provide transaction processing services will remain in effect. We have a continuing need for technological change and we may not have the resources to effectively implement new technology. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market areas. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers. System failure or breaches /f our network security could subject us to increased operating costs as well as litigation and other liabilities. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations. We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors. Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. 8 We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations. Government regulation can result in limitations on our operations. We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve System, the FDIC, the Iowa Department of Banking ("IDOB") and the Illinois Department of Financial and Professional Regulation ("IDFPR"). Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of stockholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect profitability. For example, new legislation or regulation may limit the manner in which we may conduct our business, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads. Failure to pay interest on our debt may adversely impact our ability to pay dividends. As of December 31, 2005, we had $25.8 million of junior subordinated debentures held by three business trusts that we control. Interest payments on the debentures, which totaled $1.6 million for 2005, must be paid before we pay dividends on our capital stock, including our Common Stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. Deferral of interest payments could also cause a decline in the market price of our Common Stock. There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price stockholders paid for them. Although our common shares are listed for quotation on the Nasdaq Capital Market, the trading in our common shares has substantially less liquidity than many other companies quoted on Nasdaq. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that volume of trading in our common shares will increase in the future. Item 1.B. Unresolved Staff Comments There are no unresolved staff comments. Item 2. Properties The original office of Quad City Bank & Trust is in a 6,700 square foot facility, which was completed in January 1994. In March 1994, Quad City Bank & Trust acquired that facility, which is located at 2118 Middle Road in Bettendorf, Iowa. Construction of a second full service banking facility was completed in July 1996 to provide for the convenience of customers and to expand the market territory. Quad City Bank & Trust also owns that facility which is located at 4500 Brady Street in Davenport, Iowa. The two-story building is in two segments that are separated by an atrium. Originally, Quad City Bank & Trust owned the south half of the building, while the north half was owned by the developer. Quad City Bank & Trust acquired the northern segment of this facility in August 2003. Each segment has two floors that are 6,000 square feet. In addition, the southern segment has a 6,000 square foot basement level. In the southern segment, Quad City Bank & Trust occupies the first floor and utilizes the basement, which underwent remodeling during 2004, for operational functions, training and storage. At December 31, 2003, approximately 1,500 square feet on the second floor of the southern segment were leased to a professional services firm, and approximately 4,500 square feet were occupied by various operational and administrative functions, which prior to January 2003 had been located in an adjacent office building. Renovations were completed during 2004 on both floors of the northern segment of the building, which is now utilized by additional operational and administrative functions of Quad City Bank & Trust and the Company. 9 Renovation of a third full service banking facility was completed in February 1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near the intersection of 7th Street and John Deere Road in Moline, Illinois near the Rock Island/Moline border. The building is owned by a third party limited liability company, in which the Company has a 20% interest. Quad City Bank & Trust and Bancard are the building's major tenants. Quad City Bank & Trust occupies the main floor of the structure and a portion of the lower level. Bancard relocated its operations to the lower level of the 30,000 square foot building in late 1997. The Company relocated its corporate headquarters to the building in February 1998 and occupies approximately 2,000 square feet on the second floor. Construction of a fourth full service banking facility was completed in October 2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City Bank & Trust leases approximately 6,000 square feet on the first floor and 2,200 square feet on the lower level of the 24,000 square foot facility. The office opened in October 2000. In September 2003, the Company announced plans for a fifth Quad City Bank & Trust banking facility, to be located in west Davenport, Iowa at Five Points. Total costs were approximately $3.6 million. The facility was completed and began operations in March 2005. Quad City Bank & Trust's Five Points branch is a 12,000 square foot facility. The Company announced plans, in April 2001, to expand its banking operations to the Cedar Rapids, Iowa market. Initially, from June until mid-September 2001, the Cedar Rapids operation functioned as a branch of Quad City Bank & Trust while waiting for regulatory approvals for a new state bank charter. On September 14, 2001, the Cedar Rapids branch operation was converted into the new charter and began operations as Cedar Rapids Bank & Trust Company. Until the summer of 2005, Cedar Rapids Bank & Trust leased approximately 8,200 square feet in the GreatAmerica Building in downtown Cedar Rapids, which had served as its only office. In February 2004, Cedar Rapids Bank & Trust announced plans to build a four floor building in downtown Cedar Rapids. The bank's main office relocated to this site in July 2005, when construction was completed. Cedar Rapids Bank & Trust owns the lower three floors of the facility, and an unrelated third party owns the fourth floor in a condominium arrangement with the bank. In the summer of 2005, Cedar Rapids Bank & Trust also completed construction on a branch office in northern Cedar Rapids on Council Street. Cedar Rapids Bank & Trust's first branch facility began operations on June 2, 2005. The Company announced plans in June 2004 to expand banking operations to the Rockford, Illinois market. Initially, from September through December 2004, the Rockford operation functioned as a branch of Quad City Bank & Trust while waiting for regulatory approvals for a new state bank charter in Illinois. On January 3, 2005, the Rockford branch operation was converted into the Company's third charter and began operations as Rockford Bank and Trust Company. Rockford Bank & Trust leases approximately 7,800 square feet in the newly restored Morrissey Building at 127 North Wyman Street in downtown Rockford, which serves as its main office. In the third quarter of 2005, Rockford Bank & Trust moved forward with plans for a second banking location on Guilford Road at Alpine Road in Rockford. A temporary modular facility opened in December 2005. The Company plans to construct a 20,000 square foot building projected for completion in August 2006. The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. 10 Item 3. Legal Proceedings There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the stockholders of the Company for a vote during the fourth quarter of the fiscal year ended December 31, 2005. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The common stock, par value $1.00 per share, of the Company is listed for quotation on The Nasdaq Capital Market under the symbol "QCRH". The stock began trading on October 6, 1993. As of December 31, 2005, there were 4,531,224 shares of common stock outstanding held by approximately 2,600 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by The Nasdaq Capital Market, for the periods indicated. 2005 2004 2003 sales price sales price sales price --------------------- ------------------- ------------------ High Low High Low High Low -------------------------------------------------------------------- First quarter........ $22.000 $20.000 $22.000 $18.667 $12.100 $11.220 Second quarter....... 22.060 19.830 19.667 17.400 13.333 11.633 Third quarter........ 22.750 20.500 19.940 17.550 16.667 13.207 Fourth quarter....... 20.500 17.920 21.990 18.000 19.387 15.000
On April 28, 2005, the board of directors declared a cash dividend of $0.04 payable on July 6, 2005, to stockholders of record on June 15, 2005. On October 27, 2005, the board of directors declared a cash dividend of $0.04 per share payable on January 6, 2006, to stockholders of record on December 23, 2005. In the future, it is the Company's intention to continue to consider the payment of dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital for continued growth, but believes that operating results have reached a level that can sustain dividends to stockholders as well. The Company has issued junior subordinated debentures in four private placements. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances currently exist. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Both Iowa law and Illinois law provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits. Before declaring its first dividend, Rockford Bank & Trust, as a de novo institution, is required by Illinois law to carry at least one-tenth of its net profits since the issuance of its charter to its surplus until its surplus is equal to its capital. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state member banks, such as the banks. Generally, a member bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior Federal Reserve approval, however, a state member bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank's calendar year-to-date net income plus the bank's retained net income for the two preceding calendar years. The Federal Reserve's approval for Rockford Bank & Trust to become a member bank is conditioned upon Rockford Bank & Trust's commitment that without prior Federal Reserve approval, it will not pay dividends until after it has been in operation for three years and has received two consecutive satisfactory composite CAMELS ratings. Notwithstanding the availability of funds for dividends, however, the banks' regulators may prohibit the payment of any dividends by the banks if they determine that such payment would constitute an unsafe or unsound practice. The Company's ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. The Company did not repurchase any of its common stock during the fourth quarter of 2005. 11 Item 6. Selected Financial Data The following "Selected Consolidated Financial Data" of the Company is derived in part from, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto. See Item 8 "Financial Statements." Results for past periods are not necessarily indicative of results to be expected for any future period. SELECTED CONSOLIDATED FINANCIAL DATA (dollars in thousands, except per share data) Years Ended December 31, Six Year Ended June 30, ----------------------------------- Months ---------------------- Ended December 31, 2005 2004 2003 2002 2002 2001 ----------------------------------------------------------------------- Statement of Income Data: Interest income ........................ $ 48,688 $ 38,017 $ 33,378 $ 16,120 $ 28,520 $ 28,544 Interest expense ....................... 21,281 13,325 11,950 6,484 12,870 16,612 Net interest income .................... 27,407 24,692 21,428 9,636 15,650 11,932 Provision for loan/lease losses ........ 877 1,372 3,405 2,184 2,265 889 Noninterest income ..................... 10,073 8,682 11,168 8,840 7,915 6,313 Noninterest expenses ................... 29,433 24,281 21,035 11,413 17,023 13,800 Pre-tax net income ..................... 7,170 7,721 8,156 4,879 4,277 3,556 Minority interest in income of consolidated subsidiary ................ 78 -- -- -- -- -- Income tax expense ..................... 2,282 2,504 2,695 1,683 1,315 1,160 Net income ............................. 4,810 5,217 5,461 3,196 2,962 2,396 Per Common Share Data: Net income-basic ....................... $ 1.06 $ 1.23 $ 1.31 $ 0.77 $ 0.74 $ 0.71 Net income-diluted ..................... 1.04 1.20 1.28 0.76 0.72 0.69 Cash dividends declared ................ 0.08 0.08 0.07 0.03 -- -- Dividend payout ratio .................. 7.55% 6.50% 5.34% 3.90% --% --% Balance Sheet: Total assets ........................... $1,042,614 $ 870,084 $ 710,040 $ 604,600 $ 518,828 $ 400,948 Securities ............................. 182,365 149,561 128,843 81,654 76,231 56,710 Loans/leases ........................... 756,254 648,351 522,471 449,736 390,594 287,865 Allowance for estimated losses on loans/leases ....................... 8,884 9,262 8,643 6,879 6,111 4,248 Deposits ............................... 698,504 588,016 511,652 434,748 376,317 302,155 Stockholders' equity: Common ............................... 54,467 50,774 41,823 36,587 32,578 23,817 Key Ratios: Return on average assets ............... 0.51% 0.65% 0.83% 1.13% 0.64% 0.62% Return on average common equity .......................... 9.14 11.89 13.93 18.41 10.07 10.95 Net interest margin (TEY) (1) .......... 3.25 3.41 3.55 3.68 3.74 3.38 Efficiency ratio (2) ................... 78.53 72.75 64.53 61.71 72.20 75.64 Nonperforming assets to total assets ........................... 0.36 1.23 0.70 0.83 0.44 0.44 Allowance for estimated losses on loans/leases to total loans/leases ..... 1.17 1.43 1.65 1.53 1.56 1.48 Net charge-offs to average loans/leases ................... 0.25 0.13 0.34 0.34 0.12 0.10 Average stockholders' equity to average assets ......................... 5.63 5.49 5.94 6.12 6.38 5.69 Earnings to fixed charges Excluding interest on Deposits ............................. 1.78 x 2.11 x 2.51 x 2.90 x 1.95 x 1.90 x Including interest on Deposits ............................. 1.32 1.56 1.66 1.73 1.32 1.21
(1) Interest earned and yields on nontaxable investments are determined on a tax equivalent basis using a 34% tax rate. (2) Noninterest expenses divided by the sum of net interest income before provision for loan/lease losses and noninterest income. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion provides additional information regarding our operations for the twelve-month periods ending December 31, 2005, 2004, and 2003, and financial condition at December 31, 2005 and 2004. This discussion should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document. Overview The Company was formed in February 1993 for the purpose of organizing Quad City Bank & Trust. Over the past thirteen years, the Company has grown to include two additional banking subsidiaries and a number of nonbanking subsidiaries, which in aggregate totaled $1.04 billion in consolidated assets as of December 31, 2005. The Company reported earnings of $4.8 million or $1.06 basic earnings per share for 2005, as compared to $5.2 million or $1.23 basic earnings per share for 2004, and $5.5 million or $1.31 basic earnings per share for 2003. Earnings for 2005 were negatively impacted by anticipated increases in both personnel and facilities costs, as the subsidiary banks opened four new banking locations during the year, and by a related write-off of $332 thousand of tenant improvements at a previously occupied facility. Also during 2005, the Company absorbed the start-up losses experienced by Rockford Bank & Trust, which opened at the beginning of 2005. Earnings for 2004 reflected the Company's issuance of $8.0 million in floating rate and $12.0 million in fixed/floating rate trust preferred securities. In connection with this issuance, the Company redeemed, on June 30, 2004, $12.0 million of trust preferred securities originally issued in 1999. Prior to this redemption, the Company had expensed $747 thousand of unamortized issuance costs associated with the 1999 trust preferred securities in March 2004. The write-off of these costs, combined with the additional interest costs of supporting both the original and the new securities from February through June, resulted in an after-tax reduction to net income during 2004 of $729 thousand, or $0.17 in diluted earnings per share. Earnings for 2003 were positively impacted by the Company's continued merchant credit card processing through September 2003 for an ISO portfolio, which had been sold in October 2002. This ISO processing contributed $864 thousand, or $0.20 in diluted earnings per share, to the Company's net income during 2003. For 2004, excluding the one-time write-off of the unamortized issuance costs and the additional interest costs incurred for approximately four months, net income would have been $5.9 million, or diluted earnings per share of $1.37, a 9% improvement over earnings for 2003. Although excluding the impact of this event is a non-GAAP measure, management believes that it is important to provide such information due to the non-recurring nature of this expense and to more accurately compare the results of the periods presented. When compared to 2004, there was solid growth in 2005 in both net interest income and noninterest income for the Company. For 2005, net interest income and noninterest income improved by 11% and 16%, respectively, for a combined increase of $4.1 million when compared to 2004. A decrease in the provision for loan/lease losses of $495 thousand from 2004 to 2005 also contributed positively to net income. The successful resolution of several large credits in the subsidiary banks' loan portfolios, through foreclosure, payoff, or restructuring, resulted in reductions to both provision expense and the level of allowance for loan/lease losses. Merchant credit card fees, net of processing costs and trust department fees also contributed an additional $661 thousand, in aggregate, to the Company's noninterest income. Partially offsetting these revenue contributions for the Company was an increase in noninterest expense of $5.2 million. The primary contributors to the increase in noninterest expense were salaries and employee benefits, which increased $2.8 million from the same period in 2004 and occupancy and equipment expense, which increased $1.0 million with the addition of four new banking locations during the year. Also during 2005, the Company incurred $1.9 million of pretax operating costs associated with the start-up of the new banking operation in Rockford, Illinois. The Company's results of operations are dependent primarily on net interest income, which is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar level 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's averag% tax equivalent yield on interest earning assets increased 0.53% for 2005 as compared to 2004. With the same comparison, the average cost of interest-bearing liabilities increased 0.70%, which resulted in a 0.17% decrease in the net interest spread of 3.13% for 2004 to 2.96% for 2005. The significant narrowing of the net interest spread from year to year, in turn depressed net interest margin. For 2005, net interest margin was 3.25% compared to 3.41% for 2004. Management continues to closely monitor and manage 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. 13 The Company's operating results are also affected by sources of noninterest income, including merchant credit card fees, trust fees, deposit service charge fees, gains from the sales of residential real estate loans and other income. Operating expenses of the Company include employee compensation and benefits, occupancy and equipment expense and other administrative expenses. The Company's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The majority of the subsidiary banks' loan portfolios are invested in commercial loans. Deposits from commercial customers represent a significant funding source as well. The Company has continued to add facilities and employees to accommodate both our historical growth and anticipated future growth. As such, overhead expenses have had a significant impact on earnings. This trend is likely to continue as the Company and our three banks continue to add the facilities and resources necessary to attract and serve additional customers. Trust department income continues to be a significant contributor to noninterest income. During 2005, trust department fees totaled $2.8 million. Trust department fees contributed $2.5 million in revenues during 2004. During 2003, trust department fees totaled $2.2 million. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. Assets under administration at December 31, 2005 increased $32.8 million during the year to $811.2 million, resulting primarily from the development of existing relationships and the addition of new trust relationships. Assets under administration at December 31, 2004 were $778.4 million, which was an increase of $104.9 million from December 31, 2003, when assets totaled $673.5 million. 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/lease losses. The Company's allowance for loan/lease loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan/lease loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan/lease portfolio, it enhances its methodology accordingly. Management may report a materially different amount for the provision for loan/lease losses in the statement of operations to change the allowance for loan/lease losses if its assessment of the above factors were different. 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 section entitled "Financial Condition - Allowance for Loan/Lease Losses." Although management believes the levels of the allowance as of December 31, 2003, 2004, and 2005 were adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. Results of Operations 2005 compared with 2004 Overview. Net income for 2005 was $4.8 million as compared to net income of $5.2 million for 2004 for a decrease of $407 thousand or 8%. Basic earnings per share for 2005 were $1.06 as compared to $1.23 for 2004. The decrease in net income was comprised of an increase in net interest income after provision for loan losses of $3.2 million in combination with an increase in aggregate noninterest income of $1.4 million and a decrease in federal and state income taxes of $222 thousand, offset by an increase in noninterest expenses of $5.1 million. Several specific factors contributed to the decline in net income from 2004 to 2005. Primary factors included a $2.8 million, or 21%, increase in salaries and employee benefits, an increase in occupancy and equipment expense of 32%, or $1.0 million, and $1.9 million of pretax operating costs associated with the start-up of the new banking operation in Rockford. 14 Interest income. Interest income grew from $38.0 million for 2004 to $48.7 million for 2005. The 28% increase in interest income was attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, in combination with an improved aggregate asset yield. The average yield on interest earning assets for 2005 was 5.75% as compared to 5.22% for 2004. Interest expense. Interest expense increased by $8.0 million, from $13.3 million for 2004 to $21.3 million for 2005. The 60% increase in interest expense was primarily att2ibutable to an aggregate increase in interest rates, in combination with greater average outstanding balances in interest-bearing liabilities. The average cost on interest bearing liabilities was 2.79% for 2005 as compared to 2.09% for 2004. Provision for loan/lease losses. The provision for loan/lease losses is established based on a number of factors, including the local and national economy and the risk associated with the loans/leases in the portfolio. The Company had an allowance for estimated losses on loans/leases of approximately 1.17% of total gross loans/leases at December 31, 2005, as compared to approximately 1.43% of total gross loans at December 31, 2004, and 1.65% at December 31, 2003. The provision for loan/lease losses declined significantly to $877 thousand for 2005, as compared to $1.4 million for 2004. During both periods, management made monthly provisions for loan/lease losses based upon a number of factors, principally the increase in loans/leases and a detailed analysis of the loan/lease portfolio. During 2005, the successful resolution of several large credits primarily in Quad City Bank & Trust's loan/lease portfolio, through foreclosure, payoff, or restructuring, resulted in reductions to both provision expense and the level of allowance for loan/lease losses. During 2005, the net growth in the loan/lease portfolio generated a provision expense of $889 thousand; however, 44%, or $394 thousand, was offset by adjustments to the allowance for estimated losses on loans/leases based on the write-offs, payoffs, or restructures of several large credits within the portfolio. During 2005, there were transfers totaling $169 thousand of loans to other real estate owned. For 2005, commercial loans/leases had total charge-offs of $1.5 million, of which $926 thousand, or 61%, resulted from two customer relationships at Quad City Bank & Trust, and there were $245 thousand of commercial recoveries. Consumer loan charge-offs and recoveries totaled $359 thousand and $90 thousand, respectively, for 2005. For 2005, credit cards accounted for 49% of the consumer loan, net charge-offs. Real estate loans had $160 thousand of charge-offs and $25 thousand of recovery activity during 2005. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. The Company continually focuses its efforts at the subsidiary banks to attempt to improve the overall quality of the Company's loan/lease portfolio. Noninterest income. Noninterest income increased by $1.4 million from $8.7 million for 2004 to $10.1 million for 2005. Noninterest income for both periods, along with other miscellaneous fees, consisted primarily of income from the merchant credit card operation, fees from the trust department, depository service fees, and gains on the sale of residential real estate mortgage loans. Making significant improvements from year to year in the noninterest income category were increases in merchant credit card fees, net of processing costs and trust department fees. Merchant credit card fees, net of processing costs for 2005 increased by 26% to $1.8 million from $1.4 million for 2004. Through September 2003, Bancard processed ISO-related Visa/Mastercard activity and carried ISO-specific reserves, which provided coverage for the related exposure. In the first and third quarters of 2004, the Company recognized aggregate recoveries of $277 thousand from the reduction of these ISO-specific reserves. For 2004, Bancard's ISO-related income was $327 thousand, and Bancard's core merchant credit card fees, net of processing costs, were $1.1 million, which included the expense of specific provisions of $196 thousand that were made for local merchant chargeback losses. For 2005, Bancard's core merchant credit card fees, net of processing costs, were $1.8 million, which was an improvement of $373 thousand when compared to 2004. Significantly contributing to the 26% increase from year to year were aggregate reversals during 2005 of $134 thousand of specific allocations to the allowance for local merchant chargeback losses, and $118 thousand in recoveries during 2005 of prior period expenses. In 2005, trust department fees grew to $2.8 million from $2.5 million in 2004. The $288 thousand, or 11%, increase from year to year was primarily a reflection of continued development of existing trust relationships and the addition of new trust customers, as well as an improvement in the market values of securities held in trust accounts, when compared to one year ago. Each of these factors had a resulting impact in the calculation and realization of trust fees. Total trust assets under management were $811.2 million at December 31, 2005 compared to $778.4 million at December 31, 2004. Deposit service fees decreased $49 thousand, or 3%, remaining at $1.6 million for 2005, as well as for 2004. This decrease was primarily a result of the reduction in collected service fees on commercial noninterest bearing demand deposit accounts at Quad City Bank & Trust due to earnings credit rates which more than doubled during 2005. The year-to-date average balance of consolidated noninterest bearing demand deposits at December 31, 2005 decreased $2.6 million from December 31, 2004. Service charges and NSF (non-sufficient funds or overdraft) charges related to demand deposit accounts were the main components of deposit service fees. 15 Gains on sales of loans, net, were $1.2 million for 2005, which reflected an increase of 9%, or $104 thousand, from $1.1 million for 2004. The slight increase was a result of stagnant volumes of residential real estate loan originations from year to year, and the effect on the subsequent sale of the majority of residential mortgages into the secondary market. During 2005, earnings on the cash surrender value of life insurance grew $28 thousand, or 4%, to $656 thousand from $628 thousand for 2005. During the first quarter of 2004, the Company made significant investments in bank-owned life insurance ("BOLI") on key executives at the two existing subsidiary banks. Quad City Bank & Trust purchased $8.6 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 $182 thousand from $510 thousand for 2004 to $692 thousand for 2005. The 36% 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 2005, other noninterest income increased $419 thousand, or 48%, to $1.3 million from $867 thousand for 2004. The increase in 2005 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 2005. Noninterest expenses. Noninterest expenses for 2005 were $29.4 million as compared to $24.3 million for 2004 for an increase of $5.2 million, or 21%. For 2005, noninterest expenses for the new charter at Rockford Bank & Trust were $2.4 million. For both 2005 and 2004, the main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees. 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. The following table sets forth the various categories of noninterest expenses for the years 2005 and 2004. Twelve Months Ended December 31, --------------------------------------- 2005 2004 % Change --------------------------------------- Salaries and employee benefits .............................. $16,630,868 $13,773,439 21% Professional and data processing fees ....................... 2,865,064 2,199,984 30% Advertising and marketing ................................... 1,221,039 1,014,664 20% Occupancy and equipment expense ............................. 4,316,443 3,263,540 32% Stationery and supplies ..................................... 645,985 543,904 19% Postage and telephone ....................................... 842,779 684,964 23% Bank service charges ........................................ 516,537 570,374 (9%) Insurance ................................................... 594,282 420,080 41% Loss on disposals/sales of fixed assets ..................... 332,283 1,048 NA Loss on redemption of junior subordinated debentures ........ -- 747,490 NA Other ....................................................... 1,467,868 1,061,364 38% -------------------------- Total noninterest expenses .................... $29,433,148 $24,280,851 21% ==========================
16 For 2005, total salaries and benefits increased to $16.6 million, which was up $2.8 million from the previous year's total of $13.8 million. The increase of 21% was primarily due to the Company's increase in compensation and benefits related to an increase in employees from 243 full time equivalents ("FTEs") to 305 from year-to-year. The staffing of Rockford Bank & Trust created 18 FTEs and 38% of the increase in total salaries and benefits. Occupancy and equipment expense increased $1.0 million, or 32%, 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. Professional and data processing fees experienced a 30% increase from $2.2 million for 2004 to $2.9 million for 2005. The $665 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. Other noninterest expense increased $406 thousand to $1.5 million for 2005 from $1.1 million for 2004. The increase was primarily the result of $327 thousand of write-downs on property values of other real estate owned (OREO) at the subsidiary banks, $128 thousand of other expense incurred on OREO property, $442 of other loan expense at the subsidiary banks, and $122 thousand of cardholder program expense at Bancard. For 2005, advertising and marketing expense increased to $1.2 million from $1.0 million for 2004. The $206 thousand increase was predominately due to the addition of Rockford Bank & Trust, in combination with special promotional events at Quad City Bank & Trust and Cedar Rapids Bank & Trust revolving around the openings of their new facilities. As a result of overall growth at the subsidiary banks, in combination with their increased investments in facilities throughout 2005, as well as an increase in the level of directors and officers insurance coverage, insurance expense grew 41% from $420 thousand in 2004 to $594 thousand in 2005. Income tax expense. The provision for income taxes was $2.3 million for 2005 compared to $2.5 million for 2004, a decrease of $222 thousand or 9%. The decrease was primarily attributable to decreased income before income taxes of $551 thousand or 7% for 2005, in combination with a slight decrease in the Company's effective tax rate for 2005 to 32.2% from 32.4% for 2004. 2004 compared with 2003 Overview. Net income for 2004 was $5.2 million as compared to net income of $5.5 million for 2003 for a decrease of $244 thousand or 4%. Basic earnings per share for 2004 were $1.23 as compared to $1.31 for 2003. The decrease in net income was comprised of an increase in net interest income after provision for loan losses of $5.3 million in combination with a decrease in federal and state income taxes of $191 thousand, totally offset by a decrease in noninterest income of $2.5 million, and an increase in noninterest expenses of $3.2 million. Several specific factors contributed to the decline in net income from 2003 to 2004. Primary factors included a $2.5 million, or 69%, decrease in gains on sale of loans, a $1.1 million, or 8%, increase in salaries and employee benefits, a decrease in merchant credit card fees of 36%, or $786 thousand, and the loss on redemption of junior subordinated debentures of $747 thousand. Interest income. Interest income grew from $33.4 million for 2003 to $38.0 million for 2004. The 14% increase in interest income was attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, partially offset by a decrease in interest rates. The average yield on interest earning assets for 2004 was 5.22% as compared to 5.50% for 2003. Interest expense. Interest expense increased by $1.4 million, from $11.9 million for 2003 to $13.3 million for 2004. The 12% increase in interest expense was primarily attributable to greater average outstanding balances in interest-bearing liabilities, which was partially offset by a reduction in interest rates. The average cost on interest bearing liabilities was 2.09% for 2004 as compared to 2.35% for 2003. 17 Provision for loan losses. The provision for loan losses is established based on a number of factors, including the local and national economy and the risk associated with the loans in the portfolio. The Company had an allowance for estimated losses on loans of approximately 1.43% of total gross loans at December 31, 2004, as compared to approximately 1.65% at December 31, 2003, 1.53% at December 31, 2002, and 1.56% at June 30, 2002. The provision for loan losses declined significantly to $1.4 million for 2004, as compared to $3.4 million for 2003. During both periods, management made monthly provisions for loan losses based upon a number of factors, principally the increase in loans and a detailed analysis of the loan portfolio. During 2004, the successful resolution of several large credits in Quad City Bank & Trust's loan portfolio, through foreclosure, payoff, or restructuring, resulted in reductions to both provision expense and the level of allowance for loan losses. During 2004, the net growth in the loan portfolio actually generated provision expense of $1.8 million, however 24%, or $426 thousand, was offset by adjustments to the allowance for estimated losses on loans based on the write-offs, payoffs, or restructures of several large credits within the portfolio. During 2004, there were transfers totaling $1.9 million of loans to other real estate owned. For 2004, commercial loans had total charge-offs of $624 thousand, of which $419 thousand resulted from two customer relationships at Quad City Bank & Trust, and there were $137 thousand of commercial recoveries. Consumer loan charge-offs and recoveries totaled $292 thousand and $75 thousand, respectively, for 2004. For 2004, credit cards accounted for $93 thousand of the consumer loan charge-offs. Real estate loans had $49 thousand of charge-offs and no recovery activity during 2004. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. The Company continually focuses its efforts at the subsidiary banks to attempt to improve the overall quality of the Company's loan portfolio. Noninterest income. Noninterest income decreased by $2.5 million from $11.2 million for 2003 to $8.7 million for 2004. Noninterest income for both periods, along with other miscellaneous fees, consisted primarily of income from the merchant credit card operation, fees from the trust department, depository service fees, and gains on the sale of residential real estate mortgage loans. Making significant improvements from year to year in the noninterest income category were increases in earnings on cash surrender value of life insurance and trust department fees. Merchant credit card fees, net of processing costs, for 2004 decreased by 36% to $1.4 million from $2.2 million for 2003. 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. For 2003, net fixed monthly service fees collected from iPayment totaled $991 thousand, and Bancard's core merchant credit card fees, net of processing costs were $1.3 million. 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 also recognized a recovery of $133 thousand from the elimination of the remaining balance in the ISO-specific reserves. Less these recoveries and an additional $50 thousand of service fees collected from iPayment, Bancard's core merchant credit card fees, net of processing costs were $1.1 million for 2004, or a decrease of 15% from the previous year. The $195 thousand decrease in core merchant credit card fees, net of processing costs from year to year was primarily due to provisions for merchant chargeback losses of $226 thousand made during 2004, which were the result of two merchant situations involving fraudulent activity. In 2004, trust department fees grew to $2.5 million from $2.2 million in 2003. The $288 thousand, or 13%, increase from year to year was primarily a reflection of continued development of existing trust relationships and the addition of new trust customers, as well as an improvement in the market values of securities held in trust accounts, when compared to one year ago. Each of these factors had a resulting impact in the calculation and realization of trust fees. Total trust assets under management were $778.4 million at December 31, 2004 compared to $673.5 million at December 31, 2003. Deposit service fees increased $127 thousand, or 8%, to $1.6 million from $1.5 million for 2004 and for 2003, respectively. This increase was primarily a result of the growth in service fees collected on the noninterest bearing demand deposit accounts of downstream correspondent banks of Quad City Bank & Trust, in combination with the growth in service fees collected on demand accounts at Cedar Rapids Bank & Trust. 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 $1.1 million for 2004, which reflected a decrease of 69%, or $2.6 million, from $3.7 million for 2003. The decrease resulted from the steep decline in mortgage refinances, which was experienced throughout 2004, and its effect on the subsequent sale of the majority of residential mortgages into the secondary market. Management anticipates that the level of gains on sales of loans, net, will continue to be reduced significantly from those experienced throughout much of 2003. 18 During 2004, earnings on the cash surrender value of life insurance grew $421 thousand, or 203%, to $628 thousand from $207 thousand for 2003. During the first quarter of 2004, the Company made significant investments in bank-owned life insurance ("BOLI") on key executives at the two existing subsidiary banks. Quad City Bank & Trust purchased $8.6 million of BOLI, and Cedar Rapids Bank & Trust made a purchase of $3.6 million of BOLI. Investment advisory and management fees increased $169 thousand from $341 thousand for 2003 to $510 thousand for 2004. The 50% 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 Cedar Rapids Bank & Trust. For 2004, other noninterest income decreased $142 thousand, or 14%, to $$867 thousand from $1.0 million for 2003. The decrease, in 2004, was primarily due to a combination of decreased income from non-consolidated subsidiaries of the Company and from a gain realized during 2003 on the sale of foreclosed property at Quad City Bank & Trust. Noninterest expenses. For both 2004 and 2003, the main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees. Noninterest expenses for 2004 were $24.3 million as compared to $21.0 million for 2003 for an increase of $3.2 million, or 15%. The following table sets forth the various categories of noninterest expenses for the years 2004 and 2003. Twelve Months Ended December 31, ------------------------------------------- 2004 2003 % Change ------------------------------------------- Salaries and employee benefits .................................. $ 13,773,439 $ 12,710,505 8% Professional and data processing fees ........................... 2,199,984 1,962,243 12% Advertising and marketing ....................................... 1,014,664 786,054 29% Occupancy and equipment expense ................................. 3,263,540 2,640,602 24% Stationery and supplies ......................................... 543,904 460,421 18% Postage and telephone ........................................... 684,964 632,354 8% Bank service charges ............................................ 570,374 454,367 26% Insurance ....................................................... 420,080 444,947 (6%) Loss on disposals/sales of fixed assets ......................... 1,048 50,446 (98%) Loss on redemption of junior subordinated debentures ............ 747,490 -- NA Other ........................................................... 1,061,364 893,313 19% --------------------------- Total noninterest expenses ........................ $ 24,280,851 $ 21,035,252 15% ===========================
