U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2006.

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:
Common stock, $1 Par Value

Securities registered pursuant to Section 12(g) of the Exchange Act:
None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 o      Accelerated filer þ     Non-accelerated filer 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

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 Capital Market on June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $71,342,568.

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, 2007, the Registrant had outstanding 4,565,158 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 2007.

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

INDEX

		Page
		Number
Part I
Item 1. Business			4-7
Item 1.A. Risk Factors			8-13
Item 1.B. Unresolved Staff Comments			13
Item 2. Properties			13-14
Item 3. Legal Proceedings			14
Item 4. Submission of Matters to a Vote of Security Holders			14
Part II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters			14-16
Item 6. Selected Financial Data			16-17
Item 7. Management’s Discussion and Analysis of Financial Condition Condition and Results of Operations			18-38
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk			38-39
Item 8. Financial Statements			40-81
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			82
Item 9.A. Controls and Procedures			82-84
Item 9.B. Other Information			84
Part III
Item 10. Directors, Executive Officers and Corporate Governance			84
Item 11. Executive Compensation			84
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			84-85
Item 13. Certain Relationships and Related Transactions and Director Independence			85
Item 14. Principal Accountant Fees and Services			85

QCR HOLDINGS, INC. AND SUBSIDIARIES

INDEX - continued

		Page
		Number
Part IV
Item 15. Exhibits and Financial Schedules			85-89
Signatures			90-91
Appendix A			A1-A6
Appendix B			B1-B12
Employment Agreement - Michael A. Bauer
Statement re: Computation of Ratios
Subsidiaries
Consent of McGladrey and Pullen LLP
Certification of CEO Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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, Rockford and Milwaukee communities through its four wholly-owned banking subsidiaries, which provide full-service commercial and consumer banking and trust and asset management services:

	•		Quad City Bank and Trust Company, (“Quad City Bank & Trust”) which is based in Bettendorf, Iowa and commenced operations in 1994,
	•		Cedar Rapids Bank and Trust Company, (“Cedar Rapids Bank & Trust”) which is based in Cedar Rapids, Iowa and commenced operations in 2001, and
	•		Rockford Bank and Trust Company, (“Rockford Bank & Trust”) which is based in Rockford, Illinois and commenced operations in 2005.
	•		First Wisconsin Bank and Trust Company, (“First Wisconsin Bank & Trust”) which is based in Pewaukee, Wisconsin and commenced operations in 2007.

The Company also engages in merchant and cardholder credit card processing through its wholly owned subsidiary, Quad City Bancard, Inc. (“Bancard”), based in Moline, Illinois, in direct financing lease contracts through its 80% equity investment in M2 Lease Funds, LLC (“M2 Lease Funds”), based in the Milwaukee, Wisconsin area, and in real estate holdings through its 57% equity investment in Velie Plantation Holding Company, LLC (“Velie Plantation Holding Company”), based in Davenport, Iowa.

Subsidiary Banks. Quad City Bank & Trust was capitalized on October 13, 1993 and commenced operations on January 7, 1994. Quad City Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured 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, 2006, Quad City Bank & Trust had total segment assets of $764.4 million. See Note 20. for additional business segment information.

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 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, 2006, Cedar Rapids Bank & Trust had total segment assets of $334.4 million. See Note 20. for additional business segment information.

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 completed branch facility located on Guilford Road at Alpine Road in Rockford. At December 31, 2006, Rockford Bank & Trust had total segment assets of $106.8 million. See Note 20. for additional business segment information.

On February 20, 2007, the Company received its fourth bank charter, First Wisconsin Bank & Trust. The Company commenced operations in the Milwaukee area in April 2006, operating initially as a loan production office/deposit production office (LPO/DPO) of Rockford Bank & Trust, until June 2006, at which time it became a branch of Rockford Bank & Trust. In October 2006, the Company announced that it had entered into a series of agreements for the addition of a Wisconsin-chartered bank and the subsequent move of the branch into the charter. This transaction was consummated in February 2007. First Wisconsin Bank & Trust is a Wisconsin-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. It provides full-service commercial and consumer banking to the Milwaukee, Wisconsin area and adjacent communities through its office located in Pewaukee, Wisconsin.

Operating Subsidiaries. Bancard was capitalized in April 1995 as a Delaware corporation that provides merchant and cardholder credit card processing services. Bancard provides credit card processing for merchants and cardholders of the Company’s four subsidiary banks and approximately seventy-five agent banks. During 2006, Bancard processed in excess of 3.6 million merchant transactions with a dollar volume exceeding $368.9 million.

On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of M2 Lease Funds. John Engelbrecht, the President and Chief Executive Officer of M2 Lease Funds, retained 20% of the membership units. M2 Lease Funds, which is based in 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’s acquisition of M2 Lease Funds resulted in goodwill of $3.4 million and minority interest, which at December 31, 2006, was $797 thousand. In accordance with the provisions of FAS Statement 142, goodwill is not being amortized, but is being evaluated annually for impairment. There was no impairment of goodwill in 2006.

Since 1998, the Company has held a 20% equity investment in Velie Plantation Holding Company, LLC. In 2006, the Company acquired an additional 37% of the membership units bringing its total investment to 57% in aggregate. Velie Plantation Holding Company is engaged in holding the real estate property known as the Velie Plantation Mansion in Moline, Illinois. Six additional investors in Velie Plantation Holding Company have retained 43% of the membership units. The acquisition of a majority of the membership units resulted in minority interest of $566 thousand at December 31, 2006.

Trust Preferred Subsidiaries. In February 2004, the Company issued $12.0 million of fixed/floating rate trust preferred securities and $8.0 million 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 $8.2 million and $12.4 million, respectively.

On May 5, 2005, the Company issued $5.0 million 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.

On February 24, 2006, the Company issued $10.0 million 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 $10.3 million.

Conclusion. The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust, Rockford Bank & Trust, First Wisconsin 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 and a 57% equity interest in Velie Plantation Holding Company. 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 $114 thousand in two associated companies, Nobel Electronic Transfer, LLC, and Nobel Real Estate Investors, 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 351 individuals at December 31, 2006.

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.

The Board of Governors of the Federal Reserve System (the “Federal Reserve”) is the primary federal regulator of the Company and its subsidiaries. In addition, Quad City Bank & Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking (the “Iowa Superintendent”), Rockford Bank & Trust is regulated by the State of Illinois Department of Financial and Professional Regulation (“the Illinois DFPR”), and First Wisconsin Bank & Trust is regulated by the State of Wisconsin Department of Financial Institutions (the “Wisconsin DFI”). In addition, the FDIC, as administrator of the Deposit Insurance Fund, has regulatory authority over the subsidiary banks.

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 $11.1 million. As of December 31, 2006, commercial loans made up approximately 81% of the loan portfolio, while residential mortgages comprised approximately 10% and consumer loans comprised approximately 9%.

Cedar Rapids Bank & Trust’s current legal lending limit is approximately $4.3 million. As of December 31, 2006, commercial loans made up approximately 85% of the loan portfolio, while residential mortgages comprised approximately 7% and consumer loans comprised approximately 8%.

Rockford Bank & Trust’s current legal lending limit is approximately $2.4 million. As of December 31, 2006, commercial loans made up approximately 88% of the loan portfolio, while residential mortgages and consumer laons comprised approximately 6%.

At First Wisconsin Bank & Trust, commercial loans made up approximately 95% of the loan portfolio, while residential mortgages comprised approximately 3% and consumer loans comprised approximately 2%, at February 28, 2007.

As part of the loan monitoring activity at the four 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 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 improvements, and may include additional assets of the borrower.

The subsidiary banks sell the majority of their real estate loans in the secondary market. During the year ended December 31, 2006, the subsidiary banks originated $134.3 million of real estate loans and sold $84.2 million, or 63%, of these loans. 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. 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 $75.4 million at December 31, 2006. Servicing rights are not presently retained on the loans sold in the secondary market.

