10-Q 1 c26637e10vq.htm QUARTERLY REPORT e10vq
 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 2008
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-22208
QCR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
     
Delaware   42-1397595
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer ID Number)
3551 7th Street, Suite 204, Moline, Illinois 61265
(Address of principal executive offices)
(309) 736-3580
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days.
Yes þ      No o          
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o    Accelerated filer þ    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller reporting company o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o      No þ          
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of May 1, 2008, the Registrant had outstanding 4,612,374 shares of common stock, $1.00 par value per share.
 
 

 


 

QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
         
    Page
    Number
Part I FINANCIAL INFORMATION
       
 
       
Item 1 Consolidated Financial Statements (Unaudited)
       
 
       
Consolidated Balance Sheets, March 31, 2008 and December 31, 2007
    2  
 
       
Consolidated Statements of Income, For the Three Months Ended March 31, 2008 and 2007
    3  
 
       
Consolidated Statement of Changes in Stockholders’ Equity, For the Three Months Ended March 31, 2008
    4  
 
       
Consolidated Statements of Cash Flows, For the Three Months Ended March 31, 2008 and 2007
    5  
 
       
Notes to Consolidated Financial Statements
    6-12  
 
       
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
    13-25  
 
       
Item 3 Quantitative and Qualitative Disclosures About Market Risk
    26-27  
 
       
Item 4 Controls and Procedures
    28  
 
       
Part II OTHER INFORMATION
       
 
       
Item 1 Legal Proceedings
    29  
 
       
Item 1.A. Risk Factors
    29  
 
       
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    29  
 
       
Item 3 Defaults Upon Senior Securities
    29  
 
       
Item 4 Submission of Matters to a Vote of Security Holders
    29  
 
       
Item 5 Other Information
    29  
 
       
Item 6 Exhibits
    30  
 
       
Signatures
    31-32  

1


 

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2008 and December 31, 2007
                 
    March 31,     December 31,  
    2008     2007  
ASSETS
               
Cash and due from banks
  $ 42,135,036     $ 41,195,890  
Federal funds sold
    2,610,000       6,620,000  
Interest-bearing deposits at financial institutions
    2,653,474       5,096,048  
 
               
Securities held to maturity, at amortized cost
    350,000       350,000  
Securities available for sale, at fair value
    250,147,577       235,554,653  
 
           
 
    250,497,577       235,904,653  
 
           
 
               
Loans receivable held for sale
    5,276,079       6,507,583  
Loans/leases receivable held for investment
    1,145,793,919       1,100,392,324  
 
           
 
    1,151,069,998       1,106,899,907  
Less: Allowance for estimated losses on loans/leases
    (13,319,900 )     (12,023,637 )
 
           
 
    1,137,750,098       1,094,876,270  
 
           
 
               
Premises and equipment, net
    32,120,670       32,268,686  
Goodwill
    3,222,688       3,222,688  
Intangible asset
    983,932       887,542  
Accrued interest receivable
    8,493,275       7,964,557  
Bank-owned life insurance
    29,183,998       28,888,938  
Other assets
    17,554,604       19,639,070  
 
           
 
               
Total assets
  $ 1,527,205,352     $ 1,476,564,342  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES
               
LIABILITIES
               
Deposits:
               
Noninterest-bearing
  $ 134,692,948     $ 165,286,011  
Interest-bearing
    853,883,605       764,141,207  
 
           
Total deposits
    988,576,553       929,427,218  
 
           
 
               
Short-term borrowings
    169,497,510       183,195,840  
Federal Home Loan Bank advances
    175,102,184       168,815,006  
Other borrowings
    52,639,529       47,690,122  
Junior subordinated debentures
    36,085,000       36,085,000  
Other liabilities
    15,265,650       23,564,681  
 
           
Total liabilities
    1,437,166,426       1,388,777,867  
 
           
 
               
Minority interest in consolidated subsidiaries
    1,756,445       1,720,683  
 
               
STOCKHOLDERS’ EQUITY
               
Preferred stock, $1 par value; shares authorized 250,000;
    568       568  
March 2008 - 568 shares issued and outstanding,
               
December 2007 - 568 shares issued and outstanding,
               
Common stock, $1 par value; shares authorized 10,000,000
    4,603,849       4,597,744  
March 2008 - 4,603,849 shares issued and outstanding,
               
December 2007 - 4,597,744 shares issued and outstanding,
               
Additional paid-in capital
    42,479,538       42,317,374  
Retained earnings
    36,578,885       36,338,566  
Accumulated other comprehensive income
    4,619,641       2,811,540  
 
           
Total stockholders’ equity
    88,282,481       86,065,792  
 
           
Total liabilities and stockholders’ equity
  $ 1,527,205,352     $ 1,476,564,342  
 
           
See Notes to Consolidated Financial Statements

2


 

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31,
                 
    2008     2007  
Interest and dividend income:
               
Loans/leases, including fees
  $ 19,125,873     $ 17,488,896  
Securities:
               
Taxable
    2,846,187       1,974,199  
Nontaxable
    243,877       276,832  
Interest-bearing deposits at financial institutions
    94,265       122,333  
Federal funds sold
    25,193       79,811  
 
           
Total interest and dividend income
    22,335,395       19,942,071  
 
           
 
               
Interest expense:
               
Deposits
    7,334,314       7,960,901  
Short-term borrowings
    1,255,707       1,144,867  
Federal Home Loan Bank advances
    1,941,800       1,719,877  
Other borrowings
    570,170       131,950  
Junior subordinated debentures
    630,978       650,135  
 
           
Total interest expense
    11,732,969       11,607,730  
 
           
 
               
Net interest income
    10,602,426       8,334,341  
 
               
Provision for loan/lease losses
    2,272,240       406,457  
 
           
Net interest income after provision for loan/lease losses
    8,330,186       7,927,883  
 
           
 
               
Noninterest income:
               
