QCR HOLDINGS INC - Annual Report: 2012 (Form 10-K)

qcrholding_10k-123112.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012.

Commission file number: 0-22208

QCR HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware 42-1397595

(State of incorporation) (I.R.S. Employer Identification No.)

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices)

(309) 743-7761

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Common stock, $1.00 Par Value The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Exchange Act:

Preferred Share Purchase Rights

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ X ] No [ ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ] No [ X ]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The NASDAQ Global Market on June 30, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $53,041,956.

As of February 28, 2013, the Registrant had outstanding 4,932,356 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 2013.

QCR HOLDINGS, INC. AND SUBSIDIARIES

INDEX

			Page Number(s)
Part I
	Item 1.	Business	4-13
	Item 1A.	Risk Factors	13-23
	Item 1B.	Unresolved Staff Comments	24
	Item 2.	Properties	24
	Item 3.	Legal Proceedings	24
	Item 4.	Mine Safety Disclosures	24

Part II
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25-26

	Item 6.	Selected Financial Data	27
	Item 7.	Management's Discussion and Analysis of Financial Condition and	28-57
		Results of Operations
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	57-58
	Item 8.	Financial Statements	59-121
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	122

	Item 9A.	Controls and Procedures	122-124
	Item 9B.	Other Information	125

Part III
	Item 10.	Directors, Executive Officers and Corporate Governance	125
	Item 11.	Executive Compensation	125
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	125

	Item 13.	Certain Relationships and Related Transactions, and Director Independence	125
	Item 14.	Principal Accountant Fees and Services	125

Part IV
	Item 15.	Exhibits	125-129

Signatures			130-131

Part I

Item 1. Business

General. QCR Holdings, Inc. (the “Company”) is a multi-bank holding company headquartered in Moline, Illinois, that was formed in February 1993 under the laws of the state of Delaware. The Company serves the Quad Cities, Cedar Rapids, and Rockford communities through the following three wholly-owned banking subsidiaries, which provide full-service commercial and consumer banking and trust and asset management services:

Quad City Bank and Trust Company (“QCBT”), which is based in Bettendorf, Iowa, and commenced operations in 1994;

Cedar Rapids Bank and Trust Company (“CRBT”), which is based in Cedar Rapids, Iowa, and commenced operations in 2001; and

Rockford Bank and Trust Company (“RB&T”), which is based in Rockford, Illinois, and commenced operations in 2005.

The Company also engages in direct financing lease contracts through m2 Lease Funds, LLC (“m2”), a wholly-owned subsidiary of QCBT based in Brookfield, Wisconsin. QCBT previously owned 80% of m2. In August 2012, QCBT entered into an amendment to the operating agreement of m2 and purchased the remaining 20% noncontrolling interest. See Note 21 to the consolidated financial statements for further discussion of the acquisition.

Velie Plantation Holding Company (“VPHC”), previously owned 91% by the Company, was engaged in holding the real estate property known as the Velie Plantation in Moline, Illinois, which is the location for the Company’s headquarters. In October 2012, the Company acquired the remaining 9% noncontrolling interest, and effective December 31, 2012, VPHC was dissolved and liquidated.

Quad City Bancard, Inc. (“Bancard”), previously a wholly-owned subsidiary of the Company, conducted the Company’s credit card issuing and merchant credit cards acquiring operations. During 2008, Bancard sold its merchant credit card acquiring business. The resulting gain on sale, net of taxes and related expenses, was approximately $3.0 million. The comparative financial results associated with the merchant credit card acquiring business have been reflected as discontinued operations throughout the annual report. Effective December 31, 2009, Bancard was dissolved and liquidated. The credit card issuing operation was merged in as a department of QCBT. In January 2013, QCBT sold its credit card portfolio and the related credit card issuing operations to a third party. In connection with the transaction, the Company expects a pre-tax gain, net of transaction-related costs, of approximately $875 thousand to be realized in the first quarter of 2013.

In February 2013, the Company entered into a definitive agreement to acquire Community National Bancorporation (“Community National”). The transaction is expected to close in the second quarter of 2013. Based on the closing price of the Company’s common stock on February 13, 2013, the implied valuation of the acquisition is approximately $20.1 million. See Note 23 to the consolidated financial statements for further discussion of the acquisition.

On December 31, 2008, the Company sold its Milwaukee, Wisconsin subsidiary, First Wisconsin Bank and Trust Company (“FWBT”), for $13.7 million which resulted in a pre-tax gain on sale of approximately $495 thousand. The comparative financial results associated with FWBT have been reflected as discontinued operations throughout the annual report.

Subsidiary Banks. QCBT was capitalized on October 13, 1993, and commenced operations on January 7, 1994. QCBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. QCBT 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. QCBT, on a consolidated basis with m2, had total segment assets of $1.18 billion and $1.11 billion as of December 31, 2012 and 2011, respectively.

CRBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law. The Company commenced operations in Cedar Rapids in June 2001, operating a branch of QCBT. The Cedar Rapids branch operation then began functioning under the CRBT charter in September 2001. CRBT provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its two facilities. The headquarters for CRBT is located in downtown Cedar Rapids, and its branch location is located in northern Cedar Rapids. CRBT had total segment assets of $625.7 million and $560.1 million as of December 31, 2012 and 2011, respectively.

RB&T is an Illinois-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law. The Company commenced operations in Rockford, Illinois in September 2004, operating a branch of QCBT, and that operation began functioning under the RB&T charter in January 2005. RB&T provides full-service commercial and consumer banking and trust and asset management services to Rockford and adjacent communities through its original office located in downtown Rockford and its branch facility located on Guilford Road at Alpine Road in Rockford. RB&T had total segment assets of $313.8 million and $294.4 million as of December 31, 2012 and 2011, respectively.

See Note 20 to the consolidated financial statements for additional business segment information.

Other Operating Subsidiaries. m2, which is based in Brookfield, Wisconsin, is engaged in the business of leasing machinery and equipment to commercial and industrial businesses under direct financing lease contracts. On August 26, 2005, QCBT acquired 80% of the membership units of m2. John Engelbrecht, the President and Chief Executive Officer of m2, retained 20% of the membership units. On August 31, 2012, QCBT acquired the 20% noncontrolling interest previously owned by John Engelbrecht.

VPHC was engaged in holding the real estate property known as the Velie Plantation Mansion in Moline, Illinois. Beginning in 1998, the Company held a 20% equity investment in VPHC. The Company acquired additional membership units in 2006 (37%), in 2009 (16%), and in 2010 (18%), bringing its total equity investment to 91%. During the fourth quarter of 2012, the Company acquired the remaining 9% noncontrolling interest and, effective as of December 31, 2012, VPHC was dissolved and liquidated.

On January 1, 2008, QCBT acquired 100% of the membership units of CMG Investment Advisors, LLC, which is an investment management and advisory company. During 2010, the operating subsidiary was renamed Quad City Investment Advisors, LLC.

Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 2012 and 2011:

Name	Date Issued	Amount Issued		Interest Rate	Interest Rate as of 12/31/12			Interest Rate as of 12/31/11

QCR Holdings Statutory Trust II	February 2004	$	12,372,000	2.85% over 3-month LIBOR *		3.21	%		3.22	%
QCR Holdings Statutory Trust III	February 2004		8,248,000	2.85% over 3-month LIBOR		3.21	%		3.22	%
QCR Holdings Statutory Trust IV	May 2005		5,155,000	1.80% over 3-month LIBOR		2.14	%		2.20	%
QCR Holdings Statutory Trust V	February 2006		10,310,000	1.55% over 3-month LIBOR **		1.89	%		1.95	%
		$	36,085,000	Weighted Average Rate		2.68	%		2.71	%

*Rate was fixed at 6.93% until March 31, 2011 when it became variable based on 3-month LIBOR plus 2.85%, reset quarterly.

**Rate was fixed at 6.62% until April 7, 2011 when it became variable based on 3-month LIBOR plus 1.55%, reset quarterly.

Securities issued by Trust II, Trust III, Trust IV, and Trust V mature thirty years from the date of issuance, but are all currently callable at par at anytime.

Other Ownership Interests. The Company invests limited amounts of its capital in stocks of financial institutions and mutual funds. In addition to its wholly-owned subsidiaries, the Company owns a 20% equity position in Nobel Real Estate Investors, LLC. In June 2005, CRBT entered into a joint venture as a 50% owner of Cedar Rapids Mortgage Company, LLC.

The Company previously owned a 2.25% equity investment in Trisource Solutions, LLC (“Trisource”). On July 2, 2010, the Company exercised a put option and sold its equity investment back to the majority owner of Trisource for $750 thousand received in monthly installments of $10 thousand through July 2012, and a final balloon payment of $584 thousand received in August 2012. The gain (materially all of the sales proceeds) was recognized on a cash basis.

Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities, as described more fully in this Form 10-K. Its operating results also can be affected by trust fees, investment advisory and management fees, deposit service charge fees, gains on the sale of residential real estate and government guaranteed loans, earnings from bank-owned life insurance and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.

The Company and its subsidiaries collectively employed 356 and 355 full-time equivalents (“FTEs”) at December 31, 2012 and 2011, respectively.

The Board of Governors of the Federal Reserve System (the “Federal Reserve”) is the primary federal regulator of the Company and its subsidiaries. In addition, QCBT and CRBT are regulated by the Iowa Superintendent of Banking (“Iowa Superintendent”) and RB&T is regulated by the State of Illinois Department of Financial and Professional Regulation (“DFPR”). The FDIC, as administrator of the Deposit Insurance Fund, has regulatory authority over the subsidiary banks.

Lending/Leasing. The Company and its subsidiaries provide a broad range of commercial and retail lending and investment services to corporations, partnerships, individuals, and government agencies. The subsidiary banks actively market their services to qualified lending and deposit clients. Officers actively solicit the business of new clients entering their market areas as well as long-standing members of the local business community. The Company has an established lending/leasing policy which includes a number of underwriting factors to be considered in making a loan/lease, including, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit history of the borrower.

In accordance with Iowa regulation, the legal lending limit to one borrower for QCBT and CRBT, calculated as 15% of aggregate capital, was $14.9 million and $8.4 million, respectively, as of December 31, 2012. In accordance with Illinois regulation, the legal lending limit to one borrower for RB&T, calculated as 25% of aggregate capital, totaled $9.4 million as of December 31, 2012.

The Company recognizes the need to prevent excessive concentrations of credit exposure to any one borrower or group of related borrowers. As such, the Company has established an in-house lending limit, which is lower than each subsidiary bank’s legal lending limit, in an effort to manage individual borrower exposure levels.

The in-house lending limit is the maximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. Under the in-house limit, total credit exposure to a single borrowing entity or group of related entities will not exceed the following, subject to certain exceptions:

Quad City Bank & Trust:	$7.5 million
Cedar Rapids Bank & Trust:	$6.5 million
Rockford Bank & Trust:	$3.7 million

On a consolidated basis, the in-house lending limit is $10.0 million, which is the maximum amount of credit that all affiliated banks, when combined, will extend to a single borrowing entity or group of related entities, subject to certain exceptions.

In addition, m2’s in-house lending limit is $1.0 million to a single leasing entity or group of related entities.

As part of the loan monitoring activity at the three subsidiary banks, credit administration personnel interact closely with senior bank management. For example, the internal loan committee of each subsidiary bank meets weekly. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks. To complement the in-house loan review, an independent third-party performs external loan reviews. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of those situations.

The Company recognizes that a diversified loan/lease portfolio contributes to reducing risk in the overall loan/lease portfolio. The specific loan/lease portfolio mix is subject to change based on loan/lease demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan/lease portfolio to ensure appropriate diversification and concentration risk is maintained.

Specifically, each subsidiary bank’s total loans as a percentage of average assets may not exceed 85%. In addition, following are established policy limits and the actual allocations for the three subsidiary banks as of December 31, 2012 for the loan portfolio on a per loan type basis, reflected as a percentage of the subsidiary bank’s average gross loans:

				As of December 31, 2012
Type of Loan *	Maximum Percentage per Loan Policy **			QCBT			CRBT			RB&T


One-to-four family residential		30	%		15	%		11	%		19	%
Multi-family		15	%		4	%		8	%		5	%
Farmland		5	%		0	%		0	%		1	%
Non-farm, nonresidential		50	%		28	%		40	%		45	%
Construction and land development		20	%		5	%		5	%		3	%
Commercial and industrial		60	%		20	%		30	%		24	%
Loans to individuals		10	%		3	%		2	%		1	%
Lease financing		20	%		16	%		0	%		0	%
All other loans		10	%		9	%		4	%		2	%
					100	%		100	%		100	%

Bank stock loans ***		15	%		7	%		0	%		1	%

* The loan types above are as defined and reported in the subsidiary banks’ quarterly Reports of Condition and Income (also known as Call Reports).

** The maximum percentages listed are the same for all subsidiary banks except for CRBT, where the maximum percentage for one-to-four family residential is 25%, the maximum percentage for construction and land development is 15%, and the maximum percentage for lease financing receivables is 5%. Additionally, both CRBT and RB&T have maximum percentages for bank stock loans of 10%.

*** Bank stock loans are not a separate reportable line item on the Call Reports. The loans are reported within “all other loans” above.

The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 2012 and 2011. Residential real estate loans held for sale are included in residential real estate loans below.

	Quad City Bank & Trust					m2 Lease Funds				Cedar Rapids Bank & Trust					Rockford Bank & Trust				Intercompany Elimination			Consolidated Total
	$			%			$	%		$			%		$		%			$		$		%

	(dollars in thousands)
As of December 31, 2012:

Commercial and industrial loans	$	203,542		36	%	$	-	0	%	$	130,261		35	%	$	60,441	26	%	$	-		$	394,244	31	%
Commercial real estate loans		258,133		45	%		-	0	%		201,659		54	%		136,025	58	%		(1,838	)		593,979	46	%
Direct financing leases		-		0	%		103,686	96	%		-		0	%		-	0	%		-			103,686	8	%
Residential real estate loans		60,666		11	%		-	0	%		27,863		7	%		27,053	11	%		-			115,582	9	%
Installment and other consumer loans		47,621		8	%		-	0	%		17,425		4	%		11,675	5	%		-			76,721	6	%
Deferred loan/lease origination costs, net of fees		(77	)	0	%		3,907	4	%		(738	)	0	%		84	0	%		-			3,176	0	%
	$	569,885		100	%	$	107,593	100	%	$	376,470		100	%	$	235,278	100	%	$	(1,838	)	$	1,287,388	100	%

As of December 31, 2011:

Commercial and industrial loans	$	177,069		34	%	$	-	0	%	$	116,714		34	%	$	57,011	25	%	$	-		$	350,794	29	%
Commercial real estate loans		260,895		49	%		-	0	%		184,338		53	%		134,580	59	%		(2,009	)		577,804	48	%
Direct financing leases		-		0	%		93,212	97	%		-		0	%		-	0	%		-			93,212	8	%
Residential real estate loans		43,405		8	%		-	0	%		29,847		8	%		24,855	11	%		-			98,107	8	%
Installment and other consumer loans		48,590		9	%		-	0	%		17,846		5	%		11,787	5	%		-			78,223	7	%
Deferred loan/lease origination costs, net of fees		56		0	%		3,217	3	%		(703	)	0	%		35	0	%		-			2,605	0	%
	$	530,015		100	%	$	96,429	100	%	$	348,042		100	%	$	228,268	100	%	$	(2,009	)	$	1,200,745	100	%

Proper pricing of loans is necessary to provide adequate return to the Company’s stockholders. Loan pricing, as established by the subsidiary banks’ Asset/Liability Committee, shall include consideration for the cost of funds, loan maturity and risk, origination and maintenance costs, appropriate stockholder return, competitive factors, and the economic environment. The portfolio contains a mix of loans with fixed and floating interest rates. Management attempts to maximize the use of interest rate floors on its variable rate loan portfolio. Refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk for more discussion on the Company’s management of interest rate risk.

Commercial and Industrial Lending

As noted above, the subsidiary banks are active commercial and industrial lenders. The current areas of emphasis include loans to small and mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Since 2010, the subsidiary banks have been active in participating in lending programs offered by the Small Business Administration (“SBA”) and the United States Department of Agriculture (“USDA”). Under these programs, the government entities will generally provide a guarantee of repayment ranging from 50% to 85% of the principal amount of the qualifying loan.

Loan approval is generally based on the following factors:

Ability and stability of current management of the borrower;

Stable earnings with positive financial trends;

Sufficient cash flow to support debt repayment;

Earnings projections based on reasonable assumptions;

Financial strength of the industry and business; and

Value and marketability of collateral.

For commercial and industrial loans, the Company assigns internal risk ratings which are largely dependent upon the aforementioned approval factors. The risk rating is reviewed annually or on an as needed basis depending on the specific circumstances of the loan. See Note 1 to the consolidated financial statements for additional information, including the internal risk rating scale.

As part of the underwriting process, management reviews current borrower financial statements. When appropriate, certain commercial and industrial loans may contain covenants requiring maintenance of financial performance ratios such as, but not limited to:

Minimum debt service coverage ratio;

Minimum current ratio;

Maximum debt to tangible net worth ratio; and/or

Minimum tangible net worth

Establishment of these financial performance ratios depends on a number of factors, including risk rating and the specific industry.

Collateral for these loans generally includes accounts receivable, inventory, equipment, and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. Approved non-real estate collateral types and corresponding maximum advance percentages for each are listed below.

Approved Collateral Type	Maximum Advance%

Financial Instruments
U.S. Government Securities	90% of market value
Securities of Federal Agencies	90% of market value
Municipal Bonds rated by Moody’s
As “A” or better	80% of market value
Listed Stocks	75% of market value
Mutual Funds	75% of market value
Cash Value Life Insurance	95%, less policy loans
Savings/Time Deposits (Bank)	100% of current value

General Business
Accounts Receivable	80% of eligible accounts
Inventory	50% of value
Fixed Assets (Existing)	50% of net book value, or
	75% of orderly liquidation appraised value
Fixed Assets (New)	80% of cost
Leasehold Improvements	0%

Generally, if the above collateral is part of a cross-collateralization with other approved assets, then the maximum advance percentage may be higher.

The lending policy specifies maximum term limits for commercial and industrial loans. For term loans, the maximum term is generally 7 years. Generally, term loans range from 3 to 5 years. For lines of credit, the maximum term is typically 365 days.

In addition, the subsidiary banks often take personal guarantees or cosignors to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.

Commercial Real Estate Lending

The subsidiary banks also make commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those standards and processes specific to real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The lending policy specifies maximum loan-to-value limits based on the category of commercial real estate (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits as, or in some situations, more conservative than, those established by regulatory authorities. Following is a listing of these limits as well as some of the other guidelines included in the lending policy for the major categories of commercial real estate loans:

Commercial Real Estate Loan Types	Maximum Advance Rate **	Maximum Term
Commercial Real Estate Loans on Improved Property *	80%	7 years
Raw Land	Lesser of 90% of project cost, or 65% of "as is" appraised value	12 months
Land Development	Lesser of 90% of project cost, or 75% of appraised value	24 months
Commerical Construction Loans	Lesser of 90% of project cost, or 80% of appraised value	365 days

* Generally, the debt service coverage ratio must be a minimum of 1.25x for non-owner occupied loans and 1.15x for owner-occupied loans. For loans greater than $500 thousand, the subsidiary banks sensitivity test this ratio for deteriorated economic conditions, major changes in interest rates, and/or significant increases in vacancy rates.

** These maximum rates are consistent with , or in some situations, more conservative than, those established by regulatory authorities.

The lending policy also includes guidelines for real estate appraisals and evaluations, including minimum appraisal and evaluation standards based on certain transactions. In addition, the subsidiary banks often take personal guarantees to help assure repayment.

In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Owner-occupied loans are generally considered to have less risk. As of December 31, 2012 and 2011, approximately 35% and 29%, respectively, of the commercial real estate loan portfolio was owner-occupied.

The Company’s lending policy limits non-owner occupied commercial real estate lending to 300% of total risk-based capital, and limits construction, land development, and other land loans to 100% of total risk-based capital. Exceeding these limits warrants the use of heightened risk management practices in accordance with regulatory guidelines. As of December 31, 2012, all three subsidiary banks were in compliance with these limits.

Following is a listing of the significant industries within the Company’s commercial real estate loan portfolio as of December 31, 2012 and 2011:

	2012					2011
	Amount		%			Amount		%

	(dollars in thousands)

Lessors of Nonresidential Buildings	$	178,060		30	%	$	179,511		31	%
Lessors of Residential Buildings		61,460		10	%		50,029		9	%
Land Subdivision		28,854		5	%		33,252		6	%
New Car Dealers		27,079		5	%		25,223		4	%
Hotels		26,710		4	%		19,061		3	%
Lessors of Other Real Estate Property		12,765		2	%		15,830		3	%
New Single Family Construction		10,746		2	%		10,788		2	%
Other *		248,305		42	%		244,110		42	%

Total Commercial Real Estate Loans	$	593,979		100	%	$	577,804		100	%

* “Other” consists of all other industries. None of these had concentrations greater than $10.0 million, or 2.0% of total commercial real estate loans.

Direct Financing Leasing

m2 leases machinery and equipment to commercial and industrial customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.

The following private and public sector business assets are generally acceptable to consider for lease funding:

Computer systems

Photocopy systems

Fire trucks

Specialized road maintenance equipment

Medical equipment

Commercial business furnishings

Vehicles classified as heavy equipment

Aircraft

Equipment classified as plant or office equipment

Marine boat lifts

m2 will generally refrain from funding leases of the following type:

Leases collateralized by non-marketable items

Leases collateralized by consumer items, such as vehicles, household goods, recreational vehicles, boats, etc.