The consumer lending departments of each bank provide all types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines.

Competition. The Company currently operates in the highly competitive Quad City, Cedar Rapids, Rockford, and Milwaukee 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.

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, 2006, 2005, 2004 and 2003, along with the six-month transition period ended December 31, 2002, and the previous fiscal year ended June 30.

Internet Site. The Company maintains Internet sites for itself and its four banking subsidiaries. The Company makes available free of charge through these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Also available are many of our corporate governance documents, including our Code of Ethics. The sites are www.qcrh.com, www.qcbt.com, www.crbt.com, www.rfrdbank.com, and www.firstwisconsinbank.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, Rockford and Milwaukee markets.

We operate primarily in the Quad City, Cedar Rapids, Rockford, and Milwaukee 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 all of 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.

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.

While we have no current plans, 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. If 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:

	•		potential exposure to unknown or contingent liabilities of banks and businesses we acquire;
	•		exposure to potential asset quality issues of the acquired bank or related business;
	•		difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; and
	•		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.

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 $449.2 million, or approximately 47% of our total loan/lease portfolio as of December 31, 2006. 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 receivable, inventory and 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, $350.3 million or approximately 36%, as of December 31, 2006. 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, 2006, our allowance for loan/lease losses as a percentage of total gross loans/leases was 1.10% and as a percentage of total non-performing loans/leases was approximately 144%. 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.

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 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 of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer

break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, 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, the FDIC, the Iowa Superintendent, the Illinois DFPR, and the Wisconsin DFI. 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 or dividends on our preferred stock may adversely impact our ability to pay common stock dividends.

As of December 31, 2006, we had $36.1 million of junior subordinated debentures held by four business trusts that we control. Interest payments on the debentures, which totaled $2.5 million for 2006, 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. In the fourth quarter of 2006, the Company issued 268 shares of its Series B Non-cumulative Perpetual Preferred Stock (the “Preferred Shares”) at $50 thousand per share with a stated rate of 8.00%, although the Preferred Shares will accrue no dividends. Dividends will be payable on the Preferred Shares only if declared, but no dividends may be declared on the Company’s common stock unless and until dividends have been declared on the outstanding shares. Deferral, of either interest payments on the debentures or preferred dividends on the Preferred Shares, could cause a subsequent decline in the market price of our Common Stock because the Company would not be able to pay dividends on its Common Stock.

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 listed 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 the 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. 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 Renovations were also 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.

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 57% 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 3,800 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. 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 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. In November 2006, the Company completed construction of a 20,000 square foot permanent facility at a cost of $5.5 million.

In April 2006, the Company expanded Rockford Bank & Trust’s banking operation to the Milwaukee, Wisconsin area. Through February 2007, this operation functioned as an arm of Rockford Bank & Trust, initially as a loan production/deposit production office (LPO/DPO), then later as a branch. On February 20, 2007, First Wisconsin Bank and Trust obtained a Wisconsin charter. Under a month-to-month agreement, First Wisconsin Bank & Trust leases approximately 2,100 square feet in a multi-tenant office building on Quail Court in Pewaukee, Wisconsin.

The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company.

No individual real estate property or mortgage amounts to 10% or more of consolidated assets.

Item 3. Legal Proceedings

There are no material pending legal proceedings to which the Company or 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, 2006.

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 on The Nasdaq Capital Market under the symbol “QCRH”. The stock began trading on October 6, 1993. As of December 31, 2006, there were 4,560,629 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.

		2006								2005								2004
		sales price								sales price								sales price
		High				Low				High				Low				High				Low
First quarter		$	19.660			$	17.440			$	22.000			$	20.000			$	22.000			$	18.667
Second quarter			19.950				16.250				22.060				19.830				19.667				17.400
Third quarter			18.169				16.210				22.750				20.500				19.940				17.550
Fourth quarter			18.860				16.772				20.500				17.920				21.990				18.000

On April 27, 2006, the Company declared a cash dividend of $0.04 per share, or $182 thousand, which was paid on July 7, 2006, to stockholders of record on June 23, 2006. On October 26, 2006, the board of directors declared a cash dividend of $0.04 per share payable on January 5, 2007, to stockholders of record on December 22, 2006. 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. During the fourth quarter of 2006, the Company issued shares of noncumulative perpetual preferred stock. Also, under the terms of this preferred stock, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances 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. Iowa, Illinois and Wisconsin 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 2006.

Stockholder Return Performance Presentation

The following graph indicates, for the period commencing December 31, 2001, a comparison of cumulative total returns for QCR Holdings, Inc., the Nasdaq Capital Market (US Companies) and the SNL Midwest Bank Index prepared by SNL Securities, Charlottesville, Virginia. The graph was prepared at the Company’s request by SNL Securities.

QCR Holdings, Inc.

		Period Ending
Index		12/31/01				12/31/02				12/31/03				12/31/04				12/31/05				12/31/06
QCR Holdings, Inc.			100.00				153.13				254.91				287.94				271.19				244.20
NASDAQ Composite			100.00				68.76				103.67				113.16				115.57				127.58
SNL NASDAQ Bank Index			100.00				102.85				132.76				152.16				147.52				165.62

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 Months				Year
																		Ended				Ended
																		December				June 30,
		2006				2005				2004				2003				31, 2002				2002
Statement of Income Data:
Interest income		$	68,803			$	48,688			$	38,017			$	33,378			$	16,120			$	28,520
Interest expense			38,907				21,281				13,325				11,950				6,484				12,870
Net interest income			29,896				27,407				24,692				21,428				9,636				15,650
Provision for loan/lease losses			3,284				877				1,372				3,405				2,184				2,265
Noninterest income			11,983				10,073				8,682				11,168				8,840				7,915
Noninterest expenses			34,669				29,433				24,281				21,035				11,413				17,023
Pre-tax net income			3,926				7,170				7,721				8,156				4,879				4,277
Minority interest in income of consolidated subsidiaries			266				78				—				—				—				—
Income tax expense			858				2,282				2,504				2,695				1,683				1,315
Net income			2,802				4,810				5,217				5,461				3,196				2,962
Per Common Share Data:
Net income-basic		$	0.57			$	1.06			$	1.23			$	1.31			$	0.77			$	0.74
Net income-diluted			0.57				1.04				1.20				1.28				0.76				0.72
Cash dividends declared			0.08				0.08				0.08				0.07				0.03				—
Dividend payout ratio			14.04	%			7.55	%			6.50	%			5.34	%			3.90	%			—	%
Balance Sheet:
Total assets		$	1,271,675			$	1,042,614			$	870,084			$	710,040			$	604,600			$	518,828
Securities			194,774				182,365				149,561				128,843				81,654				76,231
Loans/leases			960,747				756,254				648,351				522,471				449,736				390,594
Allowance for estimated losses on loans/leases			10,612				8,884				9,262				8,643				6,879				6,111
Deposits			875,447				698,504				588,016				511,652				434,748				376,317
Stockholders’ equity:
Preferred			12,884				—				—				—				—				—
Common			57,999				54,467				50,774				41,823				36,587				32,578
Key Ratios:
Return on average assets			0.24	%			0.51	%			0.65	%			0.83	%			1.13	%			0.64	%
Return on average common equity			5.02				9.14				11.89				13.93				18.41				10.07
Return on average total equity			4.85				9.14				11.89				13.93				18.41				10.07
Net interest margin (TEY) (1)			2.87				3.25				3.41				3.55				3.68				3.74
Efficiency ratio (2)			82.78				78.53				72.75				64.53				61.71				72.20
Nonperforming assets to total assets			0.58				0.36				1.23				0.70				0.83				0.44
Allowance for estimated losses on loans/leases to total loans/leases			1.10				1.17				1.43				1.65				1.53				1.56
Net charge-offs to average loans/leases			0.18				0.25				0.13				0.34				0.34				0.12
Average total stockholders’ equity to average assets			5.01				5.63				5.49				5.94				6.12				6.38
Earnings to fixed charges
Excluding interest on deposits			1.31	x			1.78	x			2.11	x			2.51	x			2.90	x			1.95	x
Including interest on deposits			1.10				1.32				1.56				1.66				1.73				1.32

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, 2006, 2005, and 2004, and financial condition at December 31, 2006 and 2005. 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 fourteen years, the Company has grown to include three additional banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2006, the Company had $1.27 billion in consolidated assets.