Credit card fees, net of processing costs
    487,606       381,983  
Trust department fees
    969,823       919,111  
Deposit service fees
    754,683       578,684  
Gains on sales of loans, net
    339,854       274,731  
Gains on sales of foreclosed assets
          2,430  
Earnings on bank-owned life insurance
    295,060       203,559  
Investment advisory and management fees, gross
    414,644       376,535  
Other
    499,060       390,796  
 
           
Total noninterest income
    3,760,730       3,127,829  
 
           
 
               
Noninterest expenses:
               
Salaries and employee benefits
    6,965,507       5,554,746  
Professional and data processing fees
    1,257,411       928,648  
Advertising and marketing
    319,452       237,730  
Occupancy and equipment expense
    1,350,399       1,218,772  
Stationery and supplies
    143,148       154,722  
Postage and telephone
    272,217       253,856  
Bank service charges
    137,856       141,630  
FDIC and other insurance
    331,723       166,277  
Loss on disposals/sales of fixed assets
          239,016  
Other
    393,933       306,121  
 
           
Total noninterest expenses
    11,171,646       9,201,518  
 
           
 
               
Income before income taxes
    919,270       1,854,194  
Federal and state income taxes
    92,434       500,566  
 
           
Income before minority interest in net income of consolidated subsidiaries
    826,836       1,353,628  
Minority interest in income of consolidated subsidiaries
    140,392       90,942  
 
           
Net income
  $ 686,444     $ 1,262,686  
 
           
 
Net income
  $ 686,444     $ 1,262,686  
Less preferred stock dividends
    446,125       268,000  
 
           
Net income available to common stockholders
  $ 240,319     $ 994,686  
 
           
 
               
Earnings per common share:
               
Basic
  $ 0.05     $ 0.22  
Diluted
  $ 0.05     $ 0.22  
Weighted average common shares outstanding
    4,602,166       4,564,664  
Weighted average common and common equivalent shares outstanding
    4,609,843       4,589,866  
Cash dividends declared per common share
  $ 0.00     $ 0.00  
 
           
Comprehensive income
  $ 2,494,545     $ 1,611,234  
 
           
See Notes to Consolidated Financial Statements

3


 

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended March 31, 2008
                                                 
                                    Accumulated        
                    Additional             Other        
    Preferred     Common     Paid-In     Retained     Comprehensive        
    Stock     Stock     Capital     Earnings     Income     Total  
     
Balance December 31, 2007
  $ 568     $ 4,597,744     $ 42,317,374     $ 36,338,566     $ 2,811,540     $ 86,065,792  
Comprehensive income:
                                               
Net income
                            686,444               686,444  
Other comprehensive income, net of tax
                                    1,808,101       1,808,101  
 
                                             
Comprehensive income
                                            2,494,545  
 
                                             
Preferred cash dividends declared
                            (446,125 )             (446,125 )
Proceeds from issuance of 4,373 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan
            4,373       45,686                       50,059  
Proceeds from issuance of 1,732 shares of common stock as a result of stock options exercised
            1,732       15,839                       17,571  
Tax benefit of nonqualified stock options exercised
                    717                       717  
Stock compensation expense
                    99,922                       99,922  
     
Balance March 31, 2008
  $ 568     $ 4,603,849     $ 42,479,538     $ 36,578,885     $ 4,619,641     $ 88,282,481  
     
See Notes to Consolidated Financial Statements

4


 

QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31
                 
    2008     2007  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net income
  $ 686,444     $ 1,262,686  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation
    613,903       589,850  
Provision for loan/lease losses
    2,272,240       406,457  
Amortization of offering costs on subordinated debentures
    3,579       3,579  
Stock-based compensation expense
    120,111       (118,386 )
Minority interest in income of consolidated subsidiaries
    140,392       90,942  
Gain on sale of foreclosed assets
          (2,430 )
(Accretion of discount) amortization of premiums on securities, net
    (52,268 )     18,637  
Loans originated for sale
    (28,442,005 )     (24,642,440 )
Proceeds on sales of loans
    30,016,369       23,255,521  
Net gains on sales of loans
    (339,854 )     (274,731 )
Net losses on disposals/sales of premises and equipment
          239,016  
(Increase) decrease in accrued interest receivable
    (528,718 )     40,166  
Increase (decrease) in other assets
    1,074,650       (2,704,080 )
Decrease in other liabilities
    (8,318,402 )     (769,074 )
 
           
Net cash used in operating activities
  $ (2,753,559 )   $ (2,604,287 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net decrease (increase) in federal funds sold
    4,010,000       (4,995,000 )
Net decrease (increase) in interest-bearing deposits at financial institutions
    2,442,574       (17,852,491 )
Proceeds from sale of foreclosed assets
          15,430  
Activity in securities portfolio:
               
Purchases
    (51,832,984 )     (6,699,925 )
Calls, maturities and redemptions
    40,074,000       21,880,000  
Paydowns
    149,991       133,779  
Increase in cash value of bank-owned life insurance
    (295,060 )     (203,560 )
Net loans/leases originated and held for investment
    (46,597,566 )     (28,398,469 )
Purchase of premises and equipment
    (465,887 )     (156,295 )
Purchase of intangible asset
    (96,390 )     (872,151 )
 
           
Net cash used in investing activities
  $ (52,611,322 )   $ (37,148,682 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposit accounts
    59,149,335       2,391,930  
Net (decrease) increase in short-term borrowings
    (13,698,330 )     7,548,162  
Activity in Federal Home Loan Bank advances:
               
Advances
    12,000,000       31,000,000  
Payments
    (5,712,822 )     (17,559,822 )
Net increase in other borrowings
    4,949,407       8,477,850  
Tax benefit of nonqualified stock options exercised
    717       1,032  
Payment of cash dividends
    (451,910 )     (346,798 )
Costs from issuance of preferred stock, net
          (10,671 )
Proceeds from issuance of common stock, net
    67,630       65,778  
 
           
Net cash provided by financing activities
  $ 56,304,027     $ 31,567,461  
 
           
 
               
Net increase (decrease) in cash and due from banks
    939,146       (8,185,508 )
Cash and due from banks, beginning
    41,195,890       42,502,770  
 