For 2004, total salaries and benefits, the largest component of noninterest expenses, increased to $13.8 million or $1.1 million over the $12.7 million for 2003. The 8% increase was primarily due to the Company's increase in employees from 213 full time equivalents to 243 from year-to-year, in combination with decreased expenses for both real estate loan officer commissions and for tax benefit rights and stock appreciation rights. The growth in personnel during 2004 mirrored a combination of Quad City Bank & Trust's expansion into the Rockford market and the strong growth occurring at Cedar Rapids Bank & Trust. 2004 reflected a $747 thousand loss on the redemption of the trust preferred securities issued in 1999 at their earliest call date of June 30, 2004. Occupancy and equipment expense increased $623 thousand, or 24%. The increase was a proportionate reflection of the additional furniture, fixtures and equipment and leasehold improvements at the subsidiary banks. Professional and data processing fees increased $238 thousand, or 12%, when comparing 2004 to 2003. The increase was primarily attributable to a combination of additional legal, director, and other professional fees incurred by the subsidiary banks and by the parent company. Advertising and marketing expense grew $229 thousand from $786 thousand to $1.0 million, respectively. The 29% increase was a result of the growth at the subsidiary banks along with special events and marketing materials showcasing the ten year anniversary of Quad City Bank & Trust, which occurred in the first quarter of 2004. Bank service charges increased $116 thousand, stationary and supplies expense grew $83 thousand, and postage and phone expense increased $53 thousand. All of these increases were proportionate reflections of the Company's growth during the year. Income tax expense. The provision for income taxes was $2.5 million for 2004 compared to $2.7 million for 2003, a decrease of $191 thousand or 7%. The decrease was primarily attributable to decreased income before income taxes of $435 thousand or 5% for 2004, in combination with a slight decrease in the Company's effective tax rate for 2004 to 32.4% from 33.0% for 2003. 19 Financial Condition Total assets of the Company increased by $172.5 million, or 20%, to $1.04 billion at December 31, 2005 from $870.1 million at December 31, 2004. Total assets of the Company increased by $160.0 million, or 23%, to $870.1 million at December 31, 2004 from $710.0 million at December 31, 2003. The growth over these years primarily resulted from an increase in the loan portfolio funded by deposits received from customers and by proceeds from Federal Home Loan Bank advances. Cash and Cash Equivalent Assets. Cash and due from banks increased by $17.6 million, or 82%, to $39.0 million at December 31, 2005 from $21.4 million at December 31, 2004. Cash and due from banks decreased by $3.0 million, or 13%, to $21.4 million at December 31, 2004 from $24.4 million at December 31, 2003. Cash and due from banks represented both cash maintained at the subsidiary banks, as well as funds that the Company and its subsidiaries had deposited in other banks in the form of noninterest-bearing demand deposits. At December 31, 2005 and December 31, 2004, cash maintained at the subsidiary banks totaled $15.4 million and $9.0 million. At December 31, 2005 and December 31, 2004, funds maintained as noninterest-bearing deposits at other banks totaled $23.5 million and $12.3 million. Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold increased by $1.6 million to $4.5 million at December 31, 2005 from $2.9 million at December 31, 2004. Federal funds sold decreased by $1.1 million to $2.9 million at December 31, 2004 from $4.0 million at December 31, 2003. Fluctuations are attributed to a combination of both varying demands for Federal funds purchases by Quad City Bank & Trust's downstream correspondent banks and to varying levels of liquidity at the Company's subsidiary banks. Interest-bearing deposits at financial institutions decreased by $2.6 million, or 67%, to $1.3 million at December 31, 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 $1.8 million and maturities of certificates of deposit totaling $822 thousand. Interest-bearing deposits at financial institutions decreased by $6.5 million, or 63%, to $3.9 million at December 31, 2004 from $10.4 million at December 31, 2003. The decrease was the result of decreases in money market accounts of $3.4 million and maturities of certificates of deposit totaling $3.1 million. As a result of the interest rate environment, during 2005 and 2004, the subsidiary banks reduced their deposits in other banks in the form of certificates of deposit, increased their utilization of Federal funds sold, gained liquidity and sacrificed modest yield. Investments. Securities increased by $32.8 million, or 22%, to $182.4 million at December 31, 2005 from $149.6 million at December 31, 2004. The net increase was the result of a number of transactions in the securities portfolio. The Company purchased additional securities, classified as available for sale, in the amount of $82.3 million. This increase was partially offset by paydowns of $1.2 million that were received on mortgage-backed securities, proceeds from calls and maturities of $45.8 million, the amortization of premiums, net of the accretion of discounts, of $525 thousand, and a decrease in unrealized gains on securities available for sale, before applicable income tax of $2.0 million. Securities increased by $20.7 million, or 16%, to $149.6 million at December 31, 2004 from $128.8 million at December 31, 2003. The net increase was the result of a number of transactions in the securities portfolio. The Company purchased additional securities, classified as available for sale, in the amount of $86.7 million. This increase was partially offset by paydowns of $1.8 million that were received on mortgage-backed securities, proceeds from calls and maturities of $53.0 million, proceeds from sales of $8.4 million, net losses of $45 thousand, the amortization of premiums, net of the accretion of discounts, of $983 thousand, and a decrease in unrealized gains on securities available for sale, before applicable income tax of $1.8 million. Certain investment securities at Quad City Bank & Trust were purchased with the intent to hold the securities until they mature. These held to maturity securities, comprised of municipal securities and other bonds, were recorded at amortized cost at December 31, 2005, 2004, and 2003. The balance at December 31, 2005 was $150 thousand, which was an increase of $50 thousand from the balance of $100 thousand at December 31, 2004. The balance at December 31, 2004 was $100 thousand, which was a decrease of $300 thousand from the balance of $400 thousand at December 31, 2003. Market values at December 31, 2005, 2004, and 2003 were $155, $108 thousand, and $417 thousand, respectively. All of the Company's, Cedar Rapids Bank & Trust's and Rockford Bank & Trust's securities, and a majority of Quad City Bank & Trust's securities are placed in the available for sale category as the securities may be liquidated to provide cash for operating, investing or financing purposes. These securities were reported at fair value and increased by $32.8 million, or 22%, to $182.2 million at December 31, 2005, from $149.5 million at December 31, 2004. These securities were reported at fair value and increased by $21.0 million, or 16%, to $149.5 million at December 31, 2004, from $128.4 million at December 31, 2003. The amortized cost of such securities at December 31, 2005, 2004, and 2003 was $183.1, $148.4, and $125.6 million. 20 As of December 31, 2005, there existed no security in the investment portfolio (other than U.S. Government and U.S. Government agency securities) that exceeded 10% of stockholders' equity at that date. Loans/leases. Total gross loans/leases receivable increased by $107.9 million, or 17%, to $756.3 million at December 31, 2005 from $648.4 million at December 31, 2004. The increase was the result of the origination or purchase of $716.9 million of commercial business, consumer and real estate loans/leases, less loans transferred to other real estate owned (OREO) of $169 thousand, loan/lease charge-offs, net of recoveries, of $1.7 million and loan/lease repayments or sales of loans of $607.4 million. Included in purchases, was the acquisition on August 26, 2005 of M2 Lease Fund's lease portfolio of $32.0 million. During 2005, Quad City Bank & Trust contributed $370.5 million, or 52%, Cedar Rapids Bank & Trust contributed $271.3 million, or 38%, Rockford Bank & Trust contributed $35.7 million, or 5%, and M2 Lease Funds contributed $39.3, or 5%, of the Company's loan/lease originations or purchases. As of December 31, 2005, Quad City Bank & Trust's legal lending limit was approximately $9.4 million, Cedar Rapids Bank & Trust's legal lending limit was approximately $3.5 million, and Rockford Bank & Trust's legal lending limit was approximately $2.3 million. Total gross loans receivable increased by $125.9 million, or 24%, to $648.4 million at December 31, 2004 from $522.5 million at December 31, 2003. The increase was the result of the origination or purchase of $568.7 million of commercial business, consumer and real estate loans, less loans transferred to other real estate owned (OREO) of $1.9 million, loan charge-offs, net of recoveries, of $753 thousand and loan repayments or sales of loans of $440.2 million. During 2004, Quad City Bank & Trust contributed $347.8 million, or 61%, and Cedar Rapids Bank & Trust contributed $220.9 million, or 39% of the Company's loan originations or purchases. During 2004, the Company established new customer relationships in Wisconsin, and at December 31, 2004, held gross loans of $11.6 million from these relationships. As expected, many of these loans were sold to a Wisconsin bank during 2005 with a balance remaining at December 31, 2005 of $5.8 million. As of December 31, 2004, Quad City Bank & Trust's legal lending limit was approximately $8.2 million and Cedar Rapids Bank & Trust's legal lending limit was approximately $3.1 million. Allowance for Loan/Lease Losses. The allowance for estimated losses on loans/leases was $8.9 million at December 31, 2005 compared to $9.3 million at December 31, 2004, for a decrease of $378 thousand, or 4%. The allowance for estimated losses on loans/leases was $9.3 million at December 31, 2004 compared to $8.6 million at December 31, 2003, for an increase of $619 thousand, or 7%. During 2005, the increased level of allowance required, as a result of net growth in the loan/lease portfolio, was more than offset by negative adjustments to the allowance based on the write-offs, payoffs, or restructures of several large credits within the portfolio. The adequacy of the allowance for estimated losses on loans/leases was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions and other factors that, in management's judgment, deserved evaluation in estimating loan/lease losses. To ensure that an adequate allowance was maintained, provisions were made based on the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed monthly utilizing the percentage allocation method with specific detailed reviews completed on all credits risk-rated less than "fair quality" and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance for estimated losses on loans/leases was monitored by the credit administration staff, and reported to management and the board of directors. Net charge-offs for the years ended December 31, 2005, 2004, and 2003, were $1.7 million, $753 thousand, and $1.6 million, respectively. One measure of the adequacy of the allowance for estimated losses on loans/leases is the ratio of the allowance to the total loan/lease portfolio. Provisions were made monthly to ensure that an adequate level was maintained. The allowance for estimated losses on loans/leases as a percentage of total gross loans/leases was 1.17% at December 31, 2005, 1.43% at December 31, 2004, and 1.65% at December 31, 2003. Although management believes that the allowance for estimated losses on loans/leases at December 31, 2005 was at a level adequate to absorb probable losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan/lease losses in the future. 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 is focusing efforts at its subsidiary banks in an attempt to improve the overall quality of the Company's loan/lease portfolio. Future events could at any time 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. 21 Nonperforming Assets. The policy of the Company is to place a loan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status. Nonaccrual loans/leases were $2.6 million at December 31, 2005 compared to $7.6 million at December 31, 2004, for a decrease of $5.0 million, or 66%. The decrease in nonaccrual loans/leases was comprised of decreases in commercial loans of $4.9 million and real estate loans of $205 thousand, and an increase in consumer loans of $69 thousand. Nonaccrual commercial loans totaled $1.7 million, of which $1.5 million was due to three large lending relationships at Quad City Bank & Trust. Nonaccrual loans at December 31, 2005 represented 0.3% of the Company's held for investment loan portfolio. All of the Company's nonaccrual loans were located in the loan portfolio at Quad City Bank & Trust. None of the loans in the loan portfolios at Cedar Rapids Bank & Trust or Rockford Bank & Trust were in nonaccrual status at December 31, 2005. Nonaccrual loans/leases were $7.6 million at December 31, 2004 compared to $4.2 million at December 31, 2003, for an increase of $3.4 million, or 81%. The increase in nonaccrual loans was comprised of increases in commercial loans of $2.8 million, real estate loans of $359 thousand, and consumer loans of $221 thousand. Nonaccrual commercial loans totaled $6.6 million, of which $6.4 million was due to four large lending relationships at Quad City Bank & Trust. Nonaccrual loans at December 31, 2004 represented 1.2% of the Company's held for investment loan portfolio. All of the Company's nonperforming loans were located in the loan portfolio at Quad City Bank & Trust. None of the loans in the loan portfolio at Cedar Rapids Bank & Trust were in nonaccrual status at December 31, 2004. As of December 31, 2005, 2004, and 2003, past due loans of 30 days or more amounted to $8.7 million, $10.2 million, and $6.9 million, respectively. Past due loans as a percentage of gross loans receivable were 1.2% at December 31, 2005, 1.6 % at December 31, 2004, and 1.3% at December 31, 2003. During 2005, the Company transferred $169 thousand from the loan portfolio into other real estate owned. At December 31, 2005, $545 thousand of other real estate was held at Quad City Bank & Trust. No assets were held in other real estate owned at Cedar Rapids Bank & Trust or Rockford Bank & Trust at December 31, 2005. During 2004, the Company transferred $1.9 million from the loan portfolio into other real estate owned. At December 31, 2004, $1.4 million was held at Quad City Bank & Trust and $506 thousand was held at Cedar Rapids Bank & Trust. At December 31, 2003, the Company held no assets in other real estate owned. Other Assets. Premises and equipment increased by $7.5 million, or 42%, to $25.6 million at December 31, 2005 from $18.1 million at December 31, 2004. During the year, there were purchases of additional land, furniture, fixtures and equipment and leasehold improvements of $9.8 million, which were partially offset by both depreciation expense of $2.0 million and a one-time $332 thousand write-off of Cedar Rapids Bank & Trust tenant improvements made to the Great America Building, which had initially served as that subsidiary's main office, but was vacated during the year. 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. Costs incurred during 2005 were $1.2 million, and 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 in July 2005. Costs for this facility during 2005 were $4.0 million, and total costs for this project were $6.7 million. Cedar Rapids Bank & Trust also completed construction of a branch office located on Council Street, which opened for business in June 2005. The Company has incurred costs for this project of $1.7 million during 2005 and $2.4 million in total. During 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 subsidiary on January 3, 2005, were $259 thousand, and total costs were $472 thousand. In the third quarter of 2005, Rockford Bank & Trust moved forward with plans for a second banking location on Guilford Road at Alpine Road in Rockford. A temporary modular facility opened in December 2005. The Company plans to construct a 20,000 square foot building projected for completion in October 2006. During 2005, $1.5 million of costs were incurred on this project. 22 Premises and equipment increased by $6.1 million, or 50%, to $18.1 million at December 31, 2004 from $12.0 million at December 31, 2003. This increase resulted primarily from a combination of construction costs of $1.9 million for Quad City Bank & Trust's fifth facility, $2.6 million for Cedar Rapids Bank & Trust's new main facility, and $664 thousand for Cedar Rapids Bank & Trust's first branch facility. Additionally, there were Company purchases of additional furniture, fixtures and equipment offset by depreciation expense. Additional information regarding the composition of this account and related accumulated depreciation is described in Note 5 to the consolidated financial statements. On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of M2 Lease Funds. The purchase price of $5.0 million resulted in $3.2 million in goodwill. In accordance with the provisions of FAS statement 142, goodwill is not being amortized, but will be evaluated annually for impairment. Accrued interest receivable on loans, securities, and interest-bearing deposits at financial institutions increased by $777 thousand, or 19%, to $4.8 million at December 31, 2005 from $4.1 million at December 31, 2004. Accrued interest receivable on loans, securities, and interest-bearing deposits at financial institutions increased by $427 thousand, or 13%, to $4.1 million at December 31, 2004 from $3.6 million at December 31, 2003. Increases were due to a combination of greater average outstanding balances in interest-bearing assets, as well as increased average yields on interest-bearing assets. Bank-owned life insurance ("BOLI") increased by $1.5 million from $15.9 million at December 31, 2004 to $17.4 million at December 31, 2005. BOLI increased by $12.8 million from $3.1 million at December 31, 2003 to $15.9 million at December 31, 2004. 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 BOLI to finance the expenses associated with the establishment of supplemental retirement benefits plans ("SERPs") for the executive officers. Additionally in 2004, the subsidiary banks purchased BOLI 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 combined with existing BOLI, resulted in each subsidiary bank holding investments in BOLI policies near the regulatory maximum of 25% of capital. As the owners and beneficiaries of these holdings, the banks monitor the associated risks, including diversification, lending-limit, concentration, interest rate risk, credit risk, and liquidity. Quarterly financial information on the insurance carriers is provided to the Company by its compensation consulting firm. Benefit expense associated with both the supplemental retirement benefits and deferred compensation arrangements was $176 thousand and $125 thousand, respectively, for 2005. Earnings on BOLI totaled $656 thousand for 2005. Benefit expense associated with the supplemental retirement benefits and deferred compensation arrangements was $134 thousand and $107 thousand, respectively, for 2004. Earnings on BOLI totaled $628 thousand for 2004. Other assets increased by $1.9 million, or 13%, to $17.1 million at December 31, 2005 from $15.2 million at December 31, 2004. The largest components of other assets at December 31, 2005 were $8.8 million in Federal Reserve Bank and Federal Home Loan Bank stocks, $3.7 million in deferred tax assets, $1.7 million in various prepaid expenses, $1.1 million in net equity in unconsolidated subsidiaries and $545 thousand in net other real estate owned (OREO). Other assets increased by $5.5 million, or 56%, to $15.2 million at December 31, 2004 from $9.7 million at December 31, 2003. The largest components of other assets at December 31, 2004 were $5.9 million in Federal Reserve Bank and Federal Home Loan Bank stocks, $2.8 million in deferred tax assets, $2.0 million in various prepaid expenses, $1.9 million in net other real estate owned (OREO) and $939 thousand in net equity in unconsolidated subsidiaries. At both December 31, 2005 and 2004, other assets also included accrued trust department fees, and other miscellaneous receivables. Deposits. Deposits increased by $110.5 million, or 19% , to $698.5 million at December 31, 2005 from $588.0 million at December 31, 2004. The increase resulted from a $95.9 million net increase in non-interest bearing, NOW, money market and savings accounts combined with a $14.6 million net increase in interest-bearing certificates of deposit. The subsidiary banks experienced a net increase in brokered certificates of deposit of $7.2 million during 2005. Deposits increased by $76.4 million, or 15%, to $588.0 million at December 31, 2004 from $511.7 million at December 31, 2003. The increase resulted from a $21.1 million net decrease in non-interest bearing, NOW, money market and savings accounts offset by a $97.5 million net increase in interest-bearing certificates of deposit. As anticipated for several quarters, the merchant credit card processing for the independent sales organization ("ISO") portfolio, which was sold to iPayment, Inc. in October 2001, was transferred to another processor on February 1, 2004. Funds related to this transfer accounted for $16.5 million of the decrease in non-interest bearing deposits from December 31, 2003 to December 31, 2004. The subsidiary banks also issued brokered certificates of deposit totaling $28.8 million during 2004. During 2004, the Company established new customer relationships in Wisconsin, and at December 31, 2004, held total deposits of $2.9 million for these customers. During 2005, approximately $2.4 million of these deposits were sold at book value to a de novo Wisconsin bank. 23 Short-term Borrowings. Short-term borrowings increased by $2.7 million, or 3%, from $104.8 million as of December 31, 2004 to $107.5 million as of December 31, 2005. Short-term borrowings increased by $53.2 million, or 103%, from $51.6 million as of December 31, 2003 to $104.8 million as of December 31, 2004. 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 significant growth in assets during 2004, primarily the loan portfolio and securities available for sale, and the smaller increase in deposits, the subsidiary banks utilized additional short-term borrowings. Short-term borrowings were comprised of customer repurchase agreements of $54.7 million, $47.6 million, and $34.7 million at December 31, 2005, 2004, and 2003, respectively, as well as federal funds purchased from correspondent banks of $52.8 million at December 31, 2005, $57.2 million at December 31, 2004, and $16.9 million at December 31, 2003. FHLB Advances and Other Borrowings. FHLB advances increased $38.0 million, or 41%, from $92.0 million as of December 31, 2004 to $130.0 million as of December 31, 2005. FHLB advances increased $15.8 million, or 21%, from $76.2 million as of December 31, 2003 to $92.0 million as of December 31, 2004. As of December 31, 2005, the subsidiary banks held $7.3 million of FHLB stock in aggregate. As a result of their memberships in the FHLB of Des Moines and Chicago, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. The subsidiary banks utilized FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provided a less costly source of funds than customer deposits. Other borrowings increased to $10.8 million at December 31, 2005 for an increase of $4.8 million, or 79%, from December 31, 2004. 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 trust preferred securities, the Company made a payment to reduce the balance on the line of credit by $5.0 million. As part of the acquisition of M2 Lease Funds in August 2005, the Company acquired $289 thousand of nonrecourse loans. 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. In December 2005, the Company drew an additional $500 thousand for general corporate purposes. Other borrowings decreased to $6.0 million at December 31, 2004 for a decrease of $4.0 million, or 40%, from December 31, 2003. In September 2001, the Company had drawn a $5.0 million advance on a line of credit at an upstream correspondent bank as partial funding for the initial capitalization of Cedar Rapids Bank & Trust. In February and July 2003, the Company drew additional advances of $2.0 million and $3.0 million, respectively, as funding to maintain the required level of regulatory capital at Cedar Rapids Bank & Trust in light of the bank's growth. In February 2004, the Company formed two trusts, which, in a private transaction, issued $8.0 million of floating rate trust preferred securities and $12.0 million of fixed/floating rate trust preferred securities. Partial proceeds from this transaction were used to pay off the $10.0 million credit note balance existing on that date. In June 2004, the Company drew an advance of $7.0 million as partial funding for the redemption of the $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. Junior subordinated debentures increased $5.2 million, or 25%, from $20.6 million at December 31, 2004 to $25.8 million at December 31, 2005. On May 5, 2005, the Company issued $5,000,000 of floating rate capital securities through a newly formed subsidiary, QCR Holdings Statutory Trust IV ("Trust IV"). Trust IV is a 100% owned non-consolidated subsidiary of the Company. Trust IV used the proceeds from the sale of the trust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in the amount of $5.2 million. Junior subordinated debentures increased $8.6 million, or 72%, from $12.0 million at December 31, 2003 to $20.6 million at December 31, 2004. In June 1999, the Company issued 1,200,000 shares of trust preferred securities through a newly formed subsidiary, Trust I. These securities were $12.0 million at December 31, 2003 and 2002. 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/floating rate trust preferred securities and $8.0 million of floating rate trust preferred securities of QCR Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("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 $8.2 million and $12.4 million, respectively. 24 Other liabilities increased by $7.1 million, or 90%, to $15.0 million as of December 31, 2005 from $7.9 million as of December 31, 2004. The increase was primarily due to $3.6 million in accounts payable leases that was a portion of the acquisition of M2 Lease Funds. In the normal course of business, M2 Lease Funds often makes arrangements with vendors to pay for asset purchases in installments over periods of time, primarily less than one year. Other liabilities increased by $1.2 million, or 17%, to $7.9 million as of December 31, 2004 from $6.7 million as of December 31, 2003. The increase was primarily due to the increased balances in SERP and deferred compensation liabilities at the subsidiary banks. Other liabilities were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At both December 31, 2005 and December 31, 2004, the largest single component of other liabilities was accrued expenses of $4.5 million and $3.4 million, respectively. Stockholders' Equity. Common stock of $4.5 million as of December 31, 2004 increased by $34 thousand, or 1%, to remain at $4.5 million at December 31, 2005. The slight increase was the result of stock issued from the net exercise of stock options and stock purchased under the employee stock purchase plan. Common stock of $2.9 million as of December 31, 2003 increased by $1.6 million, or 57%, to $4.5 million at December 31, 2004. The increase was the net result of a private placement offering during the fourth quarter of 2004, which issued an additional 250,506 common shares, a three-for-two common stock split, which was paid in the form of a stock dividend on May 28, 2004, stock issued from the net exercise of stock options, stock purchased under the employee stock purchase plan, and the retirement of treasury shares. Additional paid-in capital increased to $20.8 million as of December 31, 2005 from $20.3 million at December 31, 2004. The increase of $447 thousand, or 2%, resulted primarily from proceeds received in excess of the $1.00 per share par value for the 34,494 net shares of common stock issued as the result of the exercise of stock options and purchases of stock under the employee stock purchase plan. Additional paid-in capital increased to $20.3 million as of December 31, 2004 from $17.1 million at December 31, 2003. The increase of $3.2 million, or 19%, resulted primarily from proceeds received in excess of the $1.00 per share par value for the shares of common stock issued as the result of a private placement offering, the exercise of stock options and purchases of stock under the employee stock purchase plan, partially offset by the three-for-two stock split and the retirement of treasury shares. Retained earnings increased by $4.4 million, or 18%, to $29.7 million at December 31, 2005 from $25.3 million at December 31, 2004. The increase reflected net income for the year reduced by the $362 thousand in dividends declared during 2005. On April 28, 2005, the board of directors declared a cash dividend of $0.04 payable on July 6, 2005, to stockholders of record on June 15, 2005. On October 27, 2005, the board of directors declared a cash dividend of $0.04 per share payable on January 6, 2006, to stockholders of record on December 23, 2005. Retained earnings increased by $4.4 million, or 21%, to $25.3 million at December 31, 2004 from $20.9 million at December 31, 2003. The increase reflected net income for the fiscal year reduced by a combination of the $349 thousand in dividends declared during 2004, the retirement of treasury shares, and the payout of fractional shares in conjunction with the stock split. A cash dividend of $0.04 was paid in July 2004. On October 29, 2004, the board of directors declared a cash dividend of $0.04 per share payable on January 7, 2005, to stockholders of record on December 24, 2004. Accumulated other comprehensive loss was $567 thousand as of December 31, 2005, as compared to $669 thousand of accumulated other comprehensive income as of December 31, 2004. The turnaround from comprehensive income to loss was attributable to the decrease during the period in the fair value of the securities identified as available for sale, primarily as a result of the steady climb in market interest rates. Accumulated other comprehensive income was $669 thousand as of December 31, 2004 as compared to $1.8 million as of December 31, 2003. The decrease was attributable to the decrease during the period in the fair value of the securities identified as available for sale, primarily as a result of increasing market interest rates. Liquidity and Capital Resources Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $44.7 million at December 31, 2005, $28.1 million at December 31, 2004, and $38.9 million at December 31, 2003. The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities. 25 The liquidity of the Company is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities, comprised predominately of net income and proceeds on the sale of loans, was $10.8 million for 2005 compared to $7.4 million for 2004. Net cash provided by operating activities, comprised predominately of net income and proceeds on the sale of loans, was $7.4 million for 2004 compared to net cash provided by operating activities, primarily net income and proceeds on the sale of loans, of $30.2 million for 2003. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $129.0 million for 2005 and $165.1 million for 2004. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $165.1 million for 2004 and $132.5 million for 2003, comprised predominately of loan originations and the purchase of securities. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from Federal Home Loan Bank advances, was $135.7 million for 2005 compared to $154.6 million, comprised predominately of growth in deposits and proceeds from short-term borrowings, for 2004. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from short-term borrowings, was $154.6 million for 2004 compared to $101.8 million, comprised predominately of growth in deposits and proceeds from short-term borrowings for 2003. At December 31, 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 December 31, 2005, Quad City Bank & Trust had drawn $19.5 million of their available balance of $83.0 million. As of December 31, 2005, the Company had two unsecured revolving credit notes totaling $15.0 million in aggregate. The Company had a 364-day revolving note, which matures December 21, 2006, for $10.0 million and had a balance outstanding of $5.5 million as of December 31, 2005. The Company also had a 3-year revolving note, which matures December 30, 2007, for $5.0 million and carried a balance of $5.0 million as of December 31, 2005. 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, 2005, the interest rate on both notes was 5.19%. 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. As of 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 $6.0 million as of 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%. 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 of Trust II and Trust III, respectively. The securities issued by Trust II and Trust III mature in 30 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 set at 4.83% at December 31, 2004. Both Trust II and Trust III used the proceeds from the sale of the trust preferred securities to purchase junior subordinated debentures of QCR Holdings, Inc. Partial proceeds from the issuance were used for redemption in June 2004 of the $12.0 million of 9.2% cumulative trust preferred securities issued by Trust I in 1999. On May 5, 2005, the Company issued $5.0 million of floating rate capital securities through a newly formed subsidiary, Trust IV. The securities issued by Trust IV mature in 30 years, but are callable at par after five years. The floating rate capital securities have a variable rate based on the three-month LIBOR, reset quarterly, with the rate set at 6.40% for the first quarter of 2006. Interest is payable quarterly. Trust IV is a 100% owned non-consolidated subsidiary of the Company. Trust IV used the proceeds from the sale of the trust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in the amount of $5.2 million. The Company used the net proceeds for general corporate purposes, including the paydown of its other borrowings. Commitments, Contingencies, Contractual Obligations, and Off-balance Sheet Arrangements In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit. 26 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year, or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the banks would be required to fund the commitments. The maximum potential amount of future payments the banks could be required to make is represented by the contractual amount. If the commitment is funded, the banks would be entitled to seek recovery from the customer. At December 31, 2005 and 2004, no amounts had been recorded as liabilities for the banks' potential obligations under these guarantees. As of December 31, 2005 and 2004, commitments to extend credit aggregated $385.8 million and $257.6 million, respectively. As of December 31, 2005 and 2004, standby letters of credit aggregated $15.2 million and $12.7 million, respectively. Management does not expect that all of these commitments will be funded. The Company had also executed contracts for the sale of mortgage loans in the secondary market in the amount of $2.6 million and $3.5 million as of December 31, 2005 and 2004, respectively. These amounts were included in loans held for sale at the respective balance sheet dates. 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 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 $43.4 million and $35.6 million of sold residential mortgage loans with recourse provisions still in effect at December 31, 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 years ended December 31, 2005, 2004 or 2003. 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 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 December 31, 2005, Quad City Bank & Trust had funded $13.8 million of mortgages through the FHLB's MPF Program with an attached credit exposure of $279 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 has established an allowance for credit losses on these off-balance sheet exposures of $48 thousand at December 31, 2005 and $11 thousand at December 31, 2004. 27 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 local merchant. Until 2004, Bancard had not experienced any noteable chargeback activity in which the local or agent bank merchant's cash reserves on deposit were not sufficient to cover the chargeback volumes. However, in 2004, two of Bancard's local merchants experienced cases of fraud and subsequent chargeback volumes that surpassed their cash reserves. As a result, Bancard incurred $196 thousand of chargeback loss expense due to the fraudulent activity on these two merchants and the establishment in August of an allowance for chargeback losses. Throughout 2005 monthly provisions were made to the allowance for chargeback losses based on the dollar volumes of merchant credit card activity. For the year ended December 31, 2005, monthly provisions were made totaling $48 thousand. An aggregate of $135 thousand of reversals of specific merchant reserves during 2005 more than offset these provisions. At Deccember 31, 2005 and 2004, Bancard had a merchant chargeback reserve of $77 thousand and $164 thousand, respectively. Management will continually monitor merchant credit card volumes, related chargeback activity, and Bancard's level of the allowance for chargeback losses. The Company also has a guarantee to MasterCard International Incorporated, which is backed by a $750 thousand letter of credit from Northern Trust Company. As of December 31, 2005 and 2004, there were no significant pending liabilities. Aside from cash on-hand and in-vault, the majority o& the Company's cash is maintained at upstream correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal funds sold exceeded federal insured limits by approximately $9.8 million and $10.9 million as of December 31, 2005 and 2004, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks. In an arrangement with Goldman, Sachs and Company, Cedar Rapids Bank & Trust offers a cash management program for select customers. Using this cash management tool, the customer's demand deposit account performs like an investment account. Based on a predetermined minimum balance, which must be maintained in the account, excess funds are automatically swept daily to an institutional money market fund distributed by Goldman Sachs. As with a traditional demand deposit account, customers retain complete check-writing and withdrawal privileges. If the demand deposit account balance drops below the predetermined threshold, funds are automatically swept back from the money market fund at Goldman Sachs to the account at Cedar Rapids Bank & Trust to maintain the required minimum balance. Balances swept into the money market funds are not bank deposits, are not insured by any U.S. government agency, and do not require cash reserves to be set against the balances. At December 31, 2005 and December 31, 2004, the Company had $36.1 million and $3.5 million, respectively, of customer funds invested in this cash management program. The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following table presents, as of December 31, 2005, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. Payments Due by Period (in thousands) ------------------------------------------------------------------ Description and One year After 5 Note reference Total Or less 1-3 years 4-5 years years ------------------------------------------------------------------ Deposits without a .................. $ 390,838 $ 390,838 $ -- $ -- $ -- stated maturity Certificates of deposits (6) ........ 307,666 246,128 44,810 16,728 -- Short-term borrowings (7) ........... 107,470 107,470 -- -- -- Federal Home Loan ................... 130,001 19,410 59,300 22,300 28,991 Bank advances (8) Other borrowings (9) ................ 10,765 10,765 -- -- -- Junior subordinated ................. 25,775 -- -- -- 25,775 debentures (10) Rental commitments (5) .............. 5,003 643 1,105 1,095 2,160 Purchase obligations (17) ........... 2,900 2,900 -- -- -- Operating contracts (17) ............ 4,513 1,547 2,951 7 8 ----------------------------------------------------------------- Total contractual cash obligations .................. $ 984,931 $ 779,701 $ 108,166 $ 40,130 $ 56,934 =================================================================
Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented primarily relate to certain contractual payments for capital expenditures of facilities expansion. The Company's operating contract obligations represent short and long-term lease payments for data processing equipment and services, software, and other equipment and professional services. 28 Impact of Inflation and Changing Prices The consolidated financial statements and the accompanying notes have been prepared in accordance with Generally Accepted Accounting Principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Standards In 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 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 is effective for the Company on January 1, 2006. The Company will adopt the provisions of FAS 123(R) using a modified prospective application. Under that approach, FAS 123(R) will apply to new awards, the unvested portions of outstanding awards, and to awards that are outstanding on the effective date and are subsequently modified or cancelled. The Company will incur additional expense beginning in the first quarter of 2006 related to new awards granted and the unvested portions of earlier awards. The SFAS 123 pro forma compensation costs, presented in Note 14. of 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. FORWARD LOOKING STATEMENTS This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "bode," "predict," "suggest," "project," "appear," "plan," "intend," "estimate," "may," "will," "would," "could," "should" "likely," or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the "Risk Factors" section included under Item 1A. of Part I of this Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following: 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 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, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board. o The ability of the Company to manage the risks associated with the foregoing as well as anticipated. o These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income. In an attempt to manage its exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank . Management also reviews the subsidiary banks' securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting the Company's asset/liability position, the board and management attempt to manage the Company's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board and management may decide to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates. One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure over a one year horizon, assuming no balance sheet growth and a 200 basis point upward and a 200 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 December 31, 2005 demonstrated a 4.03% decrease in interest income with a 200 basis point increase in interest rates, and a 1.98% increase in interest income with a 200 basis point decrease in interest rates. Both simulations are within the board-established policy limits of a 10% decline in value. Interest rate risk is the most significant market risk affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and their risk management system to monitor and control the Company's interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. 30 Item 8. Financial Statements McGladrey & Pullen, LLP Certified Public Accountants Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders QCR Holdings, Inc. Moline, Illinois We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QCR Holdings, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of QCR Holdings, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated January 27, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of QCR Holdings, Inc. and subsidiaries' internal control over financial reporting and an unqualified opinion on the effectiveness of QCR Holdings, Inc. and subsidiaries' internal control over financial reporting. /s/ McGladrey & Pullen, LLP Davenport, Iowa January 27, 2006 McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation of separate and independent legal entities. 31 QCR Holdings, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2005 and 2004 Assets 2005 2004 - ------------------------------------------------------------------------------------------------------ Cash and due from banks ......................................... $ 38,956,627 $ 21,372,342 Federal funds sold .............................................. 4,450,000 2,890,000 Interest-bearing deposits at financial institutions ............. 1,270,666 3,857,563 Securities held to maturity, at amortized cost (fair value 2005 $154,828; 2004 $108,254) (Note 3) ........................ 150,000 100,000 Securities available for sale, at fair value (Note 3) ........... 182,214,719 149,460,886 ---------------------------------- 182,364,719 149,560,886 ---------------------------------- Loans receivable, held for sale (Note 4) ........................ 2,632,400 3,498,809 Loans/leases receivable, held for investment (Note 4) ........... 753,621,630 644,852,018 ---------------------------------- 756,254,030 648,350,827 Less allowance for estimated losses on loans/leases (Note 4) .... 8,883,855 9,261,991 ---------------------------------- 747,370,175 639,088,836 ---------------------------------- Premises and equipment, net (Note 5) ............................ 25,621,741 18,100,590 Goodwill (Note 6) ............................................... 3,222,688 -- Accrued interest receivable ..................................... 4,849,378 4,072,762 Bank-owned life insurance ....................................... 17,367,660 15,935,000 Other assets .................................................... 17,139,874 15,205,568 ---------------------------------- Total assets .................................................... $ 1,042,613,528 $ 870,083,547 ================================== Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------------------ Liabilities: Deposits: Noninterest-bearing ......................................... $ 114,176,434 $ 109,361,817 Interest-bearing ............................................ 584,327,465 478,653,866 ---------------------------------- Total deposits (Note 7) .................................... 698,503,899 588,015,683 Short-term borrowings (Note 8) ................................ 107,469,851 104,771,178 Federal Home Loan Bank advances (Note 9) ...................... 130,000,854 92,021,877 Other borrowings (Note 10) .................................... 10,764,914 6,000,000 Junior subordinated debentures (Note 11) ...................... 25,775,000 20,620,000 Other liabilities ............................................. 14,981,346 7,881,009 ---------------------------------- Total liabilities .......................................... 987,495,864 819,309,747 ---------------------------------- Minority interest in consolidated subsidiary .................... 650,965 -- ---------------------------------- Commitments and Contingencies (Note 17) Stockholders' Equity (Note 15): Preferred stock, stated value of $1 per shares; shares authorized 250,000; shares issued none ................................. -- -- Common stock, $1 par value; shares authorized 10,000,000 2005 - 4,531,224 shares issued and outstanding 2004 - 4,496,730 shares issued and outstanding ............. 4,531,224 4,496,730 Additional paid-in capital .................................... 20,776,254 20,329,033 Retained earnings ............................................. 29,726,700 25,278,666 Accumulated other comprehensive income (loss) ................. (567,479) 669,371 ---------------------------------- Total stockholders' equity ................................. 54,466,699 50,773,800 ---------------------------------- Total liabilities and stockholders' equity ................. $ 1,042,613,528 $ 870,083,547 ==================================
See Notes to Consolidated Financial Statements. 32 QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2005, 2004, and 2003 2005 2004 2003 - ------------------------------------------------------------------------------------------------------------ Interest and dividend income: Loans/leases, including fees ............................... $ 42,427,118 $ 33,111,498 $ 28,984,000 Securities: Taxable .................................................. 5,345,980 4,067,826 3,248,115 Nontaxable ............................................... 579,817 571,405 493,162 Interest-bearing deposits at financial institutions ........ 129,460 224,293 432,119 Federal funds sold ......................................... 205,893 41,818 220,865 ------------------------------------------- Total interest and di6idend income ...................... 48,688,268 38,016,840 33,378,261 ------------------------------------------- Interest expense: Deposits ................................................... 12,842,421 6,852,108 7,005,306 Short-term borrowings ...................................... 2,181,997 1,208,494 326,916 Federal Home Loan Bank advances ............................ 4,168,077 3,464,122 3,255,416 Other borrowings ........................................... 501,241 159,165 228,433 Junior subordinated debentures ............................. 1,587,049 1,640,879 1,133,506 ------------------------------------------- Total interest expense .................................. 21,280,785 13,324,768 11,949,577 ------------------------------------------- Net interest income ..................................... 27,407,483 24,692,072 21,428,684 Provision for loan/lease losses (Note 4) ..................... 877,084 1,372,208 3,405,427 ------------------------------------------- Net interest income after provision for loan/lease losses 26,530,399 23,319,864 18,023,257 ------------------------------------------- Noninterest income: Merchant credit card fees, net of processing costs ......... 1,782,452 1,409,237 2,194,974 Trust department fees ...................................... 2,818,832 2,530,907 2,242,747 Deposit service fees ....................................... 1,582,530 1,631,713 1,505,200 Gains on sales of loans, net ............................... 1,254,242 1,149,791 3,667,513 Securities gains (losses), net ............................. 50 (45,428) 5 Earnings on bank-owned life insurance ...................... 656,005 627,796 206,893 Investment advisory and management fees .................... 691,800 509,988 340,812 Other ...................................................... 1,286,592 867,437 1,009,465 ------------------------------------------- Total noninterest income ................................ 10,072,503 8,681,441 11,167,609 ------------------------------------------- Noninterest expenses: Salaries and employee benefits ............................. 16,630,868 13,773,439 12,710,505 Professional and data processing fees ...................... 2,865,064 2,199,984 1,962,243 Advertising and marketing .................................. 1,221,039 1,014,664 786,054 Occupancy and equipment expense ............................ 4,316,443 3,263,540 2,640,602 Stationery and supplies .................................... 645,985 543,904 460,421 Postage and telephone ...................................... 842,779 684,964 632,354 Bank service charges ....................................... 516,537 570,374 454,367 Insurance .................................................. 594,282 420,080 444,947 Loss on disposals/sales of fixed assets .................... 332,283 1,048 50,446 Loss on redemption of junior subordinated debentures ....... -- 747,490 -- Other ...................................................... 1,467,868 1,061,364 893,313 ------------------------------------------- Total noninterest expenses .............................. 29,433,148 24,280,851 21,035,252 ------------------------------------------- Minority interest in income of consolidated subsidiary ....... 77,538 -- -- ------------------------------------------- Income before income taxes .............................. 7,092,216 7,720,454 8,155,614 Federal and state income taxes (Note 12) ..................... 2,282,201 2,503,782 2,694,687 ------------------------------------------- Net income .............................................. $ 4,810,015 $ 5,216,672 $ 5,460,927 =========================================== Earnings per common share (Note 16): Basic ...................................................... $ 1.06 $ 1.23 $ 1.31 Diluted .................................................... $ 1.04 $ 1.20 $ 1.28 Weighted average common shares outstanding ................. 4,518,162 4,234,345 4,173,063 Weighted average common and common equivalent shares outstanding ....................................... 4,616,556 4,344,765 4,282,583 Cash dividends declared per common share ..................... $ 0.08 $ 0.08 $ 0.07