The Company reported earnings of $2.8 million or $0.57 basic earnings per share for 2006, compared to $4.8 million or $1.06 basic earnings per share for 2005, and $5.2 million or $1.23 basic earnings per share for 2004. In 2006, increased costs for funding, increased operating expenses, primarily salaries and employee benefits, and the write-off of a single credit relationship combined to more than offset the solid growth in revenue, of 37%, experienced from the previous year. Also, during the second half of 2006, the Company’s results reflected the start-up losses experienced by the Milwaukee branch of Rockford Bank & Trust. 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.

When compared to 2005, there was solid growth in 2006 in both net interest income and noninterest income for the Company. For 2006, net interest income and noninterest income improved by 9% and 19%, respectively, for a combined increase of $4.4 million when compared to 2005. A marked increase in the provision for loan/lease losses of $2.4 million from 2005 to 2006 essentially offset the improvement in net interest income from year-to-year. A negative development with a single credit relationship in the Milwaukee portfolio prompted a write-off, which resulted in an additional loan loss provision of $992 thousand during the fourth quarter of 2006. Gains on sales of foreclosed assets and deposit service fees contributed an additional $972 thousand, in aggregate, to the Company’s noninterest income. More than offsetting additional revenue contributions for the Company during 2006 were increases in noninterest expense of $5.2 million. The primary contributor to the increase in noninterest expense was salaries and employee benefits, which increased $4.8 million from 2005. During 2006, the Company experienced a 15% increase in the average number of employees to 329, in tandem with increases in the cost of several employee compensation programs. Also, during the second half of 2006, the Company incurred $2.0 million of pretax operating costs associated with the start-up of the new banking operation in Milwaukee, Wisconsin.

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.

Net interest income increased $2.5 million, or 9%, to $29.9 million for 2006, from $27.4 million for 2005. For 2006, average earning assets increased by $205.8 million, or 24%, and average interest-bearing liabilities increased by $200.4

million, or 26%, when compared with average balances for 2005. A comparison of yields, spreads and margins from the 2006 to 2005 shows the following:

	•		The average yield on interest-earning assets increased 80 basis points to 6.55%.
	•		The average cost of interest-bearing liabilities increased 125 basis points to 4.04%.
	•		The net interest spread declined 45 basis points from 2.96% to 2.51%.
	•		The net interest margin declined 38 basis points from 3.25% to 2.87%.

The Company’s management closely monitors and manages net interest margin. From a profitability standpoint, an important challenge for the Company’s 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.

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 four 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 2006, trust department fees contributed $3.0 million. During 2005, trust department fees totaled $2.8 million. Trust department fees contributed $2.5 million in revenues during 2004. 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, 2006 increased $82.9 million during the year to $894.1 million, resulting primarily from the development of existing relationships and the addition of new trust relationships. Assets under administration at December 31, 2005 were $811.2 million, which was an increase of $32.8 million from December 31, 2004, when assets totaled $778.4 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, 2006, 2005, and 2004 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

2006 compared with 2005

Overview. Net income for 2006 was $2.8 million compared to net income of $4.8 million for 2005 for a decrease of $2.0 million, or 42%. Basic earnings per share for 2006 were $0.57 compared to $1.06 for 2005. The decrease in net income was comprised of an increase in net interest income after provision for loan losses of $81 thousand in combination with an increase in aggregate noninterest income of $1.9 million and a decrease in federal and state income taxes of $1.4 million, offset by an increase in noninterest expenses of $5.2 million. Several factors contributed to the decline in net income from 2005 to 2006. Primary factors included a $2.4 million, or 274%, increase in the provision for loan/lease losses, an increase in salaries and employee benefits of 29%, or $4.8 million, and $2.0 million of pretax operating costs associated with the start-up of the new banking operation in Milwaukee.

Interest income. Interest income grew from $48.7 million for 2005 to $68.8 million for 2006. The 41% 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 2006 was 6.55% compared to 5.75% for 2005.

Interest expense. Interest expense increased by $17.6 million, from $21.3 million for 2005 to $38.9 million for 2006. The 83% increase in interest expense was primarily attributable to an aggregate increase in interest rates, in combination with greater average outstanding balances in interest-bearing liabilities, primarily customer deposits. The average cost on interest bearing liabilities was 4.04% for 2006 compared to 2.79% for 2005.

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 1.10% of total gross loans/leases at December 31, 2006, compared to approximately 1.17% of total gross loans at December 31, 2005, and 1.43% at December 31, 2004. The provision for loan/lease losses increased significantly to $3.3 million for 2006, compared to $877 thousand for 2005. 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. In 2006, along with more than $204 million of growth within the loan/lease portfolio, the Company experienced the write-off of a single credit relationship for $992 thousand. During 2006, the net growth in the loan/lease portfolio generated a provision expense of $2.3 million, and 31%, or $1.0 million of provision expense, was the result of adjustments to the allowance for estimated losses on loans/leases based on write-offs, payoffs, or restructures of credits within the Company’s 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 2006, there were transfers totaling $130 thousand of loans to other real estate owned. For 2006, commercial loans/leases had total charge-offs of $1.4 million, of which $992 thousand, or 70%, resulted from a single customer relationship at Rockford Bank & Trust, and there were $262 thousand of commercial recoveries. Consumer loan charge-offs and recoveries totaled $460 thousand and $50 thousand, respectively, for 2006. For 2006, credit cards accounted for 27% of the consumer loan net charge-offs. Real estate loans had $45 thousand of charge-offs and $52 thousand of recovery activity during 2006. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Management continually focuses its efforts at the subsidiary banks to attempt to improve the overall quality of the Company’s loan/lease portfolio.

Noninterest income. The following table sets forth the various categories of noninterest income for the years ended December 31, 2006 and 2005.

Noninterest Income

		Years ended
		December 30,
		2006				2005				% change
Credit card fees, net of processing costs		$	1,947,984			$	1,782,452				9.3	%
Trust department fees			3,049,440				2,818,832				8.2	%
Deposit service fees			1,948,246				1,582,530				21.9	%
Gains on sales of loans, net			991,536				1,254,242				(21.0	)%
Securities gains/(losses), net			(142,866	)			50			NA
Gains on sales of foreclosed assets			664,223				42,380				1467.3	%
Earnings on bank-owned life insurance			759,100				656,005				15.7	%
Investment advisory and management fees			1,216,350				691,800				75.8	%
Other			1,569,092				1,244,212				26.1	%
Total noninterest income		$	11,983,105			$	10,072,503				19.0	%

Analysis concerning changes in noninterest income for the 2006, when compared to 2005, is as follows:

	•		Bancard’s credit card fees, net of processing costs, improved $166 thousand. Increases during 2006 in Bancard’s cardholder processing operation provided essentially all of the improvement in credit card fees, net of processing costs. The year-to-year increase in local and agent bank merchant processing volumes and the subsequent increase in merchant processing fee income during 2006 was masked by 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.
	•		Trust department fees increased $231 thousand. This was the result of the continued development of existing trust relationships and the addition of new trust customers throughout the past twelve months. Total trust assets under administration were $894.1 million at December 31, 2006 compared to $811.2 million at December 31, 2005.
	•		Deposit service fees increased $346 thousand. This increase was primarily a result of an increase in service fees collected on the demand deposit accounts in a unique program at Cedar Rapids Bank & Trust. The twelve-month average balance of the Company’s consolidated demand deposits at December 31, 2006 increased $85.6 million from December 31, 2005. Service charges and NSF (non-sufficient funds or overdraft) charges related to the Company’s demand deposit accounts were the main components of deposit service fees.
	•		Gains on sales of loans, net, decreased $263 thousand. Loans originated for sale during 2006 were $87.7 million and during 2005 were $98.7 million. Proceeds on the sales of loans during 2006 and 2005 were $85.2 million and $100.8 million, respectively.
	•		In March 2006, the Company recognized an impairment loss of $143 thousand on a mortgage-backed mutual fund investment held in Quad City Bank & Trust’s securities portfolio, and in April, incurred an additional loss of $71 thousand on the subsequent sale of that security. In July 2006, the losses were partially offset when the Company recognized a gain of $71 thousand on the partial redemption of class B common stock of Mastercard Incorporated held by Quad City Bank & Trust, as a member bank of Mastercard International Incorporated.