           
Cash and due from banks, ending
  $ 42,135,036     $ 34,317,262  
 
           
Supplemental disclosure of cash flow information, cash payments for:
               
Interest
  $ 12,261,326     $ 12,011,025  
 
           
 
Income/franchise taxes
  $ 991,238     $ 241,467  
 
           
 
               
Supplemental schedule of noncash investing activities:
               
Change in accumulated other comprehensive income, unrealized gains on securities available for sale, net
  $ 1,808,101     $ 348,548  
 
           
 
Transfers of loans to other real estate owned
  $ 219,994     $  
 
           
See Notes to Consolidated Financial Statements

5


 

QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Basis of presentation: The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2007, including QCR Holdings, Inc.’s (the “Company”) Form 10-K filed with the Securities and Exchange Commission on March 5, 2008. Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted
     The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management’s discussion and analysis are due to rounding. The results of the interim periods ended March 31, 2008, are not necessarily indicative of the results expected for the year ending December 31, 2008.
     The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Certain amounts in the prior period financial statements have been reclassified, with no effect on net income or stockholders’ equity, to conform with the current period presentation.
     Stock-based compensation plans: Please refer to Note 13 of our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007, for information related to the Company’s stock option and incentive plans, stock appreciation rights (“SARs”) and stock purchase plan.
     The Company accounts for stock-based compensation in accordance with the Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation expense over the requisite service period for awards expected to vest. Stock-based compensation expense totaled $120 thousand and ($118) thousand for the three months ended March 31, 2008 and 2007. A key component in the calculation of stock-based compensation expense is the market price of the Company’s stock. A decline in the Company’s stock price during the first quarter of 2007 contributed significantly to the recording of negative stock-based compensation expense for the period.

6


 

Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—continued
NOTE 2 — EARNINGS PER SHARE
     The following information was used in the computation of earnings per share on a basic and diluted basis.
                 
    Three months ended  
    March 31,  
    2008     2007  
Net income available to common stockholders, basic and diluted earnings
  $ 240,319     $ 994,686  
 
           
 
               
Weighted average common shares Outstanding
    4,602,166       4,564,664  
 
               
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan
    7,677       25,202  
 
           
 
               
Weighted average common and common equivalent shares oustanding
    4,609,843       4,589,866  
 
           

7


 

Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
NOTE 3 — BUSINESS SEGMENT INFORMATION
     Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a ”management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of QCR Holdings, Inc. have been defined by the structure of the Company’s internal organization, focusing on the financial information that the Company’s operating decision-makers routinely use to make decisions about operating matters.
     The Company’s primary segment, Commercial Banking, is geographically divided by markets into the secondary segments which are the four subsidiary banks wholly-owned by the Company: Quad City Bank & Trust, Cedar Rapids Bank & Trust, Rockford Bank & Trust, and First Wisconsin Bank & Trust. Each of these secondary segments offer similar products and services, but are managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.
     The Company’s Credit Card Processing segment represents the operations of Bancard. Bancard is a wholly-owned subsidiary of the Company that provides credit card processing for merchants and cardholders of the Company’s four subsidiary banks and approximately ninety-five agent banks.
     The Company’s Trust Management segment represents the trust and asset management services offered at the Company’s four subsidiary banks in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. No assets of the subsidiary banks have been allocated to the Trust Management segment.
     The Company’s All Other segment includes the operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds. This segment includes the corporate operations of the parent and the real estate holding operations of Velie Plantation Holding Company.
     Selected financial information on the Company’s business segments is presented as follows for the three months ended March 31, 2008 and 2007.

8


 

Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
QCR HOLDINGS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA — BUSINESS SEGMENTS
Three Months Ended March 31, 2008 and 2007
                                                                         
    Commercial Banking                        
    Quad City   Cedar Rapids   Rockford   First Wisconsin   Credit Card   Trust           Intercompany   Consolidated
    Bank & Trust   Bank & Trust   Bank & Trust   Bank & Trust   Processing   Management   All other   Eliminations   Total
Three Months Ended March 31, 2008
                                                                       
Total Revenue
  $ 14,209,990     $ 6,540,062     $ 2,833,857     $ 1,152,515     $ 487,606     $ 969,373     $ 1,969,842     $ (2,067,120 )   $ 26,096,125  
Net Interest Income
  $ 6,908,953     $ 2,872,260     $ 1,092,376     $ 454,299     $ 121,333     $     $ 79,666     $ (926,461 )   $ 10,602,426  
Net Income
  $ 2,047,651     $ 624,605     $ (45,889 )   $ (1,107,020 )   $ 105,824     $ 271,234     $ 297,292     $ (1,507,253 )   $ 686,444  
Total Assets
  $ 869,047,705     $ 411,212,136     $ 171,683,778     $ 76,942,364     $ 1,142,046     $     $ 137,355,571     $ (140,178,248 )   $ 1,527,205,352  
Provision for Loan/Lease Losses
  $ 583,599     $ 192,710     $ 180,000     $ 1,288,000     $ 27,931     $     $     $     $ 2,272,240  
Goodwill and Intangible Assets
  $ 3,319,078     $     $     $ 887,542     $     $     $     $     $ 4,206,620  
 
                                                                       
Three Months Ended March 31, 2007
                                                                       
Total Revenue
  $ 14,621,554     $ 5,894,559     $ 1,601,111     $ 372,277     $ 381,983     $ 919,111     $ 104,283     $ (824,978 )   $ 23,069,900  
Net Interest Income
  $ 6,002,832     $ 2,336,622     $ 586,675     $ 155,726     $ 115,573     $     $ (747,514 )   $ (115,573 )   $ 8,334,341  
Net Income
  $ 1,933,511     $ 529,356     $ (239,334 )   $ (276,961 )   $ 11,243     $ 289,144     $ (689,430 )   $ (294,843 )   $ 1,262,686  
Total Assets
  $ 884,272,061     $ 339,544,763     $ 106,425,359     $ 24,627,730     $ 1,185,374     $     $ 126,069,805     $ (178,302,273 )   $ 1,303,822,819  
Provision for Loan/Lease Losses
  $ 84,786     $ 173,270     $ 50,000     $ 43,000     $ 55,401     $     $     $     $ 406,457  
Goodwill and Intangible Assets
  $ 3,222,688     $     $     $ 872,151     $     $     $     $     $ 4,094,839  