Leases collateralized by used equipment, unless its remaining useful life can be readily determined

Leases with a repayment schedule exceeding 7 years

Residential Real Estate Lending

Generally, the subsidiary banks’ residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that adjust in one to five years, and then retain these loans in their portfolios. During 2011 and 2012, the subsidiary banks originated and held a limited amount of 15-year fixed rate residential real estate loans that met certain credit guidelines. Servicing rights are not presently retained on the loans sold in the secondary market. The lending policy establishes minimum appraisal and other credit guidelines.

As mentioned above, the subsidiary banks sell the majority of their residential real estate loans in the secondary market. The following table presents the originations and sales of residential real estate loans for the Company.

	For the year ended December 31,
	2012			2011			2010

	(dollars in thousands)

Originations of residential real estate loans	$	151,676		$	117,914		$	164,572
Sales of residential real estate loans	$	104,740		$	83,926		$	134,304
Percentage of sales to originations		69	%		71	%		82	%

Installment and Other Consumer Lending

The consumer lending department of each subsidiary bank provides many types of consumer loans, including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The lending policy addresses specific credit guidelines by consumer loan type. In particular, for home equity loans and home equity lines of credit, the minimum credit bureau score is 680. For both home equity loans and lines of credit, the maximum advance rate is 90% of value with a minimum credit bureau score of 720, and the maximum advance rate is 80% of value with a credit bureau score of 680 to 719. The maximum term on home equity loans is 10 years and maximum amortization is 15 years. The maximum term on home equity lines of credit is 5 years.

*****

In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the lending policy described above. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are generally noted as such and specifically identified in loan/lease approval documents.

Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, and Rockford markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. The Company competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.

Appendices. The commercial banking business is a highly regulated business. See Appendix A for a summary of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks.

See Appendix B for tables and schedules that show selected comparative statistical information relating to the business of the Company required to be presented pursuant to federal securities laws. Consistent with the information presented in the Form 10-K, results are presented for the fiscal years ended December 31, 2012, 2011, and 2010.

Internet Site, Securities Filings and Governance Documents. The Company maintains Internet sites for itself and each of its three banking subsidiaries. The Company makes available free of charge through these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Also available are many of its corporate governance documents, including the Code of Conduct and Ethics Policy. The sites are www.qcrh.com, www.qcbt.com, www.crbt.com, and www.rkfdbank.com.

Item 1A. Risk Factors

In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:

Difficult market conditions have affected the financial industry and may adversely affect us in the future.

Dramatic declines in the U.S. housing market over the past few years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial banks and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital from private and government entities, to merge with larger and stronger financial institutions and, in some cases, to fail. While these challenges are generally less severe than in recent years, their impact continues to be felt.

Reflecting concern about the stability of the financial markets in general and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, erosion of consumer confidence, increased market volatility and widespread reduction of business activity in general. The resulting economic pressure on consumers and erosion of confidence in the financial markets has already adversely affected our industry and may adversely affect our business, financial condition and results of operations. Although we believe that these difficult conditions in the financial markets have recently improved, a worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and other financial institutions. In particular, we may face the following risks in connection with these events:

Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage and underwrite the loans become less predictive of future behaviors.

The models used to estimate losses inherent in the credit exposure require difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of the borrowers to repay their loans, which may no longer be capable of accurate estimation and which may, in turn, impact the reliability of the models.

Our ability to borrow from other financial institutions or to engage in sales of mortgage loans to third parties on favorable terms, or at all, could be adversely affected by further disruptions in the capital markets or other events, including deteriorating investor expectations.

Competitive dynamics in the industry could change as a result of consolidation of financial services companies in connection with current market conditions.

We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

We expect to face increased capital requirements, both at the Company level and at each of the subsidiary banks. In this regard, the Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires the federal banking agencies to establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies. Furthermore, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, in September 2010 announced an agreement to a strengthened set of capital requirements for internationally active banking organizations, known as Basel III. While implementation of the proposed rules under Basel III in the U.S. has been indefinitely delayed, we expect U.S. banking authorities to follow the lead of Basel III and require all U.S. banking organizations to maintain significantly higher levels of capital, which may limit our ability to pursue business opportunities and adversely affect our results of operations and growth prospects.

We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the Deposit Insurance Fund, or DIF, and reduced the ratio of reserves to insured deposits. Furthermore, the Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will necessitate increased assessments on depository institutions. Although the precise impact on us will not be clear until implementing rules are issued, any future increases in assessments applicable to us will decrease our earnings and could have a material adverse effect on the value of, or market for, our common stock.

If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The acquisition of Community National, and other potential future acquisitions, could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

On February 14, 2013, we announced the entry into an agreement providing for the acquisition of Community National, which is expected to close in the second quarter of 2013. As part of our business strategy, we may consider acquisitions of other banks or financial institutions or branches, assets or deposits of such organizations. There is no assurance, however, that we will determine to pursue any of these opportunities or that if we determine to pursue them that we will be successful. Acquisitions involve numerous risks, any of which could harm our business, including:

difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target company and realizing the anticipated synergies of the combined businesses;

difficulties in supporting and transitioning customers of the target company;

diversion of financial and management resources from existing operations;

the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

risks of entering new markets or areas in which we have limited or no experience or are outside our core competencies;

potential loss of key employees, customers and strategic alliances from either our current business or the business of the target company;

assumption of unanticipated problems or latent liabilities; and

inability to generate sufficient revenue to offset acquisition costs.

Future acquisitions may involve the issuance of our equity securities as payment or in connection with financing the business or assets acquired, and as a result, could dilute the ownership interests of existing stockholders. In addition, consummating these transactions could result in the incurrence of additional debt and related interest expense, as well as unforeseen liabilities, all of which could have a material adverse effect on our business, results of operations and financial condition. The failure to successfully evaluate and execute acquisitions or otherwise adequately address the risks associated with acquisitions could have a material adverse effect on our business, results of operations and financial condition.

We must effectively manage our credit risk.

There are risks inherent in making any loan, including risks inherent in dealing with specific borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.

The majority of our subsidiary banks’ loan portfolios are invested in commercial and industrial and commercial real estate loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area’s largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to commercial and commercial real estate loans, our subsidiary banks are also active in residential mortgage and consumer lending. Should the economic climate fail to meaningfully improve or if it worsens, our borrowers may experience financial difficulties, and the level of nonperforming loans, charge-offs and delinquencies could rise, which could negatively impact our business through increased provision for loan/lease losses, reduced interest income on loans/leases, and increased expenses incurred to carry and resolve problem loans/leases.

Commercial and industrial loans make up a large portion of our loan/lease portfolio.

Commercial and industrial loans were $394.2 million, or approximately 31% of our total loan/lease portfolio, as of December 31, 2012. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal guarantee on commercial loans. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing these loans may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. In addition, if the U.S. economy experiences a prolonged recovery period, it could harm or continue to harm the businesses of our commercial and industrial customers and reduce the value of the collateral securing these loans.

Our loan/lease portfolio has a significant concentration of commercial real estate loans, which involve risks specific to real estate values.

Commercial real estate lending comprises a significant portion of our lending business. Specifically, commercial real estate loans were $594.0 million, or approximately 46% of our total loan/lease portfolio, as of December 31, 2012. Of this amount, $204.9 million, or approximately 35%, was owner-occupied. The market value of real estate securing our commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located, and in the past several years our market areas have experienced a general weakening in real estate valuations. Continued adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

The problems that have occurred in the residential real estate and mortgage markets throughout much of the U.S. in recent years also affected the commercial real estate market. In our market areas, we generally experienced a downturn in credit performance by our commercial real estate loan customers in recent years relative to historical norms, and despite recent improvements in certain aspects of the economy, a level of uncertainty continues to exist in the economy and credit markets, there can be no guarantee that we will not experience further deterioration in the performance of commercial real estate and other real estate loans in the future. In such case, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results, financial condition and/or capital.

Our allowance for loan/lease losses may prove to be insufficient to absorb losses in our loan/lease portfolio.

We establish 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, 2012, our allowance for loan/lease losses as a percentage of total gross loans/leases was 1.55%, and as a percentage of total nonperforming loans/leases was approximately 78.47%. In addition, we had net charge-offs as a percentage of gross average loans/leases of 0.27% for the year ended December 31, 2012. Because of the concentration of commercial and industrial and commercial real estate loans in our loan portfolio, which tend to be larger in amount than residential real estate and installment loans, the movement of a small number of loans to nonperforming status can have a significant impact on this ratio. Although management believes that the allowance for loan/lease losses as of December 31, 2012 was adequate to absorb losses on any existing loans/leases that may become uncollectible, in light of the current economic environment, which remains challenging, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance for loan/lease losses will prove sufficient to cover actual loan/lease losses in the future, particularly if economic conditions are more difficult than what management currently expects. Additional provisions to the allowance for loan/lease losses and loan/lease losses in excess of our allowance for loan/lease losses may adversely affect our business, financial condition and results of operations.

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, as well as that of our customers engaging in internet banking activities, 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. Any interruption in, or breach of security of, our computer systems and network infrastructure, or that of our internet banking customers, could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

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

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

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

We may be materially and adversely affected by the highly regulated environment in which we operate.

The Company and its bank subsidiaries are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

As a bank holding company, we are subject to regulation and supervision primarily by the Federal Reserve. QCBT and CRBT, as Iowa-chartered state member banks, are subject to regulation and supervision by both the Iowa Superintendent and the Federal Reserve. RB&T, as an Illinois-chartered state member bank, is subject to regulation and supervision by both the DFPR and the Federal Reserve. We and our banks undergo periodic examinations by these regulators, who have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies.

The primary federal and state banking laws and regulations that affect us are described in Appendix A to this report. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. For example, on July 21, 2010, the Dodd-Frank Act was signed into law, which significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act, together with the regulations to be developed thereunder, includes provisions affecting large and small financial institutions alike, including several provisions that affect how community banks, thrifts and small bank and thrift holding companies are and will be regulated. In addition, in recent years the Federal Reserve has adopted numerous new regulations addressing banks’ overdraft and mortgage lending practices. Further, the Consumer Financial Protection Bureau was recently established, with broad powers to supervise and enforce consumer protection laws, and additional consumer protection legislation and regulatory activity is anticipated in the near future.

In September 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III, which constitutes a strengthened set of capital requirements for banking organizations in the U.S. and around the world. In the U.S., Basel III is currently the subject of notices of proposed rulemakings released in June of 2012 by the respective federal bank regulatory agencies. The comment period for these notices of proposed rulemakings ended on October 22, 2012, but final regulations have not yet been released. Basel III was intended to be implemented beginning January 1, 2013 and to be fully-phased in on a global basis on January 1, 2019. However, on November 9, 2012, the federal bank regulatory agencies announced that the implementation of the proposed rules under Basel III in the U.S. was indefinitely delayed. If and when implemented in the U.S., Basel III would require higher levels of capital to be held in the form of tangible common equity, generally increase the required capital ratios, phase out certain kinds of intangibles treated as capital and certain types of instruments, like trust preferred securities, include unrealized gains and losses on available-for-sale securities as Tier 1 Capital, and change the risk weightings of assets used to determine required capital ratios. Such changes, including changes regarding interpretations and implementation, could affect us in substantial and unpredictable ways and could have a material adverse effect on us. Further, such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things.

U.S. financial institutions are also subject to numerous monitoring, recordkeeping, and reporting requirements designed to detect and prevent illegal activities such as money laundering and terrorist financing. These requirements are imposed primarily through the Bank Secrecy Act, (“BSA”) which was most recently amended by the USA Patriot Act. We have instituted policies and procedures to protect us and our employees, to the extent reasonably possible, from being used to facilitate money laundering, terrorist financing and other financial crimes. There can be no guarantee, however, that these policies and procedures are effective.

Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on us. Although we have policies and procedures designed to mitigate the risk of any such violations, there can be no assurance that such violations will not occur.

In addition to the foregoing laws and regulations, the policies of the Federal Reserve also have a significant impact on us. Among other things, the Federal Reserve’s monetary policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits, and can also affect the value of financial instruments we hold and the ability of borrowers to repay their loans, which could have a material adverse effect on us.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

The Company and each of its banking subsidiaries are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations and, due to the global financial crisis, we expect that the capital requirements imposed by the regulators will increase in the future. We intend to grow our business organically and to explore opportunities to grow our business by taking advantage of attractive acquisition opportunities, and such growth plans may require us to raise additional capital to ensure that we have adequate levels of capital to support such growth on top of our current operations. Our ability to raise additional capital, when and if needed or desired, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market condition, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. Our failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and preferred stock and to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition.

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, 2012, we had $36.1 million of junior subordinated debentures held by four business trusts that we control. Interest payments on the debentures, which totaled $1.0 million for 2012, must be paid before we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. As of December 31, 2012, the Company had 25,000 shares of non-cumulative convertible perpetual preferred stock issued and outstanding. Although these non-cumulative preferred shares will accrue no dividends, dividends will be payable on the preferred shares if declared, and no dividends may be declared on the Company’s common stock unless and until dividends have been declared on the outstanding shares. Deferral, of either interest payments on the debentures or preferred dividends on the preferred shares, could cause a subsequent decline in the market price of our common stock because the Company would not be able to pay dividends on its common stock.

In addition, as of December 31, 2012, we had 29,867 shares of senior non-cumulative perpetual preferred stock issued and outstanding, which we issued to the U.S. Department of the Treasury (the “Treasury”) as part of the Small Business Lending Fund Program (“SBLF”). The terms of the senior preferred stock impose limits on our ability to pay dividends on and repurchase shares of our common stock and other securities. In general, we may declare and pay dividends on our common stock or any other stock junior to the senior preferred stock, or repurchase shares of any such stock, only if after payment of such dividends or repurchase of such shares, our Tier 1 Capital would be at least 90% of our consolidated Tier 1 Capital on the date of issuance of the senior preferred stock. If we fail to declare and pay dividends on the senior preferred stock in a given quarter, then during such quarter and for the next three quarters following such missed dividend payment we may not pay dividends on or repurchase any common stock or any other securities that are junior to (or in parity with) the senior preferred stock, except that dividends may be paid on parity stock to the extent necessary to avoid any material breach of a covenant by which our company is bound. Although we expect to be able to pay all required dividends on the senior preferred stock (and to continue to pay dividends on common stock at current levels), there is no guarantee that we will be able to do so.

As a bank holding company, our sources of funds are limited.

We are a bank holding company, and our operations are primarily conducted by our subsidiary banks, which are subject to significant federal and state regulation. When available, cash to pay dividends to our stockholders is derived primarily from dividends received from our subsidiary banks. Our ability to receive dividends or loans from our subsidiary banks is restricted. Dividend payments by our subsidiaries to us in the future will require generation of future earnings by them and could require regulatory approval if any proposed dividends are in excess of prescribed guidelines. Further, as a structural matter, our right to participate in the assets of our subsidiary banks in the event of a liquidation or reorganization of any of the banks would be subject to the claims of the creditors of such bank, including depositors, which would take priority except to the extent we may be a creditor with a recognized claim. As of December 31, 2012, our subsidiary banks had deposits and other liabilities in the aggregate of approximately $1.93 billion.

Interest rates and other conditions impact our results of operations.

Our profitability is in large part a function of the spread between the interest rates earned on investments and loans/leases and the interest rates paid on deposits and other interest bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan/lease terms or the mix of adjustable and fixed rate loans/leases in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures about Market Risk” included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.

Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.

The market value of investments in our securities portfolio has become increasingly volatile in recent years, and as of December 31, 2012, we had gross unrealized losses of $445 thousand in our investment portfolio (more than offset by gross unrealized gains of $9.0 million). The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we formally evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if our investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on our results of operations in the periods in which the write-offs occur.

The downgrade of the U.S. credit rating and Europe’s debt crisis could have a material adverse effect on our business, financial condition and liquidity.

Standard & Poor’s lowered its long term sovereign credit rating on the U.S. of America from AAA to AA+ on August 5, 2011. A further downgrade or a downgrade by other rating agencies could have a material adverse impact on financial markets and economic conditions in the U.S. and worldwide. Any such adverse impact could have a material adverse effect on our liquidity, financial condition and results of operations. Many of our investment securities are issued by U.S. government sponsored entities.

In addition, the possibility that certain European Union (“EU”) member states will default on their debt obligations have negatively impacted economic conditions and global markets. The continued uncertainty over the outcome of international and the EU’s financial support programs and the possibility that other EU member states may experience similar financial troubles could further disrupt global markets. The negative impact on economic conditions and global markets could also have a material adverse effect on our liquidity, financial condition and results of operations.

Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of securities and/or loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, deposits, investment maturities and calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from the Federal Reserve Bank or other correspondent banks, FHLB advances, wholesale and customer repurchase agreements, brokered time deposits, and the ability to borrow at the Federal Reserve Bank’s Discount Window. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

Since mid-2007, the financial services industry and the credit markets generally have been materially and adversely affected by significant declines in asset values and by a lack of liquidity. The liquidity issues have been particularly acute for regional and community banks, as many of the larger financial institutions have significantly curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks. In addition, many of the larger correspondent lenders have reduced or even eliminated federal funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans/leases, invest in securities, meet our expenses, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.

Our business is concentrated in and dependent upon the continued growth and welfare of the Quad Cities, Cedar Rapids, and Rockford markets.

We operate primarily in the Quad Cities, Cedar Rapids, and Rockford markets, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a particularly strong presence in Bettendorf, Cedar Rapids and Davenport, Iowa and Moline and Rockford, Illinois and their surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce demand for our products and services, affect the ability of our customers to repay their loans to us, increase the levels of our nonperforming and problem loans, and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.

We face intense competition in all phases of our business from other banks and financial institutions.

The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services.

Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and offer a broader range of financial services than we can offer.

The soundness of other financial institutions could negatively affect us.

Our ability to engage in routine funding and other transactions could be negatively affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of the difficulties or failures of other banks, which would increase the capital we need to support our growth.

Our community banking strategy relies heavily on our subsidiaries’ independent management teams, and the unexpected loss of key managers may adversely affect our operations.

We rely heavily on the success of our bank subsidiaries’ independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain the executive officers and current management teams of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we manage our existing portfolio and grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.

The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

Our reputation could be damaged by negative publicity.

Reputational risk, or the risk to our business, financial condition or results of operations from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from actions taken by regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships.

The repeal of federal prohibitions on payment of interest on business demand deposits could increase our interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on business demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, some financial institutions have commenced offering interest on these demand deposits to compete for customers. If competitive pressures require us to pay interest on these demand deposits to attract and retain business customers, our interest expense would increase and our net interest margin would decrease. This could have a material adverse effect on our business, financial condition and results of operations. Further, the effect of the repeal of the prohibition could be more significant in a higher interest rate environment as business customers would have a greater incentive to seek interest on demand deposits.

The expiration of the FDIC’s Transaction Account Guarantee Program could negatively impact our liquidity and cost of funds.

Under the FDIC’s Transaction Account Guarantee Program, certain non-interest-bearing transaction accounts, including those of consumers and businesses, were insured by the FDIC over and above the $250,000 limit. This program expired on December 31, 2012, which could cause our depositors to withdraw deposits in excess of FDIC-insured levels. The withdrawal of these deposits could negatively impact our liquidity. Furthermore, the withdrawal of these deposits could negatively impact our cost of funds by potentially reducing our levels of core deposits and increasing our need to rely on wholesale funding sources, which typically represent higher cost funds.

The preparation of our consolidated financial statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and general reporting practices within the financial services industry, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies, such as those pertaining to our allowance for loan/lease losses, require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions, which may have a material adverse effect on our financial condition or results of operations in subsequent periods.

Item 1B. Unresolved Staff Comments

There are no unresolved staff comments.

Item 2. Properties

The following table is a listing of the Company’s operating facilities for its subsidiary banks:

Facility Address	Facility Square Footage		Facility Owned or Leased

Quad City Bank & Trust

2118 Middle Road in Bettendorf, IA		6,700	Owned
4500 Brady Street in Davenport, IA		36,000	Owned
3551 7th Street in Moline, IL		30,000	Owned *
5405 Utica Ridge Road in Davenport, IA		7,400	Leased
1700 Division Street in Davenport, IA		12,000	Owned

Cedar Rapids Bank & Trust

500 1st Avenue NE, Suite 100 in Cedar Rapids, IA		36,000	Owned
5400 Council Street in Cedar Rapids, IA		5,900	Owned

Rockford Bank & Trust

127 North Wyman Street in Rockford, IL		7,800	Leased
4571 Guilford Road in Rockford, IL		20,000	Owned

* The building was previously owned by VPHC. With the acquisition of the remaining 9% noncontrolling interest and the subsequent dissolution of VPHC, the Company now owns 100% of the building as of December 31, 2012.

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

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

Item 3. Legal Proceedings

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

Item 4. Mine Safety Disclosures

Not applicable.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information. The common stock, par value $1.00 per share, of the Company is listed on The NASDAQ Global Market under the symbol “QCRH”. The stock began trading on NASDAQ on October 6, 1993. The Company transferred its listing from the NASDAQ Capital Market to the NASDAQ Global Market on March 1, 2010. As of December 31, 2012, there were 4,918,202 shares of common stock outstanding held by approximately 2,600 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by NASDAQ for the periods indicated.

	2012 Sales Price				2011 Sales Price				2010 Sales Price
	High		Low		High		Low		High		Low

First quarter	$	12.450	$	8.500	$	8.670	$	7.220	$	10.000	$	7.650
Second quarter		14.500		10.700		9.470		7.290		14.400		8.730
Third quarter		14.980		12.620		9.928		8.701		10.970		8.930
Fourth quarter		15.500		11.400		9.234		8.420		9.520		6.745

Dividends on Common Stock. On May 2, 2012, the Company declared a cash dividend of $0.04 per share, or $189 thousand, which was paid on July 6, 2012, to stockholders of record as of June 21, 2012. On November 8, 2012, the Company declared a cash dividend of $0.04 per share, or $192 thousand, which was paid on January 7, 2013, to stockholders of record as of December 22, 2012. 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 to redeem the Series F Noncumulative Perpetual Preferred Stock (the “Series F Preferred Stock” (see Note 10 to the consolidated financial statements for a detailed discussion of preferred stock) in the short-term and for continued growth in the long-term, but believes that operating results have reached a level that can sustain dividends to stockholders as well.