See Notes to Consolidated Financial Statements. 33 QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2005, 2004, and 2003 Accumulated Additional Other Common Paid-In Retained Comprehensive Treasury Stock Capital Earnings Income (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2002 ............................. $ 3,071,809 $16,512,675 $15,712,600 $ 2,144,054 $ (854,536) $36,586,602 Comprehensive income: Net income ......................................... -- -- 5,460,927 -- -- 5,460,927 Other comprehensive (loss), net of tax (Note 2) .... -- -- -- (341,390) -- (341,390) ------------ Comprehensive income .............................. 5,119,537 ------------ Cash dividends declared, $0.07 per share ............. -- -- (306,778) -- -- (306,778) Proceeds from issuance of 10,278 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 14) ............. 10,278 101,209 -- -- -- 111,487 Proceeds from issuance of 75,537 shares of common stock as a result of stock options exercised (Note 14)........................................... 75,537 300,941 -- -- -- 376,478 Exchange of 24,872 shares of common stock in connection with options exercised ......... (24,872) (314,590) -- -- -- (339,462) Tax benefit of nonqualified stock options exercised .. -- 274,871 -- -- -- 274,871 ------------------------------------------------------------------------- Balance, December 31, 2003 ............................. 3,132,752 16,875,106 20,866,749 1,802,664 (854,536) 41,822,735 Comprehensive income: Net income ......................................... -- -- 5,216,672 -- -- 5,216,672 Other comprehensive (loss), net of tax (Note 2) .... -- -- -- (1,133,293) -- (1,133,293) ------------ Comprehensive income .............................. 4,083,379 ------------ Retirement of 90,219 treasury shares, April 30, 2004.. (60,146) (341,028) (453,362) -- 854,536 -- 3:2 common stock split, May 28, 2004 ................. 1,133,019 (1,133,019) (2,549) -- -- (2,549) Proceeds from issuance of 250,506 shares of common stock ....................................... 250,506 4,537,713 -- -- -- 4,788,219 Cash dividends declared, $0.08 per share ............. -- -- (348,844) -- -- (348,844) Proceeds from issuance of 9,057 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 14) ............. 9,057 127,653 -- -- -- 136,710 Proceeds from issuance of 38,604 shares of common stock as a result of stock options exercised (Note 14)........................................... 38,604 206,636 -- -- -- 245,240 Exchange of 7,062 shares of common stock in connection with options exercised ......... (7,062) (134,276) -- -- -- (141,338) Tax benefit of nonqualified stock options exercised .. -- 190,248 -- -- -- 190,248 ------------------------------------------------------------------------- Balance, December 31, 2004 ............................. 4,496,730 20,329,033 25,278,666 669,371 -- 50,773,800 Comprehensive income: Net income ......................................... -- -- 4,810,015 -- -- 4,810,015 Other comprehensive (loss), net of tax (Note 2) .... -- -- -- (1,236,850) -- (1,236,850) ------------ Comprehensive income .............................. 3,573,165 ------------ Cash dividends declared, $0.08 per share ............. -- -- (361,981) -- -- (361,981) Proceeds from issuance of 10,584 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 14) ............. 10,584 181,458 -- -- -- 192,042 Proceeds from issuance of 25,335 shares of common stock as a result of stock options exercised (Note 14)........................................... 25,335 167,764 -- -- -- 193,099 Exchange of 1,425 shares of common stock in connection with options exercised ......... (1,425) (27,994) -- -- -- (29,419) Tax benefit of nonqualified stock options exercised .. -- 125,993 -- -- -- 125,993 ------------------------------------------------------------------------- Balance, December 31, 2005 ............................. $ 4,531,224 $20,776,254 $29,726,700 $ (567,479)$ -- $54,466,699 =========================================================================
See Notes to Consolidated Financial Statements. 34 QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2005, 2004, and 2003 2005 2004 2003 - ------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income .............................................. $ 4,810,015 $ 5,216,672 $ 5,460,927 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .......................................... 2,008,773 1,475,453 1,072,943 Provision for loan/lease losses ....................... 877,084 1,372,208 3,405,427 Deferred income taxes ................................. (109,452) (185,676) (674,681) Amortization of offering costs on junior subordinated debentures .......................................... 14,317 17,933 29,506 Loss on redemption of junior subordinated debentures .. -- 747,490 -- Minority interest in income of consolidated subsidiary 77,538 -- -- Amortization of premiums on securities, net ........... 524,808 983,256 788,263 Investment securities losses (gains), net ............. (50) 45,428 (5) Loans originated for sale ............................. (98,719,913) (83,176,326) (245,414,955) Proceeds on sales of loans ............................ 100,840,794 84,617,339 268,983,441 Net gains on sales of loans ........................... (1,254,242) (1,149,791) (3,667,513) Net losses on disposals/sales of premises and equipment 332,283 1,048 50,446 Tax benefit of nonqualified stock options exercised ... 125,993 190,248 274,871 Increase in accrued interest receivable ............... (776,616) (426,654) (424,862) (Increase) decrease in other assets ................... (883,573) (3,461,144) 2,075,198 Increase (decrease) in other liabilities .............. 2,973,423 1,146,173 (1,722,249) ----------------------------------------------- Net cash provided by operating activities ............ 10,841,182 7,413,657 30,236,757 ----------------------------------------------- Cash Flows from Investing Activities: Net decrease (increase) in federal funds sold ........... (1,560,000) 1,140,000 10,365,000 Net decrease in interest-bearing deposits at financial institutions ................................ 2,586,897 6,568,529 4,159,703 Activity in securities portfolio: Purchases ............................................. (82,280,843) (86,743,594) (91,746,856) Calls and maturities .................................. 45,787,488 53,006,001 39,195,000 Paydowns .............................................. 1,197,070 1,754,343 4,025,159 Sales of securities available for sale ................ -- 8,428,590 -- Activity in bank-owned life insurance: Purchases ............................................. (776,634) (12,221,428) (66,312) Increase in cash value ................................ (656,026) (627,775) (190,873) Net loans/leases originated and held for investment ..... (78,520,322) (128,849,187) (94,278,016) Purchase of premises and equipment ...................... (9,779,493) (7,611,586) (4,152,033) Proceeds from sales of premises and equipment ........... -- 63,027 224,654 Payment for acquisition of M2 Lease Funds, LLC (Note 6) . (4,967,300) -- -- ----------------------------------------------- Net cash used in investing activities ................ (128,969,163) (165,093,080) (132,464,574) ----------------------------------------------- Cash Flows from Financing Activities: Net increase in deposit accounts ........................ 110,488,216 76,363,820 76,904,240 Net increase in short-term borrowings ................... 2,698,673 53,161,377 18,747,355 Activity in Federal Home Loan Bank advances: Advances .............................................. 49,700,000 35,500,000 12,550,000 Payments .............................................. (11,721,023) (19,710,471) (11,305,972) Net (decrease) increase in other borrowings ............. (20,603,724) (4,000,000) 5,000,000 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) (277,086) Payment of fractional shares on 3:2 stock split ......... -- (2,549) -- Proceeds from issuance of common stock, net ............. 355,722 5,028,831 148,503 ----------------------------------------------- Net cash provided by financing activities ............ 135,712,266 154,624,192 101,767,040 ----------------------------------------------- Net increase (decrease) in cash and due from banks .. 17,584,285 (3,055,231) (460,777) Cash and due from banks: Beginning ............................................... 21,372,342 24,427,573 24,888,350 ----------------------------------------------- Ending .................................................. $ 38,956,627 $ 21,372,342 $ 24,427,573 ===============================================
35 QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2005, 2004, and 2003 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information, cash payments for: Interest ................................................... $ 20,407,363 $ 13,024,698 $ 12,516,692 Income and franchise taxes ................................. 1,340,742 2,566,493 4,904,697 Supplemental Schedule of Noncash Investing Activities: Change in accumulated other comprehensive income, unrealized losses on securities available for sale, net ............. (1,236,850) (1,133,293) (341,390) Exchange of shares of common stock in connection with options exercised ................................... (29,419) (141,338) (339,462) Transfers of loans to other real estate owned .............. 169,441 1,925,320 -- Acquisition of M2 Lease Funds, LLC, cash paid at settlement (Note 6) ........................................ $ 4,967,300 ============= Fair value of assets acquired and liabilities assumed: Leases receivable held for investment, net ................. $ 31,673,951 Premises and equipment, net ................................ 82,714 Goodwill ................................................... 3,222,688 Other assets ............................................... 47,177 Other borrowings ........................................... (25,368,638) Other liabilities .......................................... (4,117,165) Minority interest .......................................... (573,427) ------------- $ 4,967,300 =============
See Notes to Consolidated Financial Statements. 36 QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Nature of Business and Significant Accounting Policies Nature of business: QCR Holdings, Inc. (the Company) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (Quad City Bank & Trust), Cedar Rapids Bank and Trust Company (Cedar Rapids Bank & Trust), Rockford Bank and Trust Company (Rockford Bank & Trust), Quad City Bancard, Inc. (Bancard), M2 Lease Funds, LLC (M2 Lease Funds), QCR Holdings Statutory Trust II (Trust II), QCR Holdings Statutory Trust III (Trust III), and QCR Holdings Statutory Trust IV (Trust IV). Quad City Bank & Trust is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. Cedar Rapids Bank & Trust is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities. Rockford Bank & Trust is a commercial bank that serves Rockford, Illinois, and adjacent communities. Quad City Bank & Trust and Cedar Rapids Bank & Trust are chartered and regulated by the state of Iowa, and Rockford Bank & Trust is chartered and regulated by the state of Illinois. All three subsidiary banks are insured and subject to regulation by the Federal Deposit Insurance Corporation, and are members of and regulated by the Federal Reserve System. Bancard conducts the Company's credit card operation and is regulated by the Federal Reserve System. In August 2005, Quad City Bank & Trust acquired 80% of the equity interests of M2 Lease Funds. M2 Lease Funds, which is based in the Milwaukee, Wisconsin, area is engaged in the business of direct financing lease contracts (see Note 6). Trust II, III and IV were formed for the purpose of issuing various trust preferred securities (see Note 11). Significant accounting policies: Accounting estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Lease residual values and the allowance for estimat%d losses on loans/leases are inherently subjective as they require material estimates that are susceptible to significant change. The fair value disclosure of financial instruments is an estimate that can be computed within a range. Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries, except Trust II, III and IV, which do not meet the criteria for consolidation. All material intercompany accounts and transactions have been eliminated in consolidation. Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and non-interest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, and short-term borrowings are treated as net increases or decreases. Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $9,500,000 and $9,700,000 as of December 31, 2005 and 2004, respectively. Investment securities: Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Loans receivable held for sale: Residential real estate loans, which are originated and intended for resale in the secondary market in the foreseeable future, are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows. 37 Loans receivable held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan's yield. As assets held for and used in the production of services, the origination and collection of these loans is classified as an investing activity in the statement of cash flows. Direct finance leases receivable held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment. Lease income is recognized on the accrual basis. Residual is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipment's fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends. The Company's estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. When collection of lease payments is considered doubtful, income recognition is ceased and the lease receivable is placed on nonaccrual status. Previously recorded but uncollected amounts on nonaccrual leases are reversed at the time the lease is placed on nonaccrual status. Cash collected on nonaccrual leases is recorded as income unless the principal is doubtful of collection in which case cash received is applied to principal. The Company defers and amortizes fees and certain incremental direct costs over the contractual term of the lease as an adjustment to the yield. These initial direct leasing costs generally approximate 3% of the leased asset's cost. The unamortized direct costs are recorded as a reduction of unearned lease income. Allowance for estimated losses on loans/leases: The allowance for estimated losses on loans/leases is maintained at the level considered adequate by management of the Company and the subsidiaries to provide for losses that are probable. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance, the Company, the subsidiary banks, and M2 Lease Funds consider the overall composition of the loan/lease portfolio. Loans/leases which have identified weaknesses are classified into higher risk groups, or are identified for continued monitoring. Historical and projected loss percentages are then applied to various classifications and, considering economic conditions and other factors that in management's judgment deserve evaluation, additional identified and unidentified loss amounts are added. Loans/leases are considered impaired when, based on current information and events, it is probable the Company and the bank involved will not be able to collect all amounts due. The portion of the allowance for loan/lease losses applicable to an impaired loan/lease is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's/lease's effective interest rate or on the fair value of the collateral for collateral dependent loans/leases. The entire change in present value of expected cash flows of impaired loans/leases is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Company and subsidiaries recognize interest income on impaired loans/leases on a cash basis. Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded. Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives. 38 Bank-owned life insurance: Bank-owned life insurance is carried at cash surrender value with increases/decreases reflected as income/expense in the statement of income. Foreclosed assets: Assets acquired through, or in lieu of, loan foreclosures, which are included in other assets on the consolidated balance sheets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Stock-based compensation plans: At December 31, 2005, the Company has three stock-based employee compensation plans, which are described more fully in Note 14. The Company currently accounts for those 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 (SFAS 123), to stock-based employee compensation. 2005 2004 2003 ----------------------------------------------- Net income, as reported ............... $ 4,810,015 $ 5,216,672 $ 5,460,927 Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects .. (174,598) (132,297) (96,447) ----------------------------------------------- Net income ....................... $ 4,635,417 $ 5,084,375 $ 5,364,480 =============================================== Earnings per share: Basic: As reported ....................... $ 1.06 $ 1.23 $ 1.31 Pro forma ......................... 1.03 1.20 1.29 Diluted: As reported ....................... 1.04 1.20 1.28 Pro forma ......................... 1.01 1.18 1.26
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 years ended December 31, 2005, 2004, and 2003: dividend rate of 0.36% to 0.58% for the years ended December 31, 2005, 2004, and 2003; risk-free interest rates based upon current rates at the date of grant (3.68% to 4.85% for stock options and 0.82% to 3.31% for the employee stock purchase plan); expected lives of 10 years for stock options and 3 months to 6 months for the employee stock purchase plan; and expected price volatility of 15.85% to 27.18%. 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 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 is effective for the Company on January 1, 2006. The Company will adopt the provisions of FAS 123(R) using a modified prospective application. Under that approach, FAS 123(R) will apply to new awards, the unvested portions of outstanding awards, and to awards that are outstanding on the effective date and are subsequently modified or cancelled. The Company will incur additional expense beginning in the first quarter of 2006 related to new awards granted and the unvested portions of earlier awards. The SFAS 123 pro forma compensation costs presented previously in this note have been calculated using a Black-Scholes option-pricing model and may not be indicative of amounts which should be expected in future periods. Income taxes: The C/mpany files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company. 39 Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Trust assets: Trust assets held by Quad City Bank & Trust and Cedar Rapids Bank & Trust in a fiduciary, agency, or custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not included in the accompanying consolidated financial statements since such items are not assets of the subsidiary banks. Earnings per common share: Basic earnings per share is computed by dividing net income by the weighted average number of common stock shares outstanding for the respective period. Diluted earnings per share is computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding for the respective period. Reclassifications: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders' equity, to conform with the current period presentation. Note 2. Comprehensive Income Comprehensive income is the total of net income and other comprehensive income (loss), which for the Company is comprised entirely of unrealized gains and losses on securities available for sale. Other comprehensive (loss) for the years ended December 31, 2005, 2004, and 2003 is comprised as follows: Tax Before Expense Net Tax (Benefit) of Tax ----------------------------------------- Year ended December 31, 2005: Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the period ............................. $(1,967,594) $ (730,775) $(1,236,819) Less reclassification adjustment for gains included in net income .......................................................... 50 19 31 ----------------------------------------- Other comprehensive (loss) ...................................................... $(1,967,644) $ (730,794) $(1,236,850) ========================================= Year ended December 31, 2004: Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the period ............................. $(1,853,560) $ (691,794) $(1,161,766) Less reclassification adjustment for (losses) included in net income .......................................................... (45,428) (16,955) (28,473) ----------------------------------------- Other comprehensive (loss) ...................................................... $(1,808,132) $ (674,839) $(1,133,293) ========================================= Year ended December 31, 2003: Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the period ............................. $ (549,473) $ (208,086) $ (341,387) Less reclassification adjustment for gains included in net income .......................................................... 5 2 3 ----------------------------------------- Other comprehensive (loss) ...................................................... $ (549,478) $ (208,088) $ (341,390) =========================================
40 Note 3. Investment Securities The amortized cost and fair value of investment securities as of December 31, 2005 and 2004 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------------------------------------------------------------- December 31, 2005: Securities held to maturity: Other bonds ................................ $ 150,000 $ 5,063 $ (235) $ 154,828 =============================================================== Securities available for sale: U.S. Treasury securities ................... $ 100,090 $ -- $ (58) $ 100,032 U.S. govt. sponsored agency securities ..... 150,114,707 54,821 (1,629,892) 148,539,636 Mortgage-backed securities ................. 2,720,059 4,218 (54,532) 2,669,745 Municipal securities ....................... 18,485,304 368,495 (40,330) 18,813,469 Corporate securities ....................... 4,672,242 72,117 (1,877) 4,742,482 Trust preferred securities ................. 850,000 68,700 -- 918,700 Other securities ........................... 6,162,792 372,582 (104,719) 6,430,655 --------------------------------------------------------------- $ 183,105,194 $ 940,933 $ (1,831,408) $ 182,214,719 =============================================================== December 31, 2004: Securities held to maturity: Other bonds ................................ $ 100,000 $ 8,254 $ -- $ 108,254 =============================================================== Securities available for sale: U.S. Treasury securities ................... $ 100,214 $ -- $ (1,025) $ 99,189 U.S. govt. sponsored agency securities ..... 114,648,596 367,536 (392,337) 114,623,795 Mortgage-backed securities ................. 3,863,733 20,297 (18,636) 3,865,394 Municipal securities ....................... 15,922,863 653,714 (131,371) 16,445,206 Corporate securities ....................... 6,704,267 230,427 (9,409) 6,925,285 Trust preferred securities ................. 1,148,988 93,814 -- 1,242,802 Other securities ........................... 5,995,056 264,450 (291) 6,259,215 --------------------------------------------------------------- $ 148,383,717 $ 1,630,238 $ (553,069) $ 149,460,886 ===============================================================
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2005 and 2004, are summarized as follows: Less than 12 Months 12 Months or More Total ----------------------------- ------------------------- ---------------------------- Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------------------------------------------------------------------------------------ December 31, 2005: Securities held to maturity: Other bonds ............................. $ 49,765 $ (235) $ -- $ -- $ 49,765 $ (235) ==================================================================================== Securities available for sale: U.S. Treasury securities ................ $ 100,032 $ (58) $ -- $ -- $ 100,032 $ (58) U.S. govt. sponsored agency securities ............................ 72,540,169 (550,284) 63,436,475 (1,079,608) 135,976,644 (1,629,892) Mortgage-backed securities .............. 304,813 (1,756) 1,934,980 (52,776) 2,239,793 (54,532) Municipal securities .................... 6,408,329 (38,636) 684,743 (1,694) 7,093,072 (40,330) Corporate securities .................... -- -- 500,877 (1,877) 500,877 (1,877) Other securities ........................ -- -- 4,895,855 (104,719) 4,895,855 (104,719) ------------------------------------------------------------------------------------ $ 79,353,343 $ (590,734) $71,452,930 $(1,240,674) $ 150,806,273 $ (1,831,408) ==================================================================================== December 31, 2004: Securities available for sale: U.S. Treasury securities ................ $ 99,189 $ (1,025) $ -- $ -- $ 99,189 $ (1,025) U.S. govt. sponsored agency securities ............................ 63,045,833 (387,973) 1,006,851 (4,364) 64,052,684 (392,337) Mortgage-backed securities .............. 2,739,543 (18,636) -- -- 2,739,543 (18,636) Municipal securities .................... 2,900,358 (128,622) 238,914 (2,749) 3,139,272 (131,371) Corporate securities .................... 1,276,752 (5,915) 256,705 (3,494) 1,533,457 (9,409) Other securities ........................ -- -- 283 (291) 283 (291) ------------------------------------------------------------------------------------ $ 70,061,675 $ (542,171) $ 1,502,753 $ (10,898) $ 71,564,428 $ (553,069) ===================================================================================
41 Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Banks(s)/Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At December 31, 2005, the investment portfolio included 270 securities. Of this number, 73 securities have current unrealized losses, which have existed for twelve months or more. All of these securities are considered to be acceptable credit risks. Based upon an evaluation of the available evidence, including recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for those securities are temporary. In addition, the Bank(s)/Company have the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net earnings in the period on which the other-than-temporary impairment is identified. During the year ended December 31, 2004, all sales of securities were from securities identified as available for sale. There were no sales of securities during the years ended December 31, 2005 and December 31, 2003. Information on proceeds received, as well as the gains and losses from the sale of those securities is as follows: 2005 2004 2003 ---------------------------------- Proceeds from sales of securities .......... $ -- $8,428,590 $ -- Gross gains from sales of securities ....... -- 26,188 -- Gross losses from sales of securities ...... -- 71,616 --
The amortized cost and fair value of securities as of December 31, 2005 by contractual maturity are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the mortgage-backed securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary. Other securities are excluded from the maturity categories as there is no fixed maturity date. Amortized Cost Fair Value --------------------------- Securities held to maturity: Due after one year through five years .......... $ 100,000 $ 100,166 Due after five years ........................... 50,000 54,662 --------------------------- $ 150,000 $ 154,828 =========================== Securities available for sale: Due in one year or less ........................ $ 49,882,321 $ 49,565,250 Due after one year through five years .......... 111,506,823 110,416,620 Due after five years ........................... 12,833,199 13,132,449 --------------------------- 174,222,343 173,114,319 Mortgage-backed securities ..................... 2,720,059 2,669,745 Other securities ............................... 6,162,792 6,430,655 --------------------------- $183,105,194 $182,214,719 ===========================
As of December 31, 2005 and 2004, investment securities with a carrying value of $135,757,114 and $117,144,212, respectively, were pledged on securities sold under agreements to repurchase and for other purposes as required or permitted by law. 42 Note 4. Loans/Leases Receivable The composition of the loan/lease portfolio as of December 31, 2005 and 2004 is presented as follows: 2005 2004 ------------------------------ Commercial and commercial real estate loans .......... $ 593,462,081 $ 532,517,321 Direct financing leases .............................. 34,911,537 -- Real estate loans held for sale - residential mortgage 2,632,400 3,498,809 Real estate loans - residential mortgage ............. 54,124,667 52,423,387 Real estate loans - construction ..................... 2,810,610 3,607,525 Installment and other consumer loans ................. 67,089,900 55,736,029 ------------------------------ 755,031,195 647,783,071 Deferred loan/lease origination costs, net ........... 1,222,835 567,756 Less allowance for estimated losses on loans/leases .. (8,883,855) (9,261,991) ------------------------------ $ 747,370,175 $ 639,088,836 ============================== Direct financing leases: Net minimum lease payments to be received .......... $ 35,447,343 $ -- Estimated residual values of leased assets ......... 7,633,646 -- Unearned lease/residual income ..................... (7,661,027) -- Fair value adjustment at acquisition ............... (508,425) -- ------------------------------ $ 34,911,537 $ -- ==============================
Loans on nonaccrual status amounted to $2,578,862 and $7,607,977 as of December 31, 2005 and 2004, respectively. Interest income in the amount of $570,055, $490,866, and $468,758 for the years ended December 31, 2005, 2004, and 2003, respectively, would have been earned on the nonaccrual loans had they been performing in accordance with their original terms. Cash interest collected on nonaccrual loans was $298,168, $230,810, and $262,819 for the years ended December 31, 2005, 2004, and 2003, respectively. There were no direct financing leases on nonaccrual status at December 31, 2005. Changes in the allowance for estimated losses on loans/leases for the years ended December 31, 2005, 2004, and 2003 are presented as follows: 2005 2004 2003 ----------------------------------------- Balance, beginning ................................ $ 9,261,991 $ 8,643,012 $ 6,878,953 Provisions charged to expense ................... 877,084 1,372,208 3,405,427 Loans/leases charged off ........................ (2,045,846) (964,708) (2,075,406) Recoveries on loans/leases previously charged off 357,172 211,479 434,038 Acquisition of M2 Lease Funds ................... 433,454 -- -- ----------------------------------------- Balance, ending ................................... $ 8,883,855 $ 9,261,991 $ 8,643,012 =========================================
Loans considered to be impaired as of December 31, 2005 and 2004 are as follows: 2005 2004 ---------------------- Impaired loans for which an allowance has been provided $1,826,429 $ 92,653 ====================== Allowance provided for impaired loans, included in the allowance for loan/lease losses ................. $1,096,493 $ 90,153 ====================== Impaired loans for which no allowance has been provided $ -- $ 96,944 ======================
Impaired loans for which no allowance has been provided have adequate collateral, based on management's current estimates. 43 The average recorded investment in impaired loans during the years ended December 31, 2005, 2004, and 2003 was $1,508,112, $3,485,989, and $5,213,072, respectively. Interest income on impaired loans of $120,120, $56,532, and $205,366 was recognized for cash payments received for the years ended December 31, 2005, 2004, and 2003, respectively. There were no impaired direct financing leases at December 31, 2005, or during the period August 26, 2005 to December 31, 2005. Loans past due 90 days or more and still accruing interest totaled $603,637 and $1,132,574 as of December 31, 2005 and 2004, respectively. There were no direct financing leases which were past due 90 days or more and still accruing interest as of December 31, 2005. Loans are made in the normal course of business to directors, officers, and their related interests. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other persons. An analysis of the changes in the aggregate amount of these loans during the years ended December 31, 2005, 2004, and 2003 was as follows: 2005 2004 2003 -------------------------------------------- Balance, beginning .............................. $ 17,533,546 $ 23,925,005 $ 23,267,366 Net increase (decrease) due to change in related parties ............................. 248,623 -- (359) Advances ...................................... 7,801,170 6,414,002 10,589,823 Repayments .................................... (14,197,146) (12,805,461) (9,931,825) -------------------------------------------- Balance, ending ................................. $ 11,386,193 $ 17,533,546 $ 23,925,005 ============================================
Note 5. Premises and Equipment The following summarizes the components of premises and equipment as of December 31, 2005 and 2004: 2005 2004 ----------------------------- Land ....................................... $ 4,088,126 $ 2,945,414 Buildings .................................. 17,726,327 12,052,192 Furniture and equipment .................... 12,185,429 9,566,067 ----------------------------- 33,999,882 24,563,673 Less accumulated depreciation .............. 8,378,141 6,463,083 ----------------------------- $25,621,741 $18,100,590 =============================
Certain facilities are leased under operating leases. Rental expense was $1,037,747, $866,581, and $837,271 for the years ended December 31, 2005, 2004, and 2003, respectively. Future minimum rental commitments under noncancelable leases are as follows as of December 31, 2005: Year ending December 31: 2006............................................... $ 642,941 2007............................................... 551,882 2008............................................... 552,626 2009............................................... 554,858 2010............................................... 540,085 Thereafter......................................... 2,160,535 ---------- $5,002,927 ==========
44 Note 6. Acquisition On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of M2 Lease Funds. Quad City Bank & Trust acquired assets and assumed liabilities totaling $35.0 million and $30.0 million, respectively, for a purchase price of $5.0 million, which resulted in goodwill of $3.2 million and minority interest of $573 thousand. 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 Lease Funds' operating results are included in the Company's Consolidated Statements of Income from August 26, 2005 through December 31, 2005. The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition: Leases receivable held for investment, net ................ $ 31,673,951 Premises and equipment, net ............................... 82,714 Goodwill .................................................. 3,222,688 Other assets .............................................. 47,177 ------------ Total assets acquired ................................ $ 35,026,530 ------------ Other borrowings .......................................... (25,368,638) Other liabilities ......................................... (4,117,165) Minority interest ......................................... (573,427) ------------ Total liabilities assumed ............................ $(30,059,230) ------------ Net assets acquired .................................. $ 4,967,300 ============
Note 7. Deposits The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was $170,994,735 and $165,685,917 as of December 31, 2005 and 2004, respectively. As of December 31, 2005, the scheduled maturities of certificates of deposit were as follows: Year ending December 31: 2006............................................ $246,127,949 2007............................................ 40,682,057 2008............................................ 4,127,720 2009............................................ 10,943,271 2010............................................ 5,785,018 ------------ $307,666,015 ============
Note 8. Short-Term Borrowings Short-term borrowings as of December 31, 2005 and 2004 are summarized as follows: 2005 2004 --------------------------- Overnight repurchase agreements with customers ... $ 54,659,851 $ 47,551,178 Federal funds purchased .......................... 52,810,000 57,220,000 --------------------------- $107,469,851 $104,771,178 ===========================
45 Information concerning repurchase agreements is summarized as follows as of December 31, 2005 and 2004: 2005 2004 ---------------------------- Average daily balance during the period ................. $ 55,092,272 $ 43,148,089 Average daily interest rate during the period ........... 1.43% 0.88% Maximum month-end balance during the period ............. $ 60,024,590 $ 48,354,535 Weighted average rate as of end of period ............... 1.47% 0.75% Securities underlying the agreements as of end of period: Carrying value ........................................ $104,145,318 $ 86,843,644 Fair value ............................................ 104,145,318 86,843,644
The securities underlying the agreements as of December 31, 2005 and 2004 were under the Company's control in safekeeping at third-party financial institutions. Information concerning federal funds purchased is summarized as follows as of December 31, 2005 and 2004: 2005 2004 -------------------------------- Average daily balance during the period ..... $ 51,536,446 $ 65,298,766 Average daily interest rate during the period .................................... 3.07% 1.76% Maximum month-end balance during the period . $ 83,125,000 $ 95,775,000 Weighted average rate as of end of period ... 3.15% 1.57%
Note 9. Federal Home Loan Bank Advances The subsidiary banks are members of either the Federal Home Loan Bank of Des Moines or the Federal Home Loan Bank of Chicago (FHLB). As of December 31, 2005 and 2004, the subsidiary banks held $7,270,300 and $5,586,800, respectively, of FHLB stock. Maturity and interest rate information on advances from the FHLB as of December 31, 2005 and 2004 is as follows: December 31, 2005 ---------------------------------- Weighted Average Interest Rate Amount Due at Year-End ---------------------------------- Maturity: Year ending December 31: 2006 ............................ $ 19,410,000 3.02% 2007 ............................ 42,200,000 3.84 2008 ............................ 17,100,000 3.69 2009 ............................ 14,200,000 4.05 2010 ............................ 8,100,000 5.16 Thereafter ...................... 28,990,854 4.22 ------------ Total FHLB advances $130,000,854 3.89 ============
46 Of the advances maturing after December 31, 2006, $30,000,000 have options which allow the FHLB, at its discretion, to terminate the advances and require the subsidiary banks to repay at predetermined dates prior to the stated maturity date of the advances. December 31, 2004 ---------------------------------- Weighted Average Interest Rate Amount Due at Year-End ---------------------------------- Maturity: Year ending December 31: 2005 ............................ $ 7,500,000 2.61% 2006 ............................ 18,410,000 2.96 2007 ............................ 16,200,000 3.58 2008 ............................ 15,100,000 3.60 2009 ............................ 11,700,000 3.95 Thereafter ...................... 23,111,877 4.65 ------------ Total FHLB advances $ 92,021,877 3.69 ============
Advances are collateralized by securities with a carrying value of $14,978,433 and $6,112,175 as of December 31, 2005 and 2004, respectively. Advances as of December 31, 2005 and 2004 are also collateralized by 1-to-4 unit residential, home equity 2nd mortgages, commercial real estate, home equity lines of credit, and business loans equal to 135%, 175%, 175%, 200%, and 250%, respectively, of total outstanding notes. At December 31, 2005, the aggregate total of loans pledged was $247,864,749. Note 10. Other Borrowings Other borrowings as of December 31, 2005 and 2004 are summarized as follows: 2005 2004 ------------------------ 364-day revolving note ............................... $ 5,500,000 $ 6,000,000 3-year revolving note ................................ 5,000,000 -- Non-recourse notes ................................... 264,914 -- ------------------------ $10,764,914 $ 6,000,000 ========================
As of December 31, 2005, the Company had two unsecured revolving credit notes totaling $15,000,000 in the aggregate. There was a 364-day revolving note, which matures December 21, 2006, for $10,000,000 and had a balance outstanding of $5,500,000 as of December 31, 2005. There was a 3-year revolving note, which matures December 30, 2007, for $5,000,000 and carried a balance of $5,000,000 at December 31, 2005. 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, 2005, the interest rate on both notes was 5.19%. At December 31, 2005, the Company held two fixed rate, non-recourse notes totaling $264,914, which were assumed in the acquisition of M2 Lease Funds in August 2005. Each of the notes is collateralized by leased machinery and equipment, and the terms of the notes are determined by the terms of the related leases. As of December 31, 2005, one note had an outstanding balance of $64,385 at an interest rate of 8.48% and a maturity date in May 2006. As of December 31, 2005, the second note had an outstanding balance of $200,529 at an interest rate of 6.00% and a maturity date in August 2007. The revolving credit note agreements contain certain covenants that place restrictions on additional debt and stipulate minimum capital and various operating ratios. 47 As of December 31, 2004, the Company had two unsecured revolving credit notes totaling $15,000,000 in aggregate. There was a 365-day revolving note, which matured December 22, 2005, for $10,000,000 and had a balance outstanding of $6,000,000 as of December 31, 2004. There was a 3-year revolving note, which matures December 30, 2007, for $5,000,000 and carried no balance at December 31, 2004. For both notes, interest was 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 both notes was 3.23%. Unused lines of credit of the subsidiary banks as of December 31, 2005 and 2004 are summarized as follows: 2005 2004 ----------------------------------- Secured .......................... $ 13,000,000 $ 13,000,000 Unsecured ........................ 91,500,000 86,500,000 ----------------------------------- $104,500,000 $ 99,500,000 ===================================
Note 11. Junior Subordinated Debentures Junior subordinated debentures are summarized as of December 31, 2005 and 2004 as follows: 2005 2004 ------------------------- Note Payable to Trust II ........................... $12,372,000 $12,372,000 Note Payable to Trust III .......................... 8,248,000 8,248,000 Note Payable to Trust IV ........................... 5,155,000 -- ------------------------- $25,775,000 $20,620,000 =========================
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 $12,000,000 at December 31, 2003. In February 2004, the Company issued, in a private transaction, $12,000,000 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 set at 7.38% for the first quarter of 2006. 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 $12,400,000 and $8,200,000, respectively. These securities were $20,000,000 in aggregate at December 31, 2005. On June 30, 2004, the Company redeemed the $12,000,000 of 9.2% cumulative trust preferred securities issued by Trust I in 1999. During 2004, the Company recognized a loss of $747,490 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. On May 5, 2005, the Company announced the issuance of $5,000,000 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 rate set at 6.40% for the first quarter of 2006. Interest is payable quarterly. Trust IV used the $5,000,000 of proceeds from the sale of the Trust Preferred Securities, in combination with $155,000 of proceeds from its own equity, to purchase $5,155,000 of junior subordinated debentures of the Company. 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. 48 The current debentures were included on the balance sheet as liabilities; however, for regulatory purposes, approximately $16,619,000 and $16,702,000 were allowed in the calculation of Tier I capital at December 31, 2005 and 2004, respectively, with the remainder allowed as Tier II capital. The required deconsolidation of trust preferred subsidiaries, such as Trust II, Trust III, and Trust IV, under FIN 46R, calls into question the permissibility of including these securities in regulatory capital in the future. In February 2004, the Federal Reserve provided confirmation to the Company for their treatment of the new issuances as Tier 1 capital for regulatory capital purposes, subject to current established limitations. Note 12. Federal and State Income Taxes Federal and state income tax expense was comprised of the following components for the years ended December 31, 2005, 2004, and 2003: 2005 2004 2003 -------------------------------------------------- Current ............... $ 2,391,653 $ 2,689,458 $ 3,369,368 Deferred .............. (109,452) (185,676) (674,681) -------------------------------------------------- $ 2,282,201 $ 2,503,782 $ 2,694,687 =================================================