9


 

Part I
Item 1
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
NOTE 4 — COMMITMENTS AND CONTINGENCIES
     In the normal course of business, the Company’s subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.
     As of March 31, 2008 and December 31, 2007, commitments to extend credit aggregated were $484.5 million and $479.1 million, respectively. As of March 31, 2008 and December 31, 2007, standby, commercial and similar letters of credit aggregated were $11.4 million and $15.2 million, respectively. Management does not expect that all of these commitments will be funded.
     Contractual obligations and other commitments were presented in the Company’s 2007 Annual Report on Form 10-K. There have been no material changes in the Company’s contractual obligations and other commitments since that report was filed.
NOTE 5 — RECENT ACCOUNTING DEVELOPMENTS
     In September 2006, FASB issued Statement of Financial Accounting Standard No. 157 (“SFAS No. 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements.  SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements.  The Company adopted the provisions of SFAS No. 157 for the quarter ended March 31, 2008. See NOTE 6 for additional information regarding fair value measurements.

10


 

Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
     In February of 2007, FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”, which gives entities the option to measure eligible financial assets, and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available for eligible items that exist on the date that a company adopts SFAS No. 159 or when an entity first recognizes a financial asset or financial liability. The decision to elect the fair value option for an eligible item is irrevocable. Subsequent changes in fair value must be recorded in earnings. This statement is effective as of the beginning of a company’s first fiscal year after November 15, 2007. The statement offered early adoption provisions that the Company elected not to exercise. There was no impact on the consolidated financial statements of the Company as a result of the adoption of SFAS No. 159 during the first quarter of 2008 since the Company has not elected the fair value option for any eligible items, as defined in SFAS No. 159.
     In December 2007, FASB issued Statement No. 141 (revised 2007), Business Combinations. Statement No. 141R fundamentally changes the manner in which the entity will account for a business combination. This Statement is effective for fiscal years beginning on or after December 15, 2008 and is predominantly prospective. The Company is currently evaluating the impact of the adoption of Statement No. 141R.
     In December 2007, FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. Statement No. 160 changes the measurement, recognition and presentation of minority interests in consolidated subsidiaries (now referred to as noncontrolling interests). This Statement is effective for fiscal years beginning on or after December 15, 2008 and is prospective for the change related to measurement and recognition and retrospective for the changes related to presentation. The Company is currently evaluating the impact of the adoption of Statement No. 160.
NOTE 6 — FAIR VALUE MEASURMENTS
     As discussed in NOTE 5 above, on January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. There was no impact on the March 31, 2008 consolidated financial statements of the Company as a result of this adoption.
     SFAS No. 157 defines fair value, establishes a framework for measuring fair value and aexpands disclosures about fair value. It also establishes a hierarchy for determining fair value measurement. The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:
  1.   Level 1 – Inputs to the valuation methodology are quotes prices (unadjusted) for identical assets or liabilities in markets;
 
  2.   Level 2 – Inputs to the valulation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
 
  3.   Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement

11


 

Part I
Item 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
     Assets measured at fair value on a recurring basis comprise the following at March 31, 2008:
                                 
            Fair Value Measurements at Reporting Date Using  
            Quoted Prices     Significant        
            in Active     Other     Significant  
            Markets for Identical     Observable     Unobservable  
(dollars in           Assets     Inputs     Inputs  
thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)  
Securities available for sale
  $ 250,148     $ 824     $ 249,324     $  
 
                               
Total
  $ 250,148     $ 824     $ 249,324     $  
                         
 
     A small portion of the securities available for sale portfolio consists of common stocks issued by various unrelated bank holding companies. The fair values used by the Companry are obtained from an independent pricing service, which represent quoted market prices for the identical securities (Level 1 inputs).
     The large majority of the securities available for sale portfolio consists of U.S. government sponsored agency securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).
     Certain financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis were not significant at March 31, 2008.

12


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
     QCR Holdings, Inc. is the parent company of Quad City Bank & Trust, Cedar Rapids Bank & Trust, Rockford Bank & Trust, First Wisconsin Bank & Trust, and Quad City Bancard, Inc.
     Quad City Bank & Trust and Cedar Rapids Bank & Trust are Iowa-chartered commercial banks, Rockford Bank & Trust is an Illinois-chartered commercial bank, and First Wisconsin Bank & Trust is a Wisconsin-chartered bank. All are members of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation.
    Quad City Bank & Trust commenced operations in 1994 and provides full-service commercial and consumer banking, and trust and asset management services to the Quad City area and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. Quad City Bank & Trust also provides leasing services through its 80%-owned subsidiary, M2 Lease Funds, located in Brookfield, Wisconsin.
 
    Cedar Rapids Bank & Trust commenced operations in 2001 and provides full-service commercial and consumer banking services to Cedar Rapids and adjacent communities through its main office located on First Avenue in downtown Cedar Rapids, Iowa and its branch facility located on Council Street in northern Cedar Rapids. Cedar Rapids Bank & Trust also provides residential real estate mortgage lending services through its 50%-owned joint venture, Cedar Rapids Mortgage Company.
 
    Rockford Bank & Trust commenced operations in January 2005 and provides full-service commercial and consumer banking services to Rockford and adjacent communities through its main office located on Guilford Road at Alpine Road in Rockford, and its branch facility located in downtown Rockford.
 
    On February 20, 2007 the Company completed a transaction that resulted in the acquisition of a Wisconsin bank charter, the transfer of the Wisconsin-based assets and liabilities of Rockford Bank & Trust into this charter, and the creation of First Wisconsin Bank & Trust. First Wisconsin Bank & Trust is a wholly owned subsidiary of the Company providing full-service commercial and consumer banking services in the Milwaukee area through its main office located in Brookfield, Wisconsin.
     Bancard provides merchant and cardholder credit card processing services. Bancard currently provides credit card processing for its local merchants and agent banks and for cardholders of the Company’s subsidiary banks and agent banks.