The Company is heavily dependent on dividend payments from its subsidiary banks to make dividend payments on the Company’s preferred and common stock. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Iowa and Illinois law provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits.

The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.

The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debentures in four private placements. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. Additionally, the Company has issued shares of non-cumulative perpetual preferred stock and under the terms of this preferred stock, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. See Note 10 to the consolidated financial statements for additional detail on the preferred stock. None of these circumstances existed through the date of filing of this Form 10-K filed with the Securities and Exchange Commission.

Purchase of Equity Securities by the Company. There were no purchases of common stock by the Company for the years ended December 31, 2012, 2011, and 2010.

Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2007 and ending December 31, 2012, a comparison of cumulative total returns for the Company, the NASDAQ Composite Index, and the SNL Bank NASDAQ Index prepared by SNL Securities, Charlottesville, Virginia. The graph was prepared at the Company’s request by SNL Securities. The information assumes that $100 was invested at the closing price in December 31, 2007 in the common stock of the Company and in each index, and that all dividends were reinvested.

Item 6. Selected Financial Data

The following “Selected Financial Data” of the Company is derived in part from, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto. See Item 8 Financial Statements. Results for past periods are not necessarily indicative of results to be expected for any future period.

	Years Ended December 31,
	2012			2011			2010			2009			2008
STATEMENT OF INCOME DATA

Continuing Operations:
Interest income	$	77,376		$	77,723		$	80,097		$	85,611		$	85,147
Interest expense		19,727			23,578			30,233			34,949			40,524
Net interest income		57,649			54,145			49,864			50,662			44,623
Provision for loan/lease losses		4,371			6,616			7,464			16,976			9,222
Non-interest income		16,621			17,462			15,406			15,547			13,931
Non-interest expense		52,259			50,993			48,549			46,937			42,334
Income tax expense		4,534			3,868			2,449			247			1,735
Income from continuing operations		13,106			10,130			6,808			2,049			5,263

Discontinued Operations:
Income from discontinued operations, before taxes		-			-			-			-			2,580
Income tax expense		-			-			-			-			846
Income from discontinued operations		-			-			-			-			1,734

Net income		13,106			10,130			6,808			2,049			6,997
Less: net income attributable to noncontrolling interests		488			438			221			277			288
Net income attributable to QCR Holdings, Inc.		12,618			9,692			6,587			1,772			6,709
Less: preferred stock dividends and discount accretion		3,496			5,284			4,128			3,844			1,785
Net income (loss) attributable to QCR Holdings, Inc. common stockholders		9,122			4,408			2,459			(2,072	)		4,924


PER COMMON SHARE DATA

Income (loss) from continuing operations - Basic (1)	$	1.88		$	0.93		$	0.54		$	(0.46	)	$	0.69
Income from discontinued operations - Basic (1)		-			-			-			-			0.38
Net income (loss) - Basic (1)		1.88			0.93			0.54			(0.46	)		1.07
Income (loss) from continuing operations - Diluted (1)		1.85			0.92			0.53			(0.46	)		0.69
Income from discontinued operations - Diluted (1)		-			-			-			-			0.37
Net income (loss) - Diluted (1)		1.85			0.92			0.53			(0.46	)		1.06
Cash dividends declared		0.08			0.08			0.08			0.08			0.08
Dividend payout ratio		4.26	%		8.60	%		14.81	%		(17.39	) %		7.48

BALANCE SHEET DATA

Total assets	$	2,093,730		$	1,966,610		$	1,836,635		$	1,779,646		$	1,605,629
Securities		602,239			565,229			424,847			370,520			256,076
Total loans/leases		1,287,388			1,200,745			1,172,539			1,244,320			1,214,690
Allowance for estimated losses on loans/leases		19,925			18,789			20,365			22,505			17,809
Deposits		1,374,114			1,205,458			1,114,816			1,089,323			1,058,959
Borrowings		547,758			590,603			566,060			542,895			431,820
Stockholders' equity:
Preferred		53,163			63,386			62,214			58,578			20,158
Common		87,271			81,047			70,357			67,017			72,337

KEY RATIOS

Return on average assets (2)		0.62	%		0.51	%		0.36	%		0.10	%		0.43
Return on average common stockholders' equity (3)		10.84			5.82			3.58			(2.97	)		7.07
Return on average total stockholder's equity (2)		8.90			7.09			5.03			1.43			7.47
Net interest margin, tax equivalent yield (4)		3.10			3.08			2.92			3.14			3.27
Efficiency ratio (5)		70.36			71.21			74.38			70.89			72.30
Loans to deposits		93.69			99.61			105.18			114.23			114.71
Nonperforming assets to total assets		1.41			2.06			2.73			2.27			1.58
Allowance for estimated losses on loans/leases to total loans/leases		1.55			1.56			1.74			1.81			1.47
Allowance for estimated losses on loans/leases to nonperforming loans/leases		78.47			58.70			49.49			74.94			84.60
Net charge-offs to average loans/leases		0.27			0.70			0.79			1.00			0.24
Average total stockholders' equity to average total assets		7.00			7.17			7.13			7.18			5.78

(1) Income (loss) amounts are attributable to QCR Holdings, Inc.

(2) Numerator is net income attributable to QCR Holdings, Inc.

(3) Numerator is net income (loss) available to QCR Holdings, Inc. common stockholders

(4) Interest earned and yields on nontaxable investments are determined on a tax equivalent basis using a 34% tax rate

(5) Non-interest expenses divided by the sum of net interest income before provision for loan/lease losses and non-interest income

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 years ending December 31, 2012, 2011, and 2010, and our financial condition at December 31, 2012 and 2011. This discussion should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.

OVERVIEW

The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty years, the Company has grown to include two additional banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2012, the Company had $2.09 billion in consolidated assets, including $1.29 billion in total loans/leases and $1.37 billion in deposits.

The Company recognized net income of $13.1 million for the year ended December 31, 2012, and net income attributable to QCR Holdings, Inc. of $12.6 million, which excludes the net income attributable to noncontrolling interests of $488 thousand. After preferred stock dividends of $3.5 million, the Company reported net income available to common stockholders of $9.1 million, or diluted earnings per share of $1.85. For the same period in 2011, the Company recognized net income of $10.1 million, and net income attributable to QCR Holdings, Inc. of $9.7 million, which excludes the net income attributable to noncontrolling interests of $438 thousand. After preferred stock dividends and discount accretion of $5.3 million, the Company reported net income available to common stockholders of $4.4 million, or diluted earnings per share of $0.92. The $5.3 million of preferred stock dividends and discount accretion included $1.2 million of accelerated discount accretion on the repurchased Treasury Capital Purchase Program (“TCPP”) preferred shares. Excluding the impact of the accelerated accretion, the Company’s diluted earnings per share for 2011 would have been $1.18. By comparison, for 2010, the Company recognized net income of $6.8 million, and net income attributable to QCR Holdings, Inc. of $6.6 million, which excludes the net income attributable to noncontrolling interests of $221 thousand. After preferred stock dividends and discount accretion of $4.1 million, the Company reported net income available to common stockholders of $2.5 million, or diluted earnings per share of $0.53.

Following is a table that represents the various net income measurements for the years ended December 31, 2012, 2011, and 2010.

	Year Ended December 31,
	2012		2011		2010

Net income	$	13,106,240	$	10,129,869	$	6,807,726
Less: Net income attributable to noncontrolling interests		488,473		438,221		221,047
Net income attributable to QCR Holdings, Inc.	$	12,617,767	$	9,691,648	$	6,586,679

Less: Preferred stock dividends and discount accretion		3,496,085		5,283,885	*	4,128,104
Net income attributable to QCR Holdings, Inc. common stockholders	$	9,121,682	$	4,407,763	$	2,458,575

Diluted earnings per common share	$	1.85	$	0.92	$	0.53

Weighted average common and common equivalent shares outstanding		4,919,559		4,789,026		4,618,242

*Includes $1.2 million of accelerated accretion of discount on the TCPP preferred shares repurchased during the third quarter of 2011. See Note 10 to the consolidated financial statements for detailed discussion of preferred stock.

Following is a table that represents the major income and expense categories.

	Year Ended December 31,
	2012			2011			2010

Net interest income	$	57,649,260		$	54,144,856		$	49,863,768
Provision for loan/lease losses		(4,370,767	)		(6,616,014	)		(7,463,618	)
Noninterest income		16,621,295			17,461,878			15,405,888
Noninterest expense		(52,258,947	)		(50,992,652	)		(48,549,063	)
Federal and state income tax		(4,534,601	)		(3,868,199	)		(2,449,249	)
Net income	$	13,106,240		$	10,129,869		$	6,807,726

NET INTEREST INCOME AND MARGIN

Net interest income, on a tax equivalent basis, grew $4.2 million, or 8% in 2012 compared to 2011. Interest income (on a tax equivalent basis) grew slightly as growth in earning assets coupled with diversification of the securities portfolio outpaced the impact of declining yields. In addition, interest expense continued its significant decline as the Company continued its shift in mix of funding from wholesale (FHLB advances, wholesale structured repurchase agreements (“structured repos”), and brokered time deposits) to core deposits. For 2012, average earning assets increased by $122.2 million, or 7%, while average interest-bearing liabilities grew modestly by $15.7 million, or 1%, when compared with average balances for 2011. Primarily funding the growth in average earning assets, noninterest-bearing deposits grew $95.9 million, or 30%. A comparison of yields, spreads and margins from 2012 to 2011 shows the following (on a tax equivalent basis):

The average yield on interest-earning assets decreased 27 basis points from 4.41% to 4.14%.

The average cost of interest-bearing liabilities decreased 28 basis points from 1.65% to 1.37%.

The net interest spread improved 1 basis point from 2.76% to 2.77%.

The net interest margin improved 2 basis points from 3.08% to 3.10%.

Net interest income, on a tax equivalent basis, grew $4.3 million, or 9% in 2011 compared to 2010. A decline in interest income was more than offset by a significant decline in interest expense. For 2011, average earning assets increased by $53.0 million, or 3%, and average interest-bearing liabilities declined by $25.3 million, or 2%, when compared with average balances for 2010. Offsetting this decline and primarily funding the growth in average earning assets, noninterest-bearing deposits grew $84.5 million, or 36%. A comparison of yields, spreads and margins from 2011 to 2010 shows the following (on a tax equivalent basis):

The average yield on interest-earning assets decreased 27 basis points from 4.68% to 4.41%.

The average cost of interest-bearing liabilities decreased 43 basis points from 2.08% to 1.65%.

The net interest spread improved 16 basis points from 2.60% to 2.76%.

The net interest margin improved 16 basis points from 2.92% to 3.08%.

The Company’s management closely monitors and manages net interest margin. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and leasing company is the improvement of their net interest margins. Management continually addresses this issue with pricing and other balance sheet management strategies including, but not limited to, the use of alternative funding sources. Over the past two years, the Company’s management has emphasized improving its funding mix by reducing its reliance on wholesale funding, which tends to be at a higher cost than deposits. In addition, with deposit growth outpacing loan growth, the Company’s management has focused on growing and diversifying its securities portfolio.

The following strategies were executed by the Company to reduce reliance on wholesale funding or reducing the cost of portions of the Company’s wholesale funding.

The Company’s largest subsidiary bank, QCBT, executed a balance sheet restructuring during the first quarter of 2011. Specifically, the bank utilized excess liquidity and prepaid $15.0 million of FHLB advances with a weighted average interest rate of 4.87% and a weighted average maturity of May 2012. The fees for prepayment totaled $832 thousand. The Company sold $37.4 million of government sponsored agency securities and recognized pre-tax gains of $880 thousand which more than offset the prepayment fees. The proceeds from the sales of the government sponsored agency securities were reinvested into government guaranteed residential mortgage-backed securities with reduced risk-weighting for regulatory capital purposes and yields that were comparable to the sold securities. The resulting impacts were significant and included:

Significantly reduced interest expense and improved net interest margin

Stronger regulatory capital

Reduced reliance on wholesale funding

Separately, during the first quarter of 2011, QCBT modified $20.4 million of fixed rate FHLB advances with a weighted average interest rate of 4.33% and a weighted average maturity of October 2013 into new fixed rate advances with a weighted average interest rate of 3.35% and a weighted average maturity of February 2014.

Additionally, during the fourth quarter of 2011, the Company’s newest subsidiary bank, RB&T, modified $13.0 million of fixed rate FHLB advances with a weighted average interest rate of 3.37% and a weighted average maturity of March 2013 into new fixed rate FHLB advances with a weighted average interest rate of 2.29% and a weighted average maturity of February 2016.

During the second quarter of 2012, the Company modified $25.0 million of fixed rate structured repos with a weighted average interest rate of 3.77% and a weighted average maturity of December 2015 into new fixed rate structured repos with a weighted average interest rate of 3.21% and a weighted average maturity of April 2019.

These modifications serve to reduce interest expense and improve net interest margin, and minimize the exposure to rising rates through the duration extension of fixed rate liabilities.

The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories are presented in the following table:

	Years Ended December 31,
	2012								2011								2010
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost

	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	3,003		$	6		0.20	%	$	49,510		$	92		0.19	%	$	63,430		$	174		0.27
Interest-bearing deposits at financial institutions		54,834			378		0.69			29,691			405		1.36			31,002			411		1.33
Investment securities (1)		603,568			14,268		2.36			501,470			12,344		2.46			400,224			11,457		2.86
Restricted investment securities		15,172			507		3.34			15,573			558		3.58			16,750			497		2.97
Gross loans/leases receivable (2) (3) (4)		1,219,623			63,364		5.20			1,177,705			64,808		5.50			1,209,587			67,999		5.62
Total interest earning assets	$	1,896,200			78,523		4.14		$	1,773,949			78,207		4.41		$	1,720,993			80,538		4.68

Noninterest-earning assets:
Cash and due from banks	$	40,770							$	48,797							$	34,559
Premises and equipment, net		31,502								30,848								31,557
Less allowance for estimated losses on loans/leases		(19,162	)							(19,902	)							(21,678	)
Other		76,383								73,346								73,887

Total assets	$	2,025,693							$	1,907,038							$	1,839,318

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	545,739			2,679		0.49	%	$	530,340			3,927		0.74	%	$	425,702			3,771		0.89
Time deposits		352,582			3,540		1.00			363,337			5,012		1.38			465,160			8,911		1.92
Short-term borrowings		170,065			248		0.15			144,267			290		0.20			142,197			628		0.44
Federal Home Loan Bank advances		201,704			7,280		3.61			211,361			7,972		3.77			233,384			9,247		3.96
Junior subordinated debentures		36,085			1,039		2.88			36,085			1,228		3.40			36,085			1,945		5.39
Other borrowings (4)		137,226			4,941		3.60			142,281			5,149		3.62			150,430			5,732		3.81
Total interest-bearing liabilities	$	1,443,401			19,727		1.37		$	1,427,670			23,578		1.65		$	1,452,958			30,234		2.08

Noninterest-bearing demand deposits	$	412,039							$	316,110							$	231,604
Other noninterest-bearing liabilities		28,460								26,558								23,690
Total liabilities	$	1,883,900							$	1,770,338							$	1,708,252

Stockholders' equity		141,793								136,700								131,066

Total liabilities and stockholders' equity	$	2,025,693							$	1,907,038							$	1,839,318

Net interest income				$	58,796							$	54,629							$	50,304

Net interest spread							2.77	%							2.76	%							2.60	%

Net interest margin							3.10	%							3.08	%							2.92	%

Ratio of average interest earning assets to average interest-bearing liabilities		131.37	%							124.25	%							118.45	%

(1) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented.

(2) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

(3) Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

(4) In accordance with ASC 860, effective January 1, 2010, the Company accounts for some participations sold, including sales of government-guaranteed portions of loans during the recourse period, as secured borrowings. As such, these amounts are included in the average balance for gross loans/leases receivable and other borrowings. For the years ended December 31, 2012, 2011 and 2010, this totaled $0.0 million, $2.5 million and $9.6 million, respectively. During the second quarter of 2011, SBA removed the recourse provision for sales which allowed for sale accounting treatment at the time of sale; thus, the decline in average balance.

The Company’s components of change in net interest income are presented in the following table:

	For the years ended December 31, 2012, 2011 and 2010
	Inc./(Dec.) from			Components of Change (1)						Inc./(Dec.) from			Components of Change (1)
	Prior Year			Rate			Volume			Prior Year			Rate			Volume
	2012 vs. 2011									2011 vs. 2010
	(dollars in thousands)									(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	(86	)	$	6		$	(92	)	$	(82	)	$	(49	)	$	(33	)
Interest-bearing deposits at other financial institutions .		(27	)		(263	)		236			(6	)		12			(18	)
Investment securities (2)		1,924			(506	)		2,430			887			(1,750	)		2,637
Restricted investment securities		(51	)		(37	)		(14	)		61			98			(37	)
Gross loans/leases receivable (3) (4) (5)		(1,444	)		(3,701	)		2,257			(3,191	)		(1,420	)		(1,771	)

Total change in interest income	$	316		$	(4,501	)	$	4,817		$	(2,331	)	$	(3,109	)	$	778

INTEREST EXPENSE
Interest-bearing demand deposits	$	(1,248	)	$	(1,359	)	$	111		$	156		$	(727	)	$	883
Time deposits		(1,472	)		(1,328	)		(144	)		(3,899	)		(2,188	)		(1,711	)
Short-term borrowings		(42	)		(88	)		46			(338	)		(347	)		9
Federal Home Loan Bank advances		(692	)		(336	)		(356	)		(1,275	)		(430	)		(845	)
Junior subordinated debentures		(189	)		(189	)		-			(717	)		(717	)		-
Other borrowings (5)		(208	)		(26	)		(182	)		(583	)		(281	)		(302	)

Total change in interest expense	$	(3,851	)	$	(3,326	)	$	(525	)	$	(6,656	)	$	(4,690	)	$	(1,966	)

Total change in net interest income	$	4,167		$	(1,175	)	$	5,342		$	4,325		$	1,581		$	2,744

(1) The column "Inc/(Dec) from Prior Year" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates.

The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

(2) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented.

(3) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

(4) Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

(5) In accordance with ASC 860, effective January 1, 2010, the Company accounts for some participations sold, including sales of government-guaranteed portions of loans during the recourse period, as secured borrowings. As such, these amounts are included in the average balance for gross loans/leases receivable and other borrowings. For the years ended December 31, 2012, 2011 and 2010, this totaled $0.0 million, $2.5 million and $9.6 million, respectively. During the second quarter of 2011, SBA removed the recourse provision for sales which allowed sale accounting treatment at the time of the sale; thus, the decline in average balance.

The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, gains from the sales of residential real estate loans and government guaranteed loans, earnings on bank-owned life insurance, and other income. Offsetting these items, the Company incurs noninterest expenses which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense, and other administrative expenses.

The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies, and actions of regulatory authorities.

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan/lease losses (also referred to as “allowance for estimated losses on loans/leases”). The Company’s allowance for loan/lease losses methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan/lease losses that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest, and in particular, the economic health of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan/lease portfolio, it enhances its methodology accordingly. Management may report a materially different amount for the provision for loan/lease losses in the statement of operations to change the allowance for loan/lease losses if its assessment of the above factors were different. The discussion regarding the Company’s allowance for loan/lease losses should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this Form 10-K, as well as the portion of this Management’s Discussion and Analysis section entitled “Financial Condition – Allowance for Estimated Losses on Loans/Leases.” Although management believes the level of the allowance as of December 31, 2012 was adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

The Company’s assessment of other-than-temporary impairment of its available-for-sale securities portfolio is another critical accounting policy as a result of the level of judgment required by management. Available-for-sale securities are evaluated to determine whether declines in fair value below their cost are other-than-temporary. In estimating other-than-temporary impairment losses management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the Company to not sell the security prior to recovery and whether it is not more-likely-than-not that the Company will be required to sell the security prior to recovery. The discussion regarding the Company’s assessment of other-than-temporary impairment should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this Form 10-K.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012, 2011, and 2010

OVERVIEW. Net income attributable to QCR Holdings, Inc. for 2012 was $12.6 million, or diluted earnings per share of $1.85 after preferred stock dividends of $3.5 million. Comparing 2012 to 2011, annual earnings grew 30%, and diluted earnings per share more than doubled. Net interest income grew $3.5 million, or 6%, as growth and shift in mix of earning assets and funding outpaced the impact of declining yields on loans and securities. Provision for loan/lease losses declined $2.2 million as loan quality continued to improve. Noninterest income fell $841 thousand which was primarily the result of increased losses on other real estate owned (“OREO”) as most of the other recurring sources realized modest gains year-over-year. Noninterest expenses grew $1.3 million, or 2%, during 2012. The large majority of this increase was salaries and employee benefits as health insurance costs continued to increase, incentive compensation grew due to improved financial performance, and the continuation of customary annual salary and benefits increases across the employee base.

Net income attributable to QCR Holdings, Inc. for 2011 was $9.7 million, or diluted earnings per share of $0.92 after preferred stock dividends and discount accretion of $5.3 million, compared to $6.6 million, or diluted earnings per share of $0.53 after preferred stock dividends of $4.1 million, for 2010. The $5.3 million of preferred stock dividends and discount accretion included $1.2 million of accelerated discount accretion on the repurchased TCPP preferred shares. Excluding the impact of the accelerated accretion, the Company’s diluted earnings per share for 2011 would have been $1.18. Net interest income grew $4.3 million, or 9%, year-over-year. The Company’s noninterest income increased $2.1 million, or 13%, during 2011. As part of the balance sheet restructuring at QCBT and as a result of favorable market conditions, the Company sold $54.3 million of securities at pre-tax gains totaling $1.5 million. The remaining increase consisted of modest growth across the majority of the Company’s major noninterest income sources. Noninterest expense increased $2.4 million, or 5%, during 2011. The large majority of this increase was salaries and employee benefits as the Company resumed customary annual salary and benefits increases for the majority of the employee base, increased health insurance costs, and increased incentive compensation based on improved financial performance. Lastly, the Company’s provision for loan/lease losses declined $848 thousand, or 11%, during 2011.