	•		During 2006, a foreclosed asset, determined by litigation to be property of Quad City Bank & Trust, was sold at auction for a net gain of $650 thousand. During 2006, the Company realized an additional net gain of $14 thousand on the sale of three other foreclosed assets at Quad City Bank & Trust.
	•		Earnings on the cash surrender value of life insurance increased $103 thousand. At December 31, 2006, levels of bank-owned life insurance (BOLI) on key executives at the subsidiary banks was $13.9 million at Quad City Bank & Trust, $4.2 million at Cedar Rapids Bank & Trust, and $825 thousand at Rockford Bank & Trust.
	•		Investment advisory and management fees increased $525 thousand. Beginning January 1, 2006, the investment representatives at Quad City Bank & Trust, who had previously been employees of LPL Financial Services, were brought on as staff of the bank. As a result of this organizational change, fees are now reported gross rather than net of representative commissions, as in previous years. Approximately 70% of the year-to-year increase was due to this change. The balance of the increase 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.
	•		Other noninterest income increased $325 thousand. During 2006, M2 Lease Funds had $93 thousand in gains on the disposal of leased assets, which contributed to other noninterest income. M2 Lease Funds was acquired during the third quarter of 2005. Other noninterest income in each period consisted primarily of income from affiliated companies, earnings on other assets, Visa check card fees, and ATM fees.

Noninterest expenses. The following table sets forth the various categories of noninterest expenses for the years ended December 31, 2006 and 2005.

Noninterest Expenses

		Years ended
		December 31,
		2006				2005				% change
Salaries and employee benefits		$	21,262,541			$	16,458,860				29.2	%
Professional and data processing fees			3,192,326				2,865,064				11.4	%
Advertising and marketing			1,367,545				1,221,039				12.0	%
Occupancy and equipment expense			4,762,827				4,316,443				10.3	%
Stationery and supplies			670,915				645,985				3.9	%
Postage and telephone			961,394				842,779				14.1	%
Bank service charges			583,687				516,537				13.0	%
Insurance			612,058				594,282				3.0	%
Loss on disposals/sales of fixed assets			36,305				332,283				(89.1	)%
Other			1,219,386				1,639,876				(25.6	)%
Total noninterest expenses		$	34,668,984			$	29,433,148				17.8	%

Analysis concerning changes in noninterest expenses for 2006, when compared to 2005, is as follows:

•

Salaries and benefits increased $4.8 million. The increase was primarily due to an increase in the average number of employees from 286 full time equivalents (FTEs) to 329 from year-to-year, as a result of the Company’s continued expansion. Also, the Company experienced increases in the expense for several employee compensation programs, such as the SERPs, the deferred compensation program and stock-based compensation programs during 2006, primarily related to a combination of the application of the provisions of SFAS 123R and a senior officer’s planned retirement in 2009. As the result of a previously described organizational change at Quad City Bank & Trust, commissions for investment representatives, previously net from fees, are now included as a portion of salaries and benefits expense. The Company’s application of the

provisions of SFAS 123R is described in detail in Note 1, Nature of Business and Significant Accounting Policies.

	•		Professional and data processing fees increased $327 thousand. The primary contributors to the year-to-year increase were legal, consulting, and data processing fees incurred at the subsidiary banks.
	•		Advertising and marketing expense increased $147 thousand. Cedar Rapids Bank & Trust and Rockford Bank & Trust, as the primary contributors, accounted for 84% of the increase.
	•		Occupancy and equipment expense increased $446 thousand. The increase was a reflection of the Company’s investment during 2005 in five new subsidiary bank facilities, in combination with the related costs associated with additional furniture, fixtures and equipment, such as depreciation, maintenance, utilities, and property taxes. However, the year-to-year increase in occupancy and equipment expense was offset by a $344 thousand intercompany elimination of rental income earned by Velie Plantation Holding Company, which had not been a consolidated subsidiary of the Company at December 31, 2005.
	•		Loss on disposals/sales of fixed assets decreased $296 thousand. During the third quarter of 2005, in conjunction with Cedar Rapids Bank & Trust’s move into their new main office facility, the Company took a one-time $332 thousand write-off of tenant improvements which had been made to the GreatAmerica Building, which had initially served as that subsidiary’s main office.
	•		Other noninterest expense decreased $420 thousand. During 2005, Quad City Bank & Trust incurred $303 thousand of write-downs on the property value of other real estate owned (OREO) and $114 thousand of other expense incurred on OREO property. Also, during the third quarter of 2006, the subsidiary banks re-allocated $236 thousand of accrued noninterest expense into specific accrual categories, such as legal expense and marketing expense.

Income tax expense. The provision for income taxes was $858 thousand for the year ended December 31, 2006 compared to $2.3 million for the year ended December 31, 2005 for a decrease of $1.4 million, or 62%. The decrease was the result of a decrease in income before income taxes of $3.2 million, or 46%, for 2006 when compared to 2005. 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 31.8% for 2005 to 21.8% for 2006.

2005 compared with 2004

Overview. Net income for 2005 was $4.8 million 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 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 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.

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% 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 attributable 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 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, 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, 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. Management continually focuses its efforts at the subsidiary banks to attempt to improve the overall quality of the Company’s loan/lease portfolio.

Noninterest income. The following table sets forth the various categories of noninterest income for the years ended December 31, 2005 and 2004.

Noninterest Income

		Years ended
		December 30,
		2005				2004				% change
Credit card fees, net of processing costs		$	1,782,452			$	1,409,237				26.5	%
Trust department fees			2,818,832				2,530,907				11.4	%
Deposit service fees			1,582,530				1,631,713				(3.0	)%
Gains on sales of loans, net			1,254,242				1,149,791				9.1	%
Securities losses, net			50				(45,428	)			(100.1	)%
Gains on sales of foreclosed assets			42,380				—			NA
Earnings on bank-owned life insurance			656,005				627,796				4.5	%
Investment advisory and management fees			691,800				509,988				35.7	%
Other			1,244,212				867,437				48.3	%
Total noninterest income		$	10,072,503			$	8,681,441				16.0	%

Analysis concerning changes in noninterest income for the 2005, when compared to 2004, is as follows:

•

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 administration 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.
	•		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. The following table sets forth the various categories of noninterest expenses for the years ended December 31, 2005 and 2004.