A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended December 31, 2005, 2004, and 2003: Year Ended December 31, ----------------------------------------------------------------------------------- 2005 2004 2003 -------------------------- -------------------------- ----------------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ----------------------------------------------------------------------------------- Computed "expected" tax expense ................................ $ 2,482,276 35.0% $ 2,702,159 35.0% $ 2,854,465 35.0% Effect of graduated tax rates interest ......................... (70,922) (1.0) (77,205) (1.0) (81,556) (1.0) Tax exempt income, net ....................... (231,370) (3.3) (220,560) (2.9) (212,105) (2.6) Bank-owned life insurance .................................. (213,388) (3.0) (212,060) (2.7) (62,390) (0.8) State income taxes, net of federal benefit ......................... 262,850 3.7 303,735 3.9 226,446 2.8 Other ........................................ 52,755 0.7 7,713 0.1 (30,173) (0.4) ----------------------------------------------------------------------------------- $ 2,282,201 32.1% $ 2,503,782 32.4% $ 2,694,687 33.0% ===================================================================================
The net deferred tax assets included with other assets on the consolidated balance sheets consisted of the following as of December 31, 2005 and 2004: 2005 2004 ----------------------- Deferred tax assets: Net unrealized losses on securities available for sale ................................. $ 322,996 $ -- Compensation ......................................... 1,465,821 1,291,563 Loan and credit card losses .......................... 3,039,498 3,309,991 Other ................................................ 120,704 116,997 ----------------------- 4,949,019 4,718,551 ----------------------- Deferred tax liabilities: Net unrealized gains on securities available for sale -- 407,798 Premises and equipment ............................... 920,329 1,052,783 Investment accretion ................................. 33,098 37,260 Deferred loan origination fees, net .................. 168,177 223,339 Other ................................................ 106,881 117,083 ----------------------- 1,228,485 1,838,263 ----------------------- Net deferred tax asset ........................... $3,720,534 $2,880,288 =======================
49 The change in deferred income taxes was reflected in the consolidated financial statements as follows for the years ended December 31, 2005, 2004, and 2003: 2005 2004 2003 ----------------------------------- Provision for income taxes .............. $(109,452) $(185,676) $(674,681) Statement of stockholders' equity- accumulated other comprehensive income, unrealized (losses) on securities available for sale, net . (730,794) (674,839) (208,088) ----------------------------------- $(840,246) $(860,515) $(882,769) ===================================
Note 13. Employee Benefit Plans The Company has a profit sharing plan which includes a provision designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions. All employees are eligible to participate in the plan. The Company matches 100% of the first 3% of employee contributions, and 50% of the next 3% of employee contributions, up to a maximum amount of 4.5% of an employee's compensation. Additionally, at its discretion, the Company may make additional contributions to the plan which are allocated to the accounts of participants in the plan based on relative compensation. Company contributions for the years ended December 31, 2005, 2004, and 2003 were as follows: 2005 2004 2003 ------------------------------- Matching contribution .......................... $557,299 $415,582 $377,854 Discretionary contribution ..................... 90,100 89,000 90,000 ------------------------------- $647,399 $504,582 $467,854 ===============================
The Company has offered nonqualified supplemental executive retirement plans (SERPs) with certain executive officers. The SERPs allow certain executives to accumulate retirement benefits beyond those provided by the qualified plans. During the years ended December 31, 2005 and 2004, the Company's contributions were $176,313 and $134,000, respectively. As of December 31, 2005 and 2004, the liability related to the SERPs was $310,313 and $134,000, respectively. The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company's matching contribution differs by officer and is a maximum of between $7,000 and $20,000 annually. Interest on the deferred amounts is earned at The Wall Street Journal's prime rate subject to a minimum of 4% and a maximum of 12% with such limits differing by officer. Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. During the years ended December 31, 2005, 2004, and 2003 the Company expensed $124,562, $107,420, and $86,275, respectively, related to the agreements. As of December 31, 2005 and 2004 the liability related to the agreements totals $830,222 and $627,160, respectively. The Company has also entered into deferred compensation agreements with certain management officers. Under the provisions of the agreements the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company's matching contribution differs by officer and is a maximum between 4% and 10% of officer's compensation. Interest on the deferred amounts is earned at The Wall Street Journal's prime rate plus one percentage point, and has a minimum of 4% and shall not exceed 8%. Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. During the years ended December 31, 2005 and 2004, the Company expensed $44,111 and $21,448, respectively related to the agreements. As of December 31, 2005 and 2004, the liability related to the agreements totaled $170,949 and $62,152, respectively. 50 Note 14. Stock Based Compensation Stock option and incentive plans: The Company's Board of Directors and its stockholders adopted in June 1993 the QCR Holdings, Inc. Stock Option Plan (Stock Option Plan). Up to 225,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive stock options or nonqualified stock options granted under the Stock Option Plan. All of the options have been granted under this plan, and on June 30, 2003, the plan expired. The Company's Board of Directors adopted in November 1996 the QCR Holdings, Inc. 1997 Stock Incentive Plan (1997 Stock Incentive Plan). Up to 225,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock options and restricted stock granted under the 1997 Stock Incentive Plan. As of December 31, 2004, there are no remaining options available for grant under this plan. The Company's Board of Directors adopted in January 2004, and the stockholders approved in May 2004, the QCR Holdings, Inc. 2004 Stock Incentive Plan (2004 Stock Incentive Plan). Up to 225,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock options and restricted stock granted under the 2004 Stock Incentive Plan. As of December 31, 2005, there are 170,312 remaining options available for grant under this plan. The Stock Option Plan, the 1997 Stock Incentive Plan, and the 2004 Stock Incentive Plan (stock option plans) are administered by the Executive Committee appointed by the Board of Directors (Committee). The number and exercise price of options granted under the stock option plans is determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for incentive stock options. All options have a 10-year life and will vest and become exercisable from 1-to-5 years after the date of the grant. Only nonqualified stock options have been issued to date. In the case of nonqualified stock options, the stock option plans provide for the granting of "Tax Benefit Rights" to certain participants at the same time as these participants are awarded nonqualified options. Each Tax Benefit Right entitles a participant to a cash payment equal to the excess of the fair market value of a share of common stock on the exercise date over the exercise price of the related option multiplied by the difference between the rate of tax on ordinary income over the rate of tax on capital gains (federal and state). A summary of the stock option plans as of December 31, 2005, 2004, and 2003 and changes during the years then ended is presented below: December 31, ---------------------------------------------------------------------------- 2005 2004 2003 ----------------------- ----------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------------------------------------------------------------------------- Outstanding, beginning ............................ 244,816 $ 11.56 224,800 $ 8.57 300,566 $ 7.56 Granted ......................................... 34,400 21.08 60,100 19.33 7,350 13.47 Exercised ....................................... (25,335) 20.62 (38,604) 6.35 (75,998) 4.98 Forfeited ....................................... (1,223) 12.63 (1,480) 8.99 (7,118) 9.41 ---------------------------------------------------------------------------- Outstanding, ending ............................... 252,658 13.25 244,816 11.56 224,800 8.57 ============================================================================ Exercisable, ending ............................... 146,979 135,210 145,598 Weighted average fair value per option of options granted during the period ............................... $ 8.99 $ 8.29 $ 5.58
51 A further summary of options outstanding as of December 31, 2005 is presented below: Options Outstanding ------------------------------------------------- Options Exercisable Weighted ------------------------------- Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ---------------------------------------------------------------------------------------------------------- $5.89 to $6.90 22,722 $ 4.62 $ 6.61 19,242 $ 6.55 $7.00 to $7.13 35,450 5.22 7.01 26,000 7.01 $7.45 to $9.39 38,878 1.74 8.88 37,978 8.91 $9.87 to $11.64 34,892 5.70 10.33 25,782 10.40 $11.83 to $18.40 45,986 3.49 15.66 27,626 14.25 $18.67 to $20.90 45,130 8.44 19.78 10,351 19.68 $21.00 to $22.00 29,600 9.05 21.29 -- -- -------------- ------------- 252,658 146,979 ============== =============
Stock appreciation rights: Additionally, the 1997 Stock Incentive Plan and 2004 Stock Incentive Plan allow the granting of stock appreciation rights (SARs). SARs are rights entitling the grantee to receive cash having a fair market value equal to the appreciation in the market value of a stated number of shares from the date of grant. Like options, the number and exercise price of SARs granted is determined by the Committee. The SARs vest 20% per year, and the term of the SARs may not exceed 10 years from the date of the grant. As of December 31, 2005, 2004, and 2003 there were 104,775, 111,375, and 135,525 SARs, respectively, outstanding, with 93,435, 84,810, and 92,310, respectively, exercisable. During the years ended 2005, 2004, and 2003 the Company expensed ($137,026), $297,441, and $915,224, respectively, related to the SARs. As of December 31, 2005 and 2004 the liability related to the SARs totals $1,035,935 and $1,251,908, respectively. A further summary of SARs is presented below: December 31, 2005 Liability Recorded for SARs ------------------------------- -------------------------------- December 31, SARs SARs -------------------------------- Exercise Price Outstanding Exercisable 2005 2004 - ----------------------------------------------------------------------------------------------- $6.90 32,250 25,410 $ 412,800 $ 488,565 $7.00 12,600 8,100 160,020 193,200 $9.11 12,750 12,750 134,980 151,555 $10.75 16,575 16,575 148,346 185,269 $11.83 4,425 4,425 34,810 54,313 $12.17 750 750 5,650 6,625 $13.55 -- -- -- -- $14.22 25,425 25,425 139,329 172,381 ---------------------------------------------------------------- 104,775 93,435 $ 1,035,935 $ 1,251,908 ================================================================
Stock purchase plan: The Company's Board of Directors and its stockholders adopted in October 2002 the QCR Holdings, Inc. Employee Stock Purchase Plan (the "Purchase Plan"). As of January 1, 2005 there were 128,185 shares of common stock available for issuance under the Purchase Plan. For each six-month offering period, the Board of Directors will determine how many of the total number of available shares will be offered. The purchase price is the lesser of 90% of the fair market value at the date of the grant or the investment date. The investment date, as established by the Board of Directors of the Company, is the date common stock is purchased after the end of each calendar quarter during an offering period. The maximum dollar amount any one participant can elect to contribute in an offering period is $5,000. Additionally, the maximum percentage that any one participant can elect to contribute is 5% of his or her compensation. During the year ended December 31, 2005, 10,516 shares were granted and 10,584 purchased. Shares granted during the year ended December 31, 2005 had a weighted average fair value of $3.09 per share. 52 Note 15. Regulatory Capital Requirements and Restrictions on Dividends The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005 and 2004, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject. As of December 31, 2005, the most recent notification from the Federal Deposit Insurance Corporation categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the subsidiary banks' categories. The Company and the subsidiary banks' actual capital amounts and ratios as of December 31, 2005 and 2004 are also presented in the table (dollars in thousands). To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------------- As of December 31, 2005: Company: Total risk-based capital $ 86,515 10.14% $ 68,252 >= 8.0% N/A N/A Tier 1 risk-based capital 69,081 8.10% 34,126 >= 4.0 N/A N/A Leverage ratio 69,081 6.84% 40,373 >= 4.0 N/A N/A Quad City Bank & Trust: Total risk-based capital $ 60,670 10.22% $ 47,480 >= 8.0% $ 59,350 >= 10.0% Tier 1 risk-based capital 54,609 9.20% 23,740 >= 4.0 35,610 >= 6.0 Leverage ratio 54,609 7.84% 27,876 >= 4.0 34,845 >= 5.0 Cedar Rapids Bank & Trust: Total risk-based capital $ 23,476 10.26% $ 18,313 >= 8.0% $ 22,891 >= 10.0% Tier 1 risk-based capital 20,869 9.12% 9,156 >= 4.0 13,735 >= 6.0 Leverage ratio 20,869 7.46% 11,186 >= 4.0 13,983 >= 5.0 Rockford Bank & Trust (A): Total risk-based capital $ 9,019 29.77% $ 2,424 >= 8.0% $ 3,030 >= 10.0% Tier 1 risk-based capital 8,757 28.90% 1,212 >= 4.0 1,818 >= 6.0 Leverage ratio 8,757 24.16% 1,450 >= 4.0 1,813 >= 5.0
53 To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------------- As of December 31, 2004: Company: Total risk-based capital $ 79,299 10.9% $ 58,066 >= 8.0% N/A N/A Tier 1 risk-based capital 66,807 9.2 29,033 >= 4.0 N/A N/A Leverage ratio 66,807 7.8 34,209 >= 4.0 N/A N/A Quad City Bank & Trust: Total risk-based capital $ 54,772 10.3% $ 42,513 >= 8.0% $ 53,141 > 10.0% Tier 1 risk-based capital 48,127 9.1 21,256 >= 4.0 31,885 > 6.0 Leverage ratio 48,127 7.6 25,476 >= 4.0 31,845 > 5.0 Cedar Rapids Bank & Trust: Total risk-based capital $ 20,680 10.8% $ 15,280 >= 8.0% $ 19,100 > 10.0% Tier 1 risk-based capital 18,292 9.6 7,640 >= 4.0 11,460 > 6.0 Leverage ratio 18,292 8.2 8,949 >= 4.0 11,186 > 5.0
(A) As a de novo bank, Rockford Bank & Trust cannot, without the prior consent of the Federal Reserve Bank, pay dividends until TTED] after the first three years of operations and two consecutive satisfactory CAMELS ratings. In addition, the Bank is required to maintain a tangible Tier I leverage ratio of at least 9% throughout its first three years of operations. The de novo period for Rockford Bank & Trust will expire in January 2008. Federal Reserve Bank policy provides that a bank holding company should not pay dividends unless (i) the dividends can be fully funded out of net income from the company's net earnings over the prior year and (ii) the prospective rate of earnings retention appears consistent with the company's (and its subsidiaries') capital needs, asset quality, and overall financial condition. In addition, the Delaware General Corporation Law restricts the Company from paying dividends except out of its surplus, or in the case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. In addition, the subsidiary banks, as members of the Federal Reserve System, will be prohibited from paying dividends to the extent such dividends declared in any calendar year exceed the total of its net profits of that year combined with its retained net profits of the preceding two years, or are otherwise determined to be an "unsafe and unsound practice" by the Federal Reserve Board. Note 16. Earnings Per Common Share The following information was used in the computation of basic and diluted earnings per common share for the years ended December 31, 2005, 2004, and 2003: 2005 2004 2003 ------------------------------------ Net income ....................................... $4,810,015 $5,216,672 $5,460,927 ==================================== Weighted average common shares outstanding ....... 4,518,162 4,234,345 4,173,063 Weighted average common shares issuable upon exercise of stock options and under the Employee Stock Purchase Plan ............................ 98,394 110,420 109,520 ------------------------------------ Weighted average common and common equivalent shares outstanding .................. 4,616,556 4,344,765 4,282,583 ====================================
Note 17. Commitments and Contingencies In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit. 54 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 subsidiary banks upon extension of credit, is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The 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 subsidiary banks would be required to fund the commitments. The maximum potential amount of future payments the subsidiary banks could be required to make is represented by the contractual amount. If the commitment is funded, the subsidiary banks would be entitled to seek recovery from the customer. At December 31, 2005 and 2004 no amounts have been recorded as liabilities for the subsidiary banks' potential obligations under these guarantees. As of December 31, 2005 and 2004, commitments to extend credit aggregated $385,779,000 and $257,569,000, respectively. As of December 31, 2005 and 2004, standby letters of credit aggregated $15,242,000 and $12,653,000, 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 amount of $2,632,400 and $3,498,809 as of December 31, 2005 and 2004, respectively. These amounts are included in loans held for sale at the respective balance sheet dates. 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 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 $43,439,000 and $35,587,000 of sold residential mortgage loans with recourse provisions still in effect at December 31, 2005 and 2004, respectively. The subsidiary banks did not repurchase any loans from secondary market investors under the terms of loans sales agreements during the years ended December 31, 2005, 2004, and 2003. In the opinion of management, the risk of recourse and the subsequent requirement of loan repurchase to the subsidiary banks is not significant, and accordingly no liabilities have been established related to such. During fiscal 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 funded by the FHLB and held within their portfolio, thereby managing the liquidity, interest rate, and prepayment risks o& 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 December 31, 2005, Quad City Bank & Trust had funded $13,800,000 of mortgages through the FHLB's MPF Program with an attached credit exposure of $279,000. At December 31, 2004, Quad City Bank & Trust had funded $11,700,000 of mortgages through the FHLB's MPF Program with an attached credit exposure of $240,000. 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 $48 thousand and $11 thousand at December 31, 2005 and December 31, 2004, respectively. 55 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. Until 2004, Bancard had not experienced any notable chargeback activity in which local or agent bank merchant's cash reserves on deposit were not sufficient to cover the chargeback volumes. However, in 2004, two of these merchants experienced cases of fraud and subsequent chargeback volumes that surpassed their cash reserves. As a result, Bancard incurred $196,000 of chargeback loss expense due to the fraudulent activity on these two merchants and in the establishment in August of an allowance for chargeback losses. Throughout 2005 monthly provisions were made to the allowance for chargeback losses based on the dollar volumes of merchant credit card activity. For the year ended December 31, 2005, monthly provisions were made totaling $48,000. An aggregate of $135,000 of reversals of specific merchant reserves during 2005 more than offset these provisions. At December 31, 2005 and 2004, Bancard had a merchant chargeback reserve of $77,000 and $164,000, respectively. Management will continually monitor merchant credit card volumes, related chargeback 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 $750,000 letter of credit from The Northern Trust Company. As of December 31, 2005 and 2004, there were no significant pending liabilities. Aside from cash on-hand and in-vault, the majority of the Company's cash is maintained at upstream correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal funds sold exceeded federal insured limits by approximately $9,800,000 and $10,900,000 as of December 31, 2005 and 2004, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks. In an arrangement with Goldman, Sachs and Company (Goldman Sachs), Cedar Rapids Bank & Trust offers a cash management program for select customers. Using this cash management tool, the customer's demand deposit account performs like an investment account. Based on a predetermined minimum balance, which must be maintained in the account, excess funds are automatically swept daily to an institutional money market fund distributed by Goldman Sachs. As with a traditional demand deposit account, customers retain complete check-writing and withdrawal privileges. If the demand deposit account balance drops below the predetermined threshold, funds are automatically swept back from the money market fund at Goldman Sachs to the account at Cedar Rapids Bank & Trust to maintain the required minimum balance. Balances swept into the money market funds are not bank deposits, are not insured by any U.S. government agency, and do not require cash reserves to be set against the balances. At December 31, 2005 and December 31, 2004, the Company had $36,052,000 and $3,546,000, respectively, of customer funds invested in this cash management program. The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The Company has purchase obligations which represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms. At December 31, 2005, the Company's purchase obligations were primarily related to certain contractual payments for capital expenditures of facilities expansion. The Company has operating contract obligations which represent short and long-term payments for data processing equipment and services, software, and other equipment and professional services. The following table presents, as of December 31, 2005, significant fixed and determinable contractual obligations to these third parties by payment date. Purchase Operating Obligations Contracts ---------------------------------- Year ending December 31: 2006 ..................................... $ 2,900,000 $ 1,546,712 2007 ..................................... -- 1,072,451 2008 ..................................... -- 995,837 2009 ..................................... -- 883,113 2010 ..... ............................... -- 3,750 Thereafter ............................... -- 11,950 ---------------------------------- $ 2,900,000 $ 4,513,813 ==================================
The Company also has operating lease obligations under noncancelable leases for several of its facilities. See Note 5. In the third quarter of 2005, Rockford Bank & Trust initiated plans for a second banking location in Rockford, Illinois on Guilford Road at Alpine. A temporary modular facility opened in December providing a drive-up lane and drive-up ATM. The Company plans to build a 20,000 square foot banking facility at a projected cost of $4.4 million. Completion of the new facility is anticipated to occur in October of 2006. During 2005, capitalized costs associated with this project were $1.5 million. 56 Note 18. Quarterly Results of Operations (Unaudited) Year Ended December 31, 2005 ---------------------------------------------------------- March June September December 2005 2005 2005 2005 ---------------------------------------------------------- Total interest income ................................... $ 10,679,989 $ 11,538,870 $ 12,502,512 $ 13,966,897 Total interest expense .................................. 4,191,650 4,781,874 5,642,350 6,664,911 ---------------------------------------------------------- Net interest income ................................ 6,488,339 6,756,996 6,860,162 7,301,986 Provision for loan losses (gains) ....................... 301,206 (147,418) 382,752 340,544 Noninterest income ...................................... 2,516,475 2,434,878 2,508,535 2,612,615 Noninterest expenses .................................... 6,752,705 7,443,341 7,589,747 7,647,355 Minority interest in income of consolidated subsidiary ............................... -- -- 20,651 56,887 ---------------------------------------------------------- Net income before income taxes ....................................... 1,950,903 1,895,951 1,375,547 1,869,815 Federal and state income taxes .......................... 627,153 633,428 419,968 601,652 ---------------------------------------------------------- Net income ......................................... $ 1,323,750 $ 1,262,523 $ 955,579 $ 1,268,163 ========================================================== Earnings per common share: Basic ................................................. $ 0.29 $ 0.28 $ 0.21 $ 0.28 Diluted ............................................... 0.29 0.27 0.21 0.27
Year Ended December 31, 2004 ---------------------------------------------------------- March June September December 2004 2004 2004 2004 ---------------------------------------------------------- Total interest income $ 8,678,807 $ 9,225,725 $ 9,799,578 $ 10,312,730 Total interest expense 2,902,869 3,206,913 3,368,355 3,846,631 ---------------------------------------------------------- Net interest income 5,775,938 6,018,812 6,431,223 6,466,099 Provision for loan losses (gains) 856,841 467,659 411,385 (363,677) Noninterest income 2,358,736 2,379,412 2,019,557 1,923,736 Noninterest expenses 6,089,088 5,437,580 5,913,274 6,840,909 ---------------------------------------------------------- Net income before income taxes 1,188,745 2,492,985 2,126,121 1,912,603 Federal and state income taxes 352,828 821,773 703,464 625,717 --------------------------------------------------------- Net income $ 835,917 $ 1,671,212 $ 1,422,657 $ 1,286,886 ========================================================= Earnings per common share: Basic $ 0.20 $ 0.40 $ 0.33 $ 0.30 Diluted 0.19 0.39 0.33 0.29
57 Note 19. Parent Company Only Financial Statements The following is condensed financial information of QCR Holdings, Inc. (parent company only): Condensed Balance Sheets December 31, 2005 and 2004 Assets 2005 2004 - ---------------------------------------------------------------------------------- Cash and due from banks ........................... $ 842,260 $ 6,125,728 Interest-bearing deposits at financial institutions .................................... 95,727 415,439 Securities available for sale, at fair value ...... 1,593,719 1,638,617 Investment in bank subsidiaries ................... 86,100,599 66,900,880 Investment in nonbank subsidiaries ................ 1,376,780 1,250,673 Net loans receivable .............................. -- 21,764 Other assets ...................................... 2,070,084 2,552,837 ---------------------------- Total assets ................................. $ 92,079,169 $ 78,905,938 ============================ Liabilities and Stockholders' Equity - ---------------------------------------------------------------------------------- Liabilities: Other borrowings ................................ $ 10,500,000 $ 6,000,000 Junior subordinated debentures .................. 25,775,000 20,620,000 Other liabilities ............................... 1,337,470 1,512,138 ---------------------------- Total liabilities ............................ 37,612,470 28,132,138 ---------------------------- Stockholders' Equity: Common stock .................................... 4,531,224 4,496,730 Additional paid-in capital ...................... 20,776,254 20,329,033 Retained earnings ............................... 29,726,700 25,278,666 Accumulated other comprehensive income (loss) ... (567,479) 669,371 ---------------------------- Total stockholders' equity ................... 54,466,699 50,773,800 ---------------------------- Total liabilities and stockholders' equity ... $ 92,079,169 $ 78,905,938 ============================
Condensed Statements of Income Years Ended December 31, 2005, 2004, and 2003 2005 2004 2003 - ------------------------------------------------------------------------------------ Total interest income ....................... $ 48,991 $ 114,731 $ 83,894 Securities gains, net ....................... 50 26,188 5 Equity in net income of bank subsidiaries ... 6,491,611 7,643,815 6,075,566 Equity in net income of nonbank subsidiaries 405,220 259,660 867,217 Other ....................................... 386,382 212,814 303,052 ------------------------------------ Total income ........................... 7,332,254 8,257,208 7,329,734 ------------------------------------ Interest expense ............................ 1,988,963 2,547,534 1,361,939 Salaries and employee benefits .............. 778,402 1,135,333 720,989 Professional and data processing fees ....... 508,237 361,063 288,217 Other ....................................... 344,280 423,347 292,914 ------------------------------------ Total expenses ......................... 3,619,882 4,467,277 2,664,059 ------------------------------------ Income before income tax benefit ....... 3,712,372 3,789,931 4,665,675 Income tax benefit .......................... 1,097,643 1,426,741 795,252 ------------------------------------ Net income ............................. $4,810,015 $5,216,672 $5,460,927 ====================================
58 Condensed Statements of Cash Flows Years Ended December 31, 2005, 2004, and 2003 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income .............................................. $ 4,810,015 $ 5,216,672 $ 5,460,927 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Distributions in excess of (less than) earnings of: Bank subsidiaries ................................... (6,491,611) (6,643,815) (5,075,566) Nonbank subsidiaries ................................ 28,893 2,662,973 41,775 Depreciation .......................................... 3,877 4,507 4,506 Provision for loan losses ............................. 3,269 -- -- Loss on redemption of junior subordinated debentures .. -- 747,490 -- Investment securities gains, net ...................... (50) (26,188) (5) Tax benefit of nonqualified stock options exercised ... 125,993 190,248 274,871 (Increase) decrease in accrued interest receivable .... 26,788 (28,252) (6,715) (Increase) decrease in other assets ................... 424,737 (1,103,348) (299,820) Increase (decrease) in other liabilities .............. (176,051) 523,507 (47,516) -------------------------------------------- Net cash (used in) provided by operating activities (1,244,140) 1,543,794 352,457 -------------------------------------------- Cash Flows from Investing Activities: Net (increase) decrease in interest-bearing deposits at financial institutions ................................ 319,712 (281,648) 153,118 Purchase of securities available for sale ............... (167,736) (307,392) (28,496) Proceeds from calls and maturities of securities ........ 298,988 227,001 200,000 Capital infusion, bank subsidiaries ..................... (14,000,000) (4,000,000) (5,000,000) Capital infusion, nonbank subsidiaries .................. (155,000) (620,000) (500,000) Net loans (originated) repaid ........................... 22,084 -- (757) Purchase of premises and equipment ...................... (7,500) -- -- -------------------------------------------- Net cash used in investing activities ............. (13,689,452) (4,982,039) (5,176,135) -------------------------------------------- Cash Flows from Financing Activities: Net (decrease) increase in other borrowings ............. 4,500,000 (4,000,000) 5,000,000 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) (277,086) Payment from fractional shares on 3:2 stock split ....... -- (2,549) -- Proceeds from issuance of common stock, net ............. 355,722 5,028,831 148,503 -------------------------------------------- Net cash provided by financing activities ......... 9,650,124 9,309,466 4,871,417 -------------------------------------------- Net increase (decrease) in cash and due from banks (5,283,468) 5,871,221 47,739 Cash and due from banks: Beginning ............................................... 6,125,728 254,507 206,768 -------------------------------------------- Ending .................................................. $ 842,260 $ 6,125,728 $ 254,507 ============================================
Note 20. Fair Value of Financial Instruments FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosures of fair value information about financial instruments for which it is practicable to estimate that value. When quoted market prices are not available, fair values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the discounted rates and estimates of future cash flows. In this regard, fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement. Some financial instruments and all nonfinancial instruments are excluded from the disclosures. The aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of their financial instruments. Cash and due from banks, federal funds sold, and interest-bearing deposits at financial institutions: The carrying amounts reported in the balance sheets for cash and due from banks, federal funds sold, and interest-bearing deposits at financial institutions equal their fair values. 59 Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans/leases receivable: The fair values for variable rate loans equal their carrying values. The fair values for all other types of loans/leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans/leases with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market. Accrued interest receivable and payable: The fair value of accrued interest receivable and payable is equal to its carrying value. Deposits: The fair values disclosed for demand deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits. Short-term borrowings: The fair value for short-term borrowings is equal to its carrying value. Federal Home Loan Bank advances and junior subordinated debentures: The fair value of these instruments is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Other borrowings: The fair value for variable rate other borrowings is equal to its carrying value. Commitments to extend credit: The fair value of these commitments is not material. The carrying values and estimated fair values of the Company's financial instruments as of December 31, 2005 and 2004 are presented as follows: 2005 2004 --------------------------- -------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------------------------------------------------- Cash and due from banks .................................... $ 38,956,627 $ 38,956,627 $ 21,372,342 $ 21,372,342 Federal funds sold ......................................... 4,450,000 4,450,000 2,890,000 2,890,000 Interest-bearing deposits at financial institutions ............................................. 1,270,666 1,270,666 3,857,563 3,857,563 Investment securities: Held to maturity ......................................... 150,000 154,828 100,000 108,254 Available for sale ....................................... 182,214,719 182,214,719 149,460,886 149,460,886 Loans/leases receivable, net ............................... 747,370,175 745,921,173 639,088,836 639,212,836 Accrued interest receivable ................................ 4,849,379 4,849,379 4,072,762 4,072,762 Deposits ................................................... 698,503,899 696,761,899 588,015,683 587,509,683 Short-term borrowings ...................................... 107,469,851 107,469,851 104,771,178 104,771,178 Federal Home Loan Bank advances ............................ 130,000,854 128,861,854 92,021,877 92,107,877 Other borrowings ........................................... 10,764,914 10,764,914 6,000,000 6,000,000 Junior subordinated debentures ............................. 25,775,000 27,653,149 20,620,000 22,049,216 Accrued interest payable ................................... 2,410,398 2,410,398 1,536,976 1,536,976
60 Note 21. Business Segment Information Selected financial information on the Company's business segments, with all intercompany accounts and transactions eliminated, is presented as follows for the years ended December 31, 2005, 2004, and 2003: 2005 2004 2003 ------------------------------------------------- Commercial banking: Quad City Bank & Trust: Revenue ................ $ 36,732,246 $ 32,342,266 $ 32,624,650 Net income ............. 4,965,565 5,914,913 5,148,423 Assets ................. 668,896,016 634,206,797 555,403,875 Depreciation ........... 1,476,476 1,245,853 902,175 Capital expenditures ... 1,787,723 3,783,114 3,851,445 Intangible assets ...... -- -- -- Cedar Rapids Bank & Trust: Revenue ................ 14,627,423 9,809,878 6,920,826 Net income ............. 1,274,625 873,348 249,866 Assets ................. 288,537,122 228,249,176 149,673,720 Depreciation ........... 392,491 185,869 140,606 Capital expenditures ... 6,170,123 3,582,029 292,260 Intangible assets ...... -- -- -- Rockford Bank & Trust: Revenue ................ 1,084,242 16,476 -- Net (loss) ............. (1,297,322) (346,490) -- Assets ................. 41,206,869 1,660,473 -- Depreciation ........... 97,125 10,689 -- Capital expenditures ... 1,744,149 207,239 -- Intangible assets ...... -- -- --
2005 2004 2003 ------------------------------------------------- Credit card processing: Revenue ................... $ 2,056,474 $ 1,612,824 $ 2,372,619 Net income ................ 631,954 441,117 1,056,399 Assets .................... 575,974 889,407 736,710 Depreciation .............. 29,359 28,535 25,656 Capital expenditures ...... 32,533 39,204 8,328 Intangible assets ......... -- -- -- Trust management: Revenue ................... 2,818,832 2,530,907 2,242,747 Net income ................ 611,647 625,459 490,018 Assets .................... N/A N/A N/A Depreciation .............. N/A N/A N/A Capital expenditures ...... N/A N/A N/A Intangible assets ......... -- -- -- Leasing services: Revenue ................... 958,854 -- -- Net income ................ 663,084 -- -- Assets .................... 38,585,572 -- -- Depreciation .............. 9,445 -- -- Capital expenditures ...... 37,465 -- -- Intangible assets ......... 3,222,688 -- -- All other: Revenue ................... 482,700 385,930 385,028 Net (loss) ................ (2,039,538) (2,291,675) (1,483,779) Assets .................... 4,811,975 5,077,694 4,225,250 Depreciation .............. 3,877 4,507 4,506 Capital expenditures ...... 7,500 -- -- Intangible assets ......... -- -- --
61 Note 22. Subsequent Event On February 24, 2006, the Company announced the issuance of $10,000,000 of fixed/floating rate capital securities of QCR Holdings Statutory Trust V ("Trust V"). The securities represent the undivided beneficial interest in Trust V, 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 V mature in thirty years, but are callable at par after five years. The Trust Preferred Securities have a fixed rate of 6.62%, payable quarterly, for five years, at which time they have a variable rate based on the three-month LIBOR, reset quarterly. Trust V used the $10,000,000 of proceeds from the sale of the Trust Preferred Securities, in combination with $310,000 of proceeds from its own equity, to purchase $10,310,000 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. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of December 31, 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 Exchange Act was recorded, processed, summarized and reported as and when required. Management's Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting includes controls and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. The Company's management assessed the effectiveness of the Company's internal control, over financial reporting as of December 31, 2005. Management's assessment is based on the criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the Company maintained effective internal control over financial reporting as of December 31, 2005. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2005. McGladrey & Pullen, LLP, the Company's independent registered public accounting firm, has issued an attestation report on the Company's internal control over financial reporting as of December 31, 2005 and management's assessment of the internal control over financial reporting which is included following in this Form 10-K. 62 McGladrey & Pullen, LLP Certified Public Accountants Report of Independent Registered Public Accounting Firm. To the Board of Directors QCR Holdings, Inc. Moline, Illinois We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that QCR Holdings, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company acquired an 80% ownership interest in M2 Lease Funds, LLC. (M2) during 2005, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, M2's internal control over financial reporting associated with total assets of $38.6 million, total revenues of $948,000, and net income of $392,000 included in the consolidated financial statements of the Company as of and for the year ended December 31, 2005. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of M2. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated January 27, 2006 expressed an unqualified opinion on those consolidated financial statements. /s/ McGladrey & Pullen, LLP Davenport, Iowa January 27, 2006 McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation of separate and independent legal entities. 63 Changes in Internal Control over Financial Reporting. The Company recently underwent a comprehensive effort to ensure compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002. As a result, several enhancements to the Company's internal controls over financial reporting have been implemented, including, but not limited to, changes in wire transfer access, reviews of file maintenance reports, and changes in the access to the issuance of credit cards. During 2005, the Company implemented one of the more significant changes, which was a comprehensive Reconciliation and Account Certification Policy, creating a centralized reconciliation process throughout the Company, culminating in a consolidated reporting package that is submitted to the Chief Financial Officer. At December 31, 2005, the Company had fully completed its evaluation and the implementation of many significant control enhancements. These control enhancements were not made in response to material weaknesses in the Company's internal control over financial reporting, but rather as part of the Company's ongoing efforts to improve internal control over financial reporting. The Company will continue to work throughout 2006 to implement additional control enhancements. Other than changes as described above, there have been no other significant 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. Item 9B. Other Information None. Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item is set forth under the caption "Election of Directors" in the Proxy Statement, and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is set forth under the caption "Executive Compensation" in the Proxy Statement, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is set forth under the caption "Security Ownership of Certain Beneficial Owners" in the Proxy Statement, and is incorporated herein by reference, or is presented below. Equity Compensation Plan Information The table below sets forth the following information as of December 31, 2005 for (i) all compensation plans previously approved by the Company's stockholders and (ii) all compensation plans not previously approved by the Company's stockholders: (a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights; (b) the weighted-average exercise price of such outstanding options, warrants and rights; and (c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans. EQUITY COMPENSATION PLAN INFORMATION - ------------------------------------------------------------------------------------------------------------------------------------ Number of securities remaining Number of securities Weighted-average exercise available for to be issued upon price of outstanding options, future issuance under Plan category exercise of warrants and rights equity compensation plans outstanding options, (b) (excluding securities warrants and rights reflected in column(a)) (a) (c) - ------------------------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders............... 255,102 $13.29 287,981 (1) Equity compensation plans not approved by security holders.. -- -- -- Total............................. 255,102 $13.29 287,981 (1)