13


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
OVERVIEW
THREE MONTHS ENDED MARCH 31, 2008
     The Company reported earnings for the first quarter ended March 31, 2008 of $686 thousand, which resulted in diluted earnings per share for common shareholders of $0.05. Earnings and diluted earnings per share for the first quarter of 2007 were $1.3 million and $0.22, respectively. The primary reason for this decrease in earnings was a sharp increase in the provision for loan/lease losses in the amount of $1.9 million. Of this increase, $1.1 million was the result of a charge-off associated with a single lending relationship at First Wisconsin Bank & Trust. Additionally, in light of the uncertainty in the national economy and its potential impact on our local markets, the Company took steps to increase the qualitative loan/lease loss reserve factors for each of the subsidiary banks and leasing company. This adjustment led to the majority of the remaining increase in the provision. Despite the significant increase in the provision expense, the Company experienced strong growth in core earnings as earnings before provision and taxes increased more than $900 thousand from $2.2 million for the first quarter of 2007 to $3.1 million for the first quarter of 2008.
     The Company’s operating results are derived largely from net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on borrowings and customer deposits. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
     Net interest income increased $2.3 million, or 27%, to $10.6 million for the quarter ended March 31, 2008, from $8.3 million for the first quarter of 2007. For the first quarter of 2008, average earning assets increased by $190.9 million, or 16%, and average interest-bearing liabilities increased by $176.6 million, or 17%, when compared with average balances for the first quarter of 2007. A comparison of yields, spread and margin from the first quarter of 2008 to the first quarter of 2007 is as follows:
    The average yield on interest-earning assets decreased 25 basis points.
 
    The average cost of interest-bearing liabilities decreased 58 basis points.
 
    The net interest spread improved 33 basis points from 2.46% to 2.79%.
 
    The net interest margin improved 26 basis points from 2.87% to 3.13%.
     The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories, as well as the components of change in net interest income, are presented in the following tables:

14


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
                                                 
    For the three months ended March 31,  
    2008     2007  
            Interest     Average             Interest     Average  
    Average     Earned     Yield or     Average     Earned     Yield or  
    Balance     or Paid     Cost     Balance     or Paid     Cost  
         
ASSETS
                                               
Interest earning assets:
                                               
Federal funds sold
  $ 3,979     $ 25       2.51 %   $ 7,024     $ 80       4.56 %
Interest-bearing deposits at financial institutions
    10,394       94       3.62 %     9,671       122       5.05 %
Investment securities (1)
    233,944       3,209       5.49 %     188,966       2,385       5.05 %
Gross loans/leases receivable (2)
    1,123,330       19,126       6.81 %     975,044       17,489       7.17 %
                         
 
                                               
Total interest earning assets
    1,371,647       22,454       6.55 %     1,180,705       20,076       6.80 %
 
                                               
Noninterest-earning assets:
                                               
Cash and due from banks
  $ 35,672                     $ 35,187                  
Premises and equipment
    31,895                       32,159                  
Less allowance for estimated losses on loans/leases
    (12,722 )                     (10,816 )                
Other
    68,773                       48,915                  
 
                                           
 
                                               
Total assets
  $ 1,495,265                     $ 1,286,150                  
 
                                           
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand deposits
  $ 332,679       2,192       2.64 %   $ 299,226       2,701       3.61 %
Savings deposits
    39,633       161       1.62 %     30,802       162       2.10 %
Time deposits
    433,416       4,981       4.60 %     415,756       5,098       4.90 %
Short-term borrowings
    183,565       1,256       2.74 %     121,451       1,145       3.77 %
Federal Home Loan Bank advances
    172,162       1,942       4.51 %     158,873       1,720       4.33 %
Junior subordinated debentures
    36,085       631       6.99 %     36,085       650       7.21 %
Other borrowings
    49,288       570       4.63 %     8,001       132       6.60 %
                         
 
                                               
Total interest-bearing liabilities
  $ 1,246,828       11,733       3.76 %   $ 1,070,194       11,608       4.34 %
 
                                               
Noninterest-bearing demand
  $ 136,338                     $ 119,819                  
Other noninterest-bearing liabilities
    23,247                       24,403                  
Total liabilities
    1,406,413                       1,214,416                  
 
                                               
Minority interest in consolidated subsidiaries
    1,739                                          
 
                                               
Stockholders’ equity
    87,113                       71,734                  
 
                                           
 
                                               
Total liabilities and stockholders’ equity
  $ 1,495,265                     $ 1,286,150                  
 
                                           
 
                                               
Net interest income
          $ 10,721                     $ 8,468          
 
                                           
 
                                               
Net interest spread
                    2.79 %                     2.46 %
 
                                           
 
                                               
Net interest margin
                    3.13 %                     2.87 %
 
                                           
 
                                               
Ratio of average interest earning assets to average interest- bearing liabilities
    110.01 %                     110.33 %                
 
                                           
 
(1)   Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate for each period presented.
 
(2)   Loan fees are not material and are included in interest income from loans receivable.

15


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
Analysis of Changes of Interest Income/Interest Expense
For the three months ended March 31, 2008
                         
    Inc./(Dec.)   Components    
    from   of Change (1)    
    Prior Period   Rate   Volume
    2008 vs. 2007
    (Dollars in Thousands)
INTEREST INCOME
                       
Federal funds sold
  $ (55 )   $ (28 )   $ (27 )
Interest-bearing deposits at financial institutions
    (28 )     (79 )     51  
Investment securities (2)
    824       220       604  
Gross loans/leases receivable (3)
    1,637       (4,915 )     6,552  
     
 
                       
Total change in interest income
  $ 2,378     $ (4,802 )   $ 7,180  
     
 
                       
INTEREST EXPENSE
                       
Interest-bearing demand deposits
  $ (509 )   $ (2,069 )   $ 1,560  
Savings deposits
    (1 )     (165 )     164  
Time deposits
    (117 )     (1,103 )     986  
Short-term borrowings
    111       (1,596 )     1,707  
Federal Home Loan Bank advances
    222       74       148  
Junior subordinated debentures
    (19 )     (19 )      
Other borrowings
    438       (275 )     713  
     
 
                       
Total change in interest expense
  $ 125     $ (5,153 )   $ 5,278  
     
 
                       
Total change in net interest income
  $ 2,253     $ 351     $ 1,902  
     
 
(1)   The column “increase/decrease from prior period” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.
 