Noninterest Expenses

		Years ended
		December 31,
		2005				2004				% change
Salaries and employee benefits		$	16,458,860			$	13,773,439				19.5	%
Professional and data processing fees			2,865,064				2,199,984				30.2	%
Advertising and marketing			1,221,039				1,014,664				20.3	%
Occupancy and equipment expense			4,316,443				3,263,540				32.3	%
Stationery and supplies			645,985				543,904				18.8	%
Postage and telephone			842,779				684,964				23.0	%
Bank service charges			516,537				570,374				(9.4	)%
Insurance			594,282				420,080				41.5	%
Loss on disposals/sales of fixed assets			332,283				1,048			NA
Loss on redemption of junior subordinated debentures			—				747,490				(100.0	)%
Other			1,639,876				1,061,364				54.5	%
Total noninterest expenses		$	29,433,148			$	24,280,851				21.2	%

Analysis concerning changes in noninterest expenses for 2005, when compared to 2004, is as follows:

	•		For 2005, total salaries and benefits increased to $16.5 million, which was up $2.7 million from the previous year’s total of $13.8 million. The increase of 20% 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.
	•		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.
	•		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.
	•		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.
	•		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.
	•		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.
	•		Fiscal 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. In February 2004, the Company issued $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 the redemption, the Company had expensed $747 thousand of unamortized issuance costs associated with the 1999 trust preferred securities in March 2004.

•

Other noninterest expense increased $579 thousand to $1.6 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.

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 31.9% from 32.4% for 2004.

Financial Condition

Total assets of the Company increased by $229.1 million, or 22%, to $1.27 billion at December 31, 2006 from $1.04 billion at December 31, 2005. 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. 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 $3.5 million, or 9%, to $42.5 million at December 31, 2006 from $39.0 million at December 31, 2005. 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 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, 2006 and December 31, 2005, cash maintained at the subsidiary banks totaled $23.0 million and $15.4 million. At December 31, 2006 and December 31, 2005, funds maintained as noninterest-bearing deposits at other banks totaled $19.5 million and $23.5 million.

Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold decreased by $2.2 million to $2.3 million at December 31, 2006 from $4.5 million at December 31, 2005. Federal funds sold increased by $1.6 million to $4.5 million at December 31, 2005 from $2.9 million at December 31, 2004. Fluctuations occur due to a combination of varying demands for Federal funds purchases by Quad City Bank & Trust’s downstream correspondent banks and of varying levels of liquidity at the Company’s subsidiary banks.

Interest-bearing deposits at financial institutions increased by $859 thousand, or 68%, to $2.1 million at December 31, 2006 from $1.3 million at December 31, 2005. Included in interest-bearing deposits at financial institutions are demand accounts, money market accounts, and certificates of deposit. The increase was the result of increases in money market accounts of $955 thousand and a net decrease in certificates of deposit totaling $96 thousand. 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. The decrease was the result of decreases in money market accounts of $1.8 million and maturities of certificates of deposit totaling $822 thousand.

Investments. Securities increased by $12.4 million, or 7%, to $194.8 million at December 31, 2006 from $182.4 million at December 31, 2005. 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 $79.8 million, and there was an increase in unrealized gains on securities available for sale, before applicable income tax of $923 thousand. These increases were partially offset by paydowns of $706 thousand that were received on mortgage-backed securities, proceeds from calls, maturities and redemptions of $62.4 million, proceeds from sales of $4.8 million, net losses of $143 thousand, and the amortization of premiums, net of the accretion of discounts, of $252 thousand.

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.

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 other bonds, were recorded at amortized cost at December 31, 2006, 2005, and 2004. The balance at December 31, 2006 was $350 thousand, which was an increase of $200 thousand from the balance of $150 thousand at December 31, 2005. The December 31, 2005 balance was an increase of $50 thousand from the balance of $100 thousand at December 31, 2004. Market values at December 31, 2005, 2004, and 2003 were $358, $155 thousand, and $108 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 $12.2 million, or 7%, to $194.4 million at December 31, 2006, from $182.2 million at December 31, 2005. 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. The amortized cost of such securities at December 31, 2006, 2005, and 2004 was $194.4, $183.1, and $148.4 million.

As of December 31, 2006, 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 $204.5 million, or 27%, to $960.7 million at December 31, 2006 from $756.3 million at December 31, 2005. The increase was the result of the origination or purchase of $515.7 million of commercial business, consumer and real estate loans/leases, less loans transferred to other real estate owned (OREO) of $130 thousand, loan/lease charge-offs, net of recoveries, of $1.6 million and loan/lease repayments or sales of loans of $309.5 million. During 2006, Quad City Bank & Trust contributed $259.5 million, or 50%, Cedar Rapids Bank & Trust contributed $124.4 million, or 24%, Rockford Bank & Trust contributed $96.5 million, or 19%, and M2 Lease Funds contributed $35.3, or 7%, of the Company’s loan/lease originations or purchases. As of December 31, 2006, Quad City Bank & Trust’s legal lending limit was approximately $11.1 million, Cedar Rapids Bank & Trust’s legal lending limit was approximately $4.3 million, and Rockford Bank & Trust’s legal lending limit, which included our Wisconsin operations at that time, was approximately $2.4 million.

At December 31, 2006, no one customer accounted for more than 10% of revenues or loans.

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.

Allowance for Loan/Lease Losses. The allowance for estimated losses on loans/leases was $10.6 million at December 31, 2006 compared to $8.9 million at December 31, 2005, for an increase of $1.7 million, or 19%. 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 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, 2006, 2005, and 2004, were $1.6 million, $1.7 million, and $753 thousand, 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 1.10% at December 31, 2006, 1.17% at December 31, 2005, and 1.43% at December 31, 2004.

Although management believes that the allowance for estimated losses on loans/leases at December 31, 2006 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.

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 $6.5 million at December 31, 2006 compared to $2.6 million at December 31, 2005, for an increase of $3.9 million, or 154%. The increase in nonaccrual loans/leases was comprised of increases in commercial loans of $3.8 million and real estate loans of $160 thousand, and a decrease in consumer loans of $30 thousand. Nonaccrual commercial loans totaled $5.5 million, of which $4.0 million was due to a single large lending relationship at Quad City Bank & Trust. Nonaccrual loans at December 31, 2006 represented less than 1% of the Company’s held for investment loan portfolio. At December 31, 2006, 82% of the Company’s nonaccrual loans/leases were held in Quad City Bank & Trust’s portfolio, 13% were held in M2 Lease Funds’ portfolio, and 5% were held in Cedar Rapids Bank & Trust’s portfolio.

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.

As of December 31, 2006, 2005, and 2004, past due loans of 30 days or more amounted to $8.2 million, $8.7 million, and $10.2 million, respectively. Past due loans as a percentage of gross loans receivable were 0.9% at December 31, 2006, 1.2% at December 31, 2005, and 1.6 % at December 31, 2004.

During 2006, the Company transferred $130 thousand from the loan portfolio into other real estate owned. At December 31, 2006, $93 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, 2006. 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.

Other Assets. Premises and equipment increased by $6.9 million, or 27%, to $32.5 million at December 31, 2006 from $25.6 million at December 31, 2005. This increase resulted primarily from $4.0 million in construction costs incurred for Rockford Bank & Trust’s first branch facility, which opened in November 2006, in combination with a $4.0 million real estate acquisition, resulting from a majority ownership in Velie Plantation Holding Company at December 31, 2006. Additionally, there were Company purchases of additional furniture, fixtures and equipment of $1.3 million offset by $2.4 million of depreciation expense. Additional information regarding the composition of this account and related accumulated depreciation is described in Note 5 to the consolidated financial statements.

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. During 2005, $1.5 million of initial costs were incurred on the construction of a 20,000 square foot permanent facility, which was completed in 2006.

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 is evaluated annually for impairment.