INTEREST INCOME. For 2012, interest income declined modestly ($347 thousand, or less than 1%) as growth in earning assets and diversification of the securities portfolio fell short of the impact of declining yields on loans and securities. The Company’s average interest-earning assets increased $122.2 million, or 7%, year-over-year. The Company grew securities ($102.1 million, or 20%) and loans ($41.9 million, or 4%), while its federal funds sold position declined $46.5 million as the Company invested some of its excess liquidity. As growth in deposits continued to outpace loan growth during 2012, the Company continued to grow and diversify its securities portfolio, including increasing the portfolio of government guaranteed residential mortgage-backed securities as well as more than tripling the portfolio of tax exempt municipal securities. Of the latter, the large majority are privately placed debt issuances located in or near the Company’s existing markets and require a thorough underwriting process before investment. Notably, the significant increase in tax exempt municipal debt securities expanded interest income on a tax equivalent basis to reflect net growth year-over-year.

For 2011, interest income declined $2.4 million, or 3%, primarily as a result of the continued shift in interest-earning asset mix and the extended historical low interest rate environment. The Company’s average interest-earning assets increased $53.0 million, or 3%, year-over-year. Most notably, the Company grew its securities portfolio as the average balance of investment securities increased $101.3 million, or 25%. Partially offsetting this growth, the average balance of loans/leases declined $31.9 million, or 3%, and the average balance of federal funds sold fell $13.9 million, or 22%. This continued shift in interest-earning asset mix is the result of weak loan demand and the Company’s strategy to invest some of its excess liquidity in government sponsored agency securities and government guaranteed residential mortgage-backed securities.

The Company intends to continue to grow quality loans and leases as well as diversify the securities portfolio to maximize yield while minimizing credit and interest rate risk.

INTEREST EXPENSE. Comparing 2012 to 2011, interest expense declined $3.9 million, or 16%, year-over-year. With average interest-bearing liabilities increasing slightly, the following were major contributors to the decline in interest expense:

Continued reduction of interest rates paid across all deposits without runoff (the average cost of interest-bearing deposits fell from 1.00% for 2011 down to 0.61% for 2012),

The impact of the aforementioned balance sheet restructuring strategies executed in 2011 and 2012, and

Continued shift of funding from wholesale borrowings and brokered and other time deposits to core deposits, including non-interest bearing deposits.

Comparing 2011 to 2010, interest expense declined $6.7 million, or 22%, year-over-year. The Company’s average interest-bearing liabilities decreased $25.3 million, or 2%, from 2010 to 2011. Also contributing to the decline in interest expense, the Company was successful in shifting the mix of funding from wholesale borrowings and brokered time deposits to core deposits. The aforementioned balance sheet strategies executed by QCBT and RB&T in 2011 were major contributors to the shift in mix and the decline in interest expense. Lastly, management continued to drive down deposit pricing. The average cost of interest-bearing deposits declined 42 basis points from 1.42% for 2010 down to 1.00% for 2011.

The Company’s management intends to continue to shift the mix of funding from wholesale borrowing and brokered and other time deposits to core deposits including noninterest-bearing deposits. Continuing this trend will strengthen the Company’s franchise value, reduce funding costs, and increase fee income opportunities through deposit service charges.

PROVISION FOR LOAN/LEASE LOSSES. The provision for loan/lease losses is established based on a number of factors, including the Company’s historical loss experience, delinquencies and charge-off trends, the local and national economy and the risk associated with the loans/leases in the portfolio as described in more detail in the “Critical Accounting Policies” section.

The Company’s provision for loan/lease losses declined $2.2 million, or 34%, from $6.6 million for 2011 to $4.4 million for 2012. This decline followed a drop in provision for loan/lease losses of $848 thousand, or 11%, comparing 2010 to 2011. The declines were the result of continued improvement in loan quality as evidenced by a declining trend in the level of classified and criticized loans (see table and further discussion in the Allowance for Estimated Losses on Loans/Leases section). This trend translated over to nonperforming loans/leases, as the Company’s level of nonperforming loans/leases declined $9.1 million, or 22%, from 2010 to 2011, and then again $6.6 million, or 21%, from 2011 to 2012. The impact of improving loan quality to the provision for loan/lease losses more than offset the impact of loan growth over the past two years.

The Company had an allowance for estimated losses on loans/leases of 1.55% of total gross loans/leases at December 31, 2012, compared to 1.56% of total gross loans/leases at December 31, 2011, and compared to 1.74% of total gross loans/leases at December 31, 2010.

NONINTEREST INCOME. The following tables set forth the various categories of noninterest income for the years ended December 31, 2012, 2011, and 2010.

	Years Ended
	December 31, 2012			December 31, 2011			$ Change			% Change

Trust department fees	$	3,632,278		$	3,368,995		$	263,283			7.8	%
Investment advisory and management fees, gross		2,361,159			2,108,918			252,241			12.0
Deposit service fees		3,485,929			3,493,001			(7,072	)		(0.2	)
Gains on sales of residential real estate loans		1,388,142			999,162			388,980			38.9
Gains on sales of government guaranteed portions of loans		1,069,565			1,565,881			(496,316	)		(31.7	)
Earnings on bank-owned life insurance		1,609,208			1,445,891			163,317			11.3
Credit card fees, net of processing costs		599,164			500,544			98,620			19.7
Subtotal	$	14,145,445		$	13,482,392		$	663,053			4.9
Securities gains, net		104,600			1,472,528			(1,367,928	)		(92.9	)
Losses on other real estate owned, net		(1,332,972	)		(374,910	)		(958,062	)		255.5
Other		3,704,222			2,881,868			822,354			28.5
Total noninterest income	$	16,621,295		$	17,461,878		$	(840,583	)		(4.8	) %

	Years Ended
	December 31, 2011			December 31, 2010			$ Change			% Change

Trust department fees	$	3,368,995		$	3,290,844		$	78,151			2.4	%
Investment advisory and management fees, gross		2,108,918			1,812,903			296,015			16.3
Deposit service fees		3,493,001			3,478,743			14,258			0.4
Gains on sales of residential real estate loans		999,162			1,655,570			(656,408	)		(39.6	)
Gains on sales of government guaranteed portions of loans		1,565,881			1,513,944			51,937			3.4
Earnings on bank-owned life insurance		1,445,891			1,331,085			114,806			8.6
Credit card fees, net of processing costs		500,544			259,590			240,954			92.8
Subtotal	$	13,482,392		$	13,342,679		$	139,713			1.0
Securities gains, net		1,472,528			-			1,472,528			100.0
Losses on other real estate owned, net		(374,910	)		(835,163	)		460,253			(55.1	)
Other		2,881,868			2,898,372			(16,504	)		(0.6	)
Total noninterest income	$	17,461,878		$	15,405,888		$	2,055,990			13.3	%

Trust department fees continue to be a significant contributor to noninterest income. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully managed trusts. As the markets have experienced volatility with the national economy’s recovery from recession, the Company’s fee income has experienced similar volatility, but has realized net growth year-over-year in fee income for 2011 (2.4%) and 2012 (7.8%). In recent years, the Company has been successful in expanding its customer base which has helped to offset some of the volatility and contributed to the net growth in fee income.

Over the past two years, management has placed a stronger emphasis on growing its investment advisory and management services, including adding three business development officers in late 2011 and early 2012. Fee income from investment advisory and management services increased in consecutive years with year-over-year increases of 16.3% and 12.0% for 2011 and 2012, respectively. Similar to trust department fees, these fees are largely determined based on the value of the investments managed. And, similar to the trust department, the Company has had some success in expanding its customer base which has helped to offset the market volatility affecting asset values as the national economy continues to slowly recover.

As management understands the importance of growing fee income, expanding market share in trust and investment advisory services will continue to be a primary strategic focus.

Deposit service fees have remained flat over the past two years. The Company has placed an emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits as the latter tends to be lower in interest cost and higher in service fees. A large majority of this shift and growth over the past two years has been non-interest bearing correspondent bank deposits. The majority of these deposits include a variety of services (processing of cash letter items, wire transfer services, safekeeping of securities, etc.) and the Company has offered a reduction of fees charged for these services if the correspondent bank carries a certain level of non-interest bearing deposits. With loan demand weak and liquidity strong across the correspondent bank customer portfolio, the correspondent bank customers have carried higher deposits to maximize the reduction of fees. The Company has continually reviewed the fees charged on all deposit-related services and has consistently increased across the board to be in line with or to lead the market. In addition, the Company has recently evaluated the level of fee reduction and compensating balances for the aforementioned correspondent bank deposits and restructured the program to minimize the reduction of fees beginning in 2013. The Company plans to continue the shift in mix of deposits and to focus on growing deposit service fees.

Regarding sales of residential mortgages, the Company experienced fluctuation as refinancing activity was strong in 2010, slowed in 2011, and rebounded in 2012 as the yield curve flattened further driving down longer-term interest rates and allowing opportunities for refinancing.

In 2010, the Company elevated its focus on small business lending by taking advantage of programs offered by the SBA and USDA. In some cases, it is more beneficial for the Company to sell the government guaranteed portion at a premium. Sales activity for government guaranteed portions of loans tends to fluctuate depending on the demand for small business loans that fit the criteria for the government guarantee. Further, some of the transactions can be large and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can be large. Lastly, a strategy for improved pricing is packaging loans together for sale. From time to time, the Company may execute on this strategy, which may delay the gains on sales of some loans to achieve better pricing. Despite the fluctuation, the Company will continue to focus on growing small business lending and selling the government guaranteed portion as it continues to be beneficial.

During the third quarter of 2011, as a result of favorable market conditions, QCBT sold $8.6 million of government agency securities for a pre-tax gain totaling $444 thousand. The related sales proceeds were reinvested into residential mortgage-backed securities with higher yields and similar credit risk to the sold securities. Similarly, as a result of favorable market conditions, RB&T sold $8.3 million of government agency securities for a pre-tax gain totaling $149 thousand. The sales proceeds were utilized to diversify RB&T’s securities portfolio and fund loan growth. Separately, during the first quarter of 2011, in an effort to offset the $832 thousand of fees for prepaying $15.0 million of FHLB advances, QCBT sold $37.4 million of government agency securities for a pre-tax gain totaling $880 thousand. See detailed discussion of this restructuring transaction in the Net Interest Income and Margin section earlier in Management’s Discussion and Analysis.

In 2012, the Company incurred increased write-downs of existing OREO as the result of further declines in appraised values. Of the total losses on OREO for the year, the Company wrote down $1.2 million of existing OREO and recognized losses on sales of $173 thousand. Management continues to proactively manage its OREO portfolio in an effort to sell timely at minimal loss. The Company’s OREO portfolio totaled $4.0 million at December 31, 2012 which is the lowest level since 2008.

Earnings on bank-owned life insurance (“BOLI”) experienced strong growth over the past two years. The Company purchased additional BOLI in 2011 totaling $7.0 million (or growth of 21% over 2010), and another $2.0 million (or growth of 5% over 2011) in 2012. Yields on BOLI (based on a simple average and excluding impact of federal tax exemption) were 3.67% for 2012 and 3.83% for 2011. Notably, a small portion of the Company’s BOLI is variable rate whereby the returns are determined by the performance of the equity market. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Included in other noninterest income for 2012, the Company recognized $580 thousand pre-tax gain on the sale of a small equity interest in a company that provided data processing services to the Company merchant credit card acquiring business that was previously sold in 2008. In addition, CRBT recognized $616 thousand of fee income for the execution of interest rate swaps related to four commercial loans in 2012. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while CRBT receives a variable interest rate as well as an upfront fee depending on the pricing. Management believes that these swaps help position CRBT more favorably for rising rate environments. Management will continue to review opportunities to execute these swaps at all three of its subsidiary banks as the circumstances are appropriate for the borrower and the Company.

NONINTEREST EXPENSES. The following tables set forth the various categories of noninterest expenses for the years ended December 31, 2012, 2011, and 2010.

	Years Ended
	December 31, 2012		December 31, 2011		$ Change			% Change

Salaries and employee benefits	$	33,274,509	$	30,365,020	$	2,909,489			9.6	%
Occupancy and equipment expense		5,635,257		5,297,949		337,308			6.4
Professional and data processing fees		4,317,939		4,461,187		(143,248	)		(3.2	)
FDIC and other insurance		2,330,611		2,698,282		(367,671	)		(13.6	)
Loan/lease expense		1,041,824		2,160,674		(1,118,850	)		(51.8	)
Advertising and marketing		1,445,476		1,288,797		156,679			12.2
Postage and telephone		959,708		937,557		22,151			2.4
Stationery and supplies		541,122		516,873		24,249			4.7
Bank service charges		853,895		725,717		128,178			17.7
Subtotal	$	50,400,341	$	48,452,056	$	1,948,285			4.0
Prepayment fees on Federal Home Loan Bank advances		-		832,099		(832,099	)		(100.0	)
Other-than-temporary impairment losses on securities		62,400		118,847		(56,447	)		(47.5	)
Other		1,796,206		1,589,650		206,556			13.0
Total noninterest expense	$	52,258,947	$	50,992,652	$	1,266,295			2.5	%

	Years Ended
	December 31, 2011		December 31, 2010		$ Change			% Change

Salaries and employee benefits	$	30,365,020	$	27,843,127	$	2,521,893			9.1	%
Occupancy and equipment expense		5,297,949		5,472,248		(174,299	)		(3.2	)
Professional and data processing fees		4,461,187		4,524,519		(63,332	)		(1.4	)
FDIC and other insurance		2,698,282		3,528,267		(829,985	)		(23.5	)
Loan/lease expense		2,160,674		1,657,552		503,122			30.4
Advertising and marketing		1,288,797		1,053,909		234,888			22.3
Postage and telephone		937,557		1,004,176		(66,619	)		(6.6	)
Stationery and supplies		516,873		491,252		25,621			5.2
Bank service charges		725,717		420,252		305,465			72.7
Subtotal	$	48,452,056	$	45,995,302	$	2,456,754			5.3
Prepayment fees on Federal Home Loan Bank advances		832,099		-		832,099			100.0
Other-than-temporary impairment losses on securities		118,847		113,800		5,047			4.4
Losses on lease residual values		-		617,000		(617,000	)		(100.0	)
Other		1,589,650		1,822,961		(233,311	)		(12.8	)
Total noninterest expense	$	50,992,652	$	48,549,063	$	2,443,589			5.0	%

Management places strong emphasis on overall cost containment and is committed to improve the Company’s general efficiency.

Salaries and employee benefits, which is the largest component of noninterest expense, increased 9.1% and 9.6% in 2011 and 2012, respectively. For the past two years, the increases are largely the result of:

Customary annual salary and benefits increases for the majority of the Company’s employee base in 2011 and 2012. For 2010, the Company did not generally increase salaries across the employee base.

Continued increases in health insurance-related employee benefits for the majority of the Company’s employee base.

Higher accrued incentive compensation based on improved financial performance in 2011 and 2012.

Targeted talent additions in late 2011 and early 2012. Specifically, the Company added four business development officers (three in the Wealth Management Division and one in the Correspondent Banking Division) in an effort to continue to grow market share.

Occupancy and equipment expense increased from 2011 to 2012 with the purchases of additional technology for enhanced customer service and for improved fraud detection and prevention systems. In addition, the largest branch of RB&T was renovated to allow for existing and future expansion.

Professional and data processing fees declined in 2011 and again in 2012 as management was successful in containing costs through contract renegotiation or managed reduction in activity where costs are determined on a usage basis. Management will continue to focus on driving these recurring costs down.

FDIC and other insurance expense experienced significant declines in 2011 and 2012. FDIC insurance premiums are calculated using a variety of factors, including, but not limited to, balance sheet levels, funding mix, and regulatory compliance. The subsidiary banks have been successful in managing these factors and driving down FDIC insurance cost. In addition, the FDIC modified the calculation for premiums effective during the second quarter of 2011. The modification was favorable for the Company’s subsidiary banks.

Loan/lease expense fluctuated significantly over the past two years with a 30% increase during 2011, and a 52% decline in 2012. Generally, loan/lease expense has a direct relationship with the level of nonperforming loans/leases; however, it may deviate depending upon the individual nonperforming loans/leases. Management expects these historically elevated levels of expense to continue to decline in line with the declining trend in nonperforming loans/leases.

The Company incurred additional expenses for advertising and marketing during 2011 and 2012 in an effort to gain market share across all three markets the Company serves.

Bank service charges, which include costs incurred to provide services to QCBT’s correspondent banking customer portfolio, have increased significantly over the past two years. The increase is due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio over the past two years.

In an effort to utilize some of its excess liquidity and improve net interest margin by eliminating some of its higher cost wholesale funding, QCBT prepaid $15.0 million of FHLB advances during the first quarter of 2011. As a result, QCBT incurred a prepayment fee totaling $832 thousand. To offset these fees, QCBT sold $37.4 million of government sponsored agency securities for a pre-tax gain totaling $880 thousand. See a detailed discussion of this restructuring transaction in the Net Interest Income and Margin section earlier in Management’s Discussion and Analysis.

During 2012, the Company’s evaluation of its securities portfolio for other-than-temporary impairment (“OTTI”) determined that two privately held equity securities experienced declines in fair value that were other-than-temporary. As a result, the Company wrote down the value of these securities and recognized losses in the amount of $62 thousand. Similarly, during 2011, the Company’s evaluation determined that two privately held equity securities experienced declines in fair value that were other-than-temporary and the Company wrote down the value of these securities and recognized losses in the amount of $119 thousand. Moreover, in 2010, management identified a single issue trust preferred security that experienced a decline in fair value determined to be other-than-temporary. As a result, the Company wrote down the value of this security and recognized a loss totaling $114 thousand. The Company does not own any other trust preferred securities.

During the first quarter of 2010, the Company recognized losses in residual values for two direct financing equipment leases. The sharp declines in value were isolated and attributable to changes in unique market conditions during the quarter related to the specific equipment. Specifically, one of the affected leases related to auto-industry equipment. During the first quarter of 2010, several like equipment dealers declared bankruptcy which led to disruption in the specific market. As a result, pricing for new like equipment declined sharply. Similarly, for the other affected lease, the underlying equipment was a commercial printer. The commercial printing industry has experienced some challenges and pricing for this particular equipment experienced sharp declines during the first quarter of 2010. In both cases, management determined the amount of the loss by comparing the recorded estimated residual value of the affected leases to the estimated value at the end of the lease term, as adjusted for the declined pricing for new like equipment. And, in both cases, the equipment was sold in the second quarter of 2010 without any further losses realized. For 2011 and 2012, there were no losses on residual values. Management continues to perform periodic and specific reviews of its residual values, and has identified modest residual risk remaining in the lease portfolio.

INCOME TAX EXPENSE. The provision for income taxes was $4.5 million for 2012, or an effective tax rate of 25.7%, compared to $3.9 million for 2011, or an effective tax rate of 27.6%, for an increase of $666 thousand, or 17%. The decline in effective tax rate is primarily the result of the following:

The continued application of tax credits that were acquired in the third quarter of 2011.

The increase in tax-exempt municipal securities during 2012, which, in turn, resulted in an increase in nontaxable income. Specifically, the Company grew its municipal securities portfolio from $25.7 million at December 31, 2011 to $97.6 million at December 31, 2012.

The provision for income taxes was $3.9 million for the year ended December 31, 2011, compared to $2.5 million for the year ended December 31, 2010 for an increase of $1.4 million, or 58%. The increase was the result of significant growth in income before taxes of $4.7 million, or 51%, year-over-year. Additionally, primarily due to a decline in the proportionate share of tax-exempt income to total income year-over-year, the Company experienced a slight increase in the effective tax rate from 26.5% for 2010 to 27.6% for 2011.

FINANCIAL CONDITION

OVERVIEW. Following is a table that represents the major categories of the Company’s balance sheet.

	As of December 31,
	2012					2011					2010
	(dollars in thousands)

	Amount		%			Amount		%			Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	110,488		5	%	$	100,673		5	%	$	143,737		8	%
Securities		602,239		29	%		565,229		29	%		424,847		23	%
Net loans/leases		1,267,462		61	%		1,181,956		60	%		1,152,174		63	%
Other assets		113,541		5	%		118,752		6	%		115,877		6	%
Total assets	$	2,093,730		100	%	$	1,966,610		100	%	$	1,836,635		100	%

Total deposits	$	1,374,114		66	%	$	1,205,458		61	%	$	1,114,816		61	%
Total borrowings		547,758		26	%		590,603		30	%		566,059		31	%
Other liabilities		31,424		1	%		26,116		1	%		23,189		1	%
Total stockholders' equity		140,434		7	%		144,433		8	%		132,571		7	%
Total liabilities and stockholders' equity	$	2,093,730		100	%	$	1,966,610		100	%	$	1,836,635		100	%

Total assets grew $127.1 million, or 6%, to $2.09 billion at December 31, 2012, from $1.97 billion at December 31, 2011. The Company grew its net loan/lease portfolio $85.5 million, or 7%, and its securities portfolio $37.0 million, or 7%, during 2012. The asset growth was funded by strong and continued growth of the Company’s deposit portfolio (as balances grew $168.7 million, or 14%) partially offset by a reduction in federal funds purchased.