(2)   Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate for each period presented.
 
(3)   Loan fees are not material and are included in interest income from loans/leases receivable.

16


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
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, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest, and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. Management may report a materially different amount for the provision for loan/lease losses in the statement of operations to change the allowance for 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 in the section entitled “Financial Condition” of this Management’s Discussion and Analysis that discusses the allowance for loan/lease losses. Although management believes the levels of the allowance as of both March 31, 2008 and December 31, 2007 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
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
     Interest income increased by $2.4 million to $22.3 million for the three-month period ended March 31, 2008 when compared to $19.9 million for the quarter ended March 31, 2007. The 12% increase in interest income was attributable to greater average outstanding balances in interest earning assets, principally with respect to loans/leases receivable. With the sharp decline in national and local market interest rates over the past two quarters, the Company’s average yield on interest earning assets decreased 25 basis points from 6.80% for the three months ended March 31, 2007 to 6.55% for the same period in 2008.

17


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
     Interest expense experienced a slight increase as it grew a modest $100 thousand from $11.6 million for the first quarter of 2007 to $11.7 million for the first quarter of 2008. Although the Company saw an increase in interest-bearing liabilities of $176.6 million, or 17%, from the first quarter in 2007 to the first quarter in 2008, this was effectively offset by the decline in the average cost of interest bearing liabilities. Specifically, the Company’s average cost of interest bearing liabilities was 3.76% for the first three months of 2008, which was a decrease of 58 basis points when compared to the first quarter of 2007.
     The provision for loan/lease losses increased nearly $1.9 million from $406 thousand for the first quarter of 2007 to $2.3 million for the first quarter of 2008. Of this increase, $1.1 million was the result of a large charge-off associated with a single lending relationship at First Wisconsin Bank & Trust. This loan was with a real estate developer that had a number of other development projects, not financed by First Wisconsin Bank & Trust, go into receivership and the developer recently filed for bankruptcy protection. Management believed it was prudent to fully charge off and provide for this credit in the first quarter of 2008. Additionally, due to the current uncertainty regarding the national economy and the impact on local markets, the Company increased the qualitative factors applied to all loans within the reserve adequacy calculations for all of the subsidiary banks and the leasing company. This adjustment accounted for the majority of the remaining increase in the provision. As a direct result, the Company’s allowance for loan/lease losses to gross loans/leases increased to 1.16% at March 31, 2008 from 1.09% at December 31, 2007.
     The following table sets forth the various categories of non-interest income for the three months ended March 31, 2008 and 2007.
Non-interest Income
                                 
    Three months ended              
    March 31,              
    2008     2007     $ change     % change  
Credit card fees, net of processing costs
  $ 487,606     $ 381,983     $ 105,623       27.7 %
Trust department fees
    969,823       919,111       50,712       5.5 %
Deposit service fees
    754,683       578,684       175,999       30.4 %
Gains on sales of loans, net
    339,854       274,731       65,123       23.7 %
Gains on sales of foreclosed assets
    0       2,430       (2,430 )     (100.0 )%
Earnings on bank-owned life insurance
    295,060       203,559       91,501       45.0 %
Investment advisory and management fees
    414,644       376,535       38,109       10.1 %
Other
    499,060       390,796       108,264       27.7 %
 
                         
Total non-interest income
  $ 3,760,730     $ 3,127,829     $ 632,901       20.2 %
 
                         

18


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
     Analysis concerning changes in non-interest income for the first quarter of 2008, when compared to the first quarter of 2007, is as follows:
    Bancard’s credit card fees, net of processing costs, increased $106 thousand for the first quarter of 2008 when compared to the first quarter of 2007. An increase in interchange income offset a slight decrease in merchant income which contributed the majority of this increase. Net credit card charge-offs of $28 thousand during the first quarter of 2008, which were nearly half of the charge-offs in the comparable period of 2007, were another primary contributor to the increase.
 
    Deposit service fees increased $176 thousand. This increase was primarily the result of an increase in NSF (non-sufficient funds or overdraft) charges related to demand deposit accounts at the Company’s subsidiary banks. The quarterly average balance of the Company’s consolidated demand deposits at March 31, 2008 increased $50.0 million, or 12%, from March 31, 2007. Service charges and NSF charges related to the Company’s demand deposit accounts were the main components of deposit service fees.
 
    Gains on sales of loans, net, increased $65 thousand. Loans originated for sale during the first quarter of 2008 were $28.4 million and during the first quarter of 2007 were $24.6 million. Proceeds on the sales of loans during the first quarters of 2008 and 2007 were $30.0 million and $23.3 million, respectively.
 
    Earnings on bank-owned life insurance (BOLI) experienced an increase of $92 thousand for the first quarter of 2008 when compared to the first quarter 2007. Over the past year, the subsidiary banks have purchased additional BOLI for key executives increasing the level of insurance by $10.1 million, thus increasing the related earnings.
 
    Other non-interest income increased $108 thousand, due primarily to increased earnings in unconsolidated subsidiaries and increases in Visa check card fees at the subsidiary banks.