Accrued interest receivable on loans, securities, and interest-bearing deposits at financial institutions increased by $2.4 million, or 48%, to $7.2 million at December 31, 2006 from $4.8 million at December 31, 2005. 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. 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 $17.4 million at December 31, 2005 to $18.9 million at December 31, 2006. BOLI increased by $1.5 million from $15.9 million at December 31, 2004 to $17.4 million at December 31, 2005. Banks may generally buy BOLI as a financing or cost recovery vehicle for pre-and post-retirement employee benefits. During 2004, the subsidiary banks purchased $8.0 million of 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. During the 2006, Quad City Bank & Trust purchased an additional $751 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 the supplemental retirement benefits and deferred compensation arrangements was $533 thousand and $269 thousand, respectively, for 2006. The announcement early in 2006 of a senior officer’s planned retirement in 2009 resulted in accelerated accruals to each of these executive compensation programs. Earnings on BOLI totaled $759 thousand for 2006. Benefit expense associated with both the supplemental retirement benefits and deferred compensation arrangements was $176 thousand and $170 thousand, respectively, for 2005. Earnings on BOLI totaled $656 thousand for 2005.

Other assets increased by $888 thousand, or 5%, to $18.0 million at December 31, 2006 from $17.1 million at December 31, 2005. The largest components of other assets at December 31, 2006 were $10.3 million in Federal Reserve Bank and Federal Home Loan Bank stocks, $3.8 million in deferred tax assets, $1.7 million in various prepaid expenses, $1.2 million in net equity in unconsolidated subsidiaries and $679 thousand in accrued trust department fees. 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). At both December 31, 2006 and 2005, other assets also included net other real estate owned (OREO), accrued trust department fees, and other miscellaneous receivables.

Deposits. Deposits increased by $176.9 million, or 25%, to $875.4 million at December 31, 2006 from $698.5 million at December 31, 2005. The increase resulted from a $67.7 million net increase in non-interest bearing, NOW, money market and savings accounts combined with a $109.2 million net increase in interest-bearing certificates of deposit. The subsidiary banks experienced a net increase in brokered certificates of deposit of $35.4 million during 2006.

United Fire Group accounted for 10%, or $87.7 million, of the Company’s consolidated deposits at December 31, 2006.

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.

Short-term Borrowings. Short-term borrowings increased by $4.2 million, or 4%, from $107.5 million as of December 31, 2005 to $111.7 million as of December 31, 2006. 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. The subsidiary banks offer short-term repurchase agreements to some of their major customers. Also, the subsidiary banks purchase Federal funds for short-term funding needs from the Federal Reserve Bank, or from their correspondent banks. Short-term borrowings were comprised of customer repurchase agreements of $62.3 million, $54.7 million, and $47.6 million at December 31, 2006, 2005, and 2004, respectively, as well as federal funds purchased from correspondent banks of $49.4 million at December 31, 2006, $52.8 million at December 31, 2005, and $57.2 million at December 31, 2004.

FHLB Advances and Other Borrowings. FHLB advances increased $21.9 million, or 17%, from $130.0 million as of December 31, 2005 to $151.9 million as of December 31, 2006. 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. As of December 31, 2006, the subsidiary banks held $8.5 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 decreased $7.0 million, or 65%, from $10.8 million at December 31, 2005 to $3.8 million at December 31, 2006. In February 2006, with proceeds from the issuance of the trust preferred securities of Trust V, the

Company made a payment to reduce the balance on a line of credit at an upstream correspondent bank by $10.0 million. In March 2006, the Company drew an advance of $8.5 million, primarily to provide $3.0 million of additional capital to Quad City Bank & Trust and $4.5 million of additional capital to Cedar Rapids Bank & Trust for capital maintenance purposes at each of these subsidiaries. During the third quarter of 2006, the Company drew additional advances totaling $6.0 million, primarily to provide $3.2 million of additional capital to Quad City Bank & Trust and $1.5 million of additional capital to Rockford Bank & Trust for capital maintenance purposes at each of these subsidiaries. During the fourth quarter of 2006, with proceeds from the issuance $12.9 million of noncumulative perpetual preferred stock, the Company reduced the balance on the line of credit by $12.5 million. In December 2006, the Company drew an additional $1.0 million for general corporate purposes.

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.

Junior subordinated debentures increased $10.3 million, or 40%, from $25.8 million at December 31, 2005 to $36.1 million at December 31, 2006. On February 4, 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 $10.3 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. Additional information regarding the composition of this account is described in Note 10 to the consolidated financial statements.

Other liabilities increased by $5.6 million, or 37%, to $20.6 million as of December 31, 2006 from $15.0 million as of December 31, 2005. The increase was primarily due to the increased balances in accounts payable leases and accrued interest payable. 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 were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At December 31, 2006 and December 31, 2005, the largest single component of other liabilities was accounts payable leases of $6.4 million and accrued expenses of $4.5 million, respectively.

Stockholders’ Equity. In the fourth quarter of 2006, the Company issued 268 shares of Series B Non Cumulative Perpetual Preferred Stock at $50 thousand per share for a total of $12.9 million with a stated rate of 8.00%. The Preferred Shares will accrue no dividends,and dividends will be payable on the Preferred Shares only if declared. The capital raised was used to pay down the balance on the Company’s line of credit.

Common stock of $4.5 million as of December 31, 2005 increased by $29 thousand, or less than 1%, to $4.6 million at December 31, 2006. The slight increase was the net result of stock issued from the net exercise of stock options and stock purchased under the employee stock purchase plan. 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.

Additional paid-in capital increased to $34.3 million as of December 31, 2006 from $20.8 million at December 31, 2005. The increase of $13.5 million, or 65%, resulted primarily from $12.9 million in proceeds received in excess of the $1.00 per share par value for the 268 shares of Preferred Stock issued. Also contributing to the increase in additional paid-in capital, were proceeds received in excess of the $1.00 per share par value for the 29,405 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 $20.8 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.

Retained earnings increased by $2.3 million, or 8%, to $32.0 million at December 31, 2006 from $29.7 million at December 31, 2005. The increase reflected net income for the fiscal year reduced by a combination of $364 thousand in common dividends declared during 2006 and $164 thousand in preferred dividends declared in December 2006. A cash dividend of $0.04 was paid in July 2006. On October 26, 2006, the board of directors declared a cash dividend of $0.04 per share payable on January 5, 2007, to stockholders of record on December 22, 2006. 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.

Accumulated other comprehensive income was $28 thousand as of December 31, 2006 compared to a loss of $567 thousand as of December 31, 2005. The increase was attributable to the increase during the period in the fair value of the securities identified as available for sale, primarily as a result of the relatively unchanged market interest rates during 2006. Accumulated other comprehensive loss was $567 thousand as of December 31, 2005, 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.

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 $47.0 million at December 31, 2006, $44.7 million at December 31, 2005, and $28.1 million at December 31, 2004. 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.

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 the increase in other liabilities, was $7.2 million for 2006 compared to net cash provided by operating activities, primarily net income and net proceeds on the sale of loans, of $9.6 million for 2005. Net cash provided by operating activities, comprised predominately of net income and net proceeds on the sale of loans, was $9.6 million for 2005 compared to $7.4 million for 2004. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $222.9 million for 2006 and $127.7 million for 2005, comprised predominately of loan originations and the purchase of securities. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $127.7 million for 2005 and $165.1 million for 2004. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from Federal Home Loan Bank advances, was $219.2 million for 2006 compared to $135.8 million, comprised predominately of growth in deposits and proceeds from Federal Home Loan Bank advances for 2005. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from Federal Home Loan Bank advances, was $135.8 million for 2005 compared to $154.6 million, comprised predominately of growth in deposits and proceeds from short-term borrowings, for 2004.

At December 31, 2006, 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, 2006, the subsidiary banks were not drawn on any of these available lines. At December 31, 2006, the Company had a $15.0 million unsecured revolving credit note with a maturity date of April 6, 2007. In April 2006, a single 364-day revolving note was written in substitution and replacement of the two existing notes, which were a 364-day revolving note for $10.0 million maturing on December 21, 2006 and a 3-year revolving note for $5.0 million, maturing on December 30, 2007. At December 31, 2006, the replacement note carried a balance outstanding of $3.5 million. Interest is payable monthly at the Federal Funds rate plus 1% per annum, as defined in the credit agreement. As of December 31, 2006, the interest rate on the replacement note was 6.25%.