Total assets grew $130.0 million, or 7%, to $1.97 billion at December 31, 2011, from $1.84 billion at December 31, 2010. The Company grew its securities portfolio $140.4 million, or 33%, during 2011. Additionally, gross loans/leases grew $28.2 million, or 2%. The growth was partially offset by a decline in federal funds sold and interest-bearing deposits at financial institutions as the Company invested some of its excess liquidity. The net increase in assets was funded primarily by strong and continued growth of the Company’s deposit portfolio as balances grew $90.6 million, or 8%.

INVESTMENT SECURITIES. The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on asset-liability position and maximizing return. With the strong growth in deposits more than outpacing the loan growth over the past two years, the Company has grown and diversified its securities portfolio, including increasing the portfolio of agency sponsored residential mortgage-backed securities as well as more than tripling the portfolio of municipal securities. Of the latter, the large majority are privately placed debt issuances by municipalities located in or near the Company’s existing markets and require a thorough underwriting process before investment. As the portfolio has grown over the recent years, management has elevated its focus on maximizing return while minimizing credit and interest rate risk. Additionally, management will continue to diversify the portfolio with further growth strictly dictated by the pace of growth in deposits and loans. Ideally, management expects to fund future loan growth partially with cashflow from the securities portfolio (calls and maturities of government sponsored agencies and/or paydowns on residential mortgage-backed securities).

Following is a breakdown of the Company’s securities portfolio by type as of December 31, 2012, 2011, and 2010.

	2012						2011						2010
	Amount			%			Amount			%			Amount			%
	(dollars in thousands)
U.S. govt. sponsored agency securities	$	338,609			56	%	$	428,955			76	%	$	402,225			95	%
Residential mortgage-backed and related securities		163,601			27	%		108,854			19	%		70			0	%
Municipal securities		97,615			16	%		25,689			5	%		20,603			5	%
Trust preferred securities		139			0	%		81			0	%		78			0	%
Other securities		2,275			0	%		1,650			0	%		1,871			0	%
	$	602,239			100	%	$	565,229			100	%	$	424,847			100	%

As a % of Total Assets		28.76	%					28.74	%					23.13	%
Net Unrealized Gains as a % of Amortized Cost		1.44	%					1.38	%					0.27	%
Duration (in years)		2.8						1.8						1.7

The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities.

See Note 2 to the consolidated financial statements for additional information regarding the Company’s investment securities.

LOANS/LEASES. The Company’s gross loan/lease portfolio grew $86.6 million, or 7%, from 1.20 billion at December 31, 2011, to $1.29 billion at December 31, 2012. The growth was spread out over commercial and industrial ($43.5 million, or 12%), owner-occupied commercial real estate ($37.1 million, or 22%), residential real estate loans ($17.5 million, or 18%), and direct financing leases ($10.5 million, or 11%). Partially offsetting this growth, commercial construction loans ($15.4 million, or 26%) and other non-owner occupied commercial real estate loans ($4.9 million, or 1%) declined.

The Company’s gross loan/lease portfolio grew $28.2 million, or 2%, from $1.17 billion at December 31, 2010, to $1.20 billion at December 31, 2011. The growth was spread out over owner-occupied commercial real estate loans ($26.4 million, or 19%), direct financing leases ($10.2 million, or 12%), and residential real estate loans ($15.9 million, or 19%). Partially offsetting this growth, commercial and industrial loans declined $14.8 million, or 4%. The net decline in commercial and industrial loans is primarily a function of:

The residual impact of the economic downturn whereby originations have been outpaced by payments and maturities, and

The Company’s strategy to sell the government guaranteed portions of certain commercial and industrial loans at a premium. The guaranteed portion typically ranged from 70% to 90% of the total outstanding loan balance. For 2011, the Company sold $27.1 million of government guaranteed portions of commercial and industrial loans.

The shift in mix within the commercial loan portfolio in 2012 was favorable as commercial construction and other non-owner commercial real estate loans are historically riskier than commercial and industrial and owner-occupied commercial real estate loans.

Regarding the Company’s levels of qualified small business lending as defined by the Treasury as part of the Company’s participation in the SBLF, see the Stockholders’ Equity section later in the Management’s Discussion and Analysis.

The mix of loan/lease types within the Company’s loan/lease portfolio is presented in the following table.

	As of December 31,
	2012						2011						2010						2009						2008
	Amount			%			Amount			%			Amount			%			Amount			%			Amount			%
	(dollars in thousands)
Commercial and industrial loans	$	394,244			31	%	$	350,794			29	%	$	365,625			31	%	$	441,536			36	%	$	439,117			36	%
Commercial real estate loans		593,979			46	%		577,804			48	%		553,717			47	%		556,007			45	%		526,669			43	%
Direct financing leases		103,686			8	%		93,212			8	%		83,010			7	%		90,059			7	%		79,408			7	%
Residential real estate loans		115,582			9	%		98,107			8	%		82,197			7	%		70,608			6	%		79,228			7	%
Installment and other consumer loans		76,720			6	%		78,223			7	%		86,240			8	%		84,271			6	%		88,540			7	%

Total loans/leases	$	1,284,211			100	%	$	1,198,140			100	%	$	1,170,789			100	%	$	1,242,481			100	%	$	1,212,962			100	%

Plus deferred loan/lease origination costs, net of fees		3,176						2,605						1,750						1,839						1,727
Less allowance for estimated losses on loans/leases		(19,925	)					(18,789	)					(20,365	)					(22,505	)					(17,809	)

Net loans/leases	$	1,267,462					$	1,181,956					$	1,152,174					$	1,221,815					$	1,196,880

Historically, the Company structures most residential real estate loans to conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell the loans on the secondary market avoiding the interest rate risk associated with longer term fixed rate loans and recognizing noninterest income for the gain on sale. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. Historically, the subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years, and then retain these loans in their portfolios. During 2011 and 2012, the Company originated and held a limited amount of 15-year fixed rate residential real estate loans that met certain credit guidelines. The remaining residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. In addition, the Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

The following tables set forth the remaining maturities by loan/lease type as of December 31, 2012 and 2011. Maturities are based on contractual dates.

	As of December 31, 2012
										Maturities After One Year
	Due in one year or less			Due after one through 5 years			Due after 5 years			Predetermined interest rates			Adjustable interest rates

	(dollars in thousands)

Commerical and industrial loans	$	183,891		$	147,051		$	63,302		$	117,183		$	93,170
Commercial real estate loans		135,789			328,703			129,487			322,114			136,076
Direct financing leases		4,256			95,675			3,755			99,430			-
Residential real estate loans		1,717			2,253			111,612			75,573			38,292
Installment and other consumer loans		33,132			38,566			5,022			23,322			20,266
	$	358,785		$	612,248		$	313,178		$	637,622		$	287,804

Percentage of total loans/leases		28	%		48	%		24	%		69	%		31	%

	As of December 31, 2011
										Maturities After One Year
	Due in one year or less			Due after one through 5 years			Due after 5 years			Predetermined interest rates			Adjustable interest rates

	(dollars in thousands)

Commerical and industrial loans	$	144,928		$	150,567		$	55,299		$	108,815		$	97,051
Commercial real estate loans		129,446			332,610			115,748			336,709			111,649
Direct financing leases		3,109			86,663			3,440			90,103			-
Residential real estate loans		825			1,064			96,218			57,244			40,038
Installment and other consumer loans		27,389			43,869			6,965			27,333			23,501
	$	305,697		$	614,773		$	277,670		$	620,204		$	272,239

Percentage of total loans/leases		26	%		51	%		23	%		69	%		31	%

Over the past two years, the Company has seen minimal extension of its overall loan/lease portfolio. With the growth in municipal securities and residential real estate loans, both of which are longer duration assets with fixed interest rates, it’s important that the Company limits extension of the rest of the loan portfolio in an effort to limit exposure to rising rate scenarios. The aforementioned strategy discussed in the Noninterest Income section for execution of interest rate swaps on commercial loans helps to offset the growth of the longer term fixed rate assets and maintain a favorable interest rate risk profile.

Management continues to focus on growing quality loans/leases and carefully monitors maturities and interest rate sensitivity of the current portfolio.

See Note 3 to the consolidated financial statements for additional information on the Company’s loan/lease portfolio.

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES. The allowance for estimated losses on loans/leases totaled $19.9 million at December 31, 2012, which was an increase of $1.1 million, or 6%, from $18.8 million at December 31, 2011. Provision for loan/lease losses totaled $4.4 million for 2012 and outpaced net charge-offs of $3.2 million, or 27 basis points of average loans/leases outstanding, which is the lowest level since 2008.

The allowance for estimated losses on loans/leases was $18.8 million at December 31, 2011, which was a decline of $1.6 million, or 8%, from $20.4 million at December 31, 2010. For 2011, net charge-offs of $8.2 million, or 70 basis points of average loans/leases outstanding, exceeded provision leading to the net decline.

The following table summarizes the activity in the allowance for estimated losses on loans/leases.

	Years ended December 31,
	2012			2011			2010			2009			2008
	(dollars in thousands)

Average amount of loans/leases outstanding, before allowance for estimated losses on loans/leases	$	1,219,623		$	1,177,705		$	1,209,587		$	1,222,493		$	1,124,255

Allowance for estimated losses on loans/leases:
Balance, beginning of fiscal period	$	18,789		$	20,365		$	22,505		$	17,809		$	11,315
Charge-offs:
Commercial and industrial		(683	)		(3,334	)		(2,609	)		(7,510	)		(1,205	)
Commercial real estate		(2,232	)		(3,682	)		(5,922	)		(2,824	)		(805	)
Direct financing leases		(740	)		(1,101	)		(999	)		(1,255	)		(264	)
Residential real estate		(4	)		-			(35	)		(314	)		(326	)
Installment and other consumer		(717	)		(945	)		(1,135	)		(2,104	)		(1,085	)
Subtotal charge-offs		(4,376	)		(9,062	)		(10,700	)		(14,007	)		(3,685	)

Recoveries:
Commercial and industrial		663			414			380			344			313
Commercial real estate		222			287			381			98			420
Direct financing leases		77			3			163			52			-
Residential real estate		-			-			-			40			81
Installment and other consumer		179			166			172			1,193			143
Subtotal recoveries		1,141			870			1,096			1,727			957

Net charge-offs		(3,235	)		(8,192	)		(9,604	)		(12,280	)		(2,728	)
Provision charged to expense		4,371			6,616			7,464			16,976			9,222
Balance, end of fiscal year	$	19,925		$	18,789		$	20,365		$	22,505		$	17,809

Ratio of net charge-offs to average loans/leases outstanding		0.27	%		0.70	%		0.79	%		1.00	%		0.24	%

The adequacy of the allowance for estimated losses on loans/leases was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on the increase/decrease in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed monthly with specific detailed reviews completed on all credits risk-rated less than “fair quality” and carrying aggregate exposure in excess of $100 thousand. The adequacy of the allowance for estimated losses on loans/leases was monitored by the credit administration staff and reported to management and the board of directors.

During the year ended December 31, 2010, two of the Company’s subsidiary banks, CRBT and RB&T, decreased the duration for the historical charge-off experience used in the quantitative factor from five years to three years. Based on the change (growth, mix, and quality) of the loan portfolios of CRBT and RB&T over the past several years, management determined decreasing the duration appropriately addressed the credit risk within the current portfolios.

The Company continued the strengthening of its core loan portfolio as the levels of criticized and classified loans declined in 2011 and 2012, as reported in the following table.

	As of December 31,
Internally Assigned Risk Rating *	2012		2011		2010

	(dollars in thousands)

Special Mention (Rating 6)	$	22,056	$	26,034	$	43,551
Substandard (Rating 7) - Performing		31,821		36,278		42,498
Substandard (Rating 7) - Nonperforming		16,427		26,434		32,612
Doubtful (Rating 8)		-		-		21
	$	70,304	$	88,746	$	118,682


Criticized Loans **	$	70,304	$	88,746	$	118,682
Classified Loans ***	$	48,248	$	62,712	$	75,131

* Amounts above exclude the government guaranteed portion, if any. The Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.

** Criticized loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

*** Classified loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 7 or 8, regardless of performance.

The declining trend in criticized and classified loans over the past two years translated to a reduction in nonperforming loans/leases of $6.6 million, or 21%, during 2012, and $9.1 million, or 22%, during 2011. Furthermore, nonperforming loans/leases have declined $22.4 million, or 47%, from their peak at September 30, 2010. See the table in the following section for further detail on nonperforming loans/leases and nonperforming assets. As a direct result, the level of allowance as a percentage of gross loans/leases has declined since 2009 and leveled off in 2012. Notably, the Company has strengthened its allowance as a percentage of nonperforming loans/leases. The following table summarizes the trend in allowance as a percentage of gross loans/leases and as a percentage of nonperforming loans/leases as of December 31, 2012, 2011, and 2010.

	As of December 31,
	2012			2011			2010

Allowance / Gross Loans/Leases		1.55	%		1.56	%		1.74	%
Allowance / Nonperforming Loans/Leases *		78.47	%		58.70	%		49.49	%

*Nonperforming loan/leases consist of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing troubled debt restructurings.

The following table presents the allowance for estimated losses on loans/leases by type and the percentage of loan/lease type to total loans/leases.

	As of December 31,
	2012					2011					2010					2009					2008
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%

	(dollars in thousands)

Commercial and industrial loans		4,532		31	%		4,878		29	%		7,549		31	%		6,239		36	%		8,260		36	%
Commercial real estate loans		11,070		46	%		10,597		48	%		9,087		47	%		11,147		45	%		6,255		43	%
Direct financing leases		1,990		8	%		1,339		8	%		1,531		7	%		1,681		7	%		1,402		7	%
Residential real estate loans		1,070		9	%		705		8	%		748		7	%		737		6	%		690		7	%
Installment and other consumer loans		1,263		6	%		1,270		7	%		1,450		8	%		2,407		6	%		1,195		7	%
Unallocated		-	NA				-	NA				-	NA				294	NA				7	NA
	$	19,925		100	%	$	18,789		100	%	$	20,365		100	%	$	22,505		100	%	$	17,809		100	%

% - Represents the percentage of the certain type of loan/lease to total loans/leases

Although management believes that the allowance for estimated losses on loans/leases at December 31, 2012 was at a level adequate to absorb probable losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan/lease losses in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require additional increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.

See Note 3 to the consolidated financial statements for additional information on the Company’s allowance for estimated losses on loans/leases.

NONPERFORMING ASSETS. The table below presents the amounts of nonperforming assets.

	As of December 31,
	2012			2011			2010			2009			2008

	(dollars in thousands)

Nonaccrual loans/leases (1) (2)	$	17,932		$	18,995		$	37,427		$	28,742		$	20,828
Accruing loans/leases past due 90 days or more		159			1,111			320			89			222
Troubled debt restructures - accruing		7,300			11,904			3,405			1,201			-
Other real estate owned		3,955			8,386			8,535			9,286			3,857
Other repossessed assets		212			109			366			1,071			450
	$	29,558		$	40,505		$	50,053		$	40,389		$	25,357

Nonperforming loans/leases to total loans/leases		1.97	%		2.67	%		3.51	%		2.41	%		1.73	%
Nonperforming assets to total loans/leases plus reposessed property		2.29	%		3.35	%		4.24	%		3.22	%		2.08	%
Nonperforming assets to total assets		1.41	%		2.06	%		2.73	%		2.27	%		1.58	%
Texas ratio (3)		18.68	%		25.58	%		33.57	%		27.47	%		23.69	%

(1)

Includes government guaranteed portions of loans, if applicable.

(2)

Includes troubled debt restructurings of $5.7 million at December 31, 2012, $8.6 million at December 31, 2011, $12.6 million at December 31, 2010 and none for the other periods presented.

(3)

Texas Ratio = Nonperforming Assets (excluding Other Repossessed Assets) / Tangible Equity plus Allowance for Estimated Losses on Loans/Leases. Texas Ratio is a non-GAAP financial measure. Management included as this is considered by many investors and analysts to be a metric with which to analyze and evaluate asset quality. Other companies may calculate this ratio differently.

Historically, the large majority of the Company’s nonperforming assets consisted of nonaccrual loans/leases and OREO. For nonaccrual loans/leases, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate. OREO is carried at the lower of carrying amount or fair value less costs to sell.

The policy of the Company is to place a loan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected; or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. A loan/lease is well secured if it is secured by collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status.

Over the past two years, the Company’s nonperforming assets have declined significantly ($10.9 million, or 27%, during 2012, and $9.5 million, or 19%, during 2011). A combination of improved performance and charge-offs contributed to the general decrease throughout 2011 and 2012. In addition, there was a significant shift in mix as accruing troubled debt restructurings (“TDRs”) grew and nonaccrual loans/leases and OREO fell during the two-year period. This shift in mix is favorable as the accruing TDRs are performing on the restructured terms and accruing interest income.

DEPOSITS. Deposits grew $168.7 million, or 14%, during 2012, and grew $90.6 million, or 8%, during 2011. The table below presents the composition of the Company’s deposit portfolio.

	As of December 31,
	2012					2011					2010
	Amount		%			Amount		%			Amount		%

	(dollars in thousands)

Noninterest bearing demand deposits	$	450,660		33	%	$	357,184		30	%	$	276,827		25	%
Interest bearing demand deposits		588,912		43	%		510,788		42	%		460,624		41	%
Time deposits		289,222		21	%		292,575		24	%		312,010		28	%
Brokered time deposits		45,320		3	%		44,911		4	%		65,355		6	%
	$	1,374,114		100	%	$	1,205,458		100	%	$	1,114,816		100	%

The Company has been successful in shifting the deposit mix over the past two years with an increase in noninterest bearing deposits and declines in brokered and retail time deposits. Specifically, QCBT continues to have success growing its correspondent banking business as noninterest bearing correspondent deposits more than doubled growing $123.2 million from $80.8 million at December 31, 2010 to $204.0 million at December 31, 2012. These increases and the Company’s overall strong liquidity position have allowed the Company to reduce the level of brokered and other time deposits which drives the reduction in the Company’s average cost of deposits. Management will continue to focus on growing its noninterest bearing deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. See discussion regarding policy limits on bank stock loans in the Lending/Leasing section under Item 1 – Business in Part I of this Form 10-K.

SHORT-TERM BORROWINGS. The subsidiary banks offer overnight repurchase agreements to some of their major customers. Also, the subsidiary banks purchase federal funds for short-term funding needs from the Federal Reserve Bank, or from their correspondent banks. The table below presents the composition of the Company’s short-term borrowings.

	As of December 31,
	2012		2011		2010

	(dollars in thousands)

Overnight repurchase agreements with customers	$	104,943	$	110,236	$	118,904
Federal funds purchased		66,140		103,300		22,250
	$	171,083	$	213,536	$	141,154

The large increase in federal funds purchased from December 31, 2010 to December 31, 2011 was temporary and the result of short-term fluctuations in noninterest bearing correspondent deposit balances for several customers over the end of the year.

See Note 6 to the consolidated financial statements for additional information on the Company’s short-term borrowings.

FHLB ADVANCES AND OTHER BORROWINGS. As a result of their memberships in the FHLB of Des Moines and Chicago, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. The subsidiary banks utilize FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provide a less costly source of funds than customer deposits. FHLB advances declined $34.0 million, or 14%, during 2011 as the result of a combination of prepayment ($15.0 million) and maturities ($19.0 million). For 2012, FHLB advances declined slightly; however, the decline would have been larger if RB&T had not borrowed a short-term 14-day advance in the amount of $9.0 million at the end of 2012 for short-term funding needs because the cost of the FHLB advance was less than federal funds purchased.

	As of December 31,
	2012			2011			2010

	(dollars in thousands)

Amount Due	$	202,350		$	204,750		$	238,750
Weighted Average Interest Rate at Year-End		3.45	%		3.67	%		3.84	%

See Note 7 to the consolidated financial statements for additional information regarding FHLB advances.

Other borrowings consist largely of wholesale structured repurchase agreements which the subsidiary banks utilize as an alternative funding source to FHLB advances and customer deposits. The table below presents the composition of the Company’s other borrowings.

	As of December 31,
	2012		2011		2010

	(dollars in thousands)

Wholesale structured repurchase agreements	$	130,000	$	130,000	$	135,000
364-day revolving note		5,600		3,600		2,500
Series A subordinated notes		2,640		2,632		2,624
Secured borrowings - loan participations sold		-		-		9,946
	$	138,240	$	136,232	$	150,070

The increase in borrowing on the 364-day revolving note of $2.0 million was the result of funding needed to execute on the partial redemption of the Series F Preferred Stock previously issued to the Treasury under the SBLF program. For a detailed discussion of this partial redemption, see below.

As a result of a change in accounting rules, effective January 1, 2010, the Company recorded $9.9 million of secured borrowings and $561 thousand of deferred gains related to sales of the government guaranteed portion of certain loans as of December 31, 2010. These secured borrowings did not bear interest and matured within 90 days of the sales, at which time the sales were fully recognized for accounting purposes.

Effective with the second quarter of 2011, SBA and USDA removed the recourse provisions for future sales which allows for sale accounting treatment at the time of sale. As a result, the Company was able to recognize gains at the time of sale for the sales during the second quarter and in subsequent periods. In addition, the Company did not have any related secured liabilities at December 31, 2011 or December 31, 2012.

Additional information regarding other borrowings is described in Note 8 to the consolidated financial statements.

It is management’s intention to continue to reduce the reliance on wholesale funding, including FHLB advances, structured repos, and brokered time deposits. Replacement of this funding with core deposits helps to reduce interest expense as the wholesale funding tends to be higher funding cost. Management continually evaluates the potential opportunities to prepay or modify (essentially refinance at a net lower interest rate while extending the maturity) these liabilities, as the Company has successfully executed in the past. The table below presents the maturity schedule including weighted average cost for the Company’s combined wholesale funding portfolio.