(1) Includes 117,669 shares available under the QCR Holdings, Inc. Employee Stock Purchase Plan. 64 Item 13. Certain Relationships and Related Transactions The information required by this item is set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Transactions with Management" in the Proxy Statement, and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The information required by this item is set forth under the caption "Independent Registered Public Accounting Firm" in the Proxy statement and is incorporated herein by reference. Part IV Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements These documents are listed in the Index to Consolidated Financial Statements under Item 8. (a) 2. Financial Statement Schedules Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the consolidated financial statements and the accompanying notes thereto. (a) 3. Exhibits The following exhibits are either filed as a part of this Annual Report on Form 10-K or are incorporated herein by reference: Exhibit Number. Exhibit Description 3.1 Certificate of Incorporation of QCR Holdings, Inc., as amended (incorporated herein by reference to Exhibit 3(i) of Registrant's Annual Report on Form 10K for the year ended December 31, 2004). 3.2 Bylaws of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 3(ii) of Registrant's Quarterly Report on Form 10Q for the quarter ended September 30, 2002). 4.1 Specimen Stock Certificate of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 4.1 of Registrant's Form SB-2, File No. 33-67028). 4.2 Registration of Preferred Share Purchase Rights of QCR Holdings, Inc. (incorporated by reference to Item 1. of Registrant's form 8-A12G, File No. 000-22208). 10.1 Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer dated January 1, 2004 (incorporated herein by reference to Exhibit 10(i) of Registrant's Annual Report on Form 10K for the year ended December 31, 2003). 10.2 Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated January 1, 2004 (incorporated herein by reference to Exhibit 10(ii) of Registrant's Annual Report on Form 10K for the year ended December 31, 2003). 10.3 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Michael A. Bauer dated January 1, 2004 (incorporated herein by reference to Exhibit 10(iii) of Registrant's Annual Report on Form 10K for the year ended December 31, 2003). 10.4 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Douglas M. Hultquist dated January 1, 2004 (incorporated herein by reference to Exhibit 10(iv) of Registrant's Annual Report on Form 10K for the year ended December 31, 2003). 65 Exhibit Number. Exhibit Description 10.5 Lease Agreement between Quad City Bank and Trust Company and 56 Utica L.L.C. (incorporated herein by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.6 Employment Agreement between Quad City Bank and Trust Company and Larry J. Helling dated January 1, 2004 (incorporated herein by reference to Exhibit 10(vi) of Registrant's Annual Report on Form 10K for the year ended December 31, 2003). 10.7 Executive Deferred Compensation Agreement for Todd A. Gipple, Executive Vice President and Chief Financial Officer of QCR Holdings, Inc. dated January 1, 2004 (incorporated herein by reference to Exhibit 10(viii) of Registrant's Annual Report on Form 10K for the year ended December 31, 2003). 10.8 Executive Deferred Compensation Agreement for Larry J. Helling, President and Chief Executive Officer of Cedar Rapids Bank and Trust Company dated January 1, 2004 (incorporated herein by reference to Exhibit 10(ix) of Registrant's Annual Report on Form 10K for the year ended December 31, 2003). 10.9 Employment Agreement between QCR Holdings, Inc. and Todd A. Gipple dated January 1, 2004 (incorporated herein by reference to Exhibit 10(xi) of Registrant's Annual Report on Form 10K for the year ended December 31, 2003). 10.10 QCR Holdings, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 5.1 of Registrant's Form S-8, file No. 333-101356). 10.11 Dividend Reinvestment Plan of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 5.1 of Registrant's Form S-3, File No. 333-102699). 10.12 Indenture by and between QCR Holdings, Inc. / QCR Holdings Statutory Trust II and U.S. Bank National Association, as debenture and institutional trustee, dated February 18, 2004 (incorporated herein by reference to Exhibit 10(i) of Registrant's Quarterly Report on Form 10Q for the quarter ended March 31, 2004). 10.13 Indenture by and between QCR Holdings, Inc. / QCR Holdings Statutory Trust III and U.S. Bank National Association, as debenture and institutional trustee, dated February 18, 2004 (incorporated herein by reference to Exhibit 10(ii) of Registrant's Quarterly Report on Form 10Q for the quarter ended March 31, 2004). 10.14 Employment Agreement between QCR Holdings, Inc. and Thomas Budd dated June 2004 (incorporated herein by reference to Exhibit 10(i) of Registrant's Quarterly Report on Form 10Q for the period ended June 30, 2004). 10.15 Employment Agreement between QCR Holdings, Inc. and Shawn Way dated June 2004 (incorporated herein by reference to Exhibit 10(ii) of Registrant's Quarterly Report on Form 10Q for the period ended June 30, 2004). 10.16 Lease Agreement between Quad City Bank and Trust Company and 127 North Wyman Development, L.L.C. dated November 3, 2004 (incorporated herein by reference to Exhibit 10(i) of Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2004). 10.17 2004 Stock Incentive Plan of QCR Holdings, Inc. (incorporated herein by reference to Exhibit B of Registrant's Form Pre 14A, filed March 5, 2004, File No. 000-22208). 10.18 Director Compensation Schedule of QCR Holdings, Inc. (incorporated herein by reference to Registrant's Form 8-K, filed February 2, 2005, file No. 000-22208). 66 10.19 Non-Qualified Supplemental Executive Retirement Agreement between Quad City Bank and Trust Company and Certain Key Executives dated February 1, 2004 (incorporated herein by reference to Exhibit 10.20 of Registrant's Annual Report on form 10K for the year ended December 31, 2004). 10.20 Non-Qualified Supplemental Executive Retirement Agreement between Cedar Rapids Bank and Trust Company and Certain Key Executives dated February 1, 2004 (incorporated herein by reference to Exhibit 10(xxi) of Registrant's Annual Report on Form 10K for the year ended December 31, 2004). 10.21 Executive Deferred Compensation Agreement between QCR Holdings, Inc. and Thomas Budd dated July 15, 2004 (incorporated herein by reference to Exhibit 10(xxii) of Registrant's Annual Report on Form 10K for the year ended December 31, 2004). 10.22 Deferred Income Plan of Quad City Holdings, Inc. (incorporated herein by reference to Exhibit 99.1 of Registrant's Form S-8, filed October 21, 1997, File No. 333-38341). 10.23 Stock Option Plan of Quad City Holdings, Inc. (incorporated herein by reference to Exhibit 10.1 of Registrant's Form SB-2, File No. 33-67028). 10.24 1997 Stock Incentive Plan of Quad City Holdings, Inc. (incorporated herein by reference to Exhibit 10.1 of Registrant's Form S-8, File No. 333-87229). 10.25 Indenture by and between QCR Holdings, Inc./QCR Holdings Statutory Trust IV and Wells Fargo Bank, National Association, as debenture and institutional trustee, dated May 4, 2005 (incorporated herein by reference to Exhibit 10(i) of Registrant's Quarterly Report on Form 10Q for the quarter ended March 31, 2005). 10.26 Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht dated August 26, 2005 (incorporated herein by reference to Exhibit 10(i) of Registrant's Quarterly Report on Form 10Q for the quarter ended September 30, 2005). 10.27 Indenture by and between QCR Holdings, Inc./QCR Holdings Statutory Trust V and Wells Fargo Bank, National Association, as debenture and institutional trustee, dated February 24, 2006 (exhibit is being filed herewith). 12.1 Statement re: Computation of Ratios (exhibit is being filed herewith). 21.1 Subsidiaries of QCR Holdings, Inc. (exhibit is being filed herewith). 23.1 Consent of Independent Registered Public Accounting Firm - McGladrey and Pullen LLP (exhibit is being filed herewith). 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. 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QCR HOLDINGS, INC. Dated: March 13, 2006 By: /s/ Douglas M. Hultquist Douglas M. Hultquist President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date - ------------------------------------------------------------------------------------------------ /s/ Michael A. Bauer Chairman of the Board of Directors March 13, 2006 - ---------------------------- Michael A. Bauer /s/ Douglas M. Hultquist President, Chief Executive March 13, 2006 - ---------------------------- Douglas M. Hultquist Officer and Director /s Patrick S. Baird Director March 13, 2006 - ---------------------------- Patrick Baird /s/ James J. Brownson Director March 13, 2006 - ---------------------------- James J. Brownson /s/ Larry J. Helling Director March 13, 2006 - ---------------------------- Larry J. Helling /s/ Mark C. Kilmer Director March 13, 2006 - ---------------------------- Mark C. Kilmer /s/ John K. Lawson Director March 13, 2006 - ---------------------------- John K. Lawson /s/ Ronald G. Peterson Director March 13, 2006 - ---------------------------- Ronald G. Peterson /s/ Henry Royer Director March 13, 2006 - ---------------------------- Henry Royer
68 Appendix A SUPERVISION AND REGULATION General Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including the Iowa Superintendent of Banking (the "Superintendent"), the Illinois Department of Financial and Professional Regulation (the "DFPR"), the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Federal Deposit Insurance Corporation (the "FDIC"). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities and securities laws administered by the Securities and Exchange Commission (the "SEC") and state securities authorities have an impact on the business of the Company. The effect of these statutes, regulations and regulatory policies may be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for the respective operations of the Company and its subsidiaries and is intended primarily for the protection of the FDIC-insured deposits and depositors of the Banks, rather than shareholders. The following is a summary of the material elements of the regulatory framework that applies to the Company and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. As such, the following is qualified in its entirety by reference to applicable law. Any change in statutes, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries. The Company General. The Company, as the sole shareholder of the Banks, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the "BHCA"). In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company's operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require. Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be "so closely related to banking ... as to be a proper incident thereto." This authority would permit the Company to engage in a variety of banking-related businesses, including the operation of a thrift, consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies. 69 Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, the Company has not applied for approval to operate as a financial holding company. Federal law also prohibits any person or company from acquiring "control" of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. "Control" is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances at 10% ownership. Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital levels fall below the minimum required levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of total assets weighted according to risk; and (ii) a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain loan servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments that do not qualify as Tier 1 capital and a portion of the company's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 2005, the Company had regulatory capital in excess of the Federal Reserve's minimum requirements. Dividend Payments. The Company's ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the Company is subject to the limitations of the Delaware General Corporation Law (the "DGCL"), which allow the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Federal Securities Regulation. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Banks The Iowa Banks are chartered under Iowa law and the Illinois Bank is chartered under Illinois law. The deposit accounts of the Banks are insured by the FDIC's Bank Insurance Fund ("BIF"). The Banks are members of the Federal Reserve System ("member banks"). As Iowa-chartered, FDIC-insured member banks, the Iowa Banks are subject to the examination, supervision, reporting and enforcement requirements of the Superintendent, as the chartering authority for Iowa banks. As an Illinois-chartered, FDIC-insured member bank, the Illinois Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFPR, as the chartering authority for Illinois banks. The Banks are also subject to the examination, reporting and enforcement requirements of the Federal Reserve, the primary federal regulator of member banks. In addition, the FDIC, as administrator of the BIF, has regulatory authority over the Banks. 70 Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 2005, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2006, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has been used to cover interest payments due on the outstanding obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations until the final maturity of such obligations in 2019. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2005, the FICO assessment rate for BIF and SAIF members was approximately 0.01% of deposits. Supervisory Assessments. All Iowa banks are required to pay supervisory assessments to the Superintendent to fund the operations of the Superintendent and all Illinois banks are required to pay supervisory assessments to the DFPR to fund the operations of the DFPR. The amount of the assessment payable by each Bank is calculated on the basis of that Bank's total assets. During the year ended December 31, 2005, the Iowa Banks paid supervisory assessments to the Superintendent totaling $92 thousand and the Illinois Bank paid supervisory assessments to the DFPR totaling $6 thousand. Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. The Federal Reserve has established the following minimum capital standards for state-chartered insured member banks, such as the Banks: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. In general, the components of Tier 1 capital and total capital are the same as those for bank holding companies discussed above. The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, regulations of the Federal Reserve provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Both the DFPR's order issuing a charter to the Illinois Bank and the FDIC's approval of deposit insurance for the Illinois Bank are conditioned upon the Illinois Bank maintaining a Tier 1 capital to assets ratio of not less than 8% for the first three years of operation; and the Federal Reserve's approval of the Illinois Bank's application to become a member bank is conditioned upon the Illinois Bank maintaining a Tier 1 capital to assets ratio of not less than 9% for the first three years of operation. If the Illinois Bank's Tier 1 capital to assets ratio falls below 9%, the Illinois Bank may need to raise additional capital to maintain the required ratio. Further, federal law and regulations provide various incentives for financial institutions to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a financial institution that is "well-capitalized" may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities and may qualify for expedited processing of other required notices or applications. Additionally, one of the criteria that determines a bank holding company's eligibility to operate as a financial holding company is a requirement that all of its financial institution subsidiaries be "well-capitalized." Under the regulations of the Federal Reserve, in order to be "well-capitalized" a financial institution must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater. 71 Federal law also provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution's asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest cert!in subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution. As of December 31, 2005: (i) neither of the Iowa Banks was subject to a directive from the Federal Reserve to increase its capital to an amount in excess of the minimum regulatory capital requirements; (ii) each of the Iowa Banks exceeded its minimum regulatory capital requirements under Federal Reserve capital adequacy guidelines; and (iii) each of the Iowa Banks was "well-capitalized," as defined by Federal Reserve regulations. Liability of Commonly Controlled Institutions. Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in danger of default. Because the Company controls each of the Banks, the Banks are commonly controlled for purposes of these provisions of federal law. Dividend Payments. The primary source of funds for the Company is dividends from the Banks. Under applicable Iowa and Illinois law, the Banks may not pay dividends in excess of their undivided profits. Before declaring its first dividend, the Illinois Bank, as a de novo institution, is required by Illinois law to carry at least one-tenth of its net profits since the issuance of its charter to its surplus until its surplus is equal to its capital. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state member banks, such as the Banks. Generally, a member bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior Federal Reserve approval, however, a state member bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank's calendar year-to-date net income plus the bank's retained net income for the two preceding calendar years. The Federal Reserve's approval for the Illinois Bank to become a member bank is conditioned upon the Illinois Bank's commitment that without prior Federal Reserve approval, it will not pay dividends until after it has been in operation for three years and has received two consecutive satisfactory composite CAMELS ratings. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Iowa Banks exceeded its minimum capital requirements under applicable guidelines as of December 31, 2005. As of December 31, 2005, approximately $1.9 million would have been available to be paid as dividends by the Iowa Banks. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the Banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice. Insider Transactions. The Banks are subject to certain restrictions imposed by federal law on extensions of credit to the Company, on investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Banks. Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to their respective directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to "related interests" of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or one of its subsidiaries or a principal shareholder of the Company may obtain credit from banks with which the Banks maintain correspondent relationships. Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. 72 In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments. Branching Authority. The Iowa Banks have the authority under Iowa law to establish branches anywhere in the State of Iowa, subject to receipt of all required regulatory approvals. In 1997, the Company formed a de novo Illinois bank that was merged into the Quad City Bank and Trust Company, resulting in the Quad City Bank and Trust Company establishing a branch office in Illinois. Under Illinois law, the Quad City Bank and Trust Company may continue to establish offices in Illinois to the same extent permitted for an Illinois bank (subject to certain conditions, including certain regulatory notice requirements). Similarly, the Illinois Bank has the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is permitted only in those states the laws of which expressly authorize such expansion. State Bank Investments and Activities. The Iowa Banks and the Illinois Bank generally are permitted to make investments and engage in activities directly or through subsidiaries as authorized by Iowa law or Illinois law, respectively. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Banks. Federal Reserve System. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $48.3 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $48.3 million, the reserve requirement is $1.215 million plus 10% of the aggregate amount of total transaction accounts in excess of $48.3 million. The first $7.8 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Banks are in compliance with the foregoing requirements. Recent Regulatory Developments. On February 8, 2006, President Bush signed the Federal Deposit Insurance Reform Act of 2005 ("FDIRA") into law as part of the Deficit Reduction Act of 2005 and on February 15, 2006, President Bush signed into law the technical and conforming amendments designed to implement FDIRA. FDIRA provides for legislative reforms to modernize the federal deposit insurance system. 73 Among other things, FDIRA: (i) merges the BIF and the SAIF of the FDIC into a new Deposit Insurance Fund (the "DIF"); (ii) allows the FDIC, after March 31, 2010, to increase deposit insurance coverage by an adjustment for inflation and requires the FDIC's Board of Directors, not later than April 1, 2010 and every five years thereafter, to consider whether such an increase is warranted; (iii) increases the deposit insurance limit for certain employee benefit plan deposits from $100,000 to $250,000, subject to adjustments for inflation after March 31, 2010, and provides for pass-through insurance coverage for such deposits; (iv) increases the deposit insurance limit for certain retirement account deposits from $100,000 to $250,000, subject to adjustments for inflation after March 31, 2010; (v) allows the FDIC's Board of Directors to set deposit insurance premium assessments in any amount the Board of Directors deems necessary or appropriate, after taking into account various factors specified in FDIRA; (vi) replaces the fixed designated reserve ratio of 1.25% with a reserve ratio range of 1.15%-1.50%, with the specific reserve ratio to be determined annually by the FDIC by regulation; (vii) permits the FDIC to revise the risk-based assessment system by regulation; (viii) requires the FDIC, at the end of any year in which the reserve ratio of the DIF exceeds 1.50% of estimated insured deposits, to declare a dividend payable to insured depository institutions in an amount equal to 100% of the amount held by the DIF in excess of the amount necessary to maintain the DIF's reserve ratio at 1.5% of estimated insured deposits or to declare a dividend equal to 50% of the amount in excess of the amount necessary to maintain the reserve ratio at 1.35% if the reserve ratio is between 1.35%-1.50% of estimated insured deposits; and (ix) provides a one-time credit based upon the assessment base of the institution on December 31, 1996 to each insured depository institution that was in existence as of December 31, 1996 and paid a deposit insurance assessment prior to that date (or a successor to any such institution). The merger of the BIF and SAIF will take effect no later than July 1, 2006, while the remaining provisions are not effective until the FDIC issues final regulations. FDIRA requires the FDIC to issue final regulations no later than 270 days after enactment: (i) designating a reserve ratio; (ii) implementing increases in deposit insurance coverage; (iii) implementing the dividend requirement; (iv) implementing the one-time assessment credit; and (v) providing for assessments in accordance with FDIRA. Appendix B GUIDE 3 INFORMATION The Following tables and schedules show selected comparative financial information required by the Securities and Exchange Commission Securities Act Guide 3, regarding the business of QCR Holdings, Inc. ("the Company") for the periods shown. Dual presentation of the tables in Items III and IV is provided. The first presentation is comparative financial information for periods as presented in the Company's December 31, 2005 10-K. The second presentation is comparative financial information restated in calendar year periods consistent with the Company's current fiscal year, which was adopted in August 2002. 74 I. Distribution of Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differential A. and B. Consolidated Average Balance Sheets and Analysis of Net Interest Earnings Years Ended December 31, ---------------------------------------------------------------------------------------- 2005 2004 2003 ---------------------------------------------------------------------------------------- Interest Average Interest Average Interest Average Average Earned Yield or Average Earned Yield or Average Earned Yield or Balance or Paid Cost Balance or Paid Cost Balance or Paid Cost ---------------------------------------------------------------------------------------- (Dollars in Thousands) ASSETS Interest earnings assets: Federal funds sold ..................... $ 6,256 $ 206 3.29% $ 6,619 $ 42 0.63% $ 23,864 $ 221 0.93% Interest-bearing deposits at at financial institutions ............ 3,583 129 3.60 9,030 224 2.48 14,705 432 2.94 Investment securities (1) .............. 159,467 6,224 3.90 130,408 4,933 3.78 92,558 3,995 4.32 Gross loans/leases receivable (2) ..... 682,858 42,427 6.21 587,450 33,112 5.64 480,314 28,984 6.03 ------------------- -------------------- ------------------- Total interest earning assets .... 852,164 48,986 5.75 733,507 38,311 5.22 611,441 33,632 5.50 Noninterest-earning assets: Cash and due from banks ................ $ 29,576 $ 29,891 $ 28,394 Premises and equipment, net ............ 23,016 14,346 9,852 Less allowance for estimated losses on loans/leases ............... (9,048) (9,517) (7,997) Other .................................. 39,198 31,300 18,362 --------- --------- --------- Total assets ...................... $ 934,906 $ 799,527 $ 660,052 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits ....... $ 198,359 3,356 1.69% $ 171,552 1,379 0.80% $ 158,287 1,450 0.92% Savings deposits ....................... 22,823 264 1.16 15,553 50 0.32 12,817 58 0.45 Time deposits .......................... 299,673 9,222 3.08 228,563 5,423 2.37 199,328 5,498 2.76 Short-term borrowings .................. 98,089 2,183 2.23 100,944 1,209 1.20 40,122 327 0.82 Federal Home Loan Bank advances ........ 107,927 4,168 3.86 91,912 3,463 3.77 77,669 3,255 4.19 Junior subordinated debentures ......... 23,842 1,587 6.66 23,293 1,641 7.05 12,000 1,134 9.45 Other borrowings ....................... 11,074 501 4.52 5,125 160 3.12 8,071 228 2.82 ------------------- -------------------- ------------------- Total interest-bearing liabilities ....................... 761,787 21,281 2.79 636,942 13,325 2.09 508,294 11,950 2.35 Noninterest-bearing demand ............. 108,116 110,748 102,825 Other noninterest-bearing liabilities .......................... 12,353 7,947 9,720 Total liabilities ...................... 882,256 755,637 620,839 Stockholders' equity ................... 52,650 43,890 39,213 --------- --------- --------- Total liabilities and stockholders' equity .............. $ 934,906 $ 799,527 $ 660,052 ========= ========= ========= Net interest income .................... $ 27,705 $ 24,986 $ 21,682 ======== ========= ======== Net interest spread .................... 2.96% 3.13% 3.15% ====== ====== ====== Net interest margin .................... 3.25% 3.41% 3.55% ====== ====== ====== Ratio of average interest earning assets to average interest- bearing liabilities .................. 111.86% 115.16% 120.29% ======== ======= ========
(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. 75 C. Analysis of Changes of Interest Income/Interest Expense For the years ended December 31, 2005, 2004 and 2003 Components Inc./(Dec.) of Change (1) from ------------------- Prior Year Rate Volume --------------------------------- 2005 vs. 2004 --------------------------------- (Dollars in Thousands) INTEREST INCOME Federal funds sold ................................................ $ 164 $ 166 $ (2) Interest-bearing deposits at other financial institutions .......................................... (95) 75 (170) Investment securities (2) ......................................... 1,289 159 1,130 Gross loans/leases receivable (2) (3) ............................. 9,315 3,600 5,715 -------------------------------- Total change in interest income ......................... $ 10,673 $ 4,000 $ 6,673 -------------------------------- INTEREST EXPENSE Interest-bearing demand deposits .................................. $ 1,977 $ 1,732 $ 245 Savings deposits .................................................. 214 182 32 Time deposits ..................................................... 3,799 1,856 1,943 Short-term borrowings ............................................. 974 1,009 (35) Federal Home Loan Bank advances ................................... 705 89 616 Junior subordinated debentures .................................... (54) (92) 38 Other borrowings .................................................. 341 95 246 -------------------------------- Total change in interest expense ............................. $ 7,956 $ 4,871 $ 3,085 -------------------------------- Total change in net interest income ............................... $ 2,717 $ (871) $ 3,588 ================================ Components Inc./(Dec.) of Change (1) from ------------------- Prior Year Rate Volume --------------------------------- 2004 vs. 2003 --------------------------------- (Dollars in Thousands) INTEREST INCOME Federal funds sold ................................................ $ (179) $ (65) $ (114) Interest-bearing deposits at other financial institution ........................................... (208) (60) (148) Investment securities (2) ......................................... 938 (561) 1,499 Gross loans/leases receivable (2) (3) ............................. 4,128 (2,066) 6,194 -------------------------------- Total change in interest income .............................. $ 4,679 $ (2,752) $ 7,431 -------------------------------- INTEREST EXPENSE Interest-bearing demand deposits .................................. $ (71) $ (199) $ 128 Savings deposits .................................................. (8) (19) 11 Time deposits ..................................................... (75) (842) 767 Short-term borrowings ............................................. 882 197 685 Federal Home Loan Bank advances ................................... 208 (358) 566 Junior subordinated debentures .................................... 507 (346) 853 Other borrowings .................................................. (68) 22 (90) -------------------------------- Total change in interest expense ............................. $ 1,375 $ (1,545) $ 2,920 -------------------------------- Total change in net interest income ............................... $ 3,304 $ (1,207) $ 4,511 ================================
(1) The column "increase/decrease from prior year" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. (2) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented. (3) Loan/lease fees are not material and are included in interest income from loans/leases receivable. 76 II. Investment Portfolio A. Investment Securities The following tables present the amortized cost and fair value of investment securities as of December 31, 2005, 2004 and 2003. Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ----------------------------------------------- (Dollars in Thousands) December 31, 2005 - --------------------------------------------------------------- Securities held to maturity: Other bonds ................................................... $ 150 $ 5 $ -- $ 155 ----------------------------------------------- Totals .................................................. $ 150 $ 5 $ -- $ 155 =============================================== Securities available for sale: U.S. Treasury securities ...................................... $ 100 $ -- $ -- $ 100 U.S. gov't.sponsored agency securities .................................................. 150,115 55 (1,630) 148,540 Mortgage-backed securities .................................... 2,720 4 (54) 2,670 Municipal securities .......................................... 18,485 368 (40) 18,813 Corporate securities .......................................... 4,672 72 (2) 4,742 Trust preferred securities .................................... 850 69 -- 919 Other securities .............................................. 6,163 373 (105) 6,431 ----------------------------------------------- Totals ................................................... $ 183,105 $ 941 $ (1,831) $ 182,215 =============================================== December 31, 2004 - --------------------------------------------------------------- Securities held to maturity: Other bonds ................................................... $ 100 $ 8 $ -- $ 108 ----------------------------------------------- Totals .................................................. $ 100 $ 8 $ -- $ 108 =============================================== Securities available for sale: U.S. Treasury securities ...................................... $ 100 $ -- $ (1) $ 99 U.S. gov't.sponsored agency securities .................................................. 114,649 368 (392) 114,625 Mortgage-backed securities .................................... 3,864 20 (19) 3,865 Municipal securities .......................................... 15,923 654 (132) 16,445 Corporate securities .......................................... 6,704 230 (9) 6,925 Trust preferred securities .................................... 1,149 94 -- 1,243 Other securities .............................................. 5,995 264 -- 6,259 ----------------------------------------------- Totals ................................................... $ 148,384 $ 1,630 $ (553) $ 149,461 =============================================== December 31, 2003 - --------------------------------------------------------------- Securities held to maturity: Municipal securities .......................................... $ 250 $ 4 $ -- $ 254 Other bonds ................................................... 150 13 -- 163 ----------------------------------------------- Totals ................................................... $ 400 $ 17 $ -- $ 417 =============================================== Securities available for sale: U.S. Treasury securities ...................................... $ 1,002 $ 3 $ -- $ 1,005 U.S. gov't.sponsored agency securities .................................................. 86,732 1,105 (64) 87,773 Mortgage-backed securities .................................... 5,656 67 (8) 5,715 Municipal securities .......................................... 15,664 1,018 (1) 16,681 Corporate securities .......................................... 9,466 492 (4) 9,954 Trust preferred securities .................................... 1,350 105 -- 1,455 Other securities .............................................. 5,688 173 (1) 5,860 ----------------------------------------------- Totals .................................................. $ 125,558 $ 2,963 $ (78) $ 128,443 ===============================================
77 B. Investment Securities, Maturities, and Yields The following table presents the maturity of securities held on December 31, 2005 and the weighted average stated coupon rates by range of maturity: Weighted Amortized Average Cost Yield ------------------------ (Dollars in Thousands) U.S. Treasury securities: After 1 but within 5 years ........................ $ 100 4.30% ======================= U.S. Gov't.Sponsored Agency securities: Within 1 year ..................................... $ 46,876 3.65% After 1 but within 5 years ........................ 101,728 4.01% After 5 but within 10 years ....................... 1,511 3.87% ----------------------- Total ..................................... $150,115 3.89% ======================= Mortgage-backed securities: After 1 but within 5 years ........................ 2,294 3.99% After 5 but within 10 years ....................... 426 5.94% ----------------------- Total ..................................... $ 2,720 4.30% ======================= Municipal securities: Within 1 year ..................................... $ 703 6.10% After 1 but within 5 years ........................ 7,310 5.33% After 5 but within 10 years ....................... 8,673 6.86% After 10 years .................................... 1,799 4.93% ----------------------- Total ..................................... $ 18,485 6.03% ======================= Corporate securities: Within 1 year ..................................... $ 2,303 5.29% After 1 but within 5 years ........................ 2,369 6.14% ----------------------- Total ..................................... $ 4,672 5.72% ======================= Trust preferred securities: After 10 years .................................... $ 850 1.90% ======================= Other bonds: After 1 but within 5 years ........................ 100 5.00% After 5 but within 10 years ....................... 50 6.55% ----------------------- Total ..................................... $ 150 5.52% ======================= Other securities with no maturity or stated face rate ......................................... $ 6,163 ========
78 B. Investment Securities, Maturities, and Yields The following table presents the maturity of securities held on December 31, 2004 and the weighted average stated coupon rates by range of maturity: Weighted Amortized Average Cost Yield ------------------------ (Dollars in Thousands) U.S. Treasury securities: Within 1 year ..................................... $ 100 1.66% ======================= U.S. Gov't.Sponsored Agency securities: Within 1 year ..................................... $ 13,995 2.91% After 1 but within 5 years ........................ 95,590 3.36% After 5 but within 10 years ....................... 5,064 4.65% ----------------------- Total ..................................... $114,649 3.36% ======================= Mortgage-backed securities: Within 1 year ..................................... $ 33 5.09% After 1 but within 5 years ........................ 1,722 3.88% After 5 but within 10 years ....................... 2,109 4.37% ----------------------- Total ..................................... $ 3,864 4.16% ======================= Municipal securities: Within 1 year ..................................... $ 580 6.84% After 1 but within 5 years ........................ 6,081 5.57% After 5 but within 10 years ....................... 6,857 7.13% After 10 years .................................... 2,405 7.84% ----------------------- Total ..................................... $ 15,923 6.63% ======================= Corporate securities: Within 1 year ..................................... $ 2,001 4.29% After 1 but within 5 years ........................ 4,703 5.66% ----------------------- Total ..................................... $ 6,704 5.25% ======================= Trust preferred securities: After 10 years .................................... $ 1,149 8.81% ======================= Other bonds: After 1 but within 5 years ........................ 50 5.30% After 5 but within 10 years ....................... 50 6.55% ----------------------- Total ..................................... $ 100 5.93% ======================= Other securities with no maturity or stated face rate .................................. $ 5,995 ========
C. Investment Concentrations At December 31, 2005 and 2004, there were no securities in the investment portfolio above (other than U.S. Government, U.S. Government agencies, and corporations) that exceeded 10% of the stockholders' equity. 79 III. Loan/Lease Portfolio A. Types of Loans/Leases The composition of the loan/lease portfolio is presented as follows: December 31, June 30, -------------------------------------------------- ------------------------ 2005 2004 2003 2002 2002 2001 -------------------------------------------------- ------------------------ (Dollars in Thousands) Commercial and commercial real estate loans ................................ $ 593,462 $ 532,517 $ 435,345 $ 350,206 $ 305,019 $ 209,933 Direct financing leases ....................... 34,911 -- -- -- -- -- Real estate loans held for sale - residential mortgage ........................ 2,632 3,499 3,790 23,691 8,498 5,824 Real estate loans - residential mortgage ...... 54,125 52,423 29,604 28,761 34,034 32,191 Real estate loans - construction .............. 2,811 3,608 2,254 2,230 2,861 2,568 Installment and other consumer loans .......... 67,090 55,736 50,984 44,567 40,037 37,362 -------------------------------------------------------------------------- Total loans/leases ............ 755,031 647,783 521,977 449,455 390,449 287,878 Deferred loan/lease origination costs (fees), net ................................. 1,223 568 494 281 145 (13) Less allowance for estimated losses on loans/leases ...................... (8,884) (9,262) (8,643) (6,879) (6,111) (4,248) -------------------------------------------------------------------------- Net loans/leases .............. $ 747,370 $ 639,089 $ 513,828 $ 442,857 $ 384,483 $ 283,617 =========================================================================== Direct financing leases: Net minimum lease payments to be received ... 35,447 -- -- -- -- -- Estimated residual values of leased assets .. 7,633 -- -- -- -- -- Unearned lease/residual income .............. (7,661) -- -- -- -- -- Fair value adjustment at acquisition ........ (508) -- -- -- -- -- -------------------------------------------------------------------------- Total leases .................. $ 34,911 $ -- $ -- $ -- $ -- $ -- =========================================================================== December 31, June 30, -------------------------------------------------- ------------------------ 2005 2004 2003 2002 2002 2001 -------------------------------------------------- ------------------------ (Dollars in Thousands) Commercial and commercial real estate loans ................................ $ 593,462 $ 532,517 $ 435,345 $ 350,206 $ 255,486 $ 186,952 Direct financing leases ....................... 34,911 -- -- -- -- -- Real estate loans held for sale - residential mortgage ........................ 2,632 3,499 3,790 23,691 13,470 1,627 Real estate loans - residential mortgage ...... 54,125 52,423 29,604 28,761 30,457 37,388 Real estate loans - construction .............. 2,811 3,608 2,254 2,230 3,399 2,117 Installment and other consumer loans .......... 67,090 55,736 50,984 44,567 40,103 37,434 -------------------------------------------------------------------------- Total loans/leases ............ 755,031 647,783 521,977 449,455 342,915 265,518 Deferred loan/lease origination costs (fees), net ................................. 1,223 568 494 281 84 100 Less allowance for estimated losses on loans/leases ...................... (8,884) (9,262) (8,643) (6,879) (4,939) (3,972) -------------------------------------------------------------------------- Net loans/leases .............. $ 747,370 $ 639,089 $ 513,828 $ 442,857 $ 338,060 $ 261,646 =========================================================================== Direct financing leases: Net minimum lease payments to be received ... 35,447 -- -- -- -- -- Estimated residual values of leased assets .. 7,633 -- -- -- -- -- Unearned lease/residual income .............. (7,661) -- -- -- -- -- Fair value adjustment at acquisition ........ (508) -- -- -- -- -- -------------------------------------------------------------------------- Total leases .................. $ 34,911 $ -- $ -- $ -- $ -- $ -- ===========================================================================
80 III. Loan/Lease Portfolio B. Maturities and Sensitivities of Loans/Leases to Changes in Interest Rates Maturities After One Year ------------------------------ At December 31, 2005 Due in one Due after one Due after Predetermined Adjustable year or less through 5 years 5 years interest rates interest rates --------------------------------------------------------------------------- (Dollars in Thousands) Commercial and commercial real estate loans ................................... $ 184,853 $ 324,872 $ 83,737 $ 305,137 $ 103,472 Direct financing leases ................... 1,122 22,789 11,000 33,789 -- Real estate loans held for sale - residential mortgage .... -- -- 2,632 2,632 -- Real estate loans - residential mortgage .................. 909 531 52,685 6,855 46,361 Real estate loans - construction .......... 2,811 -- -- -- -- Installment and other consumer loans ...... 21,997 43,643 1,450 30,245 14,848 ------------------------------------------------------------------------- Total loans/leases ........ $ 211,692 $ 391,835 $ 151,504 $ 378,658 $ 164,681 ======================================================================== Maturities After One Year ------------------------------ At December 31, 2004 Due in one Due after one Due after Predetermined Adjustable year or less through 5 years 5 years interest rates interest rates --------------------------------------------------------------------------- (Dollars in Thousands) Commercial and commercial real estate loans ................................... $ 167,946 $ 309,430 $ 55,141 $ 250,590 $ 113,981 Direct financing leases ................... -- -- -- -- -- Real estate loans held for sale - residential mortgage .................... -- -- 3,499 3,471 28 Real estate loans - residential mortgage ................................ 1,042 231 51,150 4,568 46,813 Real estate loans - construction .......... 3,527 81 -- 81 -- Installment and other consumer loans ...... 13,760 40,334 1,642 28,638 13,338 ------------------------------------------------------------------------- Total loans/leases ........ $ 186,275 $ 350,076 $ 111,432 $ 287,348 $ 174,160 ========================================================================
81 III. Loan/Lease Portfolio C. Risk Elements 1. Nonaccrual, Past Due and Restructured Loans/Leases The following tables represent Nonaccrual, Past Due, Renegotiated Loans/Leases, and other Real Estate Owned: December 31, June 30, --------------------------------------------------------- 2005 2004 2003 2002 2002 2001 --------------------------------------------------------- (Dollars in Thousands) Loans/leases accounted for on nonaccrual basis ............ $ 2,579 $ 7,608 $ 4,204 $ 4,608 $ 1,560 $ 1,232 Accruing loans/leases past due 90 days or more ............ 604 1,133 756 431 708 495 Other real estate owned ................................... 545 1,925 -- -- -- 47 Troubled debt restructurings .............................. -- -- -- -- -- -- --------------------------------------------------------- Totals .................................... $ 3,728 $10,666 $ 4,960 $ 5,039 $ 2,268 $ 1,774 ========================================================= December 31, --------------------------------------------------------- 2005 2004 2003 2002 2001 2000 --------------------------------------------------------- (Dollars in Thousands) Loans/leases accounted for on nonaccrual basis ............ $ 2,579 $ 7,608 $ 4,204 $ 4,608 $ 1,846 $ 655 Accruing loans/leases past due 90 days or more ............ 604 1,133 756 431 1,765 1,197 Other real estate owned ................................... 545 1,925 -- -- 47 -- Troubled debt restructurings .............................. -- -- -- -- -- -- --------------------------------------------------------- Totals .................................... $ 3,728 $10,666 $ 4,960 $ 5,039 $ 3,658 $ 1,852 =========================================================