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%.

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.

On February 24, 2006, the Company issued of $10.0 million of fixed/floating rate capital securities of QCR Holdings Statutory Trust V. 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 plus 1.55%, reset and payable quarterly. Trust V used the $10.0 million of proceeds from the sale of the trust preferred securities, in combination with $310 thousand of proceeds from its own equity to purchase $10.3 million 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.

In the first quarter of 2007, the Company opened a private placement offering of common stock in connection with the addition of the Wisconsin-chartered bank. The Company is offering up to $3,000,000 of common stock, net of expenses. The total number of shares offered is 182,353 at an offering price of $17.00 per share. The offering terminates on March 31, 2007. The Company intends to use 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.

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, 2006 and 2005, no amounts had been recorded as liabilities for the banks’ potential obligations under these guarantees.

As of December 31, 2006 and 2005, commitments to extend credit aggregated $459.3 million and $385.8 million, respectively. As of December 31, 2006 and 2005, standby letters of credit aggregated $18.6 million and $15.2 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 $6.2 million and $2.6 million as of December 31, 2006 and 2005, 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 $39.7 million and $43.4 million of sold residential mortgage loans with recourse provisions still in effect at December 31, 2006 and December 31, 2005, 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, 2006, 2005 or 2004. In the opinion of management, the risk of recourse to the subsidiary banks is not significant, and accordingly no liabilities have been established related to such.

During 2004, Quad City Bank & Trust joined the Federal Home Loan Bank’s (FHLB) Mortgage Partnership Finance (MPF) Program, which offers a “risk-sharing” alternative to selling residential mortgage loans to investors in the secondary market. Lenders funding mortgages through the MPF Program manage the credit risk of the loans they originate. The loans are 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 both December 31, 2006 and 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. In conjunction with its participation in this program, Quad City Bank & Trust had both a credit enhancement receivable and a credit enhancement liability for $31 thousand at December 31, 2006. 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 at December 31, 2005.

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. Throughout 2006 monthly provisions were made to the allowance for chargeback losses based on the dollar volumes of merchant credit card and related chargeback activity. For the year ended December 31, 2006, monthly provisions were made totaling $4 thousand. At December 31, 2006 and 2005, Bancard had a merchant chargeback reserve of $81 thousand and $77 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 limited guarantee to MasterCard International Incorporated, which is backed by a $750 thousand letter of credit from Northern Trust Company. As of December 31, 2006 and 2005, 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 $7.0 million and $9.8 million as of December 31, 2006 and 2005, 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, 2006 and December 31, 2005, the Company had $23.5 million and $36.1 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, 2006, 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 stated maturity		$	458,569			$	458,569			$	—			$	—			$	—
Certificates of deposits (6)			416,878				332,666				54,574				29,638				—
Short-term borrowings (7)			111,684				111,684				—				—				—
Federal Home Loan Bank advances (8)			151,859				42,200				29,300				16,100				64,259
Other borrowings (9)			3,762				3,762				—				—				—
Junior subordinated debentures (10)			36,085				—				—				—				36,085
Rental commitments (5)			4,352				552				1,107				1,029				1,664
Purchase obligations (16)			—				—				—				—				—
Operating contracts (16)			4,190				1,738				2,379				69				4
Total contractual cash obligations		$	1,187,379			$	951,171			$	87,360			$	46,836			$	102,012

Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The Company had no purchase obligations at December 31, 2006. 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.

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 July 2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes recognized in accordance with SFAS 109, “Accounting for

Income Taxes.” This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company is currently evaluating the impact of FIN 48. The Company will adopt this Interpretation in the first quarter of 2007.

In September 2006, the FASB ratified Emerging Issues Task Force 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 addresses accounting for split-dollar life insurance arrangements after the employer purchases a life insurance policy on the covered employee, and will be effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of the adoption of EITF 06-4.

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:

	•		The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.
	•		The costs, effects and outcomes of existing or future litigation.
	•		Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board.
	•		The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
	•		These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company’s net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net 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, 2006 demonstrated a 3.64% decrease in interest income with a 200 basis point increase in interest rates, and a 1.41% 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.

Item 8. Financial Statements

QCR Holdings, Inc.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm			41
Financial Statements
Consolidated balance sheets as of December 31, 2006 and 2005			42
Consolidated statements of income for the years ended December 31, 2006, 2005, and 2004			43
Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2006, 2005, and 2004			44
Consolidated statements of cash flows for the years ended December 31, 2006, 2005, and 2004			45-46
Notes to consolidated financial statements			47-81

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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, 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, 2006, 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 March 15, 2007 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.

Davenport, Iowa
March 15, 2007

McGladrey & Pullen, LLP is a member firm of RSM International –
an affiliation of separate and independent legal entities.

QCR Holdings, Inc.
and Subsidiaries

Consolidated Balance Sheets
December 31, 2006 and 2005

		2006				2005
Assets
Cash and due from banks		$	42,502,770			$	38,956,627
Federal funds sold			2,320,000				4,450,000
Interest-bearing deposits at financial institutions			2,130,096				1,270,666
Securities held to maturity, at amortized cost			350,000				150,000
Securities available for sale, at fair value (Note 3)			194,423,893				182,214,719
			194,773,893				182,364,719
Loans receivable, held for sale (Note 4)			6,186,632				2,632,400
Loans/leases receivable, held for investment (Note 4)			954,560,692				753,621,630
			960,747,324				756,254,030
Less allowance for estimated losses on loans/leases (Note 4)			10,612,082				8,883,855
			950,135,242				747,370,175
Premises and equipment, net (Note 5)			32,524,840				25,621,741
Goodwill			3,222,688				3,222,688
Accrued interest receivable			7,160,298				4,849,378
Bank-owned life insurance			18,877,526				17,367,660
Other assets			18,027,603				17,139,874
Total assets		$	1,271,674,956			$	1,042,613,528
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing		$	124,184,486			$	114,176,434
Interest-bearing			751,262,781				584,327,465
Total deposits (Note 6)			875,447,267				698,503,899
Short-term borrowings (Note 7)			111,683,951				107,469,851
Federal Home Loan Bank advances (Note 8)			151,858,749				130,000,854
Other borrowings (Note 9)			3,761,636				10,764,914
Junior subordinated debentures (Note 10)			36,085,000				25,775,000
Other liabilities			20,592,953				14,981,346
Total liabilities			1,199,429,556				987,495,864
Minority interest in consolidated subsidiaries			1,362,820				650,965
Commitments and Contingencies (Note 16)
Stockholders’ Equity (Note 14):
Preferred stock, stated value of $1 and stated dividend rate of 8.00% per share; shares authorized 250,000			268				—
December 2006 — 268 shares issued and outstanding
December 2005 — 0 shares issued and outstanding
Common stock, $1 par value; shares authorized 10,000,000			4,560,629				4,531,224
December 2006 — 4,560,629 shares issued and outstanding
December 2005 — 4,531,224 shares issued and outstanding
Additional paid-in capital			34,293,511				20,776,254
Retained earnings			32,000,213				29,726,700
Accumulated other comprehensive income (loss)			27,959				(567,479	)
Total stockholders’ equity			70,882,580				54,466,699
Total liabilities and stockholders’ equity		$	1,271,674,956			$	1,042,613,528