19


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
     The following table sets forth the various categories of non-interest expenses for the three months ended March 31, 2008 and 2007.
Non-interest Expenses
                                 
    Three months ended              
    March 31,              
    2008     2007     $ change     % change  
Salaries and employee benefits
  $ 6,965,507     $ 5,554,746     $ 1,410,761       25.4 %
Professional and data processing fees
    1,257,411       928,648       328,763       35.4 %
Advertising and marketing
    319,452       237,730       81,722       34.4 %
Occupancy and equipment expense
    1,350,399       1,218,772       131,627       10.8 %
Stationery and supplies
    143,148       154,758       (11,574 )     (7.5 )%
Postage and telephone
    272,217       253,856       18,361       7.2 %
Bank service charges
    137,856       141,630       (3,774 )     (2.7 )%
FDIC and other insurance
    331,723       166,277       165,446       99.5 %
Loss on disposals/sales of fixed assets
    0       239,016       (239,016 )     (100.0 )%
Other
    393,933       306,121       87,812       28.7 %
 
                         
Total non-interest expenses
  $ 11,171,646     $ 9,201,518     $ 1,970,128       21.4 %
 
                         
     Analysis concerning changes in non-interest expenses for the first quarter of 2008, when compared to the first quarter of 2007, is as follows:
    Salaries and employee benefits, which is the largest component of non-interest expenses, increased $1.4 million. The increase was primarily due to an increase in employees from 330 full time equivalents (FTEs) to 357 FTEs from year-to-year, as a result of the Company’s continued expansion.
 
    Professional and data processing fees increased $329 thousand. The primary contributor to the year-to-year increase was an increase in fees related to several consulting projects at the Company and subsidiary banks.
 
    Advertising and marketing increased nearly $82 thousand. Of this increase, $50 thousand was the result of increased advertising at the Company’s newest subsidiary bank, First Wisconsin Bank & Trust.
 
    FDIC and other insurance expense increased 100% to $332 thousand. The $166 thousand increase was entirely the result of the Federal Deposit Insurance Corporation’s (FDIC) new premium pricing system and the assessment methodology for deposit insurance coverage now being applied to the subsidiary banks.
 
    During the first quarter of 2007, Quad City Bank & Trust contributed two vacant lots, valued at $239 thousand in the aggregate, to allow the development of retail space to take place adjacent to its Five Points facility.

20


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
     The provision for income taxes was $92 thousand for the first three months of 2008 compared to $501 thousand for the first quarter of 2007 for a decrease of $408 thousand, or 82%. The decrease was the result of a decrease in income before income taxes of $935 thousand, or 50%, for the 2008 quarter when compared to the 2007 quarter. Primarily due to an increase in the proportionate share of tax-exempt income to total income, from year to year, the Company experienced a decrease in the effective tax rate from 27.0% for the first quarter of 2007 to 10.1% for the first quarter of 2008.
FINANCIAL CONDITION
     Total assets of the Company increased by $50.6 million, or 3%, to $1.53 billion at March 31, 2008 from $1.48 billion at December 31, 2007. The growth resulted primarily from the net increase in the loan/lease portfolio, funded by increases in interest-bearing deposits.
     The composition of the Company’s securities portfolio is managed to maximize return while considering the impact on asset-liability position and liquidity needs. Securities increased by $14.6 million, or 6%, to $250.5 million at March 31, 2008 from $235.9 million at December 31, 2007. The increase was the result of a number of transactions in the securities portfolio. The Company purchased $51.8 million of securities classified as available for sale. The available for sale portfolio, which is largely comprised of United States government agency securities and municipal securities, experienced an increase in the fair value totaling $2.9 million. The accretion of discounts, net of the amortization of premiums, amounted to $52 thousand. These portfolio increases were partially offset by $40.1 million of maturities and calls of securities, and paydowns of $150 thousand that were received on mortgage-backed securities.
     Gross loans/leases receivable grew by $44.2 million, or 4%, to $1.15 billion at March 31, 2008 from $1.11 billion at December 31, 2007. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table:
                 
    As of   As of
(dollars in thousands)   March 31, 2008   December 31, 2007
Commercial
  $ 398,422     $ 368,170  
Commercial Real Estate
    507,081       499,486  
Direct Financing Leases
    68,613       67,224  
Residential Real Estate
    80,747       84,539  
Installment and Other Consumer
    94,575       85,930  
Deferred loan/lease origination costs, net of fees
    1,632       1,551  
     
TOTAL LOANS/LEASES
  $ 1,151,070     $ 1,106,900  
     
The majority of residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with long term fixed rate loans. Loans originated for this purpose were classified as held for sale.

21


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
     The allowance for estimated losses on loans/leases was $13.3 million at March 31, 2008 compared to $12.0 million at December 31, 2007, an increase of $1.3 million, or nearly 11%. The allowance for estimated losses on loans/leases was determined based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmental guarantees and other factors that, in management’s judgement, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed monthly with specific detailed reviews completed on all loans 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 loan review staff, and reported to management and the board of directors. Due to the current uncertainty regarding the national economy and the impact on local markets, the Company increased the qualitative factors applied to all loans within the reserve adequacy calculations for all of the subsidiary banks and the leasing company. As a direct result, the Company’s allowance for loan/lease losses to gross loans/leases increased to 1.16% at March 31, 2008 from 1.09% at December 31, 2007.
     Although management believes that the allowance for estimated losses on loans/leases at March 31, 2008 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan/lease losses in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.
     Net charge-offs for the three months ended March 31, 2008 were $976 thousand, and for the first quarter of 2007, there were net recoveries of $56 thousand. Of this increase, $1.1 million was the result of the aforementioned charge-off associated with a single lending relationship at First Wisconsin Bank & Trust.
     The table below presents the amounts of nonperforming assets:
                 
    As of   As of
(dollars in thousands)   March 31, 2008   December 31, 2007
Nonaccrual loans/leases
  $ 10,543     $ 6,488  
Accruing loans/leases past due 90 days or more
    444       500  
Other real estate owned
    716       496  
     