	As of December 31,
	2012					2011
Maturity:	Amount Due		Weighted Average Interest Rate at Quarter-End			Amount Due		Weighted Average Interest Rate at Year-End
	(dollar amounts in thousands)
Year ending December 31:

2012	$	-		0.00	%	$	34,601		2.93	%
2013		34,508		1.29			18,000		2.24
2014		39,170		2.88			39,170		2.87
2015		66,000		2.59			67,000		2.97
2016		85,992		3.72			82,890		3.81
2017		46,000		3.70			42,000		3.91
Thereafter		106,000		3.66			96,000		3.75
Total Wholesale Funding	$	377,670		3.20		$	379,661		3.41

STOCKHOLDERS’ EQUITY. The table below presents the composition of the Company’s stockholders’ equity, including the common and preferred equity components.

	As of December 31,
	2012						2011						2010
	Amount			%			Amount			%			Amount			%

	(dollars in thousands)

Common stock	$	5,039					$	4,879					$	4,732
Additional paid in capital - common		25,804						26,381						24,328
Retained earnings		53,327						44,586						40,551
Accumulated other comprehensive income		4,707						4,755						704
Noncontrolling interests		-						2,052						1,648
Less: Treasury stock		(1,606	)					(1,606	)					(1,606	)
Total common stockholders' equity		87,271			62	%		81,047			56	%		70,357			53	%

Preferred stock		55						65						63
Additional paid in capital - preferred		53,108						63,321						62,151
Total preferred stockholders' equity		53,163			38	%		63,386			44	%		62,214			47	%

Total stockholders' equity	$	140,434			100	%	$	144,433			100	%	$	132,571			100	%

Tangible common equity* / total tangible assets		4.02	%					3.85	%					3.56	%

*Tangible common equity is defined as total common stockholders’ equity excluding equity of noncontrolling interests and excluding goodwill and other intangible assets. This ratio is a non-GAAP financial measure. Management included this ratio as it is considered by many investors and analysts to be a metric with which to analyze and evaluate the equity composition. Other companies may calculate this ratio differently.

The following table presents the details of the preferred stock issued and outstanding as of December 31, 2012.

	Date Issued	Aggregate Purchase Price		Stated Dividend Rate			Annual Dividend

Series E Non-Cumulative Convertible Perpetual Preferred Stock	June 2010	$	25,000,000		7.00	%	$	1,750,000
Series F Non-Cumulative Perpetual Preferred Stock	September 2011		29,867,000		5.00	%		1,493,350
		$	54,867,000				$	3,243,350

The Series E Noncumulative Convertible Perpetual Preferred Stock (the “Series E Preferred Stock”) is perpetually convertible by the holder into shares of the Company’s common stock at a per share conversion price of $12.15, subject to anti-dilution adjustments upon the occurrence of certain events. In addition, the Company can exercise a conversion option on or after the third anniversary of the issue date (June 30, 2013) at the same $12.15 per share conversion price if the Company’s common stock price equals or exceeds $17.22 for at least 20 trading days in a period of 30 consecutive trading days.

Regarding the Series F Preferred Stock, non-cumulative dividends are payable quarterly, and the dividend rate is based on changes in the level of “Qualified Small Business Lending” or “QSBL” by the Company’s wholly owned bank subsidiaries, QCBT, CRBT and RB&T. Based upon the change in the banks’ level of QSBL over the baseline level (as defined by the SBLF, the baseline is the average of QSBL for the last two quarters of 2009 and the first two quarters of 2010), the dividend rate for the first 10 calendar quarters may be adjusted to between 1% and 5%. For the 11th calendar quarter through 4.5 years after issuance, the dividend rate will be fixed at between 1% and 5%, based upon the increase in QSBL from the baseline level to the level as of the end of the ninth dividend period (i.e. as of September 30, 2013), or will be fixed at 7% if there is no increase or there is a decrease in QSBL during such period. In addition, beginning on April 1, 2014 and ending on April 1, 2016, if there is no increase or there is a decrease in QSBL from the baseline level to the level as of the end of the ninth dividend period (i.e. as of September 30, 2013), because of the Company’s participation in the TCPP, the Company will be subject to an additional lending incentive fee of 2% per year, or 9% dividend rate. After 4.5 years from issuance, regardless of QSBL growth over baseline, the dividend rate will increase to 9%.

For 2011 and 2012, the Company reported a net decline in QSBL from the baseline; therefore, the dividend rate for all of the corresponding calendar quarters was 5%. Specifically, as of December 31, 2012, the Company reported its QSBL in accordance with SBLF guidelines and calculated a net decline from the baseline of $66.9 million, or 15%. The decline is primarily the result of the following:

The Company’s strategic introduction into SBA and USDA lending in 2010. The government guaranteed portion of these loans (typically 50% to 85% of the total amount outstanding) is not eligible as QSBL per SBLF guidelines.

Based on the size of the Company and its legal lending limit, the majority of commercial loan growth over the past several years has been to businesses whose revenues exceeded the limits defined as QSBL per SBLF guidelines.

The Company had a strong small business loan portfolio as of the baseline, which coupled with the residual impact of the economic downturn and the increased competition for small business loans (as many competitor lenders shifted their focus from construction and non-owner occupied commercial real estate lending to small business lending), resulted in originations outpaced by payments and maturities in the second half of 2010 and all of 2011.

Since the baseline, the Company continues to support the lending needs of small businesses, although some of this support may be ineligible as QSBL per SBLF guidelines. Regardless of eligibility, the Company will continue to focus strongly on small business lending.

On June 29, 2012, the Company redeemed 10,223 shares of Series F Preferred Stock from the Treasury for an aggregate redemption amount of $10.2 million plus unpaid dividends to the date of redemption of $125 thousand. The remaining Series F Preferred Stock may be redeemed at any time at the option of the Company, subject to approval of the Company’s primary federal banking regulator. All redemptions must be in amounts equal to the lesser of at least 25% of the number of originally issued shares, or 100% of the then-outstanding shares.

See Note 10 to the consolidated financial statements for detail on the Company’s preferred stock.

DISCUSSION ON CHANGES IN STOCKHOLDERS’ EQUITY FOR 2012. Stockholders’ equity decreased $4.0 million, or 3%, during 2012. Net income of $13.1 million for 2012 increased retained earnings; however, this was more than offset by the partial redemption of $10.2 million of the Series F Preferred Stock, the purchase of the noncontrolling interests of m2 and VPHC of $4.7 million, and the declaration of preferred and common stock dividends totaling $3.5 million and $381 thousand, respectively. Specifically regarding the preferred stock dividends, the following details the dividend activity for 2012:

$1.8 million for the four quarterly dividends on the outstanding shares of the Series E Preferred Stock at a stated dividend rate of 7.00%, and

$1.7 million for the four quarterly dividends on the outstanding shares of the Series F Preferred Stock at a stated dividend rate of 5.00%.

See discussion above and Note 10 to the consolidated financial statements for further discussion on the partial redemption of the Series F Preferred Stock.

See Note 21 to the consolidated financial statements for discussion on the acquisition of the noncontrolling interest in m2 which comprises the large majority of the total purchase of $4.7 million described above.

Lastly, the available for sale portion of the securities portfolio experienced a slight decline in fair value for 2012.

DISCUSSION ON CHANGES IN STOCKHOLDERS’ EQUITY FOR 2011. Stockholders’ equity increased $11.9 million, or 9%, during 2011. Net income of $10.1 million for 2011 increased retained earnings; however, this was partially offset by declaration and accrual of preferred stock dividends and discount accretion totaling $5.3 million, and declaration of common stock dividends of $373 thousand. Specifically regarding the preferred stock dividends, the following details the dividend activity for 2011:

$1.8 million for the quarterly dividends on the outstanding shares of the Series D Cumulative Perpetual Preferred Stock (the “Series D Preferred Stock”) at a stated rate of 5.00%, including the related discount accretion, paid up through redemption which occurred on September 15, 2011,

$1.2 million for the accelerated accretion of the remaining discount on the redeemed Series D Preferred Stock,

$1.8 million for the four quarterly dividends on the outstanding shares of the Series E Preferred Stock at a stated dividend rate of 7.00%, and

$590 thousand for the first quarterly dividend on the outstanding shares of the Series F Preferred Stock at a stated dividend rate of 5.00%.

The net proceeds from the issuance of the Series F Preferred Stock and the simultaneous redemption of the Series D Preferred Stock totaled $1.7 million which helped contribute to the increase in stockholder’s equity. See Note 10 to the consolidated financial statements for additional information on the Series F Preferred Stock.

Lastly, the available for sale portion of the securities portfolio experienced an increase in fair value of $4.1 million, net of tax, for 2011 as a result of fluctuation in certain 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. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $98.6 million during 2012, $128.0 million during 2011, and $129.0 million during 2010. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans. During 2012, the Company invested some of its excess liquidity as its overall liquidity position (both on and off balance sheet liquidity) had strengthened.

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, structured repos, brokered time deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its residential mortgage-backed securities portfolio. At December 31, 2012, the subsidiary banks had 31 lines of credit totaling $311.7 million, of which $52.7 million was secured and $259.0 million was unsecured. At December 31, 2012, $271.7 million was available as $40.0 million was utilized for short-term borrowing needs at QCBT. At December 31, 2011, the subsidiary banks had 22 lines of credit totaling $225.4 million, of which $72.9 million was secured and $152.5 million was unsecured. At December 31, 2011, $159.4 million was available as $66.0 million was utilized as a result of the short-term fluctuations in noninterest bearing correspondent deposit balances for several customers over the end of the year. The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company has a single $20.0 million secured revolving credit note with a maturity of March 29, 2013. As of December 31, 2012, the Company had $14.4 million available as the note carried an outstanding balance of $5.6 million. See Note 8 to the consolidated financial statements for additional information regarding the lines of credit and revolving credit note.

Investing activities used cash of $132.8 million during 2012 compared to $137.3 million for 2011, and $59.5 million for 2010. Proceeds from calls, maturities, paydowns, and sales of securities were $433.5 million for 2012 compared to $486.3 million for 2011, and $326.1 million for 2010. Purchases of securities used cash of $474.5 million for 2012 compared to $622.2 million for 2011, and $383.0 million for 2010. The net increase in loans/leases used cash of $91.3 million for 2012 compared to $56.1 million for 2011. For 2010, the Company’s net decrease in loans/leases was $63.4 million.

Financing activities provided cash of $110.5 million for 2012 compared to $111.8 million for 2011, and $47.7 million for 2010. Net increases in deposits totaled $168.7 million, $90.6 million, and $25.5 million for 2012, 2011, and 2010, respectively.

Total cash provided by operating activities was $30.7 million for 2012 compared to $36.6 million for 2011, and $17.9 million for 2010.

Throughout its history, the Company has secured additional capital through various resources, including the issuance of trust preferred securities and the issuance of preferred stock. See Notes 9 and 10 to the consolidated financial statements for information on the issuance of trust preferred securities and the issuance of preferred stock, respectively.

As of December 31, 2012 and 2011, the subsidiary banks remained “well-capitalized” in accordance with regulatory capital requirements administered by the federal banking authorities. See Note 14 to the consolidated financial statements for detail of the capital amounts and ratios for the Company and subsidiary banks.

In June 2012, the federal bank regulatory agencies issued joint proposed rules that would implement an international capital accord called “Basel III,” developed by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors. The proposed rules would apply to all depository organizations in the United States and most of their parent companies and would increase minimum capital ratios, add a new minimum common equity ratio, add a new capital conservation buffer, include unrealized gains and losses on available-for-sale securities as Tier 1 Capital, and would change the risk-weightings of certain assets for the purposes of calculating certain capital ratios. The proposed changes, if implemented, would be phased in from 2013 through 2019. The comment period with respect to the proposed rules expired on October 22, 2012. Various banking associations, industry groups, individual financial institutions (including the Company) provided comments on the proposed rules to the regulators. On November 9, 2012, the federal bank regulatory agencies announced that the implementation of the proposed rules under Basel III in the United States was indefinitely delayed. It is unclear when the final rules will be adopted and what changes, if any, may be made to the proposed rules. Management continues to assess the effect of the proposed rules on the Company and the subsidiary banks’ capital positions and will monitor development regarding the proposed rules.

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, 2012 and 2011, no amounts had been recorded as liabilities for the banks' potential obligations under these guarantees.

As of December 31, 2012 and 2011, commitments to extend credit aggregated $430.1 million and $393.6 million, respectively. As of December 31, 2012 and 2011, standby letters of credit aggregated $15.2 million and $8.3 million, respectively. Management does not expect that all of these commitments will be funded.

Additional information regarding commitments, contingencies, and off-balance sheet arrangements is described in Note 16 to the consolidated financial statements.

The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following table presents, as of December 31, 2012, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

	Financial		Payments Due by Period
Description	Statement Note Reference		Total		One Year or Less		2 - 3 Years		4 - 5 Years		After 5 Years

			(dollars in thousands)

Deposits without a stated maturity		N/A	$	1,039,572	$	1,039,572	$	-	$	-	$	-

Certificates of deposit		5		334,542		225,152		90,917		18,473		-

Short-term borrowings		6		171,083		171,083		-		-		-

FHLB advances		7		202,350		24,000		43,850		93,500		41,000

Other borrowings		8		138,240		5,600		35,000		30,000		67,640

Junior subordinated debentures		9		36,085		-		-		-		36,085

Rental commitments		4		1,752		373		592		448		339

Operating contracts		N/A		6,158		4,173		1,985		-		-

Total contractual cash obligations			$	1,929,782	$	1,469,953	$	172,344	$	142,421	$	145,064

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, 2012. 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 of the Company and the accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

IMPACT OF NEW ACCOUNTING STANDARDS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 amended Topic 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarified the application of existing fair value measurement requirements, changed certain principles in Topic 820 and required additional fair value disclosures. ASU 2011-04 was effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s consolidated financial statements. See Note 19 to the consolidated financial statements.

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income. ASU 2011-05 amended Topic 220, Comprehensive Income, to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 required entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 was effective for annual periods beginning after December 15, 2011. Additionally, in December 2011, FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05. ASU 2011-12 deferred the effective date for the changes in ASU 2011-05 that specifically refer to the presentation of the effects of reclassifications adjustments out of accumulated other comprehensive income on the components of net income and other comprehensive income on the face of the financial statements for all periods presented. ASU 2011-12 reinstated the requirements of the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of ASU 2011-05. ASU 2011-12 and 2011-05 were both effective for the Company for the quarter ending March 31, 2012. See new separate consolidated statements of comprehensive income within the consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. Adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2013, FASB issued ASU 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. ASU 2013-02 supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income (“AOCI”) in ASUs 2011-05 and 2011-12, which were adopted by the Company during the current year. The amendments require an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required. Adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

FORWARD LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A. of Part I of this Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.

The costs, effects and outcomes of existing or future litigation.

Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the Securities and Exchange Commission or the Public Company Accounting Oversight Board.

The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

In an attempt to manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank’s interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank. Internal asset/liability management teams consisting of members of the subsidiary banks’ management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks’ securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

In adjusting the Company’s asset/liability position, the board of directors and management attempt to manage the Company’s interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board of directors and management may decide to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 300, 400, and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 basis point downward shift. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve. Effective with the modeling for the second quarter of 2010, the Company added an interest rate scenario where interest rates experience a parallel and instantaneous shift upward 300 basis points. The asset/liability management committees of the subsidiary bank boards of directors has established policy limits of a 10% decline in net interest income for the 200 and the newly added 300 basis point upward shifts and the 100 basis point downward shift.

Application of the simulation model analysis at December 31, 2012 demonstrated the following:

	NET INTEREST INCOME EXPOSURE in YEAR 1
INTEREST RATE SCENARIO	As of December 31, 2012			As of December 31, 2011			As of December 31, 2010

100 basis point downward shift		-1.5	%		-1.5	%		-1.9	%
200 basis point upward shift		-0.9	%		-3.1	%		-3.0	%
300 basis point upward shock		0.8	%		-4.2	%		-1.6	%

The simulation is within the board-established policy limit of a 10% decline in net interest income for all three scenarios.

Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company’s interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

Item 8. Financial Statements

QCR Holdings, Inc.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Financial Statements

Consolidated balance sheets as of December 31, 2012 and 2011

Consolidated statements of income for the years ended December 31, 2012, 2011, and 2010

Consolidated statements of comprehensive income for the years ended December 31, 2012, 2011, and 2010
Consolidated statements of changes in stockholders' equity for the years ended December 31, 2012, 2011, and 2010

Consolidated statements of cash flows for the years ended December 31, 2012, 2011, and 2010

Notes to consolidated financial statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

QCR Holdings, Inc.

We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. 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, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2013 expressed an unqualified opinion on the effectiveness of QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting.

Davenport, Iowa

March 11, 2013

QCR Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2012 and 2011

Assets	2012			2011
Cash and due from banks	$	61,568,446		$	53,136,710
Federal funds sold		26,560,000			20,785,000
Interest-bearing deposits at financial institutions		22,359,490			26,750,602


Securities held to maturity, at amortized cost		72,079,385			200,000
Securities available for sale, at fair value		530,159,986			565,029,291
		602,239,371			565,229,291

Loans receivable, held for sale		4,577,233			3,832,760
Loans/leases receivable, held for investment		1,282,810,406			1,196,912,737
		1,287,387,639			1,200,745,497
Less allowance for estimated losses on loans/leases		(19,925,204	)		(18,789,262	)
		1,267,462,435			1,181,956,235

Premises and equipment, net		31,262,390			31,740,751
Goodwill		3,222,688			3,222,688
Bank-owned life insurance		45,620,489			42,011,281
Restricted investment securities		15,747,850			15,253,600
Other real estate owned, net		3,954,538			8,385,758
Other assets		13,732,795			18,138,138
Total assets	$	2,093,730,492		$	1,966,610,054

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	450,659,723		$	357,183,481
Interest-bearing		923,454,377			848,274,307
Total deposits		1,374,114,100			1,205,457,788

Short-term borrowings		171,082,961			213,536,450
Federal Home Loan Bank advances		202,350,000			204,750,000
Other borrowings		138,239,762			136,231,663
Junior subordinated debentures		36,085,000			36,085,000
Other liabilities		31,424,848			26,116,451
Total liabilities		1,953,296,671			1,822,177,352

Commitments and Contingencies

Stockholders' Equity:
Preferred stock, $1 par value, shares authorized 250,000		54,867			65,090
December 2012 - 54,867 shares issued and outstanding
December 2011 - 65,090 shares issued and outstanding
Common stock, $1 par value; shares authorized 20,000,000		5,039,448			4,879,435
December 2012 - 5,039,448 shares issued and 4,918,202 outstanding
December 2011 - 4,879,435 shares issued and 4,758,189 outstanding
Additional paid-in capital		78,912,791			89,702,533
Retained earnings		53,326,542			44,585,902
Accumulated other comprehensive income		4,706,683			4,754,714
Noncontrolling interests		-			2,051,538
Less treasury stock, December 2012 and 2011 - 121,246 common shares, at cost		(1,606,510	)		(1,606,510	)
Total stockholders' equity		140,433,821			144,432,702
Total liabilities and stockholders' equity	$	2,093,730,492		$	1,966,610,054

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Income

Years Ended December 31, 2012, 2011, and 2010

	2012			2011			2010
Interest and dividend income:
Loans/leases, including fees	$	63,363,520		$	64,807,673		$	67,999,191
Securities:
Taxable		10,781,300			10,877,832			10,109,083
Nontaxable		2,339,579			983,040			907,085
Interest-bearing deposits at financial institutions		378,566			404,879			411,079
Restricted investment securities		507,281			557,698			497,214
Federal funds sold		5,627			92,126			173,714
Total interest and dividend income		77,375,873			77,723,248			80,097,366

Interest expense:
Deposits		6,218,713			8,939,056			12,681,625
Short-term borrowings		248,545			290,450			628,255
Federal Home Loan Bank advances		7,279,599			7,972,025			9,246,562
Other borrowings		4,940,970			5,149,022			5,732,142
Junior subordinated debentures		1,038,786			1,227,839			1,945,014
Total interest expense		19,726,613			23,578,392			30,233,598

Net interest income		57,649,260			54,144,856			49,863,768
Provision for loan/lease losses		4,370,767			6,616,014			7,463,618
Net interest income after provision for loan/lease losses		53,278,493			47,528,842			42,400,150

Noninterest income:
Trust department fees		3,632,278			3,368,995			3,290,844
Investment advisory and management fees		2,361,159			2,108,918			1,812,903
Deposit service fees		3,485,929			3,493,001			3,478,743
Gains on sales of loans, net		2,457,707			2,565,043			3,169,514
Securities gains		104,600			1,472,528			-
Losses on other real estate owned, net		(1,332,972	)		(374,910	)		(835,163	)
Earnings on bank-owned life insurance		1,609,208			1,445,891			1,331,085
Credit card issuing fees, net of processing costs		599,164			500,544			259,590
Other		3,704,222			2,881,868			2,898,372
Total noninterest income		16,621,295			17,461,878			15,405,888

Noninterest expenses:
Salaries and employee benefits		33,274,509			30,365,020			27,843,127
Occupancy and equipment expense		5,635,257			5,297,949			5,472,248
Professional and data processing fees		4,317,939			4,461,187			4,524,519
FDIC and other insurance		2,330,611			2,698,282			3,528,267
Loan/lease expense		1,041,824			2,160,674			1,657,552
Advertising and marketing		1,445,476			1,288,797			1,053,909
Postage and telephone		959,708			937,557			1,004,176
Stationery and supplies		541,122			516,873			491,252
Bank service charges		853,895			725,717			420,252
Prepayment fees on Federal Home Loan Bank advances		-			832,099			-
Other-than-temporary impairment losses on securities		62,400			118,847			113,800
Losses on lease residual values		-			-			617,000
Other		1,796,206			1,589,650			1,822,961
Total noninterest expenses		52,258,947			50,992,652			48,549,063