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc.
and Subsidiaries

Consolidated Statements of Income
Years Ended December 31, 2006, 2005, and 2004

		2006				2005				2004
Interest and dividend income:
Loans/leases, including fees		$	60,098,090			$	42,427,118			$	33,111,498
Securities:
Taxable			6,995,972				5,345,980				4,067,826
Nontaxable			914,128				579,817				571,405
Interest-bearing deposits at financial institutions			319,491				129,460				224,293
Federal funds sold			475,345				205,893				41,818
Total interest and dividend income			68,803,026				48,688,268				38,016,840
Interest expense:
Deposits			27,064,755				12,842,421				6,852,108
Short-term borrowings			3,169,069				2,181,997				1,208,494
Federal Home Loan Bank advances			5,609,114				4,168,077				3,464,122
Other borrowings			574,517				501,241				159,165
Junior subordinated debentures			2,489,879				1,587,049				1,640,879
Total interest expense			38,907,334				21,280,785				13,324,768
Net interest income			29,895,692				27,407,483				24,692,072
Provision for loan/lease losses (Note 4)			3,284,242				877,084				1,372,208
Net interest income after provision for loan/lease losses			26,611,450				26,530,399				23,319,864
Noninterest income:
Merchant credit card fees, net of processing costs			1,947,984				1,782,452				1,409,237
Trust department fees			3,049,440				2,818,832				2,530,907
Deposit service fees			1,928,246				1,582,530				1,631,713
Gains on sales of loans, net			991,536				1,254,242				1,149,791
Securities gains (losses), net			(142,866	)			50				(45,428	)
Gains on sales of foreclosed assets			664,223				42,380				—
Earnings on bank-owned life insurance			759,100				656,005				627,796
Investment advisory and management fees			1,216,350				691,800				509,988
Other			1,569,092				1,244,212				867,437
Total noninterest income			11,983,105				10,072,503				8,681,441
Noninterest expenses:
Salaries and employee benefits			21,262,541				16,458,860				13,773,439
Professional and data processing fees			3,192,326				2,865,064				2,199,984
Advertising and marketing			1,367,545				1,221,039				1,014,664
Occupancy and equipment expense			4,762,827				4,316,443				3,263,540
Stationery and supplies			670,915				645,985				543,904
Postage and telephone			961,394				842,779				684,964
Bank service charges			583,687				516,537				570,374
Insurance			612,058				594,282				420,080
Loss on disposals/sales of fixed assets			36,305				332,283				1,048
Loss on redemption of junior subordinated debentures			—				—				747,490
Other			1,219,386				1,639,876				1,061,364
Total noninterest expenses			34,668,984				29,433,148				24,280,851
Income before income taxes			3,925,571				7,169,754				7,720,454
Federal and state income taxes (Note 11)			857,842				2,282,201				2,503,782
Income before minority interest in net income of consolidated subsidiaries			3,067,729				4,887,553				5,216,672
Minority interest in income of consolidated subsidiaries			265,524				77,538				—
Net Income		$	2,802,205			$	4,810,015			$	5,216,672
Net Income		$	2,802,205			$	4,810,015			$	5,216,672
Less: preferred stock dividends			164,373				—				—
Net income available to common stockholders		$	2,637,832			$	4,810,015			$	5,216,672
Earnings per common share (Note 15):
Basic		$	0.57			$	1.06			$	1.23
Diluted		$	0.57			$	1.04			$	1.20
Weighted average common shares outstanding			4,609,626				4,518,162				4,234,345
Weighted average common and common equivalent shares outstanding			4,653,229				4,616,556				4,344,765
Cash dividends declared per common share		$	0.08			$	0.08			$	0.08

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc.
and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2006, 2005, and 2004

																		Accumulated
										Additional								Other
		Preferred				Common				Paid-In				Retained				Comprehensive				Treasury
		Stock				Stock				Capital				Earnings				Income (Loss)				Stock				Total
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 13)			—				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 13)			—				10,584				181,458				—				—				—				192,042
Proceeds from issuance of 25,335 shares of common stock as a result of stock options exercised (Note 13)			—				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
Comprehensive income:
Net income			—				—				—				2,802,205				—				—				2,802,205
Other comprehensive income, net of tax (Note 2)			—				—				—				—				595,438				—				595,438
Comprehensive income																											3,397,643
Common cash dividends declared, $0.08 per share			—				—				—				(364,319	)			—				—				(364,319	)
Preferred cash dividends declared			—				—				—				(164,373	)			—				—				(164,373	)
Proceeds from issuance of 268 shares of preferred stock			268				—				12,884,146				—				—				—				12,884,414
Proceeds from issuance of 14,552 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 13)			—				14,552				223,901				—				—				—				238,453
Proceeds from issuance of 16,221 shares of common stock as a result of stock options exercised (Note 13)			—				16,221				109,522				—				—				—				125,743
Exchange of 1,368 shares of common stock in connection with options exercised			—				(1,368	)			(23,458	)			—				—				—				(24,826	)
Tax benefit of nonqualified stock options exercised			—				—				37,795				—				—				—				37,795
Stock compensation expense			—				—				285,351				—				—				—				285,351
Balance, December 31, 2006		$	268			$	4,560,629			$	34,293,511			$	32,000,213			$	27,959			$	—			$	70,882,580

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows
Years Ended December 31, 2006, 2005, and 2004

		2006				2005				2004
Cash Flows from Operating Activities:
Net income		$	2,802,205			$	4,810,015			$	5,216,672
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			2,395,174				2,008,773				1,475,453
Provision for loan/lease losses			3,284,242				877,084				1,372,208
Deferred income taxes			(394,934	)			(109,452	)			(185,676	)
Amortization of offering costs on subordinated debentures			14,317				14,317				17,933
Loss on redemption of junior subordinated debentures			—				—				747,490
Stock-based compensation expense			171,125				—				—
Minority interest in income of consolidated subsidiaries			265,524				77,538				—
Gain on sale of foreclosed assets			(664,223	)			(42,380	)			—
Amortization of premiums on securities, net			252,457				524,808				983,256
Investment securities losses (gains), net			142,866				(50	)			45,428
Loans originated for sale			(87,721,100	)			(98,719,913	)			(83,176,326	)
Proceeds on sales of loans			85,161,720				100,840,794				84,617,339
Net gains on sales of loans			(991,536	)			(1,254,242	)			(1,149,791	)
Net losses on disposals/sales of premises and equipment			36,305				332,283				1,048
Tax benefit of nonqualified stock options exercised			—				125,993				190,248
Increase in accrued interest receivable			(2,310,920	)			(776,616	)			(426,654	)
(Increase) decrease in other assets			(819,095	)			(2,113,950	)			(3,461,144	)
Increase (decrease) in other liabilities			5,560,811				2,973,423				1,146,173
Net cash provided by operating activities			7,184,938				9,568,425				7,413,657
Cash Flows from Investing Activities:
Net decrease (increase) in federal funds sold			2,130,000				(1,560,000	)			1,140,000
Net (increase) decrease in interest-bearing deposits at financial institutions			(859,430	)			2,586,897				6,568,529
Proceeds from sale of foreclosed assets			1,220,942				1,272,757
Activity in securities portfolio:
Purchases			(79,759,340	)			(82,280,843	)			(86,743,594	)
Calls, maturities and redemptions			62,386,012				45,787,488				53,006,001
Paydowns			705,794				1,197,070				1,754,343
Sales			4,786,122				—				8,428,590
Activity in bank-owned life insurance:
Purchases			(750,766	)			(776,634	)			(12,221,428	)
Increase in cash value			(759,100	)			(656,026	)			(627,775	)
Net loans/leases originated and held for investment			(202,624,972	)			(78,520,322	)			(128,849,187	)
Purchase of premises and equipment			(9,334,578	)			(9,779,493	)			(7,611,586	)
Proceeds from sales of premises and equipment			—				—				63,027
Payment for acquisition of M2 Lease Funds, LLC			—				(4,967,300	)			—
Net cash used in investing activities		$	(222,859,316	)		$	(127,696,406	)		$	(165,093,080	)