The policy of the company is to place a loan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected, or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in restoration to current status. 2. Potential Problem Loans/Leases. To management's best knowledge, there are no such significant loans/leases that have not been disclosed in the above table. 3. Foreign Outstandings. None. 4. Loan/Lease Concentrations. At December 31, 2005, there were no concentrations of loans/leases exceeding 10% of the total loans/leases which are not otherwise disclosed in Item III. A. D. Other Interest-Bearing Assets There are no interest-bearing assets required to be disclosed here. 82 IV. Summary of Loan/Lease Loss Experience A. Analysis of the Allowance for Estimated Losses on Loans/Leases The following tables summarize activity in the allowance for estimated losses on loans/leases of the Company: Six months Years ended ended Years ended December 31, December 31, June 30, -------------------------------------------------------------------------------- 2005 2004 2003 2002 2002 2001 -------------------------------------------------------------------------------- (Dollars in Thousands) Average amount of loans/leases outstanding, before allowance for estimated losses on loans/leases ................................ $ 682,858 $ 587,450 $ 480,314 $ 419,104 $ 334,205 $ 265,350 Allowance for estimated losses on loans/ leases: Balance, beginning of fiscal period .............. 9,262 8,643 6,879 6,111 4,248 3,617 Charge-offs: Commercial ................................... (1,530) (624) (1,777) (1,349) (437) (87) Real Estate .................................. (160) (49) -- -- -- -- Installment and other consumer ............... (356) (292) (298) (105) (204) (213) -------------------------------------------------------------------------------- Subtotal charge-offs .................. (2,046) (965) (2,075) (1,454) (641) (300) -------------------------------------------------------------------------------- Recoveries: Commercial ................................... 245 137 192 -- 101 2 Real Estate .................................. 25 -- -- -- -- -- Installment and other consumer ............... 87 75 242 38 138 39 -------------------------------------------------------------------------------- Subtotal recoveries ................... 357 212 434 38 239 41 -------------------------------------------------------------------------------- Net charge-offs ....................... (1,689) (753) (1,641) (1,416) (402) (259) Provision charged to expense ..................... 877 1,372 3,405 2,184 2,265 890 Acquisition of M2 Lease Funds, LLC ............... 434 -- -- -- -- -- -------------------------------------------------------------------------------- Balance, end of fiscal year ...................... $ 8,884 $ 9,262 $ 8,643 $ 6,879 $ 6,111 $ 4,248 ================================================================================ Ratio of net charge-offs to average loans/ leases outstanding ............................. 0.25% 0.13% 0.34% 0.34% 0.12% 0.10% Years ended December 31, -------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 2000 -------------------------------------------------------------------------------- (Dollars in Thousands) Average amount of loans/leases outstanding, before allowance for estimated losses on loans/leases ................................ $ 682,858 $ 587,450 $ 480,314 $ 387,936 $ 294,708 $ 237,947 Allowance for estimated losses on loans/ leases: Balance, beginning of fiscal period .............. 9,262 8,643 6,879 4,939 3,972 3,341 Charge-offs: Commercial ................................... (1,530) (624) (1,777) (1,455) (332) (87) Real Estate .................................. (160) (49) -- -- -- -- Installment and other consumer ............... (356) (292) (298) (214) (205) (355) -------------------------------------------------------------------------------- Subtotal charge-offs .................. (2,046) (965) (2,075) (1,669) (537) (442) -------------------------------------------------------------------------------- Recoveries: Commercial ................................... 245 137 192 73 29 2 Real Estate .................................. 25 -- -- -- -- -- Installment and other consumer ............... 87 75 242 126 66 71 -------------------------------------------------------------------------------- Subtotal recoveries ................... 357 212 434 199 95 73 -------------------------------------------------------------------------------- Net charge-offs ....................... (1,689) (753) (1,641) (1,470) (442) (369) Provision charged to expense ..................... 877 1,372 3,405 3,410 1,409 1,000 Acquisition of M2 Lease Funds, LLC ............... 434 -- -- -- -- -- -------------------------------------------------------------------------------- Balance, end of fiscal year ...................... $ 8,884 $ 9,262 $ 8,643 $ 6,879 $ 4,939 $ 3,972 ================================================================================ Ratio of net charge-offs to average loans/leases outstanding ....................... 0.25% 0.13% 0.34% 0.38% 0.15% 0.16%
83 B. Allocation of the Allowance for Estimated Losses on Loans/Leases The following tables present the allowance for the estimated losses on loans/leases by type of loans/leases and the percentage of loans/leases in each category to total loans/leases: December 31, 2005 December 31, 2004 December 31, 2003 -------------------------------------------------------------------- % of % of % of Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans -------------------------------------------------------------------- (Dollars in Thousands) Commercial and commercial real estate loans ............... $7,331 78.60% $8,423 82.21% $7,676 83.40% Direct financing leases ................................... 546 4.62% -- --% -- --% Real estate loans held for sale - residential mortgage ................................................ 16 0.35% 17 0.54% 4 0.73% Real estate loans - residential mortgage .................. 250 7.17% 205 8.09% 272 5.67% Real estate loans - construction .......................... 12 0.37% 21 0.56% 11 0.43% Installment and other consumer loans ...................... 725 8.89% 591 8.60% 678 9.77% Unallocated ............................................... 4 NA 5 NA 2 NA -------------------------------------------------------------------- Total ........................................ $8,884 100.00% $9,262 100.00% $8,643 100.00% ==================================================================== December 31, 2002 June 30, 2002 June 30, 2001 -------------------------------------------------------------------- % of % of % of Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans -------------------------------------------------------------------- (Dollars in Thousands) Commercial and commercial real estate loans ............... $6,176 77.91% $5,240 78.12% $3,231 72.92% Direct financing leases ................................... -- --% -- --% -- --% Real estate loans held for sale - residential mortgage ................................................ 24 5.27% 1 2.18% -- 2.02% Real estate loans - residential mortgage .................. 159 6.40% 302 8.72% 182 11.18% Real estate loans - construction .......................... 11 0.50% 14 0.73% -- 0.89% Installment and other consumer loans ...................... 507 9.92% 554 10.25% 835 12.99% Unallocated ............................................... 2 NA -- NA -- NA -------------------------------------------------------------------- Total ........................................ $6,879 100.00% $6,111 100.00% $4,248 100.00% ==================================================================== December 31, 2005 December 31, 2004 December 31, 2003 --------------------------------------------------------------------- % of Loans/ % of Loans % of Loans Leases to Total Leases to Total Leases to Total Amount Loans/Leases Amount Loans/Leases Amount Loans/Leases --------------------------------------------------------------------- Commercial and commercial real estate loans ............... $7,331 78.60% $8,423 82.21% $7,676 83.40% Direct financing leases ................................... 546 4.62% -- --% -- --% Real estate loans held for sale - residential mortgage ................................................ 16 0.35% 17 0.54% 4 0.73% Real estate loans - residential mortgage .................. 250 7.17% 205 8.09% 272 5.67% Real estate loans - construction .......................... 12 0.37% 21 0.56% 11 0.43% Installment and other consumer loans ...................... 725 8.89% 591 8.60% 678 9.77% Unallocated ............................................... 4 NA 5 NA 2 NA ------------------------------------------------------------------- Total ........................................ $8,884 100.00% $9,262 100.00% $8,643 100.00% ==================================================================== December 31, 2002 December 31, 2001 December 31, 2000 -------------------------------------------------------------------- % of % of % of Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans ------------------------------------------------------------------- (Dollars in Thousands) Commercial and commercial real estate loans ............... $6,176 77.91% $4,305 74.50% $3,339 70.41% Direct financing leases ................................... -- --% -- --% -- 0.00% Real estate loans held for sale - residential mortgage ................................................ 24 5.27% 14 3.93% 2 0.61% Real estate loans - residential mortgage .................. 159 6.40% 140 8.88% 183 14.08% Real estate loans - construction .......................... 11 0.50% 17 0.99% 11 0.80% Installment and other consumer loans ...................... 507 9.92% 461 11.70% 437 14.10% Unallocated ............................................... 2 NA 2 NA -- NA -------------------------------------------------------------------- Total ........................................ $6,879 100.00% $4,939 100.00% $3,972 100.00% ====================================================================
84 V. Deposits. The average amount of and average rate paid for the categories of deposits for the years ended December 31, 2005, 2004, and 2003 are discussed in the consolidated average balance sheets and can be found on pages 2 and 3 of Appendix B. Included in interest bearing deposits at December 31, 2005, 2004 and 2003 were certificates of deposit totaling $170,994,735 $165,685,917, and $73,799,534 respectively, that were $100,000 or greater. Maturities of these certificates were as follows: December 31, --------------------------------------- 2005 2004 2003 --------------------------------------- (Dollars in Thousands) One to three months $ 52,276 $ 39,352 $ 28,120 Three to six months 55,123 60,456 21,176 Six to twelve months 35,580 40,699 17,600 Over twelve months 28,016 25,179 6,904 --------------------------------------- Total certificates of deposit greater than $100,000 $ 170,995 $ 165,686 $ 73,800 ======================================= VI. Return on Equity and Assets. The following tables present the return on assets and equity and the equity to assets ratio of the Company: Years ended December 31, --------------------------------------- 2005 2004 2003 --------------------------------------- (Dollars in Thousands) Average total assets $ 934,906 $ 799,527 $ 660,052 Average equity 52,650 43,890 39,213 Net income 4,810 5,217 5,461 Return on average assets 0.51% 0.65% 0.83% Return on average equity 9.14% 11.89% 13.93% Dividend payout ratio 7.55% 6.50% 5.34% Average equity to average assets ratio 5.63% 5.49% 5.94% VII. Short Term Borrowings. The information requested is disclosed in Note 8 to the December 31, 2005 Consolidated Financial Statements. 85 EX-10 2 bear_qcrindenture.txt Exhibit 10.27 QCR Holdings, Inc. as Issuer INDENTURE Dated as of February 24, 2006 WELLS FARGO BANK, NATIONAL ASSOCIATION As Trustee JUNIOR SUBORDINATED DEBT SECURITIES Due April 7, 2036 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS SECTION 1.01. Definitions.....................................................1 ARTICLE II DEBT SECURITIES SECTION 2.01. Authentication and Dating.......................................8 SECTION 2.02. Form of Trustee's Certificate of Authentication.................9 SECTION 2.03. Form and Denomination of Debt Securities........................9 SECTION 2.04. Execution of Debt Securities....................................9 SECTION 2.05. Exchange and Registration of Transfer of Debt Securities.......10 SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Debt Securities...........12 SECTION 2.07. Temporary Debt Securities......................................13 SECTION 2.08. Payment of Interest............................................14 SECTION 2.09. Cancellation of Debt Securities Paid, etc......................15 SECTION 2.10. Computation of Interest........................................15 SECTION 2.11. Extension of Interest Payment Period...........................17 SECTION 2.12. CUSIP Numbers..................................................18 SECTION 2.13. Global Debentures..............................................18 ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01. Payment of Principal, Premium and Interest; Agreed Treatment of the Debt Securities...............................20 SECTION 3.02. Offices for Notices and Payments, etc..........................21 SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office.............21 SECTION 3.04. Provision as to Paying Agent...................................22 SECTION 3.05. Certificate to Trustee.........................................23 SECTION 3.06. Additional Interest............................................23 SECTION 3.07. Compliance with Consolidation Provisions.......................23 SECTION 3.08. Limitation on Dividends........................................23 SECTION 3.09. Covenants as to the Trust......................................24 ARTICLE IV LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01. Securityholders' Lists.........................................25 SECTION 4.02. Preservation and Disclosure of Lists...........................25 ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT SECTION 5.01. Events of Default..............................................26 SECTION 5.02. Payment of Debt Securities on Default; Suit Therefor...........28 SECTION 5.03. Application of Moneys Collected by Trustee.....................30 SECTION 5.04. Proceedings by Securityholders.................................30 SECTION 5.05. Proceedings by Trustee.........................................31 SECTION 5.06. Remedies Cumulative and Continuing.............................31 SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders....................................31 SECTION 5.08. Notice of Defaults.............................................32 SECTION 5.09. Undertaking to Pay Costs.......................................32 ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of Trustee.........................33 SECTION 6.02. Reliance on Documents, Opinions, etc...........................34 SECTION 6.03. No Responsibility for Recitals, etc............................35 SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities....................36 SECTION 6.05. Moneys to be Held in Trust.....................................36 SECTION 6.06. Compensation and Expenses of Trustee...........................36 SECTION 6.07. Officers' Certificate as Evidence..............................37 SECTION 6.08. Eligibility of Trustee.........................................37 SECTION 6.09. Resignation or Removal of Trustee, Calculation Agent, Paying Agent or Debt Security Registrar........................38 SECTION 6.10. Acceptance by Successor........................................39 SECTION 6.11. Succession by Merger, etc......................................40 SECTION 6.12. Authenticating Agents..........................................40 ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders......................................41 SECTION 7.02. Proof of Execution by Securityholders..........................42 SECTION 7.03. Who Are Deemed Absolute Owners.................................42 SECTION 7.04. Debt Securities Owned by Company Deemed Not Outstanding........43 SECTION 7.05. Revocation of Consents; Future Securityholders Bound...........43 ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01. Purposes of Meetings...........................................44 SECTION 8.02. Call of Meetings by Trustee....................................44 SECTION 8.03. Call of Meetings by Company or Securityholders.................44 SECTION 8.04. Qualifications for Voting......................................45 SECTION 8.05. Regulations....................................................45 SECTION 8.06. Voting.........................................................45 SECTION 8.07. Quorum; Actions................................................46 SECTION 8.08. Written Consent Without a Meeting..............................47 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures without Consent of Securityholders.....47 SECTION 9.02. Supplemental Indentures with Consent of Securityholders........48 SECTION 9.03. Effect of Supplemental Indentures..............................49 SECTION 9.04. Notation on Debt Securities....................................50 SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be furnished to Trustee...........................................50 ARTICLE X REDEMPTION OF SECURITIES SECTION 10.01. Optional Redemption............................................50 SECTION 10.02. Special Event Redemption.......................................50 SECTION 10.03. Notice of Redemption; Selection of Debt Securities.............51 SECTION 10.04. Payment of Debt Securities Called for Redemption...............51 ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 11.01. Company May Consolidate, etc., on Certain Terms................52 SECTION 11.02. Successor Entity to be Substituted.............................53 SECTION 11.03. Opinion of Counsel to be Given to Trustee......................53 ARTICLE XII SATISFACTION AND DISCHARGE OF INDENTURE SECTION 12.01. Discharge of Indenture.........................................53 SECTION 12.02. Deposited Moneys to be Held in Trust by Trustee................54 SECTION 12.03. Paying Agent to Repay Moneys Held..............................54 SECTION 12.04. Return of Unclaimed Moneys.....................................54 ARTICLE XIII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 13.01. Indenture and Debt Securities Solely Corporate Obligations.....55 ARTICLE XIV MISCELLANEOUS PROVISIONS SECTION 14.01. Successors.....................................................55 SECTION 14.02. Official Acts by Successor Entity..............................55 SECTION 14.03. Surrender of Company Powers....................................55 SECTION 14.04. Addresses for Notices, etc.....................................56 SECTION 14.05. Governing Law..................................................56 SECTION 14.06. Evidence of Compliance with Conditions Precedent...............56 SECTION 14.07. Non-Business Days..............................................57 SECTION 14.08. Table of Contents, Headings, etc...............................57 SECTION 14.09. Execution in Counterparts......................................57 SECTION 14.10. Severability...................................................57 SECTION 14.11. Assignment.....................................................57 SECTION 14.12. Acknowledgment of Rights.......................................57 ARTICLE XV SUBORDINATION OF DEBT SECURITIES SECTION 15.01. Agreement to Subordinate.......................................58 SECTION 15.02. Default on Senior Indebtedness.................................58 SECTION 15.03. Liquidation; Dissolution; Bankruptcy...........................59 SECTION 15.04. Subrogation....................................................60 SECTION 15.05. Trustee to Effectuate Subordination............................61 SECTION 15.06. Notice by the Company..........................................61 SECTION 15.07. Rights of the Trustee, Holders of Senior Indebtedness..........62 SECTION 15.08. Subordination May Not Be Impaired..............................62 EXHIBITS EXHIBIT A FORM OF DEBT SECURITY THIS INDENTURE, dated as of February 24, 2006, between QCR Holdings, Inc., a bank holding company incorporated in Delaware (hereinafter sometimes called the "Company"), and Wells Fargo Bank, National Association, a national banking association with its principal place of business in the State of Delaware, as trustee (hereinafter sometimes called the "Trustee"). W I T N E S S E T H: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Junior Subordinated Debt Securities due April 7, 2036 (the "Debt Securities") under this Indenture and to provide, among other things, for the execution and authentication, delivery and administration thereof, the Company has duly authorized the execution of this Indenture. NOW, THEREFORE, in consideration of the premises, and the purchase of the Debt Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debt Securities as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted in the United States at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Acceleration Event" shall have the meaning set forth in Section 5.01. "Additional Interest" shall have the meaning set forth in Section 3.06. "Additional Provisions" shall have the meaning set forth in Section 15.01. "Applicable Depository Procedures" means, with respect to any transfer or transaction involving a Global Debenture or beneficial interest therein, the rules and procedures of the Depositary for such Global Debenture, in each case to the extent applicable to such transaction and as in effect from time to time. "Authenticating Agent" means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.12. "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors or the executive committee or any other duly authorized designated officers of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in Wilmington, Delaware or New York City are permitted or required by any applicable law or executive order to close. "Calculation Agent" means the Person identified as "Trustee" in the first paragraph hereof with respect to the Debt Securities and the Institutional Trustee with respect to the Trust Securities. "Capital Securities" means undivided beneficial interests in the assets of the Trust which are designated as "Capital Securities" and rank pari passu with Common Securities issued by the Trust; provided, however, that if an Event of Default has occurred and is continuing, the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Capital Securities Guarantee" means the guarantee agreement that the Company will enter into with Wells Fargo Bank, National Association or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust. "Capital Treatment Event" means the receipt by the Company and the Trust of an Opinion of Counsel experienced in such matters to the effect that, as a result of any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debt Securities, there is more than an insubstantial risk that, within 90 days of the receipt of such opinion, the aggregate Liquidation Amount of the Capital Securities will not be eligible to be treated by the Company as "Tier 1 Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve or OTS; as applicable (or any successor regulatory authority with jurisdiction over bank, savings & loan or financial holding companies), as then in effect and applicable to the Company; provided, however, that the inability of the Company to treat all or any portion of the Liquidation Amount of the Capital Securities as Tier 1 Capital shall not constitute the basis for a Capital Treatment Event, if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve may now or hereafter accord Tier 1 Capital treatment in excess of the amount which may now or hereafter qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines; provided further, however, that the distribution of the Debt Securities in connection with the liquidation of the Trust by the Company shall not in and of itself constitute a Capital Treatment Event unless such liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Certificate" means a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company. "Common Securities" means undivided beneficial interests in the assets of the Trust which are designated as "Common Securities" and rank pari passu with Capital Securities issued by the Trust; provided, however, that if an Event of Default has occurred and is continuing, the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Company" means QCR Holdings, Inc., a bank holding company incorporated in Delaware, and, subject to the provisions of Article XI, shall include its successors and assigns. "Debt Security" or "Debt Securities" has the meaning stated in the first recital of this Indenture. "Debt Security Register" has the meaning specified in Section 2.05. "Declaration" means the Amended and Restated Declaration of Trust of the Trust dated as of February 24, 2006, as amended or supplemented from time to time. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Interest" has the meaning set forth in Section 2.08. "Deferred Interest" has the meaning set forth in Section 2.11. "Depositary" means an organization registered as a clearing agency under the Securities Exchange Act of 1934 that is designated as Depositary by the Company or any successor thereto. DTC will be the initial Depositary. "Depositary Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Depositary effects book-entry transfers and pledges of securities deposited with the Depositary. "DTC" means The Depository Trust Company, a New York corporation. "Event of Default" means any event specified in Section 5.01, which has continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Extension Period" has the meaning set forth in Section 2.11. "Federal Reserve" means the Board of Governors of the Federal Reserve System. "Fixed Rate" means a per annum rate of interest, equal to 6.62% commencing February 24, 2006. "Global Debenture" means a security that evidences all or part of the Debt Securities, the ownership and transfers of which shall be made through book entries by a Depositary. "Indenture" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both. "Initial Purchaser" means the initial purchaser of the Capital Securities. "Institutional Trustee" has the meaning set forth in the Declaration. "Interest Payment Date" means January 7, April 7, July 7 and October 7 of each year, commencing on April 7, 2006, during the term of this Indenture. "Interest Payment Period" means the period from and including an Interest Payment Date, or in the case of the first Interest Payment Period, the original date of issuance of the Debt Securities, to, but excluding, the next succeeding Interest Payment Date or, in the case of the last Interest Payment Period, the Redemption Date, Special Redemption Date or Maturity Date, as the case may be. "Interest Rate" is defined to mean the Fixed Rate and Variable Rate, as applicable. "Investment Company Event" means the receipt by the Company and the Trust of an Opinion of Counsel experienced in such matters to the effect that, as a result of a change in law or regulation or written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion will be, considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the original issuance of the Debt Securities. "LIBOR" means the London Interbank Offered Rate for U.S. Dollar deposits in Europe as determined by the Calculation Agent according to Section 2.10(b). "LIBOR Banking Day" has the meaning set forth in Section 2.10(b)(1). "LIBOR Business Day" has the meaning set forth in Section 2.10(b)(1). "LIBOR Determination Date" has the meaning set forth in Section 2.10(b). "Liquidation Amount" means the liquidation amount of $1,000 per Trust Security. "Maturity Date" means April 7, 2036. "Notice" has the meaning set forth in Section 2.11. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the Vice Chairman, the President or any Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 14.06 if and to the extent required by the provisions of such Section. "Opinion of Counsel" means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.06 if and to the extent required by the provisions of such Section. "OTS" means the Office of Thrift Supervision and any successor federal agency that is primarily responsible for regulating the activities of savings and loan holding companies. "Outstanding" means when used with reference to Debt Securities, subject to the provisions of Section 7.04, means, as of any particular time, all Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except (a) Debt Securities theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Debt Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any Paying Agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent); provided, that, if such Debt Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Articles X and XIV or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Debt Securities paid pursuant to Section 2.06 or in lieu of or in substitution for which other Debt Securities shall have been authenticated and delivered pursuant to the terms of Section 2.06 unless proof satisfactory to the Company and the Trustee is presented that any such Debt Securities are held by bona fide holders in due course. "Paying Agent" has the meaning set forth in Section 3.04(e). "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Debt Security means every previous Debt Security evidencing all or a portion of the same debt as that evidenced by such particular Debt Security; and, for the purposes of this definition, any Debt Security authenticated and delivered under Section 2.06 in lieu of a lost, destroyed or stolen Debt Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Debt Security. "Principal Office of the Trustee" means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at all times shall be located within the United States and at the time of the execution of this Indenture shall be 919 Market Street, Suite 700, Wilmington, DE 19801. "Redemption Date" has the meaning set forth in Section 10.01. "Redemption Price" means 100% of the principal amount of the Debt Securities being redeemed plus accrued and unpaid interest on such Debt Securities to the Redemption Date or, in the case of a redemption due to the occurrence of a Special Event to the Special Redemption Date if such Special Redemption Date is on or after April 7, 2011. "Responsible Officer" means, with respect to the Trustee, any officer within the Principal Office of the Trustee with direct responsibility for the administration of the Indenture, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Securityholder," "holder of Debt Securities" or other similar terms, means any Person in whose name at the time a particular Debt Security is registered on the Debt Security Register. "Senior Indebtedness" means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker's acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), whether incurred on or prior to the date of this Indenture or thereafter incurred, unless (1) with the prior approval of the Federal Reserve if not otherwise generally approved, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior or are pari passu in right of payment to the Debt Securities; or (2) the Federal Reserve shall hereafter classify or otherwise recognize any such obligation as pari passu or subordinate to the Debt Securities. "Special Event" means any of a Tax Event, an Investment Company Event or a Capital Treatment Event. "Special Redemption Date" has the meaning set forth in Section 10.02. "Special Redemption Price" means (1) if the Special Redemption Date is before April 7, 2011, One Hundred Five Percent (105%) of the principal amount of the Debt Securities to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption or (2) if the Special Redemption Date is on or after April 7, 2011, the Redemption Price for such Special Redemption Date. "Subsidiary" means, with respect to any Person, (i) any corporation, at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Tax Event" means the receipt by the Company and the Trust of an Opinion of Counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, regulatory procedure, notice or announcement (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debt Securities, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debt Securities; (ii) interest payable by the Company on the Debt Securities is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to or otherwise required to pay, or required to withhold from distributions to holders of Trust Securities, more than a de minimis amount of other taxes (including withholding taxes), duties, assessments or other governmental charges. "Trust" means QCR Holdings Statutory Trust V, the Delaware statutory trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debt Securities under this Indenture, of which the Company is the sponsor. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time-to-time, or any successor legislation. "Trust Securities" means Common Securities and Capital Securities of QCR Holdings Statutory Trust V. "Trustee" means the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. "United States" means the United States of America and the District of Columbia. "U.S. Person" has the meaning given to United States Person as set forth in Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended. "Variable Rate" means a per annum rate of interest, equal to LIBOR plus 1.55%, as determined on the LIBOR Determination Date preceding each Interest Payment Date, reset quarterly, commencing upon expiration of the Fixed Rate Period. ARTICLE II DEBT SECURITIES SECTION 2.01. Authentication and Dating. Upon the execution and delivery of this Indenture, or from time to time thereafter, Debt Securities in an aggregate principal amount not in excess of $10,310,000 may be executed and delivered by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debt Securities to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Vice Chairman, President or Chief Financial Officer or one of its Vice Presidents, without any further action by the Company hereunder. In authenticating such Debt Securities, and accepting the additional responsibilities under this Indenture in relation to such Debt Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary or other officers with appropriate delegated authority of the Company as the case may be. The Trustee shall have the right to decline to authenticate and deliver any Debt Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing Securityholders. The definitive Debt Securities shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debt Securities, as evidenced by their execution of such Debt Securities. SECTION 2.02. Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication on all Debt Securities shall be in substantially the following form: This is one of the Debt Securities referred to in the within-mentioned Indenture. WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as trustee By ------------------------------ Authorized Officer SECTION 2.03. Form and Denomination of Debt Securities. ---------------------------------------- The Debt Securities shall be substantially in the form of Exhibit A hereto. The Debt Securities shall be in registered, certificated form without coupons and in minimum denominations of $100,000 and any multiple of $1,000 in excess thereof. The Debt Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. SECTION 2.04. Execution of Debt Securities. The Debt Securities shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Vice Chairman, President or Chief Financial Officer or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents, by facsimile or otherwise, and which need not be attested. Only such Debt Securities as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized officer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debt Security executed by the Company shall be conclusive evidence that the Debt Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Debt Securities shall cease to be such officer before the Debt Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debt Securities nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debt Securities had not ceased to be such officer of the Company; and any Debt Security may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debt Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. Every Debt Security shall be dated the date of its authentication. SECTION 2.05. Exchange and Registration of Transfer of Debt Securities. The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.02, a register (the "Debt Security Register") for the Debt Securities issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debt Securities as provided in this Article II. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. Debt Securities to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debt Security or Debt Securities which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Debt Security at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debt Security for a like aggregate principal amount. Registration or registration of transfer of any Debt Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Debt Security, shall be deemed to complete the registration or registration of transfer of such Debt Security. All Debt Securities presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by, a written instrument or instruments of transfer in form satisfactory to the Company and either the Trustee or the Authenticating Agent duly executed by, the holder or such holder's attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debt Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of any Debt Security for a period of 15 days immediately preceding the date of selection of Debt Securities for redemption. Notwithstanding the foregoing, Debt Securities may not be transferred except in compliance with the restricted securities legend set forth below, unless otherwise determined by the Company in accordance with applicable law, which legend shall be placed on each Debt Security: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES, REPRESENTS AND WARRANTS THAT IT WILL NOT ENGAGE IN HEDGING TRANSACTIONS INVOLVING THIS SECURITY UNLESS SUCH TRANSACTIONS ARE IN COMPLIANCE WITH THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23,95-60,91-38,90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE COMPANY AND TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"). THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF DEPOSITORS AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE COMPANY, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE COMPANY OR ANY OF ITS SUBSIDIARIES AND IS NOT SECURED. SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Debt Securities. In case any Debt Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debt Security bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debt Security, or in lieu of and in substitution for the Debt Security so destroyed, lost or stolen. In every case the applicant for a substituted Debt Security shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debt Security and of the ownership thereof. The Trustee may authenticate any such substituted Debt Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debt Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debt Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debt Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debt Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof. Every substituted Debt Security issued pursuant to the provisions of this Section 2.06 by virtue of the fact that any such Debt Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debt Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debt Securities duly issued hereunder. All Debt Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debt Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.07. Temporary Debt Securities. Pending the preparation of definitive Debt Securities, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debt Securities that are typed, printed or lithographed. Temporary Debt Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Debt Securities but with such omissions, insertions and variations as may be appropriate for temporary Debt Securities, all as may be determined by the Company. Every such temporary Debt Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debt Securities. Without unreasonable delay, the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debt Securities and thereupon any or all temporary Debt Securities may be surrendered in exchange therefor, at the Principal Office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.02, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debt Securities a like aggregate principal amount of such definitive Debt Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debt Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Debt Securities authenticated and delivered hereunder. SECTION 2.08. Payment of Interest. During the Fixed Rate Period, each Debt Security will bear interest at the Fixed Rate. Thereafter each Debt Security will bear interest at the then applicable Variable Rate from and including each Interest Payment Date, but excluding, the next succeeding Interest Payment Date or, in the case of the last Interest Payment Period, the Redemption Date, Special Redemption Date or Maturity Date, as applicable, on the principal thereof, on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on Deferred Interest and on any overdue installment of interest (including Defaulted Interest), payable (subject to the provisions of Article XV) on each Interest Payment Date commencing on April 7, 2006. Interest and any Deferred Interest on any Debt Security that is payable, and is punctually paid or duly provided for by the Company, on any Interest Payment Date shall be paid to the Person in whose name said Debt Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, except that interest and any Deferred Interest payable on the Maturity Date, the Redemption Date, or the Special Redemption Date, as the case may be, shall be paid to the Person to whom principal is paid. In (i) case the Maturity Date of any Debt Security or (ii) the event that any Debt Security or portion thereof is called for redemption and the redemption date is subsequent to a regular record date with respect to any Interest Payment Date and either on or prior to such Interest Payment Date, interest on such Debt Security will be paid upon presentation and surrender of such Debt Security. Any interest on any Debt Security, other than Deferred Interest, that is payable, but is not punctually paid or duly provided for by the Company, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder, and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Debt Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements reasonably satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than fifteen nor less than ten days prior to the date of the proposed payment and not less than ten days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Debt Security Register, not less than ten days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered on such special record date and thereafter the Company shall have no further payment obligation in respect of the Defaulted Interest. Any interest scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debt Securities. The term "regular record date" as used in this Section shall mean the fifteenth day prior to the applicable Interest Payment Date, whether or not such date is a Business Day. Subject to the foregoing provisions of this Section, each Debt Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debt Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debt Security. SECTION 2.09. Cancellation of Debt Securities Paid, etc. All Debt Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any Paying Agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debt Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debt Securities canceled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy all canceled Debt Securities unless the Company otherwise directs the Trustee in writing, in which case the Trustee shall dispose of such Debt Securities as directed by the Company. If the Company shall acquire any of the Debt Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debt Securities unless and until the same are surrendered to the Trustee for cancellation. SECTION 2.10. Computation of Interest. (a) From February 24, 2006 until April 7, 2011 (the "Fixed Rate Period"), the interest shall be computed on the basis of a 360-day year of twelve 30-day months and the amount payable for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. Upon expiration of the Fixed Rate Period, the amount of interest payable for any Interest Payment Period will be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period; provided, however, that upon the occurrence of a Special Event Redemption pursuant to Section 10.02 the amounts payable pursuant to this Indenture shall be calculated as set forth in the definition of Special Redemption Price. (b) Upon expiration of the Fixed Rate Period, LIBOR, for any Interest Payment Period, shall be determined by the Calculation Agent in accordance with the following provisions: (1) On the second LIBOR Business Day (provided, that on such day commercial banks are open for business (including dealings in foreign currency deposits) in London (a "LIBOR Banking Day"), and otherwise the next preceding LIBOR Business Day that is also a LIBOR Banking Day) prior to the January 15, April 15, July 15 and October 15 immediately succeeding the commencement of such Interest Payment Period (or, with respect to the first Interest Payment Period subsequent to the Fixed Rate Period, on April 7, 2011) (each such day, a "LIBOR Determination Date" for such Interest Payment Period), the Calculation Agent shall obtain the rate for three-month U.S. Dollar deposits in Europe, which appears on Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 2000 Interest Rate and Currency Exchange Definitions) or such other page as may replace such Telerate Page 3750 on the Moneyline Telerate, Inc. service (or such other service or services as may be nominated by the British Banker's Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits), as of 11:00 a.m. (London time) on such LIBOR Determination Date, and the rate so obtained shall be LIBOR for such Interest Payment Period. "LIBOR Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in The City of New York or Wilmington, Delaware are authorized or obligated by law or executive order to be closed. If such rate is superseded on Telerate Page 3750 by a corrected rate before 12:00 noon (London time) on the same LIBOR Determination Date, the corrected rate as so substituted will be LIBOR for that Interest Payment Period. (2) If, on any LIBOR Determination Date, such rate does not appear on Telerate Page 3750 or such other page as may replace such Telerate Page 3750 on the Moneyline Telerate, Inc. service (or such other service or services as may be nominated by the British Banker's Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits), the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London Interbank market for three-month U.S. Dollar deposits in Europe (in an amount determined by the Calculation Agent) by reference to requests for quotations as of approximately 11:00 a.m. (London time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal the arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such a quotation, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that at least two leading banks in the City of New York (as selected by the Calculation Agent) are quoting on the relevant LIBOR Determination Date for three-month U.S. Dollar deposits in Europe at approximately 11:00 a.m. (London time) (in an amount determined by the Calculation Agent). As used herein, "Reference Banks" means four major banks in the London Interbank market selected by the Calculation Agent. (3) If the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR for the applicable Interest Payment Period shall be LIBOR in effect for the immediately preceding Interest Payment Period. (c) All percentages resulting from any calculations on the Debt Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (d) On each LIBOR Determination Date, the Calculation Agent shall notify, in writing, the Company and the Paying Agent of the applicable Interest Rate in effect for the related Interest Payment Period. The Calculation Agent shall, upon the request of the holder of any Debt Securities, provide the Interest Rate then in effect. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Company and the holders of the Debt Securities. The Paying Agent shall be entitled to rely on information received from the Calculation Agent or the Company as to the Interest Rate. The Company shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Debt Securities that is included in any payment and reportable for taxable income calculation purposes. SECTION 2.11. Extension of Interest Payment Period. So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time and without causing an Event of Default, to defer payments of interest on the Debt Securities by extending the interest distribution period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to twenty consecutive quarterly periods (each such extended interest distribution period, an "Extension Period"), during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). No Extension Period may end on a date other than an Interest Payment Date or extend beyond the Maturity Date, any Redemption Date or any Special Redemption Date, as the case may be. During any Extension Period, interest will continue to accrue on the Debt Securities, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Interest Rate applicable during such Extension Period, compounded quarterly from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by law. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof. At the end of any such Extension Period the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that no Extension Period may extend beyond the Maturity Date; and provided further, however, that during any such Extension Period, the Company shall be subject to the restrictions set forth in Section 3.08 of this Indenture. Prior to the termination of any Extension Period, the Company may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed twenty consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. The Company must give the Trustee notice of its election to begin such Extension Period ("Notice") at least five Business Days prior to the next succeeding Interest Payment Date on which interest on the Debt Securities would have been payable except for the election to begin such Extension Period. The Notice shall describe, in reasonable detail, why the Company has elected to begin an Extension Period. The Notice shall acknowledge and affirm the Company's understanding that it is prohibited from issuing dividends and other distributions during the Extension Period. Upon receipt of the Notice, an Initial Purchaser shall have the right, at its sole discretion, to disclose the name of the Company, the fact that the Company has elected to begin an Extension Period and other information that such Initial Purchaser, at its sole discretion, deems relevant to the company's election to begin an Extension Period. The Trustee shall give notice of the Company's election to begin a new Extension Period to the Securityholders. SECTION 2.12. CUSIP Numbers. The Company in issuing the Debt Securities may use a "CUSIP" number (if then generally in use), and, if so, the Trustee shall use a "CUSIP" number in notices of redemption as a convenience to Securityholders; provided, that any such notice may state that no representation is made as to the correctness of such number either as printed on the Debt Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debt Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP number. SECTION 2.13. Global Debentures. (a) Upon the election of the holder of Outstanding Debt Securities, which election need not be in writing, the Debt Securities owned by such holder shall be issued in the form of one or more Global Debentures registered in the name of the Depositary or its nominee. Each Global Debenture issued under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global Debenture or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Debenture shall constitute a single Debt Security for all purposes of this Indenture. (b) Notwithstanding any other provision in this Indenture, no Global Debenture may be exchanged in whole or in part for Debt Securities registered, and no transfer of a Global Debenture in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Debenture or a nominee thereof unless (i) such Depositary advises the Trustee and the Company in writing that such Depositary is no longer willing or able to properly discharge its responsibilities as Depositary with respect to such Global Debenture, and no qualified successor is appointed by the Company within ninety (90) days of receipt by the Company of such notice, (ii) such Depositary ceases to be a clearing agency registered under the Exchange Act and no successor is appointed by the Company within ninety (90) days after obtaining knowledge of such event, (iii) the Company executes and delivers to the Trustee a Company Order stating that the Company elects to terminate the book-entry system through the Depositary or (iv) an Event of Default shall have occurred and be continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Trustee shall notify the Depositary and instruct the Depositary to notify all owners of beneficial interests in such Global Debenture of the occurrence of such event and of the availability of Debt Securities to such owners of beneficial interests requesting the same. Upon the issuance of such Debt Securities and the registration in the Debt Security Register of such Debt Securities in the names of the holders of the beneficial interests therein, the Trustee shall recognize such holders of beneficial interests as holders thereof. (c) If any Global Debenture is to be exchanged for other Debt Securities or canceled in part, or if another Debt Security is to be exchanged in whole or in part for a beneficial interest in any Global Debenture, then either (i) such Global Debenture shall be so surrendered for exchange or cancellation as provided in this Article II or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Debt Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Debt Security registrar, whereupon the Trustee, in accordance with the Applicable Depository Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Debenture by the Depositary, accompanied by registration instructions, the Company shall execute and the Trustee shall authenticate and deliver any Debt Securities issuable in exchange for such Global Debenture (or any portion thereof) in accordance with the instructions of the Depositary. The Trustee shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions. (d) Every Debt Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Debenture or any portion thereof shall be authenticated and delivered in the form of, and shall be, a Global Debenture, unless such Debt Security is registered in the name of a Person other than the Depositary for such Global Debenture or a nominee thereof. (e) Debt Securities distributed to holders of Book-Entry Capital Securities (as defined in the Trust Agreement) upon the dissolution of the Trust shall be distributed in the form of one or more Global Debentures registered in the name of a Depositary or its nominee, and deposited with the Debt Securities registrar, as custodian for such Depositary, or with such Depositary, for credit by the Depositary to the respective accounts of the beneficial owners of the Debt Securities represented thereby (or such other accounts as they may direct). Debt Securities distributed to holders of Capital Securities other than Book-Entry Capital Securities upon the dissolution of the Trust shall not be issued in the form of a Global Debenture or any other form intended to facilitate book-entry trading in beneficial interests in such Debt Securities. (f) The Depositary or its nominee, as the registered owner of a Global Debenture, shall be the holder of such Global Debenture for all purposes under this Indenture and the Debt Securities, and owners of beneficial interests in a Global Debenture shall hold such interests pursuant to the Applicable Depository Procedures. Accordingly, any such owner's beneficial interest in a Global Debenture shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Depositary Participants. The Debt Securities registrar and the Trustee shall be entitled to deal with the Depositary for all purposes of this Indenture relating to a Global Debenture (including the payment of principal and interest thereon and the giving of instructions or directions by owners of beneficial interests therein and the giving of notices) as the sole holder of the Debt Security and shall have no obligations to the owners of beneficial interests therein. Neither the Trustee nor the Debt Securities registrar shall have any liability in respect of any transfers affected by the Depositary. (g) The rights of owners of beneficial interests in a Global Debenture shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such owners and the Depositary and/or its Depositary Participants. (h) No holder of any beneficial interest in any Global Debenture held on its behalf by a Depositary shall have any rights under this Indenture with respect to such Global Debenture, and such Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the owner of such Global Debenture for all purposes whatsoever. None of the Company, the Trustee nor any agent of the Company or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Debenture or maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominee) as holder of any Debt Security. ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01. Payment of Principal, Premium and Interest; Agreed Treatment of the Debt Securities. (a) The Company covenants and agrees that it will duly and punctually pay or cause to be paid all payments due on the Debt Securities at the place, at the respective times and in the manner provided in this Indenture and the Debt Securities. At the option of the Company, each installment of interest on the Debt Securities may be paid (i) by mailing checks for such interest payable to the order of the holders of Debt Securities entitled thereto as they appear on the Debt Security Register or (ii) by wire transfer to any account with a banking institution located in the United States designated by such Person to the Paying Agent no later than the related record date. (b) The Company will treat the Debt Securities as indebtedness, and the interest payable in respect of such Debt Securities as interest, for all U.S. federal income tax purposes. All payments in respect of such Debt Securities will be made free and clear of U.S. withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W-8 BEN (or any substitute or successor form) establishing its non-U.S. status for U.S. federal income tax purposes. (c) As of the date of this Indenture, the Company represents that it has no intention to exercise its right under Section 2.11 to defer payments of interest on the Debt Securities by commencing an Extension Period. (d) As of the date of this Indenture, the Company represents that the likelihood that it would exercise its right under Section 2.11 to defer payments of interest on the Debt Securities by commencing an Extension Period at any time during which the Debt Securities are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase or make a liquidation payment with respect to, any of its outstanding equity and on the Company's ability to make any payments of principal of or interest on, or repurchase or redeem, any of its debt securities that rank pari passu in all respects with (or junior in interest to) the Debt Securities. SECTION 3.02. Offices for Notices and Payments, etc. So long as any of the Debt Securities remain outstanding, the Company will maintain in Wilmington, Delaware an office or agency where the Debt Securities may be presented for payment, an office or agency where the Debt Securities may be presented for registration of transfer and for exchange as provided in this Indenture and an office or agency where notices and demands to or upon the Company in respect of the Debt Securities or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.05, such office or agency for all of the above purposes shall be the Principal Office of the Trustee. In case the Company shall fail to maintain any such office or agency in Wilmington, Delaware or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Wilmington, Delaware or where the Debt Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Wilmington, Delaware for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.09, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 3.04. Provision as to Paying Agent. (a) If the Company shall appoint a Paying Agent other than the Trustee, it will cause such Paying Agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.04: (1) that it will hold all sums held by it as such agent for the payment of all payments due on the Debt Securities (whether such sums have been paid to it by the Company or by any other obligor on the Debt Securities) in trust for the benefit of the holders of the Debt Securities; (2) that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debt Securities) to make any payment on the Debt Securities when the same shall be due and payable; and (3) that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. (b) If the Company shall act as its own Paying Agent, it will, on or before each due date of the payments due on the Debt Securities, set aside, segregate and hold in trust for the benefit of the holders of the Debt Securities a sum sufficient to pay such payments so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debt Securities) to make any payment on the Debt Securities when the same shall become due and payable. Whenever the Company shall have one or more Paying Agents for the Debt Securities, it will, on or prior to each due date of the payments on the Debt Securities, deposit with a Paying Agent a sum sufficient to pay all payments so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such Paying Agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act. (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Debt Securities, or for any other reason, pay, or direct any Paying Agent to pay to the Trustee all sums held in trust by the Company or any such Paying Agent, such sums to be held by the Trustee upon the same terms and conditions herein contained. (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 12.03 and 12.04. (e) The Company hereby initially appoints the Trustee to act as Paying Agent (the "Paying Agent"). SECTION 3.05. Certificate to Trustee. The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year, so long as Debt Securities are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company in the performance of any covenants of the Company contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.06. Additional Interest. If and for so long as the Trust is the holder of all Debt Securities and is subject to or otherwise required to pay, or is required to withhold from distributions to holders of Trust Securities, any additional taxes (including withholding taxes), duties, assessments or other governmental charges as a result of a Tax Event, the Company will pay such additional amounts (the "Additional Interest") on the Debt Securities as shall be required so that the net amounts received and retained by the Trust for distribution to holders of Trust Securities after paying all taxes (including withholding taxes on distributions to holders of Trust Securities), duties, assessments or other governmental charges will be equal to the amounts the Trust would have received and retained for distribution to holders of Trust Securities after paying all taxes (including withholding taxes on distributions to holders of Trust Securities), duties, assessments or other governmental charges if no such additional taxes, duties, assessments or other governmental charges had been imposed. Whenever in this Indenture or the Debt Securities there is a reference in any context to the payment of principal of or premium, if any, or interest on the Debt Securities, such mention shall be deemed to include mention of payments of the Additional Interest provided for in this paragraph to the extent that, in such context, Additional Interest is, was or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Interest (if applicable) in any provisions hereof shall not be construed as excluding Additional Interest in those provisions hereof where such express mention is not made, provided, however, that notwithstanding anything to the contrary contained in this Indenture or any Debt Security, the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Interest that may be due and payable. SECTION 3.07. Compliance with Consolidation Provisions. The Company will not, while any of the Debt Securities remain outstanding, consolidate with, or merge into any other Person, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article XI hereof are complied with. SECTION 3.08. Limitation on Dividends. If Debt Securities are initially issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debt Securities continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (iii) the Company shall have given notice of its election to defer payments of interest on the Debt Securities by extending the interest distribution period as provided herein and such period, or any extension thereof, shall have commenced and be continuing, then the Company may not (A) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (B) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities or (C) make any payment under any guarantees of the Company that rank pari passu in all respects with or junior in interest to the Capital Securities Guarantee (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (I) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (II) in connection with a dividend reinvestment or stockholder stock purchase plan or (III) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the occurrence of (i), (ii) or (iii) above, (b) as a result of any exchange, reclassification, combination or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). SECTION 3.09. Covenants as to the Trust. For so long as such Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under this Indenture that is a U.S. Person may succeed to the Company's ownership of such Common Securities. The Company, as owner of the Common Securities, shall use commercially reasonable efforts to cause the Trust (a) to remain a statutory trust, except in connection with a distribution of Debt Securities to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes and (c) to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debt Securities. ARTICLE IV LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01. Securityholders' Lists. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee: (a) on each regular record date for an Interest Payment Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of the Debt Securities as of such record date; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; except that no such lists need be furnished under this Section 4.01 so long as the Trustee is in possession thereof by reason of its acting as Debt Security registrar. SECTION 4.02. Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debt Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Debt Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished. (b) In case three or more holders of Debt Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Debt Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debt Securities with respect to their rights under this Indenture or under such Debt Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within five Business Days after the receipt of such application, at its election either: (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, or (2) inform such applicants as to the approximate number of holders of Debt Securities whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of Debt Securities whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Debt Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Debt Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any Paying Agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debt Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT SECTION 5.01. Events of Default. The following events shall be "Events of Default" with respect to Debt Securities: (a) the Company defaults in the payment of any interest upon any Debt Security when it becomes due and payable, and continuance of such default for a period of 30 days; for the avoidance of doubt, an extension of any interest distribution period by the Company in accordance with Section 2.11 of this Indenture shall not constitute a default under this clause 5.01(a); or (b) the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debt Securities as and when the same shall become due and payable either at maturity, upon redemption, by declaration of acceleration pursuant to Section 5.01 of this Indenture or otherwise; or (c) the Company defaults in the performance of, or breaches, any of its covenants or agreements in Sections 3.06, 3.07, 3.08 or 3.09 of this Indenture, and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of not less than 25% in aggregate principal amount of the outstanding Debt Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default' hereunder; or (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or orders the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (f) the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (1) the distribution of the Debt Securities to holders of the Trust Securities in liquidation of their interests in the Trust, (2) the redemption of all of the outstanding Trust Securities or (3) certain mergers, consolidations or amalgamations, each as permitted by the Declaration. (g) the Company shall cease to be subject to regulation or supervision by the Federal Reserve or OTS, as applicable (or any successor federal regulatory authority having jurisdiction over bank or savings and loan holding companies). If an Event of Default specified under clause (a), (b), (d), (e), (f), or (g) of this Section 5.01 (each an "Acceleration Event") occurs and is continuing with respect to the Debt Securities, then, and in each and every such case, unless the principal of the Debt Securities shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debt Securities then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debt Securities and any premium and the interest accrued, but unpaid, thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If the Company shall cease to be subject to the supervision or regulation of the Federal Reserve or the OTS, as the case may be, then the term "Acceleration Event" shall be defined to include clause (c) of this Section 5.01 as an Event of Default resulting in acceleration of payment of the Debt Securities to the same extent provided for clauses (a), (b), (d), (e), (f), and (g) of this Section 5.01. Anything in this Section 5.01 to the contrary notwithstanding, if an Event of Default specified under clause (c) occurs and is continuing, then, and in each and every such case, the Trustee, in its own name and as trustee of an express trust, shall pursue all available remedies at law and/or equity against the Company. The Company acknowledges and affirms that in the event of breach of such covenants and agreements referenced in clause (c) of this Section 5.01, the damages to the holders of the Debt Securities and the Capital Securities may be difficult or impossible to ascertain. Therefore, in addition to any remedies available at law for breach of any or all of said covenants or agreements, the holders of the Debt Securities and the Capital Securities shall be entitled to injunctive or other equitable relief in connection with the violation of any such covenants or agreements referenced in Section 5.01(c). The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Debt Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debt Securities and all payments on the Debt Securities which shall have become due otherwise than by acceleration (with interest upon all such payments and Deferred Interest, to the extent permitted by law) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.06, if any, and (ii) all Events of Default under this Indenture, other than the non-payment of the payments on Debt Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein, then and in every such case the holders of a majority in aggregate principal amount of the Debt Securities then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon; provided, however, that if the Debt Securities are held by the Trust or a trustee of the Trust, such waiver or rescission and annulment shall not be effective until the holders of a majority in aggregate liquidation amount of the outstanding Capital Securities of the Trust shall have consented to such waiver or rescission and annulment. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debt Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debt Securities shall continue as though no such proceeding had been taken. SECTION 5.02. Payment of Debt Securities on Default; Suit Therefor. The Company covenants that upon the occurrence of an Acceleration Event, the Company will pay to the Trustee, for the benefit of the holders of the Debt Securities, the whole amount that then shall have become due and payable on all Debt Securities including Deferred Interest accrued on the Debt Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.06. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debt Securities and collect in the manner provided by law out of the property of the Company or any other obligor on such Debt Securities wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debt Securities under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debt Securities, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debt Securities shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Debt Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.06) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debt Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debt Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.06. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debt Securities or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Debt Securities, may be enforced by the Trustee without the possession of any of the Debt Securities, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debt Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Debt Securities, and it shall not be necessary to make any holders of the Debt Securities parties to any such proceedings. SECTION 5.03. Application of Moneys Collected by Trustee. Any moneys collected by the Trustee shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Debt Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.06; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Debt Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debt Securities; and Fourth: The balance, if any, to the Company. SECTION 5.04. Proceedings by Securityholders. No holder of any Debt Security shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debt Securities and unless the holders of not less than 25% in aggregate principal amount of the Debt Securities then outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding; provided, that no holder of Debt Securities shall have any right to prejudice the rights of any other holder of Debt Securities, obtain priority or preference over any other such holder or enforce any right under this Indenture except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debt Securities. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debt Security to receive payment of the principal of, premium, if any, and interest on such Debt Security when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 5.05. Proceedings by Trustee. In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.06. Remedies Cumulative and Continuing. Except as otherwise provided in Section 2.06, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debt Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Debt Securities, and no delay or omission of the Trustee or of any holder of any of the Debt Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. The holders of a majority in aggregate principal amount of the Debt Securities affected (voting as one class) at the time outstanding and, if the Debt Securities are held by the Trust or a trustee of the Trust, the holders of a majority in aggregate liquidation amount of the outstanding Capital Securities of the Trust shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debt Securities; provided, however, that if the Debt Securities are held by the Trust or a trustee of the Trust, such time, method and place or such exercise, as the case may be, may not be so directed until the holders of a majority in aggregate liquidation amount of the outstanding Capital Securities of the Trust shall have directed such time, method and place or such exercise, as the case may be; provided, further, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee being advised by counsel shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration of acceleration, or ipso facto acceleration of the maturity of the Debt Securities, the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding may on behalf of the holders of all of the Debt Securities waive (or modify any previously granted waiver of) any past default or Event of Default and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debt Securities, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debt Security affected, or (c) in respect of the covenants contained in Section 3.09; provided, however, that if the Debt Securities are held by the Trust or a trustee of the Trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of the Trust Securities of the Trust shall have consented to such waiver or modification to such waiver; provided, further, that if the consent of the holder of each outstanding Debt Security is required, such waiver or modification to such waiver shall not be effective until each holder of the outstanding Capital Securities of the Trust shall have consented to such waiver or modification to such waiver. Upon any such waiver or modification to such waiver, the Default or Event of Default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debt Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver or modification to such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. Whenever any Default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said Default or Event of Default shall for all purposes of the Debt Securities and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.08. Notice of Defaults. The Trustee shall, within 90 days after a Responsible Officer of the Trustee shall have actual knowledge or received written notice of the occurrence of a Default with respect to the Debt Securities, mail to all Securityholders, as the names and addresses of such holders appear upon the Debt Security Register, notice of all Defaults with respect to the Debt Securities known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.08 being hereby defined to be the events specified in subsections (a), (b), (c), (d) and (e) of Section 5.01, not including periods of grace, if any, provided for therein); provided, that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Debt Securities, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders. SECTION 5.09. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Debt Security by such holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Debt Securities (or, if such Debt Securities are held by the Trust or a trustee of the Trust, more than 10% in liquidation amount of the outstanding Capital Securities) to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debt Security against the Company on or after the same shall have become due and payable, or to any suit instituted in accordance with Section 14.12. ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of Trustee. With respect to the holders of Debt Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debt Securities and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debt Securities, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Debt Securities has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default with respect to the Debt Securities and after the curing or waiving of all Events of Default which may have occurred (1) the duties and obligations of the Trustee with respect to the Debt Securities shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Debt Securities as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; (d) the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debt Securities unless either (1) a Responsible Officer shall have actual knowledge of such Default or Event of Default or (2) written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debt Securities or by any holder of the Debt Securities, except with respect to an Event of Default pursuant to Sections 5.01 (a) or 5.01 (b) hereof (other than an Event of Default resulting from the default in the payment of Additional Interest or premium, if any, if the Trustee does not have actual knowledge or written notice that such payment is due and payable), of which the Trustee shall be deemed to have knowledge; and (e) in the absence of bad faith on the part of the Trustee, the Trustee may seek and rely on reasonable instructions from the Company. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. SECTION 6.02. Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.01: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debt Securities (that has not been cured or waived) to exercise with respect to the Debt Securities such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in principal amount of the outstanding Debt Securities affected thereby; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care. SECTION 6.03. No Responsibility for Recitals, etc. The recitals contained herein and in the Debt Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debt Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debt Securities or the proceeds of any Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities. The Trustee or any Authenticating Agent or any Paying Agent or any transfer agent or any Debt Security registrar, in its individual or any other capacity, may become the owner or pledgee of Debt Securities with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, transfer agent or Debt Security registrar. SECTION 6.05. Moneys to be Held in Trust. Subject to the provisions of Section 12.04, all moneys received by the Trustee or any Paying Agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any Paying Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys, if any, shall be paid from time to time to the Company upon the written order of the Company, signed by the Chairman of the Board of Directors, the President, the Chief Operating Officer, a Vice President, the Treasurer or an Assistant Treasurer of the Company. SECTION 6.06. Compensation and Expenses of Trustee. Other than as provided in the Fee Agreement of even date herewith, the Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its written request for all documented reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the reasonable expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance that arises from its negligence, willful misconduct or bad faith. The Company also covenants to indemnify each of the Trustee (including in its individual capacity) and any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee), except to the extent such loss, damage, claim, liability or expense results from the negligence, willful misconduct or bad faith of such indemnitee, arising out of or in connection with the acceptance or administration of this Trust, including the costs and expenses of defending itself against any claim or liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for documented expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by (and the Company hereby grants and pledges to the Trustee) a lien prior to that of the Debt Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debt Securities. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in subsections (d), (e) or (f) of Section 5.01, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture. SECTION 6.07. Officers' Certificate as Evidence. Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence, willful misconduct or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence, willful misconduct or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.08. Eligibility of Trustee. The Trustee hereunder shall at all times be a U.S. Person that is a banking corporation or national association organized and doing business under the laws of the United States of America or any state thereof or of the District of Columbia and authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000) and subject to supervision or examination by federal, state, or District of Columbia authority. If such corporation or national association publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.08 the combined capital and surplus of such corporation or national association shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee, notwithstanding that such corporation or national association shall be otherwise eligible and qualified under this Article. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.08, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.09. If the Trustee has or shall acquire any "conflicting interest" within the meaning of ss. 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Indenture. SECTION 6.09. Resignation or Removal of Trustee, Calculation Agent, Paying Agent or Debt Security Registrar. (a) The Trustee, or any trustee or trustees hereafter appointed, the Calculation Agent, the Paying Agent and any Debt Security Registrar may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company's expense, to the holders of the Debt Securities at their addresses as they shall appear on the Debt Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor or successors by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning party and one copy to the successor. If no successor shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected Securityholders, the resigning party may petition any court of competent jurisdiction for the appointment of a successor, or any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months may, subject to the provisions of Section 5.09, on behalf of himself or herself and all others similarly situated, petition any such court for the appointment of a successor. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor. (b) In case at any time any of the following shall occur - (1) the Trustee shall fail to comply with the provisions of the last paragraph of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months, (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.08 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.09, if no successor Trustee shall have been so appointed and have accepted appointment within 30 days of the occurrence of any of (1), (2) or (3) above, any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months may, on behalf of himself or herself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee. (c) Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding may at any time remove the Trustee and nominate a successor Trustee, which shall be deemed appointed as successor Trustee unless within ten Business Days after such nomination the Company objects thereto, in which case or in the case of a failure by such holders to nominate a successor Trustee, the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.09 provided, may petition any court of competent jurisdiction for an appointment of a successor. (d) Any resignation or removal of the Trustee, the Calculation Agent, the Paying Agent and any Debt Security Registrar and appointment of a successor pursuant to any of the provisions of this Section 6.09 shall become effective upon acceptance of appointment by the successor as provided in Section 6.10. SECTION 6.10. Acceptance by Successor. Any successor Trustee, Calculation Agent, Paying Agent or Debt Security Registrar appointed as provided in Section 6.09 shall execute, acknowledge and deliver to the Company and to its predecessor an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring party shall become effective and such successor, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Debt Securities of its predecessor hereunder, with like effect as if originally named herein; but, nevertheless, on the written request of the Company or of the successor, the party ceasing to act shall, upon payment of the amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor all the rights and powers of the party so ceasing to act and shall duly assign, transfer and deliver to such successor all property and money held by such retiring party hereunder. Upon request of any such successor, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor all such rights and powers. Any party ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected to secure any amounts then due it pursuant to the provisions of Section 6.06. If a successor Trustee is appointed, the Company, the retiring Trustee and the successor Trustee shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debt Securities as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. No successor Trustee shall accept appointment as provided in this Section 6.10 unless at the time of such acceptance such successor Trustee shall be eligible and qualified under the provisions of Section 6.08. In no event shall a retiring Trustee, Calculation Agent, Paying Agent or Debt Security Registrar be liable for the acts or omissions of any successor hereunder. Upon acceptance of appointment by a successor Trustee, Calculation Agent, Paying Agent or Debt Security Registrar as provided in this Section 6.10, the Company shall mail notice of the succession to the holders of Debt Securities at their addresses as they shall appear on the Debt Security Register. If the Company fails to mail such notice within ten Business Days after the acceptance of appointment by the successor, the successor shall cause such notice to be mailed at the expense of the Company. SECTION 6.11. Succession by Merger, etc. Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, that such Person shall be otherwise eligible and qualified under this Article. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debt Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debt Securities so authenticated; and in case at that time any of the Debt Securities shall not have been authenticated, any successor to the Trustee may authenticate such Debt Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debt Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debt Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.12. Authenticating Agents. There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debt Securities issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debt Securities; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debt Securities. Any such Authenticating Agent shall at all times be a Person organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such Person publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.12 the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any Person into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor Person is otherwise eligible under this Section 6.12 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debt Securities by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.12, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.12, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debt Securities as the names and addresses of such holders appear on the Debt Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to the Debt Securities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. Other than as provided in the Fee Agreement of even date herewith, the Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee and shall receive such reasonable indemnity as it may require against the costs, expenses and liabilities incurred in furtherance of its duties under this Section 6.12. ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debt Securities or aggregate Liquidation Amount of the Capital Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders or holders of Capital Securities, as the case may be, in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debt Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or of such holders of Capital Securities duly called and held in accordance with the provisions of the Declaration, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders, or holders of Capital Securities, as the case may be, or (d) by any other method the Trustee deems satisfactory. If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such Debt Securities for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debt Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debt Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 7.02. Proof of Execution by Securityholders. Subject to the provisions of Sections 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or such Securityholder's agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debt Securities shall be proved by the Debt Security Register or by a certificate of the Debt Security Registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. SECTION 7.03. Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Debt Security, the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent and any Debt Security registrar may deem the Person in whose name such Debt Security shall be registered upon the Debt Security Register to be, and may treat such Person as, the absolute owner of such Debt Security (whether or not such Debt Security shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debt Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any Paying Agent nor any transfer agent nor any Debt Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon such holder's order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debt Security. SECTION 7.04. Debt Securities Owned by Company Deemed Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Debt Securities have concurred in any direction, consent or waiver under this Indenture, Debt Securities which are owned by the Company or any other obligor on the Debt Securities or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company (other than the Trust) or any other obligor on the Debt Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debt Securities which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debt Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debt Securities and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.05. Revocation of Consents; Future Securityholders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debt Securities specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.01) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.01) of a Debt Security (or any Debt Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debt Securities the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Debt Security (or so far as concerns the principal amount represented by any exchanged or substituted Debt Security). Except as aforesaid any such action taken by the holder of any Debt Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Debt Security, and of any Debt Security issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debt Security or any Debt Security issued in exchange or substitution therefor. ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01. Purposes of Meetings. A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Debt Securities under any other provision of this Indenture or under applicable law. SECTION 8.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.01, to be held at such time and at such place in New York or Wilmington, Delaware, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debt Securities affected at their addresses as they shall appear on the Debt Securities Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.03. Call of Meetings by Company or Securityholders. In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debt Securities, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02. SECTION 8.04. Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a Person shall be (a) a holder of one or more Debt Securities with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debt Securities. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debt Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote at the meeting. Subject to the provisions of Section 7.04, at any meeting each holder of Debt Securities with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Debt Securities held or represented by such holder; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debt Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debt Securities held by such chairman or instruments in writing as aforesaid duly designating such chairman as the Person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 8.06. Voting. The vote upon any resolution submitted to any meeting of holders of Debt Securities with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debt Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Debt Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 8.07. Quorum; Actions. The Persons entitled to vote a majority in outstanding principal amount of the Debt Securities shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in outstanding principal amount of the Debt Securities, the Persons holding or representing such specified percentage in outstanding principal amount of the Debt Securities will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.02, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the outstanding principal amount of the Debt Securities which shall constitute a quorum. Except as limited by the proviso in the first paragraph of Section 9.02, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of not less than a majority in outstanding principal amount of the Debt Securities; provided, however, that, except as limited by the proviso in the first paragraph of Section 9.02, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action that this Indenture expressly provides may be given by the holders of not less than a specified percentage in outstanding principal amount of the Debt Securities may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of not less than such specified percentage in outstanding principal amount of the Debt Securities. Any resolution passed or decision taken at any meeting of holders of Debt Securities duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting. SECTION 8.08. Written Consent Without a Meeting. Whenever under this Indenture, Securityholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken, signed by the Securityholders of all outstanding Debt Securities entitled to vote thereon. No consent shall be effective to take the action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this paragraph to the Trustee, written consents signed by a sufficient number of Securityholders to take action are delivered to the Trustee at its Principal Office. Delivery made to the Trustee at its Principal Office, shall be by hand or by certificated or registered mail, return receipt requested. Written consent thus given by the Securityholders of such number of Debt Securities as is required hereunder, shall have the same effect as a valid vote of Securityholders of such number of Debt Securities. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures without Consent of Securityholders. The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another Person to the Company, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Company, pursuant to Article XI hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of Debt Securities as the Board of Directors shall consider to be for the protection of the holders of such Debt Securities, and to make the occurrence, or the occurrence and continuance, of a Default in any of such additional covenants, restrictions or conditions a Default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make or amend such other provisions in regard to matters or questions arising under this Indenture; provided, that any such action shall not adversely affect the interests of the holders of the Debt Securities; (d) to add to, delete from, or revise the terms of Debt Securities, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debt Securities, including to provide for transfer procedures and restrictions substantially similar to those applicable to the Capital Securities, as required by Section 2.05 (for purposes of assuring that no registration of Debt Securities is required under the Securities Act of 1933, as amended); provided, that any such action shall not adversely affect the interests of the holders of the Debt Securities then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debt Securities substantially similar to those applicable to Capital Securities shall not be deemed to adversely affect the holders of the Debt Securities); (e) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debt Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 6.10; (f) to make any change (other than as elsewhere provided in this paragraph) that does not adversely affect the rights of any Securityholder in any material respect; or (g) to provide for the issuance of and establish the form and terms and conditions of the Debt Securities, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or the Debt Securities, or to add to the rights of the holders of Debt Securities. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Debt Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02. Supplemental Indentures with Consent of Securityholders. With the consent (evidenced as provided in Section 7.01) of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act, then in effect, applicable to indentures qualified thereunder) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall without such consent of the holders of each Debt Security then outstanding and affected thereby (i) extend the Maturity Date of any Debt Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate (or manner of calculation of the rate) or extend the time of payment of interest thereon, or reduce (other than as a result of the maturity or earlier redemption of any such Debt Security in accordance with the terms of this Indenture and such Debt Security) or increase the aggregate principal amount of Debt Securities then outstanding, or change any of the redemption provisions, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than United States Dollars, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debt Securities the holders of which are required to consent to any such supplemental indenture; and provided, further, that if the Debt Securities are held by the Trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in Liquidation Amount of the outstanding Capital Securities shall have consented to such supplemental indenture; provided, further, that if the consent of the Securityholder of each outstanding Debt Security is required, such supplemental indenture shall not be effective until each holder of the outstanding Capital Securities shall have consented to such supplemental indenture. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders (and holders of Capital Securities, if required) as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Debt Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debt Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04. Notation on Debt Securities. Debt Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debt Securities so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debt Securities then outstanding. SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be furnished to Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall, in addition to the documents required by Section 14.06, receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee shall receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof. ARTICLE X REDEMPTION OF SECURITIES SECTION 10.01. Optional Redemption. At any time the Company shall have the right, subject to the receipt by the Company of prior approval from any regulatory authority with jurisdiction over the Company if such approval is then required under applicable capital guidelines or policies of such regulatory authority, to redeem the Debt Securities, in whole or (provided that all accrued and unpaid interest has been paid on all Debt Securities for all Interest Periods terminating on or prior to such date) from time to time in part, on any January 7, April 7, July 7 or October 7 on or after April 7, 2011 (the "Redemption Date"), at the Redemption Price. SECTION 10.02. Special Event Redemption. If a Special Event shall occur and be continuing, the Company shall have the right, subject to the receipt by the Company of prior approval from any regulatory authority with jurisdiction over the Company if such approval is then required under applicable capital guidelines or policies of such regulatory authority, to redeem the Debt Securities, in whole or in part, at any time within 90 days following the occurrence of such Special Event (the "Special Redemption Date"), at the Special Redemption Price. SECTION 10.03. Notice of Redemption; Selection of Debt Securities. In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debt Securities, it shall fix a date for redemption and shall mail, or cause the Trustee to mail (at the expense of the Company) a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Debt Securities so to be redeemed as a whole or in part at their last addresses as the same appear on the Debt Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debt Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debt Security. Each such notice of redemption shall specify the CUSIP number, if any, of the Debt Securities to be redeemed, the date fixed for redemption, the redemption price (or manner of calculation of the price) at which Debt Securities are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debt Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Debt Securities are to be redeemed the notice of redemption shall specify the numbers of the Debt Securities to be redeemed. In case the Debt Securities are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debt Security, a new Debt Security or Debt Securities in principal amount equal to the unredeemed portion thereof will be issued. Prior to 10:00 a.m. New York City time on the Redemption Date or the Special Redemption Date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with one or more Paying Agents an amount of money sufficient to redeem on the redemption date all the Debt Securities so called for redemption at the appropriate redemption price, together with unpaid interest accrued to such date. The Company will give the Trustee notice not less than 45 nor more than 60 days prior to the redemption date as to the redemption price at which the Debt Securities are to be redeemed and the aggregate principal amount of Debt Securities to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debt Securities or portions thereof (in integral multiples of $1,000) to be redeemed. SECTION 10.04. Payment of Debt Securities Called for Redemption. If notice of redemption has been given as provided in Section 10.03, the Debt Securities or portions of Debt Securities with respect to which such notice has been given shall become due and payable on the Redemption Date or the Special Redemption Date (as the case may be) and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said Redemption Date or the Special Redemption Date (unless the Company shall default in the payment of such Debt Securities at the redemption price, together with unpaid interest accrued thereon to said date) interest on the Debt Securities or portions of Debt Securities so called for redemption shall cease to accrue. On presentation and surrender of such Debt Securities at a place of payment specified in said notice, such Debt Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with unpaid interest accrued thereon to the Redemption Date or the Special Redemption Date (as the case may be). Upon presentation of any Debt Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debt Security or Debt Securities of authorized denominations in principal amount equal to the unredeemed portion of the Debt Security so presented. ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 11.01. Company May Consolidate, etc., on Certain Terms. Nothing contained in this Indenture or in the Debt Securities shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of all or substantially all of the property or capital stock of the Company or its successor or successors, to any other corporation (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, (i) upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the successor entity shall be a corporation organized and existing under the laws of the United States or any state thereof or the District of Columbia (unless such corporation has (1) agreed to make all payments due in respect of the Debt Securities or, if outstanding, the Capital Securities and Capital Securities Guarantee without withholding or deduction for, or on account of, any taxes, duties, assessments or other governmental charges under the laws or regulations of the jurisdiction of organization or residence (for tax purposes) of such corporation or any political subdivision or taxing authority thereof or therein unless required by applicable law, in which case such corporation shall have agreed to pay such additional amounts as shall be required so that the net amounts received and retained by the holders of such Debt Securities or Capital Securities, as the case may be, after payment of all taxes (including withholding taxes), duties, assessments or other governmental charges, will be equal to the amounts that such holders would have received and retained had no such taxes (including withholding taxes), duties, assessments or other governmental charges been imposed, (2) irrevocably and unconditionally consented and submitted to the jurisdiction of any United States federal court or New York state court, in each case located in The City of New York, Borough of Manhattan, in respect of any action, suit or proceeding against it arising out of or in connection with this Indenture, the Debt Securities, the Capital Securities Guarantee or the Declaration and irrevocably and unconditionally waived, to the fullest extent permitted by law, any objection to the laying of venue in any such court or that any such action, suit or proceeding has been brought in an inconvenient forum and (3) irrevocably appointed an agent in The City of New York for service of process in any action, suit or proceeding referred to in clause (2) above) and such corporation expressly assumes all of the obligations of the Company under the Debt Securities, this Indenture, the Capital Securities Guarantee and the Declaration and (ii) after giving effect to any such consolidation, merger, sale, conveyance, transfer or other disposition, no Default or Event of Default shall have occurred and be continuing. SECTION 11.02. Successor Entity to be Substituted. In case of any such consolidation, merger, sale, conveyance, transfer or other disposition contemplated in Section 11.01 and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and reasonably satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debt Securities. Such successor entity thereupon may cause to be signed, and may issue either in its own name or in the name of the Company, any or all of the Debt Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debt Securities which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debt Securities which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debt Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debt Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debt Securities had been issued at the date of the execution hereof. SECTION 11.03. Opinion of Counsel to be Given to Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall receive, in addition to the Opinion of Counsel required by Section 9.05, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI. ARTICLE XII SATISFACTION AND DISCHARGE OF INDENTURE SECTION 12.01. Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Debt Securities theretofore authenticated (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.06) and not theretofore canceled, or (b) all the Debt Securities not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debt Securities (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.06) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Debt Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 12.04, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.05, 2.06, 3.01, 3.02, 3.04, 6.06, 6.09 and 12.04 hereof, which shall survive until such Debt Securities shall mature or are redeemed, as the case may be, and are paid in full. Thereafter, Sections 6.06, 6.09 and 12.04 shall survive, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debt Securities. SECTION 12.02. Deposited Moneys to be Held in Trust by Trustee. Subject to the provisions of Section 12.04, all moneys deposited with the Trustee pursuant to Section 12.01 shall be held in trust and applied by it to the payment, either directly or through any Paying Agent (including the Company if acting as its own Paying Agent), to the holders of the particular Debt Securities for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest. SECTION 12.03. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture, all moneys then held by any Paying Agent of the Debt Securities (other than the Trustee) shall, upon demand of the Company, be repaid to the Company or paid to the Trustee, and thereupon such Paying Agent shall be released from all further liability with respect to such moneys. SECTION 12.04. Return of Unclaimed Moneys. Any moneys deposited with or paid to the Trustee or any Paying Agent for payment of the principal of, and premium, if any, or interest on Debt Securities and not applied but remaining unclaimed by the holders of Debt Securities for two years after the date upon which the principal of, and premium, if any, or interest on such Debt Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such Paying Agent on written demand; and the holder of any of the Debt Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such Paying Agent with respect to such moneys shall thereupon cease. ARTICLE XIII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 13.01. Indenture and Debt Securities Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Debt Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any such Debt Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or agent, as such, past, present or future, of the Company or of any predecessor or successor corporation of the Company, either directly or through the Company or any successor corporation of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debt Securities. ARTICLE XIV MISCELLANEOUS PROVISIONS SECTION 14.01. Successors. All the covenants, stipulations, promises and agreements of the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not. SECTION 14.02. Official Acts by Successor Entity. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company. SECTION 14.03. Surrender of Company Powers. The Company by instrument in writing executed by authority of 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company and as to any permitted successor. SECTION 14.04. Addresses for Notices, etc. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Securityholders on the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for such purpose) to the Company at: QCR Holdings, Inc. 3551 7th Street, Suite 204 Moline, Illinois 61265 Attention: Todd A. Gipple Any notice, direction, request or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of Wells Fargo Bank, National Association at: 919 Market Street Suite 700 Wilmington, DE 19801 Attention: Corporate Trust Division SECTION 14.05. Governing Law. This Indenture and each Debt Security shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed in accordance with the law of said State, without regard to conflict of laws principles of said State other than Section 5 1401 of the New York General Obligations Law. SECTION 14.06. Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with (except that no such Opinion of Counsel is required to be furnished to the Trustee in connection with the authentication and issuance of Debt Securities issued on the date of this Indenture). Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture (except certificates delivered pursuant to Section 3.05) shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 14.07. Non-Business Days. Notwithstanding anything to the contrary contained herein, if any Interest Payment Date, other than on the Maturity Date, any Redemption Date or the Special Redemption Date, falls on a day that is not a Business Day, then any interest payable will be paid on, and such Interest Payment Date will be moved to, the next succeeding Business Day, and additional interest will accrue for each day that such payment is delayed as a result thereof. If the Maturity Date, any Redemption Date or the Special Redemption Date falls on a day that is not a Business Day, then the principal, premium, if any, and/or interest payable on such date will be paid on the next preceding Business Day. SECTION 14.08. Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 14.09. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 14.10. Severability. In case any one or more of the provisions contained in this Indenture or in the Debt Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debt Securities, but this Indenture and such Debt Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 14.11. Assignment. Subject to Article XI, the Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided, however, that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. SECTION 14.12. Acknowledgment of Rights. The Company acknowledges that, with respect to any Debt Securities held by the Trust or the Institutional Trustee of the Trust, if the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debt Securities held as the assets of the Trust after the holders of a majority in Liquidation Amount of the Capital Securities of the Trust have so directed in writing such Institutional Trustee, a holder of record of such Capital Securities may to the fullest extent permitted by law institute legal proceedings directly against the Company to enforce such Institutional Trustee's rights under this Indenture without first instituting any legal proceedings against such Institutional Trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the Debt Securities on the date such interest (or premium, if any) or principal is otherwise due and payable (or in the case of redemption, on the redemption date), the Company acknowledges that a holder of record of Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of (or premium, if any) or interest on the Debt Securities having an aggregate principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such holder on or after the respective due date specified in the Debt Securities. ARTICLE XV SUBORDINATION OF DEBT SECURITIES SECTION 15.01. Agreement to Subordinate. The Company covenants and agrees, and each holder of Debt Securities issued hereunder and under any supplemental indenture (the "Additional Provisions") by such Securityholder's acceptance thereof likewise covenants and agrees, that all Debt Securities shall be issued subject to the provisions of this Article XV; and each holder of a Debt Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the payments due on all Debt Securities issued hereunder and under any Additional Provisions shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XV shall prevent the occurrence of any Default or Event of Default hereunder. SECTION 15.02. Default on Senior Indebtedness. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any applicable grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default, and such acceleration has not been rescinded or canceled and such Senior Indebtedness has not been paid in full, then, in either case, no payment shall be made by the Company with respect to the payments due on the Debt Securities. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall, subject to Section 15.06, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness. SECTION 15.03. Liquidation; Dissolution; Bankruptcy. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding- up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company on the Debt Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness of the Company is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness of the Company remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debt Securities to the payment of all Senior Indebtedness of the Company, that may at the time be outstanding, provided, that (a) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (b) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer or other disposition of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XI of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XI of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture. SECTION 15.04. Subrogation. Subject to the payment in full of all Senior Indebtedness of the Company, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to such Senior Indebtedness until all payments due on the Debt Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debt Securities be deemed to be a payment or distribution by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Debt Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand. Nothing contained in this Article XV or elsewhere in this Indenture, any Additional Provisions or in the Debt Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Debt Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debt Securities all payments on the Debt Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debt Securities and creditors of the Company, other than the holders of Senior Indebtedness of the Company, nor shall anything herein or therein prevent the Trustee or the holder of any Debt Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. SECTION 15.05. Trustee to Effectuate Subordination. Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. SECTION 15.06. Notice by the Company. The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of moneys to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture or any Additional Provisions, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of moneys to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 15.06 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Debt Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself or herself to be a holder of Senior Indebtedness of the Company (or a trustee or representative on behalf of such holder) to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 15.07. Rights of the Trustee, Holders of Senior Indebtedness. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture or any Additional Provisions shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture or any Additional Provisions against the Trustee. The Trustee shall not owe or be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06. SECTION 15.08. Subordination May Not Be Impaired. No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debt Securities to the holders of such Senior Indebtedness, do any one or more of the following: (a) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (b) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (c) release any Person liable in any manner for the collection of such Senior Indebtedness; and (d) exercise or refrain from exercising any rights against the Company, and any other Person. Wells Fargo Bank, National Association, in its capacity as Trustee, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions herein above set forth. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. QCR Holdings, Inc. By: --------------------------------- Name: -------------------------------- Title: ------------------------------- Wells Fargo Bank, National Association, as Trustee By: --------------------------------- Name: -------------------------------- Title: ------------------------------- EXHIBIT A FORM OF JUNIOR SUBORDINATED DEBT SECURITY DUE 2036 [FORM OF FACE OF SECURITY] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES, REPRESENTS AND WARRANTS THAT IT WILL NOT ENGAGE IN HEDGING TRANSACTIONS INVOLVING THIS SECURITY UNLESS SUCH TRANSACTIONS ARE IN COMPLIANCE WITH THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23,95-60,91-38,90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"). THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF DEPOSITORS AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE COMPANY, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE COMPANY OR ANY OF ITS SUBSIDIARIES AND IS NOT SECURED. Form of Junior Subordinated Debt Security due 2036 of QCR Holdings, Inc. QCR Holdings, Inc., a bank holding company incorporated in Delaware (the "Company"), for value received promises to pay to Wells Fargo Bank, National Association, not in its individual capacity but solely as Institutional Trustee for QCR Holdings Statutory Trust V, a Delaware statutory trust (the "Holder"), or registered assigns, the principal sum of Ten Million Three Hundred Ten Thousand Dollars on April 7, 2036 and to pay interest on said principal sum from February 24, 2006, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on January 7, April 7, July 7 and October 7 of each year commencing April 7, 2006, at the rate of 6.62% (the "Fixed Rate") per annum until April 7, 2011 (the "Fixed Rate Period") and thereafter at a variable per annum rate equal to LIBOR (as defined in the Indenture) plus 1.55% (the "Variable Rate") ("Interest Rate" is defined to include the Fixed Rate and the Variable Rate, as applicable) (provided, however, that the Interest Rate for any Interest Payment Period may not exceed the highest rate permitted by New York law, as the same may be modified by United States law of general applicability) until the principal hereof shall have become due and payable, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at an annual rate equal to the Interest Rate in effect for each such Extension Period compounded quarterly. The amount of interest payable on any Interest Payment Date shall be computed during the Fixed Rate Period on the basis of a 360-day year of twelve 30-day months, and thereafter on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. Notwithstanding anything to the contrary contained herein, if any Interest Payment Date, other than on the Maturity Date, any Redemption Date or the Special Redemption Date, falls on a day that is not a Business Day, then any interest payable will be paid on, and such Interest Payment Date will be moved to, the next succeeding Business Day, and additional interest will accrue for each day that such payment is delayed as a result thereof. If the Maturity Date, any Redemption Date or the Special Redemption date falls on a day that is not a Business Day, then the principal, premium, if any, and/or interest payable on such date will be paid on the immediately preceding Business Day. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debt Security (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, except that interest and any Deferred Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date and may be paid to the Person in whose name this Debt Security (or one or more Predecessor Debt Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Debt Securities not less than 10 days prior to such special record date, all as more fully provided in the Indenture. The principal of and interest on this Debt Security shall be payable at the office or agency of the Trustee (or other Paying Agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Debt Security Register or by wire transfer of immediately available funds to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debt Security is the Institutional Trustee, the payment of the principal of and premium, if any, and interest on this Debt Security shall be made in immediately available funds when due at such place and to such account as may be designated by the Institutional Trustee. All payments in respect of this Debt Security shall be payable in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts. Upon submission of Notice (as defined in the Indenture) and so long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time and without causing an Event of Default, to defer payments of interest on the Debt Securities by extending the interest distribution period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to 20 consecutive quarterly periods (each such extended interest distribution period, an "Extension Period"), during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debt Securities, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Interest Rate applicable during such Extension Period, compounded quarterly from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by law. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that no Extension Period may extend beyond the Maturity Date, Redemption Date or Special Redemption Date, as the case may be, and provided, further, however, during any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal of or premium, if any, or interest on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities or (iii) make any payment under any guarantees of the Company that rank in all respects pari passu with or junior in respect to the Capital Securities Guarantee (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (A) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (B) in connection with a dividend reinvestment or stockholder stock purchase plan or (C) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange, reclassification, combination or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). Prior to the termination of any Extension Period, the Company may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date, the Redemption Date or Special Redemption Date, as the case may be. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but Deferred Interest shall accrue upon each installment of interest that would otherwise have been due and payable during such Extension Period until such installment is paid. The Company must give the Trustee notice of its election to begin or extend an Extension Period at least five Business Days prior to the next succeeding Interest Payment Date on which interest on the Debt Securities would have been payable except for the election to begin such Extension Period. The indebtedness evidenced by this Debt Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debt Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debt Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on such holder's behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee such holder's attorney-in-fact for any and all such purposes. Each holder hereof, by such holder's acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. The Company waives diligence, presentment, demand for payment, notice of nonpayment, notice of protest, and all other demands and notices. This Debt Security shall not be entitled to any benefit under the Indenture hereinafter referred to and shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debt Security are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has duly executed this certificate. QCR Holdings, Inc. By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Dated:__________________, 2006 CERTIFICATE OF AUTHENTICATION This is one of the Debt Securities referred to in the within-mentioned Indenture. Wells Fargo Bank, National Association, not in its individual capacity but solely as the Trustee By: --------------------------------------------- Authorized Officer Dated:__________________, 2006 [FORM OF REVERSE OF SECURITY] This Debt Security is one of a duly authorized series of Debt Securities of the Company, all issued or to be issued pursuant to an Indenture (the "Indenture"), dated as of February 24, 2006, duly executed and delivered between the Company and Wells Fargo Bank, National Association, as Trustee (the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debt Securities (referred to herein as the "Debt Securities") of which this Debt Security is a part. The summary of the terms of this Debt Security contained herein does not purport to be complete and is qualified by reference to the Indenture. Upon the occurrence and continuation of a Tax Event, an Investment Company Event or a Capital Treatment Event (each a "Special Event"), this Debt Security may become due and payable, in whole or in part, at any time, within 90 days following the occurrence of such Tax Event, Investment Company Event or Capital Treatment Event (the "Special Redemption Date"), as the case may be, at the Special Redemption Price. In the event that the Special Redemption Date falls on a day after the Fixed Rate Period but prior to the LIBOR Determination Date for any Interest Payment Period, then the Company shall be required to pay to Securityholders, on the Business Day following such LIBOR Determination Date, any additional amount of interest that would have been payable on the Special Redemption Date had the amount of interest determined on such LIBOR Determination Date been known on the first day of such Interest Payment Period. The Company shall also have the right to redeem this Debt Security at the option of the Company, in whole or in part, on any January 7, April 7, July 7 or October 7 on or after April 7, 2011 (a "Redemption Date"), at the Redemption Price. Any redemption pursuant to the preceding paragraph will be made, subject to the receipt by the Company of prior approval from any regulatory authority with jurisdiction over the Company if such approval is then required under applicable capital guidelines or policies of such regulatory authority, upon not less than 30 days' nor more than 60 days' notice. If the Debt Securities are only partially redeemed by the Company, the Debt Securities will be redeemed pro rata or by lot or by any other method utilized by the Trustee. "Redemption Price" means 100% of the principal amount of the Debt Securities being redeemed plus accrued and unpaid interest on such Debt Securities to the Redemption Date or, in the case of a redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Special Redemption Date is on or after April 7, 2011. "Special Redemption Price" means (1) if the Special Redemption Date is before April 7, 2011, One Hundred Five Percent (105%) of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption and (2) if the Special Redemption Date is on or after April 7, 2011, the Redemption Price for such Special Redemption Date. In the event of redemption of this Debt Security in part only, a new Debt Security or Debt Securities for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. Upon the occurrence of an Acceleration Event, the principal of all of the Debt Securities may be declared due and payable, and upon such acceleration shall become due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding affected thereby, as specified in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall, among other things, without the consent of the holders of each Debt Security then outstanding and affected thereby (i) change the Maturity Date of any Debt Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or manner of calculation of the rate or extend the time of payment of interest thereon, or reduce (other than as a result of the maturity or earlier redemption of any such Debt Security in accordance with the terms of the Indenture and such Debt Security) or increase the aggregate principal amount of Debt Securities then outstanding, or change any of the redemption provisions, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than United States Dollars, or impair or affect the right of any holder of Debt Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Debt Securities, the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding, on behalf of all of the holders of the Debt Securities, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except (a) a default in payments due in respect of any of the Debt Securities; (b) in respect of covenants or provisions of the Indenture which cannot be modified or amended without the consent of the holder of each Debt Security affected, or (c) in respect of the covenants of the Company relating to its ownership of Common Securities of the Trust. Any such consent or waiver by the registered holder of this Debt Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Debt Security and of any Debt Security issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Debt Security. No reference herein to the Indenture and no provision of this Debt Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay all payments due on this Debt Security at the time and place and at the rate and in the money herein prescribed. As provided in the Indenture and subject to certain limitations herein and therein set forth, this Debt Security is transferable by the registered holder hereof on the Debt Security Register of the Company, upon surrender of this Debt Security for registration of transfer at the office or agency of the Trustee in Wilmington, Delaware accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or such holder's attorney duly authorized in writing, and thereupon one or more new Debt Securities of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be made for any such registration of transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Debt Security, the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent and the Debt Security Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debt Security shall be overdue and notwithstanding any notice of ownership or writing hereon) for the purpose of receiving payment of the principal of and premium, if any, and interest on this Debt Security and for all other purposes, and neither the Company nor the Trustee nor any Authenticating Agent nor any Paying Agent nor any transfer agent nor any Debt Security Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debt Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Debt Securities are issuable only in registered certificated form without coupons. As provided in the Indenture and subject to certain limitations herein and therein set forth, Debt Securities are exchangeable for a like aggregate principal amount of Debt Securities of a different authorized denomination, as requested by the holder surrendering the same. All terms used in this Debt Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THE DEBT SECURITIES, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. EX-12 3 exhibit12_1.txt Exhibit 12.1 - Computation of Ratios QCR Holdings, Inc. Calculation of earnings to fixed charges Dec-05 Dec-04 Dec-03 Dec-02 Jun-02 Jun-01 --------------------------------------------------- Earnings before income taxes ................................. 7,092 7,721 8,156 4,879 4,277 3,556 --------------------------------------------------- Add: preferred dividends on a pretax basis ................... -- -- -- -- -- -- Add: fixed charges ........................................... 21,888 13,832 12,414 6,713 13,389 16,979 --------------------------------------------------- Earnings including interest expense on deposits (1) .......... 28,980 21,553 20,570 11,592 17,666 20,535 --------------------------------------------------- Less: interest expense on deposits ........................... 12,842 6,852 7,005 4,151 8,895 13,022 --------------------------------------------------- Earnings excluding interest expense on deposits (2) .......... 16,138 14,701 13,565 7,441 8,772 7,512 Fixed charges: Interest expense on deposits ............................... 12,842 6,852 7,005 4,151 8,895 13,022 --------------------------------------------------- Interest expense on borrowings ............................. 8,439 6,473 4,945 2,332 3,976 3,590 --------------------------------------------------- Portion of rents representative of interest factor ......... 607 507 464 230 519 367 --------------------------------------------------- Fixed charges including interest expense on deposits (3) 21,888 13,832 12,414 6,713 13,389 16,979 Less interest expense on deposits ............................ 12,842 6,852 7,005 4,151 8,895 13,022 --------------------------------------------------- Fixed charges excluding interest expense on deposits (4) 9,046 6,980 5,409 2,562 4,494 3,957 =================================================== --------------------------------------------------- Rents ........................................................ 1,038 867 837 431 796 615 --------------------------------------------------- Portion of rents representative of interest factor ........... 607 507 464 230 519 367 --------------------------------------------------- Ratio of earnings to fixed charges and preferred stock dividends: Excluding interest expense on deposits ( (2)/(4) ) ......... 1.78 2.11 2.51 2.90 1.95 1.90 Including interest expense on deposits ( (1)/(3) ) ......... 1.32 1.56 1.66 1.73 1.32 1.21
EX-21 4 exhibit21_1.txt Exhibit 21.1 - Subsidiaries of the Registrant Subsidiaries State of Incorporation/Formation Quad City Bank and Trust Company Iowa Cedar Rapids Bank and Trust Company Iowa Rockford Bank and Trust Company Illinois Quad City Bancard, Inc. Delaware M2 Lease Funds, LLC Wisconsin QCR Holdings Statutory Trust II Connecticut QCR Holdings Statutory Trust III Connecticut QCR Holdings Statutory Trust IV Delaware QCR Holdings Statutory Trust V Delaware EX-23 5 exhibit23_1.txt McGladrey & Pullen, LLP Certified Public Accountants Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the QCR Holdings, Inc. 401(k)/Profit Sharing Plan (File No. 33-77420) and Stock Option Plan (File No. 33-78024) of our reports dated January 27, 2006 relating to our audits of QCR Holdings, Inc.'s December 31, 2005 consolidated financial statements and internal control over financial reporting and to the reference to our Firm under the caption "experts" contained therein. /s/ McGladrey & Pullen, LLP Davenport, Iowa March 13, 2006 McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation of separate and independent legal entities. EX-31 6 exhibit31_1.txt Exhibit 31.1 I, Douglas M. Hultquist, certify that: 1. I have reviewed this annual report on Form 10-K 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; 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 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 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 registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls 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: March 13, 2006 /s/ Douglas M. Hultquist ----------------------------- Douglas M. Hultquist Chief Executive Officer EX-31 7 exhibit31_2.txt Exhibit 31.2 I, Todd A. Gipple, certify that: 1. I have reviewed this annual report on Form 10-K 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; 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 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 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 registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls 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: March 13, 2006 /s/ Todd A. Gipple --------------------------------- Todd A. Gipple Chief Financial Officer EX-32 8 exhibit32_1.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 Annual Report of QCR Holdings, Inc. (the "Company") on Form 10-K for the period ending December 31, 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 March 13, 2006 EX-32 9 exhibit32_2.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 Annual Report of QCR Holdings, Inc. (the "Company") on Form 10-K for the period ending December 31, 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 March 13, 2006 -----END PRIVACY-ENHANCED MESSAGE-----