Income before income taxes		17,640,841			13,998,068			9,256,975
Federal and state income tax expense		4,534,601			3,868,199			2,449,249
Net income	$	13,106,240		$	10,129,869		$	6,807,726
Less: net income attributable to noncontrolling interests		488,473			438,221			221,047
Net income attributable to QCR Holdings, Inc.	$	12,617,767		$	9,691,648		$	6,586,679

Less: preferred stock dividends and discount accretion		3,496,085			5,283,885			4,128,104
Net income attributable to QCR Holdings, Inc. common stockholders		9,121,682			4,407,763			2,458,575

Basic earnings per common share	$	1.88		$	0.93		$	0.54
Diluted earnings per common share	$	1.85		$	0.92		$	0.53

Weighted average common shares outstanding		4,844,776			4,724,781			4,593,096
Weighted average common and common equivalent shares outstanding		4,919,559			4,789,026			4,618,242

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 COMPREHENSIVE INCOME

Years Ended December 31, 2012, 2011, and 2010

	2012			2011		2010
Net income	$	13,106,240		$	10,129,869	$	6,807,726

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax		(40,839	)		7,914,236		803,133
Less reclassification adjustment for gains (losses) included in net income before tax		42,200			1,353,681		(113,800	)
		(83,039	)		6,560,555		916,933
Tax expense (benefit)		(35,008	)		2,510,006		348,376
Other comprehensive income (loss), net of tax		(48,031	)		4,050,549		568,557

Comprehensive income attributable to QCR Holdings, Inc.	$	13,058,209		$	14,180,418	$	7,376,283

See Notes to Consolidated Financial Statements

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2012, 2011, and 2010

	Preferred Stock			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling Interests			Treasury Stock			Total
Balance, December 31, 2009	$	38,805		$	4,674,536		$	82,194,330		$	38,458,477		$	135,608		$	1,699,630		$	(1,606,510	)	$	125,594,876
Net income		-			-			-			6,586,679			-			221,047			-			6,807,726
Other comprehensive income, net of tax		-			-			-			-			568,557			-			-			568,557
Common cash dividends declared, $0.08 per share		-			-			-			(366,152	)		-			-			-			(366,152	)
Preferred cash dividends declared and accrued		-			-			-			(3,679,100	)		-			-			-			(3,679,100	)
Discount accretion on cumulative preferred stock		-			-			449,004			(449,004	)		-			-			-			-
Exchange of 268 shares of Series B Non-Cumulative Perpetual Preferred Stock for 13,400 shares of Series E Non-Cumulative Perpetual Convertible Preferred Stock		13,132			-			(13,132	)		-			-			-			-			-
Exchange of 300 shares of Series C Non-Cumulative Perpetual Preferred Stock for 7,500 shares of Series E Non-Cumulative Perpetual Convertible Preferred Stock		7,200			-			(7,200	)		-			-			-			-			-
Proceeds from issuance of 4,100 shares of Series E Non-Cumulative Perpetual Convertible Preferred Stock		4,100			-			3,183,133			-			-			-			-			3,187,233
Proceeds from issuance of warrants to purchase 54,000 shares of common stock in conjunction with the issuance of Series A Subordinated Notes		-			-			84,240			-			-			-			-			84,240
Proceeds from issuance of 28,907 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-			28,907			192,362			-			-			-			-			221,269
Proceeds from issuance of 5,754 shares of common stock as a result of stock options exercised		-			5,754			37,621			-			-			-			-			43,375
Exchange of 367 shares of common stock in connection with payroll taxes for restricted stock		-			(367	)		(2,730	)		-			-			-			-			(3,097	)
Stock-based compensation expense		-			-			533,271			-			-			-			-			533,271
Restricted stock awards		-			23,598			(23,598	)		-			-			-			-			-
Purchase of noncontrolling interests		-			-			(149,032	)		-			-			(270,968	)		-			(420,000	)
Distributions to noncontrolling interests		-			-			-			-			-			(1,490	)		-			(1,490	)
Balance, December 31, 2010	$	63,237		$	4,732,428		$	86,478,269		$	40,550,900		$	704,165		$	1,648,219		$	(1,606,510	)	$	132,570,708
Net income		-			-			-			9,691,648			-			438,221			-			10,129,869
Other comprehensive income, net of tax		-			-			-			-			4,050,549			-			-			4,050,549
Common cash dividends declared, $0.08 per share		-			-			-			(372,761	)		-			-			-			(372,761	)
Preferred cash dividends declared and accrued		-			-			-			(3,694,441	)		-			-			-			(3,694,441	)
Discount accretion on cumulative preferred stock *		-			-			1,589,444			(1,589,444	)		-			-			-			-
Proceeds from issuance of 40,090 shares of Series F Non-Cumulative Perpetual Preferred Stock		40,090			-			39,956,832			-			-			-			-			39,996,922
Redemption of 38,237 shares of Series D Cumulative Perpetual Preferred Stock		(38,237	)		-			(38,198,763	)		-			-			-			-			(38,237,000	)
Redemption of 521,888 shares of common stock warrants issued in conjunction with Series D Cumulative Perpetual Preferred Stock		-			-			(1,100,000	)		-			-			-			-			(1,100,000	)
Proceeds from issuance of 36,174 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-			36,174			207,592			-			-			-			-			243,766
Proceeds from issuance of 36,459 shares of common stock as a result of stock options exercised		-			36,459			216,765			-			-			-			-			253,224
Exchange of 2,550 shares of common stock in connection with stock options exercised		-			(2,550	)		(17,101	)		-			-			-			-			(19,651	)
Stock-based compensation expense		-			-			646,419			-			-			-			-			646,419
Restricted stock awards		-			76,924			(76,924	)		-			-			-			-			-
Distributions to noncontrolling interests		-			-			-			-			-			(34,902	)		-			(34,902	)
Balance, December 31, 2011	$	65,090		$	4,879,435		$	89,702,533		$	44,585,902		$	4,754,714		$	2,051,538		$	(1,606,510	)	$	144,432,702
Net income		-			-			-			12,617,767			-			488,473			-			13,106,240
Other comprehensive loss, net of tax		-			-			-			-			(48,031	)		-			-			(48,031	)
Common cash dividends declared, $0.08 per share		-			-			-			(381,042	)		-			-			-			(381,042	)
Preferred cash dividends declared and accrued		-			-			-			(3,496,085	)		-			-			-			(3,496,085	)
Redemption of 10,223 shares of Series F Noncumulative Perpetual Preferred Stock		(10,223	)		-			(10,212,777	)		-			-			-			-			(10,223,000	)
Proceeds from issuance of 31,554 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan		-			31,554			249,316			-			-			-			-			280,870
Proceeds from issuance of 17,876 shares of common stock as a result of stock options exercised		-			17,876			155,428			-			-			-			-			173,304
Exchange of 611 shares of common stock in connection with stock options exercised		-			(611	)		(7,125	)		-			-			-			-			(7,736	)
Exchange of 576 shares of common stock in connection with payroll taxes for restricted stock		-			(576	)		(2,103	)		-			-			-			-			(2,679	)
Proceeds from exercise of warrants to purchase 54,000 shares of common stock issued in conjunction with the Series A Subordinated Notes		-			54,000			486,000			-			-			-			-			540,000
Stock-based compensation expense		-			-			849,760			-			-			-			-			849,760
Restricted stock awards		-			57,770			(57,770	)		-			-			-			-			-
Purchase of noncontrolling interest		-			-			(2,250,471	)		-			-			(2,531,748	)		-			(4,782,219	)
Distributions to noncontrolling interests		-			-			-			-			-			(8,263	)		-			(8,263	)
Balance, December 31, 2012	$	54,867		$	5,039,448		$	78,912,791		$	53,326,542		$	4,706,683		$	-		$	(1,606,510	)	$	140,433,821

* Includes $1,252,895 of accelerated discount accretion as a result of redeeming Series D Cumulative Perpetual Preferred Stock.

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2012, 2011, and 2010

	2012			2011			2010
Cash Flows from Operating Activities:
Net income	$	13,106,240		$	10,129,869		$	6,807,726
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		2,350,303			2,442,896			2,533,597
Provision for loan/lease losses		4,370,767			6,616,014			7,463,618
Deferred income taxes		2,684,367			3,952,046			1,256,004
Amortization of offering costs on subordinated debentures		14,317			14,317			14,317
Stock-based compensation expense		849,760			696,407			488,112
Losses on other real estate owned, net		1,332,972			374,910			835,163
Amortization of premiums on securities, net		3,946,551			3,487,361			3,411,202
Securities gains, net		(104,600	)		(1,472,528	)		-
Other-than-temporary impairment losses on securities		62,400			118,847			113,800
Loans originated for sale		(120,430,173	)		(100,789,010	)		(172,623,744	)
Proceeds on sales of loans		122,143,407			113,606,152			167,843,529
Gains on sales of loans, net		(2,457,707	)		(2,565,043	)		(3,169,514	)
Prepayment fees on Federal Home Loan Bank advances		-			832,099			-
Losses on lease residual values		-			-			617,000
Increase in cash value of bank-owned life insurance		(1,609,208	)		(1,445,891	)		(1,331,085	)
Decrease (increase) in other assets		757,107			(1,881,557	)		2,248,856
Increase in other liabilities		3,638,414			2,523,387			1,406,270
Net cash provided by operating activities		30,654,917			36,640,276			17,914,851

Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold		(5,775,000	)		41,175,000			(55,361,667	)
Net decrease (increase) in interest-bearing deposits at financial institutions		4,391,112			12,995,009			(10,416,198	)
Proceeds from sales of other real estate owned		5,241,265			9,220,631			6,038,825
Activity in securities portfolio:
Purchases		(474,461,164	)		(622,245,920	)		(383,018,764	)
Calls, maturities and redemptions		374,292,050			422,870,000			325,649,238
Paydowns		39,956,569			9,094,080			435,149
Sales		19,215,075			54,326,191			-
Activity in restricted investment securities:
Purchases		(4,584,300	)		(292,800	)		(1,710,800	)
Redemptions		4,090,050			1,707,900			252,200
Activity in bank-owned life insurance:
Purchases		(2,000,000	)		(7,000,000	)		(3,150,000	)
Surrender of policy		-			-			609,772
Net (increase) decrease in loans/leases originated and held for investment		(91,275,511	)		(56,096,989	)		63,387,668
Purchase of premises and equipment		(1,871,942	)		(3,064,903	)		(2,197,448	)
Net cash used in investing activities		(132,781,796	)		(137,311,801	)		(59,482,025	)

Cash Flows from Financing Activities:
Net increase in deposits		168,656,312			90,641,931			25,493,131
Net (decrease) increase in short-term borrowings		(42,453,489	)		72,381,951			(9,745,072	)
Activity in Federal Home Loan Bank advances:
Advances		23,000,000			5,000,000			36,000,000
Calls and maturities		(25,400,000	)		(24,000,000	)		(13,100,000	)
Prepayments		-			(15,832,099	)		-
Net increase (decrease) in other borrowings		2,008,099			(13,839,122	)		7,395,184
Proceeds from issuance of Series A Subordinated Notes and detachable warrants to purchase 54,000 shares of common stock		-			-			2,700,000
Payment of cash dividends on common and preferred stock		(4,088,949	)		(3,712,493	)		(4,052,089	)
Redemption of 10,223 share of Series F Noncumulative Perpetual Preferred Stock, net		(10,223,000	)		-			-
Proceeds from issuance of 40,090 shares of Series F Noncumulative Perpetual Preferred Stock, net		-			39,996,922			-
Redemption of Series D Cumulative Perpetual Preferred Stock, net		-			(38,237,000	)		-
Repurchase of 521,888 shares of common stock warrants issued in conjunction with Series D Cumulative Perpetual Preferred Stock		-			(1,100,000	)		-
Proceeds from issuance of Series E Noncumulative Convertible Perpetual Preferred Stock, net		-			-			3,187,233
Proceeds from issuance of common stock, net		994,174			477,339			261,547
Purchase of noncontrolling interests		(1,934,532	)		-			(420,000	)
Net cash provided by financing activities		110,558,615			111,777,429			47,719,934

Net increase in cash and due from banks		8,431,736			11,105,904			6,152,760
Cash and due from banks, beginning		53,136,710			42,030,806			35,878,046
Cash and due from banks, ending	$	61,568,446		$	53,136,710		$	42,030,806

Supplemental Disclosures of Cash Flow Information, cash payments for:
Interest	$	19,962,937		$	24,194,198		$	31,017,369
Income and franchise taxes		1,345,000			1,246,489			3,236,558

Supplemental Schedule of Noncash Investing Activities:

Change in accumulated other comprehensive income (loss), unrealized gains (losses) on on securities available for sale, net		(48,031	)		4,050,549			568,557
Exchange of shares of common stock in connection with payroll taxes for restricted stock and options exercised		(10,415	)		-			(3,097	)
Transfers of loans to other real estate owned		2,143,017			9,446,588			6,122,328
Liability established for purchase of noncontrolling interest		2,847,687			-			-

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies

Nature of business:

QCR Holdings, Inc. (the “Company”) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (“QCBT”), Cedar Rapids Bank and Trust Company (“CRBT”), Rockford Bank and Trust Company (“RB&T”), m2 Lease Funds, LLC (“m2”), QCR Holdings Statutory Trust II (“Trust II”), QCR Holdings Statutory Trust III (“Trust III”), QCR Holdings Statutory Trust IV (“Trust IV”), and QCR Holdings Statutory Trust V (“Trust V”). QCBT is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. CRBT is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities. RB&T is a commercial bank that serves Rockford, Illinois, and adjacent communities.

QCBT and CRBT are chartered and regulated by the state of Iowa, and RB&T is chartered and regulated by the state of Illinois. All three subsidiary banks are insured and subject to regulation by the Federal Deposit Insurance Corporation (“FDIC”), and are members of and regulated by the Federal Reserve System. m2, which is now a wholly-owned subsidiary of QCBT, based in the Milwaukee, Wisconsin area, is engaged in the business of direct financing lease contracts. QCBT previously owned 80% of m2. In August 2012, QCBT purchased the remaining 20% noncontrolling interest. See Note 21 for further discussion of the acquisition. Velie Plantation Holding Company, LLC ("VPHC), previously owned 91% by the Company, was engaged in holding the real estate property known as the Velie Plantation in Moline, Illinois. The Velie Plantation is the location of the Company’s headquarters. In October 2012, the Company acquired the remaining 9% noncontrolling interest, and effective December 31, 2012, VPHC was dissolved. Trust II, Trust III, Trust IV and Trust V were formed for the purpose of issuing various trust preferred securities (see Note 9).

Significant accounting policies:

Accounting estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for estimated losses on loans/leases, other-than-temporary impairment of securities, and the fair value of financial instruments.

Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, except Trust II, Trust III, Trust IV and Trust V, which do not meet the criteria for consolidation. All material intercompany accounts and transactions have been eliminated in consolidation.

Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and noninterest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, and short-term and other borrowings are treated as net increases or decreases.

Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $15,512,000 and $6,247,000 as of December 31, 2012 and 2011, respectively.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

Investment securities: Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities available for sale are carried at fair value. Unrealized gains or losses, net of taxes, are reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.

All securities are evaluated to determine whether declines in fair value below their amortized cost are other-than-temporary.

In estimating other-than-temporary impairment losses on available for sale debt securities, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the Company to not sell the security prior to recovery and whether it is not more-likely-than-not that it will be required to sell the security prior to recovery. If the Company does not intend to sell the security, and it is not more-likely-than-not the entity will be required to sell the security before recovery of its amortized cost basis, the Company will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion would be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

In estimating other-than-temporary impairment losses on available for sale equity securities management considers factors (1), (2) and (3) above as well as whether the Company has the intent and the ability to hold the security until its recovery. If the Company (a) intends to sell an impaired equity security and does not expect the fair value of the security to fully recover before the expected time of sale, or (b) does not have the ability to hold the security until its recovery, the security is deemed other-than-temporarily impaired and the impairment is charged to earnings. The Company recognizes an impairment loss through earnings if based upon other factors the loss is deemed to be other-than-temporary even if the decision to sell has not been made.

Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.

Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

The Company discloses allowance for credit losses (also known as “allowance for estimated loss on loans/leases”) and fair value by portfolio segment, and credit quality information, impaired financing receivables, nonaccrual status, and troubled debt restructurings by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its allowance for credit losses. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See this information following and in Note 3.

The Company’s portfolio segments are as follows:

Commercial and industrial

Commercial real estate

Residential real estate

Installment and other consumer

Direct financing leases would be considered a segment within the overall loan/lease portfolio. The accounting policies for direct financing leases are disclosed below.

The Company’s classes of loans receivable are as follows:

Commercial and industrial

Owner-occupied commercial real estate

Commercial construction, land development, and other land loans that are not owner-occupied commercial real estate

Other non-owner-occupied commercial real estate

Residential real estate

Installment and other consumer

Direct financing leases would be considered a class of financing receivable within the overall loan/lease portfolio. The accounting policies for direct financing leases are disclosed below.

Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 31 days or greater.

For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist:

It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan,

When full repayment of principal and interest is not expected,

When the loan is graded “doubtful”

When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future, or

When foreclosure action is initiated.

When a loan is placed on nonaccrual status, income recognition is ceased. Previously recorded but uncollected amounts of interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Generally, cash collected on nonaccrual loans is applied to principal. Should full collection of principal be expected, cash collected on nonaccrual loans can be recognized as interest income.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

For all classes of loans receivable, nonaccrual loans may be restored to accrual status provided the following criteria are met:

The loan is current, and all principal and interest amounts contractually due have been made,

All principal and interest amounts contractually due, including past due payments, are reasonably assured of repayment within a reasonable period, and

There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms:

Six months of repayment performance for contractual monthly payments, or

One year of repayment performance for contractual quarterly or semi-annual payments

Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment. Lease income is recognized on the interest method. Residual value is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends. The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than-temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.

The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.

The Company defers and amortizes fees and certain incremental direct costs over the contractual term of the lease as an adjustment to the yield. These initial direct leasing costs generally approximate 4% of the leased asset’s cost. The unamortized direct costs are recorded as a reduction of unearned lease income.

Troubled debt restructurings: Troubled debt restructuring exists when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company is attempting to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

The following criteria, related to granting a concession, together or separately, create a troubled debt restructuring:

A modification of terms of a debt such as one or a combination of:

- The reduction of the stated interest rate.

The extension of the maturity date or dates at a stated interest rate lower than the current market rate for the new debt with similar risk.

The reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.

The reduction of accrued interest.

A transfer from the borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan.

The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position.

Allowance for estimated losses on loans/leases: For all portfolio segments, the allowance for estimated losses on loans/leases is established as losses are estimated to have occurred through a provision for loan/lease losses charged to earnings. Loan/lease losses, for all portfolio segments, are charged against the allowance when management believes the uncollectability of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

For all portfolio segments, the allowance for estimated losses on loans/leases is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans/leases in light of historical experience, the nature and volume of the loan/lease portfolio, adverse situations that may affect the borrower’s/lessee’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A discussion of the risk characteristics and the allowance for estimated losses on loans/leases by each portfolio segment follows:

For commercial and industrial loans, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of commercial and industrial loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:

Ability and stability of current management of the borrower;

Stable earnings with positive financial trends;

Sufficient cash flow to support debt repayment;

Earnings projections based on reasonable assumptions;

Financial strength of the industry and business; and

Value and marketability of collateral.

Collateral for commercial and industrial loans generally includes accounts receivable, inventory, equipment and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

In addition, the Company often takes personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those standards and processes specific to real estate loans. Collateral for commercial real estate loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The lending policy specifies maximum loan-to-value limits based on the category of commercial real estate (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.

The lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the Company often takes personal guarantees to help assure repayment.

The Company’s lending policy limits non-owner occupied commercial real estate lending to 300% of total risk-based capital, and limits construction, land development, and other land loans to 100% of total risk-based capital. Exceeding these limits warrants the use of heightened risk management practices in accordance with regulatory guidelines. As of December 31, 2012 and 2011, all three subsidiary banks were in compliance with these limits.

In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the lending policy described above and below. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are clearly noted as such and specifically identified in loan/lease approval documents.

For commercial and industrial and commercial real estate loans, the allowance for estimated losses on loans consists of specific and general components.

The specific component relates to loans that are classified as impaired, as defined below. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan.

For commercial and industrial loans and all classes of commercial real estate loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

The general component consists of quantitative and qualitative factors and covers non-impaired loans. The quantitative factors are based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. See below for a detailed description of the Company’s internal risk rating scale. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

For commercial and industrial and commercial real estate loans, the Company utilizes the following internal risk rating scale:

1. Highest Quality – loans of the highest quality with no credit risk, including those fully secured by subsidiary bank certificates of deposit and U.S. government securities.

2. Superior Quality – loans with very strong credit quality. Borrowers have exceptionally strong earnings, liquidity, capital, cash flow coverage, and management ability. Includes loans secured by high quality, marketable securities, certificates of deposit from other institutions, and cash value of life insurance. Also includes loans supported by U.S. government, state, or municipal guarantees.

3. Satisfactory Quality – loans with satisfactory credit quality. Established borrowers with satisfactory financial condition, including credit quality, earnings, liquidity, capital and cash flow coverage. Management is capable and experienced. Collateral coverage and guarantor support, if applicable, are more than adequate. Includes loans secured by personal assets and business assets, including equipment, accounts receivable, inventory, and real estate.

4. Fair Quality – loans with moderate but still acceptable credit quality. The primary repayment source remains adequate; however, management’s ability to maintain consistent profitability is unproven or uncertain. Borrowers exhibit acceptable leverage and liquidity. May include new businesses with inexperienced management or unproven performance records in relation to peer, or borrowers operating in highly cyclical or deteriorating industries.