TOTAL NONPERFORMING ASSETS
  $ 11,703     $ 7,484  
     

22


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
     Five separate lending relationships at the subsidiary banks and leasing company, with an aggregate outstanding balance of $7.9 million, comprised 75% of the nonaccrual loans at March 31, 2008. Of the $4.1 million increase in nonaccrual loans/leases, $3.8 million was attributable to four unrelated nonperforming loans. The existence of a strong collateral position, a governmental guarantee, or an improved payment status on several of these nonperformers significantly reduces the Company’s exposure to loss. The subsidiary banks and leasing company continue to work toward resolutions with all of these customers. Nonaccrual loans represented less than one percent of the Company’s held for investment loan/lease portfolio at March 31, 2008.
     Deposits increased by $59.2 million, or 6%, to $988.6 million at March 31, 2008 from $929.4 million at December 31, 2007. The increase resulted from a $23.1 million aggregate net increase in money market, savings, and total transaction accounts, in combination with a $36.1 million net increase in interest-bearing certificates of deposit. The level of brokered certificates of deposit at the subsidiary banks remained consistent at $48.4 million at March 31, 2008 as compared to December 31, 2007.
     Short-term borrowings decreased $13.7 million, or 7%, from $183.2 million at December 31, 2007 to $169.5 million at March 31, 2008. 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. Short-term borrowings were comprised of customer repurchase agreements of $90.8 million and $93.3 million at March 31, 2008 and December 31, 2007, respectively, as well as federal funds purchased from correspondent banks of $78.7 million at March 31, 2008 and $89.9 million at December 31, 2007.
     Federal Home Loan Bank (“FHLB”) advances increased by $6.3 million, or 4%, to $175.1 million at March 31, 2008 from $168.8 million at December 31, 2007. As a result of their memberships in either the FHLB of Des Moines or Chicago, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. FHLB advances are utilized for loan matching as a hedge against the possibility of rising interest rates, and when these advances provide a less costly or more readily available source of funds than customer deposits.
     Other borrowings increased $4.9 million from $47.7 million at December 31, 2007 to $52.6 million at March 31, 2008. During 2007, the Company began the utilization of structured wholesale repurchase agreements as an alternative funding source. In the first quarter of 2008, one of the subsidiary banks entered into a new wholesale repurchase agreement transaction which accounted for the increase.

23


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
     Stockholders’ equity increased $2.2 million from $86.1 million as of December 31, 2007 to $88.3 million as of March 31, 2008. Net income of $686 thousand for the first quarter of 2008 increased retained earnings. This increase was offset by the declaration of preferred stock dividends totaling $446 thousand. Specifically, $268 thousand represented the quarterly dividend on the outstanding shares of Series B Non-Cumulative Perpetual Preferred Stock at a stated rate of 8.00%, and $178 thousand was the amount of the quarterly dividend on the outstanding shares of Series C Non-Cumulative Perpetual Preferred Stock at a stated rate of 9.50%. Additionally, the available for sale portion of the securities portfolio experienced an increase in fair value of $1.8 million for the first quarter of 2008.
LIQUIDITY AND CAPITAL RESOURCES
     Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The liquidity of the Company primarily depends upon cash flows from operating, investing, and financing activities. Net cash used in operating activities, consisting primarily of funds used to decrease other liabilities, was $2.7 million for the first three months of 2008 compared to $2.6 million net cash used in operating activities, consisting primarily of funds used to increase other assets, for the same period in 2007. Net cash used in investing activities, consisting principally of loan originations to be held for investment, was $52.5 million for the first three months of 2008 and $37.1 million, consisting primarily of loan originations to be held for investment, for the first quarter of 2007. Net cash provided by financing activities, consisting primarily of growth in deposits, for the first quarter of 2008 was $56.1 million, and for the same period in 2007 was $31.6 million, consisting principally of increased FHLB advances taken by the subsidiary banks.
     The Company has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. At March 31, 2008, the subsidiary banks had twenty lines of credit totaling $151.5 million, of which $9.0 million was secured and $142.5 million was unsecured. At March 31, 2008, the entire amount was available as the subsidiary banks had drawn none of these available balances. Additionally, the Company has a single $25.0 million unsecured revolving credit note with a 364-day maturity. As of March 31, 2008, the Company had $18.0 million available as it carried an outstanding balance on the note of $7.0 million.
     The Company and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The most recent notification from the Federal Deposit Insurance Corporation categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notifications that management believes have changed each institution’s categories.
     On April 24, 2008, the Company declared a common dividend of $0.04 per share, or $184 thousand, which will be paid on July 7, 2008 to common stockholders of record on June 23, 2008. It

24


 

Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued
is the Company’s intention to consider the payment of common dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital for continued growth; however it believes that operating results have reached a level that can sustain dividends to common stockholders as well.
     In recent years, the Company secured additional capital through various resources including approximately $36.1 million through the issuance of trust preferred securities and $20.4 million through the issuance of non-cumulative perpetual preferred stock.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
     Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
     The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the Company’s operations and future prospects are detailed in the “Risk Factors” section included under Item 1a. of Part I of the Company’s Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including the Company, which could have a material adverse effect on our operations and future prospects. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

25


 

Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company’s net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net 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, 2007 demonstrated a 2.10% decrease in net interest income with a 200 basis point increase in interest rates, and a 2.50% increase in net 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.

26


 

Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     Interest rate risk is considered to be 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.

27


 

Part I
Item 4
CONTROLS AND PROCEDURES
     Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of March 31, 2008. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.
     Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company’s internal control over financial reporting during the period covered by this report that have materially effected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

28


 

Part II
QCR HOLDINGS, INC.
AND SUBSIDIARIES
PART II — OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 1.A. Risk Factors
There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company’s 2007 Annual Report on Form 10-K. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None

29


 

Part II
PART II — OTHER INFORMATION — continued
Item 6 Exhibits
(a) Exhibits
             
 
    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.

30


 

SIGNATURES
     In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QCR HOLDINGS, INC.
       (Registrant)
         
Date May 9, 2008   /s/ Douglas M. Hultquist    
  Douglas M. Hultquist, President   
  Chief Executive Officer   
 
     
Date May 9, 2008   /s/ Todd A. Gipple    
  Todd A. Gipple, Executive Vice President   
  Chief Financial Officer   

31


 

         
SIGNATURES
     In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QCR HOLDINGS, INC.
(Registrant)
             
Date May 9, 2008
     
 
Douglas M. Hultquist, President
   
 
      Chief Executive Officer    
 
           
 
           
Date May 9, 2008
     
 
Todd A. Gipple, Executive Vice President
   
 
      Chief Financial Officer    

32