5. Early Warning – loans where the borrowers have generally performed as agreed, however unfavorable financial trends exist or are anticipated. Earnings may be erratic, with marginal cash flow or declining sales. Borrowers reflect leveraged financial condition and/or marginal liquidity. Management may be new and a track record of performance has yet to be developed. Financial information may be incomplete, and reliance on secondary repayment sources may be increasing.

6. Special Mention – loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.

7. Substandard – loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if applicable. These loans have a well-defined weakness or weaknesses which jeopardize repayment according to the contractual terms. There is distinct loss potential if the weaknesses are not corrected. Includes loans with insufficient cash flow coverage which are collateral dependent, other real estate owned, and repossessed assets.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

8. Doubtful – loans which have all the weaknesses inherent in a Substandard loan, with the added characteristic that existing weaknesses make full principal collection, on the basis of current facts, conditions and values, highly doubtful. The possibility of loss is extremely high, but because of pending factors, recognition of a loss is deferred until a more exact status can be determined. All doubtful loans will be placed on non-accrual, with all payments, including principal and interest, applied to principal reduction.

For term commercial and industrial and commercial real estate loans or credit relationships with aggregate exposure greater than $1,000,000, a loan review is required within 15 months of the most recent credit review. The review is completed in enough detail to, at a minimum, validate the risk rating. Additionally, the review shall include an analysis of debt service requirements, covenant compliance, if applicable, and collateral adequacy. The frequency of the review is generally accelerated for loans with poor risk ratings.

The Company’s Loan Quality area will perform a documentation review of a sampling of commercial and industrial and commercial real estate loans, the primary purpose of which is to ensure the credit is properly documented and closed in accordance with approval authorities and conditions. A review will also be performed by the Company’s Internal Audit Department of a sampling of commercial and industrial and commercial real estate loans, according to an approved schedule. Validation of the risk rating is part of Internal Audit’s review. Additionally, over the past several years, the Company has contracted an independent outside third party to review a sampling of commercial and industrial and commercial real estate loans. Validation of the risk rating is part of this review as well.

The Company leases machinery and equipment to commercial and industrial customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.

For direct financing leases, the allowance for estimated lease losses consists of specific and general components.

The specific component relates to leases that are classified as impaired, as defined for commercial loans above. For those leases that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired lease is lower than the carrying value of that lease.

The general component consists of quantitative and qualitative factors and covers nonimpaired leases. The quantitative factors are based on historical charge-off experience for the entire lease portfolio. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss data.

Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years or fixed rate mortgages that mature in 15 years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The lending policy establishes minimum appraisal and other credit guidelines.

The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The lending policy addresses specific credit guidelines by consumer loan type.

For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans are collectively evaluated for impairment. The Company applies a quantitative factor based on historical charge-off experience in total for each of these segments. Accordingly, the Company generally does not separately identify individual residential real estate loans, and/or installment or other consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

During the year ended December 31, 2010, CRBT and RB&T decreased the duration for the historical charge-off experience used in the quantitative factor from five years to three years. Based on the change (growth, mix, and quality) of the loan portfolios of CRBT and RB&T over the past several years, management determined decreasing the duration allowed for a more accurate assessment of the credit risk within the current portfolios.

Troubled debt restructurings are considered impaired loans/leases and are subject to the same allowance methodology as described above for impaired loans/leases by portfolio segment.

Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In addition, for transfers of a portion of financial assets (for example, participations of loan receivables), the transfer must meet the definition of a “participating interest” in order to account for the transfer as a sale. Following are the characteristics of a “participating interest”:

Pro-rata ownership in an entire financial asset.

From the date of the transfer, all cash flows received from entire financial assets are divided proportionately among the participating interest holders in an amount equal to their share of ownership.

The rights of each participating interest holder have the same priority, and no participating interest holder’s interest is subordinated to the interest of another participating interest holder. That is, no participating interest holder is entitled to receive cash before any other participating interest holder under its contractual rights as a participating interest holder.

No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset.

Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets.

Goodwill: The Company has recorded goodwill from QCBT’s purchase of 80% of m2 in August 2005. The goodwill is not being amortized, but is evaluated at least annually for impairment. An impairment charge is recognized when the calculated fair value of the reporting unit, including goodwill, is less than its carrying amount. Based on the annual analysis completed as of July 31, 2012, the Company determined that the goodwill was not impaired.

Bank-owned life insurance: Bank-owned life insurance is carried at cash surrender value with increases/decreases reflected as income/expense in the statement of income.

Restricted investment securities: Restricted investment securities represent Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank common stock. The stock is carried at cost. These equity securities are “restricted” in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other tradable equity securities. The Company views its investment in restricted stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value, rather than recognizing temporary declines in value. There have been no other-than-temporary write-downs recorded on these securities.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

Other real estate owned: Real estate acquired through, or in lieu of, loan foreclosures, is held for sale and initially recorded at fair value less costs to sell, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Subsequent write-downs to fair value are charged to earnings.

Treasury stock: Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price. When treasury stock is reissued, any difference between the sales proceeds, or fair value when issued for business combinations, and the cost is recognized as a charge or credit to additional paid-in capital.

Stock-based compensation plans: At December 31, 2012, the Company had four stock-based employee compensation plans, which are described more fully in Note 13.

The Company accounts for stock-based compensation with measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation over the requisite service period for awards expected to vest.

As discussed in Note 13, during the years ended December 31, 2012, 2011, and 2010, the Company recognized stock-based compensation expense related to stock options, stock purchase plans, and stock appreciation rights of $849,760, $696,407, and $488,112, respectively. As required, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with the following assumptions for the indicated periods:

	2012	2011	2010
Dividend yield	.86%	.88% to 1.00%	.89% to .90%
Expected volatility	29.36%	29.64% to 30.30%	26.72% to 26.88%
Risk-free interest rate	1.98%	1.90% to 3.58%	3.86% to 4.21%
Expected life of option grants (years)	6	6	6
Weighted-average grant date fair value	$2.79	$2.74	$2.89

The Company also uses the Black-Scholes option pricing model to estimate the fair value of stock purchase grants with the following assumptions for the indicated periods:

	2012	2011	2010
Dividend yield	.61% to .88%	.88% to 1.12%	.85% to .96%
Expected volatility	27.20% to 31.11%	51.62% to 53.58%	39.56% to 56.43%
Risk-free interest rate	.03% to .18%	.08% to .23%	.13% to .29%
Expected life of purchase grants (months)	3 to 6	3 to 6	3 to 6
Weighted-average grant date fair value	$1.71	$1.68	$1.81

The fair value is amortized on a straight-line basis over the vesting periods of the grants and will be adjusted for subsequent changes in estimated forfeitures. The expected dividend yield assumption is based on the Company's current expectations about its anticipated dividend policy. Expected volatility is based on historical volatility of the Company's common stock price. The risk-free interest rate for periods within the contractual life of the option or purchase is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the option and purchase grants is derived using the “simplified” method and represents the period of time that options and purchases are expected to be outstanding. Historical data is used to estimate forfeitures used in the model. Two separate groups of employees (employees subject to broad based grants, and executive employees and directors) are used.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

As of December 31, 2012, there was $419,100 of unrecognized compensation cost related to share based payments, which is expected to be recognized over a weighted average period of 2.2 years.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company's common stock for the 305,222 options that were in-the-money at December 31, 2012. The aggregate intrinsic value at December 31, 2012 was $1,295,785 on options outstanding and $398,168 on options exercisable. During the years ended December 31, 2012, 2011 and 2010, the aggregate intrinsic value of options exercised under the Company's stock option plans was $56,371, $47,026, and $16,639, respectively, and determined as of the date of the option exercise.

Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company.

Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of income.

Trust assets: Trust assets held by the subsidiary banks in a fiduciary, agency, or custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not included in the accompanying consolidated financial statements since such items are not assets of the subsidiary banks.

Earnings per common share: See Note 15 for a complete description and calculation of basic and diluted earnings per common share.

Reclassifications: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income, comprehensive income, or stockholders’ equity, to conform with the current period presentation.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies (Continued)

New accounting pronouncements: In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 amended Topic 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarified the application of existing fair value measurement requirements, changed certain principles in Topic 820 and required additional fair value disclosures. ASU 2011-04 was effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s consolidated financial statements. See Note 19.

In December 2011, FASB issued ASU 2011-11, Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. Adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2. Investment Securities

The amortized cost and fair value of investment securities as of December 31, 2012 and 2011 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
December 31, 2012:
Securities held to maturity:
Municipal securities	$	71,429,385	$	997,969	$	(71,648	)	$	72,355,706
Other securities		650,000		-		-			650,000
	$	72,079,385	$	997,969	$	(71,648	)	$	73,005,706

Securities available for sale:
U.S. govt. sponsored agency securities	$	336,570,995	$	2,198,655	$	(160,279	)	$	338,609,371
Residential mortgage-backed and related securities		160,035,196		3,736,821		(170,914	)		163,601,103
Municipal securities		24,508,015		1,696,555		(18,834	)		26,185,736
Trust preferred securities		86,200		53,200		-			139,400
Other securities		1,347,113		300,732		(23,469	)		1,624,376
	$	522,547,519	$	7,985,963	$	(373,496	)	$	530,159,986

December 31, 2011:
Securities held to maturity:
Other securities	$	200,000	$	-	$	-		$	200,000

Securities available for sale:
U.S. govt. sponsored agency securities	$	426,581,913	$	2,428,994	$	(55,687	)	$	428,955,220
Residential mortgage-backed and related securities		105,373,614		3,488,350		(8,215	)		108,853,749
Municipal securities		23,937,118		1,752,246		-			25,689,364
Trust preferred securities		86,200		-		(5,400	)		80,800
Other securities		1,354,940		140,022		(44,804	)		1,450,158
	$	557,333,785	$	7,809,612	$	(114,106	)	$	565,029,291

The Company’s held-to-maturity municipal securities consist largely of private issues of municipal debt. The municipalities are located within the Midwest with a large portion located in or adjacent to the communities of QCBT and CRBT. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

The Company’s residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2. Investment Securities (Continued)

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2012 and 2011, are summarized as follows:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
December 31, 2012:
Securities held to maturity:
Municipal securities	$	4,282,352	$	(71,648	)	$	-	$	-		$	4,282,352	$	(71,648	)

Securities available for sale:
U.S. govt. sponsored agency securities	$	55,621,718	$	(160,279	)	$	-	$	-		$	55,621,718	$	(160,279	)
Residential mortgage-backed and related securities		29,324,928		(170,914	)		-		-			29,324,928		(170,914	)
Municipal securities		1,039,625		(18,834	)		-		-			1,039,625		(18,834	)
Other securities		-		-			217,500		(23,469	)		217,500		(23,469	)
	$	85,986,271	$	(350,027	)	$	217,500	$	(23,469	)	$	86,203,771	$	(373,496	)

December 31, 2011:
Securities available for sale:
U.S. govt. sponsored agency securities	$	59,979,620	$	(55,687	)	$	-	$	-		$	59,979,620	$	(55,687	)
Residential mortgage-backed and related securities		4,906,398		(8,215	)		-		-			4,906,398		(8,215	)
Trust preferred securities		-		-			80,800		(5,400	)		80,800		(5,400	)
Other securities		251,957		(44,332	)		2,778		(472	)		254,735		(44,804	)
	$	65,137,975	$	(108,234	)	$	83,578	$	(5,872	)	$	65,221,553	$	(114,106	)

At December 31, 2012, the investment portfolio included 378 securities. Of this number, 50 securities had unrealized losses with aggregate depreciation of less than 1% from the total amortized cost basis. Of these 50, one had an unrealized loss for 12 months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company does not intend to sell these securities and/or it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. At December 31, 2012 and 2011, the Company’s equity securities represent less than 1% of the total portfolio.

For the years ended December 31, 2012 and 2011, the Company did not recognize other-than-temporary impairment on any debt securities.

For the year ended December 31, 2010, the Company’s evaluation determined the decline in fair value for one individual issue trust preferred security was other-than-temporary. As a result, the Company wrote down the value of this security and recognized a loss in the amount of $113,800. The Company does not have any other investments in trust preferred securities.

For the year ended December 31, 2012, the Company’s evaluation determined that one privately held equity security experienced a decline in fair value that was other-than-temporary. As a result, the Company wrote down the value of this security and recognized a loss in the amount of $62,400.

For the year ended December 31, 2011, the Company’s evaluation determined that two privately held equity securities experienced declines in fair value that were other-than-temporary. As a result, the Company wrote down the value of these securities and recognized losses in the amount of $118,847.

The Company did not recognize other-than-temporary impairment on any equity securities for the year ended December 31, 2010.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2. Investment Securities (Continued)

All sales of securities, as applicable, for the years ended December 31, 2012, 2011 and 2010, respectively, were from securities identified as available for sale. Information on proceeds received, as well as the gains from the sale of those securities is as follows:

	2012		2011		2010

Proceeds from sales of securities	$	19,215,075	$	54,326,191	$	-
Gross gains from sales of securities		104,600		1,472,528		-

The amortized cost and fair value of securities as of December 31, 2012, by contractual maturity are shown below. Expected maturities of mortgage-backed and related securities may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary. Other securities are excluded from the maturity categories as there is no fixed maturity date.

	Amortized Cost		Fair Value
Securities held to maturity:
Due in one year or less	$	853,965	$	858,014
Due after one year through five years		9,801,254		9,813,395
Due after five years		61,424,166		62,334,297
	$	72,079,385	$	73,005,706

Securities available for sale:
Due in one year or less	$	995,005	$	995,917
Due after one year through five years		33,202,789		33,663,178
Due after five years		326,967,416		330,275,412
	$	361,165,210	$	364,934,507
Residential mortgage-backed and related securities		160,035,196		163,601,103
Other securities		1,347,113		1,624,376
	$	522,547,519	$	530,159,986

Portions of the U.S. government sponsored agencies and municipal securities contain call options, at the discretion of the issuer, to terminate the security at predetermined dates prior to the stated maturity, summarized as follows:

	Amortized Cost		Fair Value

Municipal securities, held to maturity	$	46,672,253	$	47,157,578


U.S. govt. sponsored agency securities		304,670,224		306,253,738
Municipal securities, available for sale		13,498,939		14,381,300
	$	318,169,163	$	320,635,038

As of December 31, 2012 and 2011, investment securities with a carrying value of $384,194,020 and $412,820,519, respectively, were pledged on Federal Home Loan Bank advances, customer and wholesale repurchase agreements, and for other purposes as required or permitted by law.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable

The composition of the loan/lease portfolio as of December 31, 2012 and 2011 is presented as follows:

	2012			2011

Commercial and industrial loans	$	394,244,252		$	350,794,278
Commercial real estate loans
Owner-occupied commercial real estate		204,911,308			167,790,621
Commercial construction, land development, and other land		44,962,381			60,384,738
Other non owner-occupied commercial real estate		344,105,550			349,628,491
		593,979,239			577,803,850

Direct financing leases *		103,685,656			93,212,362
Residential real estate loans **		115,581,573			98,107,051
Installment and other consumer loans		76,720,514			78,223,080
		1,284,211,234			1,198,140,621
Plus deferred loan/lease orgination costs, net of fees		3,176,405			2,604,876
		1,287,387,639			1,200,745,497
Less allowance for estimated losses on loans/leases		(19,925,204	)		(18,789,262	)
	$	1,267,462,435		$	1,181,956,235


* Direct financing leases:
Net minimum lease payments to be received	$	117,719,380		$	106,389,988
Estimated unguaranteed residual values of leased assets		1,095,848			1,043,326
Unearned lease/residual income		(15,129,572	)		(14,220,952	)
		103,685,656			93,212,362
Plus deferred lease origination costs, net of fees		3,907,140			3,217,011
		107,592,796			96,429,373
Less allowance for estimated losses on leases		(1,990,395	)		(1,339,496	)
	$	105,602,401		$	95,089,877

Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors and management’s expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.

There were no losses related to residual values during the years ended December 31, 2012 and 2011. For the year ended December 31, 2010, the Company recognized losses totaling $617,000 in residual values for two direct financing equipment leases. At December 31, 2012, the Company had 34 leases remaining with residual values totaling $1,095,848 that were not protected with a lease end options rider. At December 31, 2011, the Company had 39 leases remaining with residual values totaling $1,043,326 that were not protected with a lease end options rider. Management has performed specific evaluations of these residual values and determined that the valuations are appropriate.

**Includes residential real estate loans held for sale totaling $4,577,233 and $3,832,760 as of December 31, 2012 and 2011, respectively.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

The aging of the loan/lease portfolio by classes of loans/leases as of December 31, 2012 and 2011 is presented as follows:

	2012
Classes of Loans/Leases	Current			30-59 Days Past Due			60-89 Days Past Due			Accruing Past Due 90 Days or More			Nonaccrual Loans/Leases			Total

Commercial and Industrial	$	388,825,307		$	3,724,506		$	9,940		$	120,000		$	1,564,499		$	394,244,252
Commercial Real Estate
Owner-Occupied Commercial Real Estate		204,141,070			142,993			-			-			627,245			204,911,308
Commercial Construction, Land Development, and Other Land		42,180,819			-			-			-			2,781,562			44,962,381
Other Non Owner-Occupied Commercial Real Estate		332,644,532			86,986			1,111,856			-			10,262,176			344,105,550
Direct Financing Leases		101,635,084			877,210			174,560			-			998,802			103,685,656
Residential Real Estate		111,993,859			2,254,730			283,466			-			1,049,518			115,581,573
Installment and Other Consumer		75,711,203			301,025			20,112			39,481			648,693			76,720,514
	$	1,257,131,874		$	7,387,450		$	1,599,934		$	159,481		$	17,932,495		$	1,284,211,234

As a percentage of total loan/lease portfolio		97.89	%		0.58	%		0.12	%		0.01	%		1.40	%		100.00	%

	2011
Classes of Loans/Leases	Current			30-59 Days Past Due			60-89 Days Past Due			Accruing Past Due 90 Days or More			Nonaccrual Loans/Leases			Total

Commercial and Industrial	$	347,417,683		$	226,394		$	239,991		$	120,000		$	2,790,210		$	350,794,278
Commercial Real Estate
Owner-Occupied Commercial Real Estate		166,632,318			146,847			-			-			1,011,456			167,790,621
Commercial Construction, Land Development, and Other Land		55,741,827			211,878			486,802			968,919			2,975,312			60,384,738
Other Non Owner-Occupied Commercial Real Estate		336,080,128			522,323			3,732,935			-			9,293,105			349,628,491
Direct Financing Leases		91,273,406			826,187			396,344			-			716,425			93,212,362
Residential Real Estate		95,456,433			1,127,465			389,678			-			1,133,475			98,107,051
Installment and Other Consumer		76,376,399			737,543			12,122			22,160			1,074,856			78,223,080
	$	1,168,978,194		$	3,798,637		$	5,257,872		$	1,111,079		$	18,994,839		$	1,198,140,621

As a percentage of total loan/lease portfolio		97.57	%		0.32	%		0.44	%		0.09	%		1.59	%		100.00	%

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

Nonperforming loans/leases by classes of loans/leases as of December 31, 2012 and 2011 is presented as follows:

	2012
Classes of Loans/Leases	Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases *		Troubled Debt Restructurings - Accruing		Total Nonperforming Loans/Leases		Percentage of Total Nonperforming Loans/Leases

Commercial and Industrial	$	120,000	$	1,564,499	$	184,084	$	1,868,583		7.36	%
Commercial Real Estate
Owner-Occupied Commercial Real Estate		-		627,245		-		627,245		2.47	%
Commercial Construction, Land Development, and Other Land		-		2,781,562		1,016,023		3,797,585		14.96	%
Other Non Owner-Occupied Commercial Real Estate		-		10,262,176		5,820,765		16,082,941		63.34	%
Direct Financing Leases		-		998,802		-		998,802		3.93	%
Residential Real Estate		-		1,049,518		167,739		1,217,257		4.79	%
Installment and Other Consumer		39,481		648,693		110,982		799,156		3.15	%
	$	159,481	$	17,932,495	$	7,299,593	$	25,391,569		100.00	%

*At December 31, 2012, nonaccrual loans/leases included $5,658,781 of troubled debt restructurings, including $99,804 in commercial and industrial loans, $5,173,589 in commercial real estate loans, $64,722 in residential real estate loans, and $320,666 in installment loans.

	2011
Classes of Loans/Leases	Accruing Past Due 90 Days or More		Nonaccrual Loans/Leases *		Troubled Debt Restructurings - Accruing		Total Nonperforming Loans/Leases		Percentage of Total Nonperforming Loans/Leases

Commercial and Industrial	$	120,000	$	2,790,210	$	187,407	$	3,097,617		9.68	%
Commercial Real Estate
Owner-Occupied Commercial Real Estate		-		1,011,456		-		1,011,456		3.16	%
Commercial Construction, Land Development, and Other Land		968,919		2,975,312		6,076,143		10,020,374		31.30	%
Other Non Owner-Occupied Commercial Real Estate		-		9,293,105		5,049,795		14,342,900		44.81	%
Direct Financing Leases		-		716,425		590,238		1,306,663		4.08	%
Residential Real Estate		-		1,133,475		-		1,133,475		3.54	%
Installment and Other Consumer		22,160		1,074,856		-		1,097,016		3.43	%
	$	1,111,079	$	18,994,839	$	11,903,583	$	32,009,501		100.00	%

**At December 31, 2011, nonaccrual loans/leases included $8,622,874 of troubled debt restructurings, including $198,697 in commercial and industrial loans, $8,074,777 in commercial real estate loans, $64,726 in direct financing leases, and $284,674 in installment loans.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

Changes in the allowance for estimated losses on loans/leases by portfolio segment for the years ended December 31, 2012, 2011, and 2010 are presented as follows:

	Year Ended December 31, 2012

	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Balance, beginning	$	4,878,006		$	10,596,958		$	1,339,496		$	704,946		$	1,269,856		$	18,789,262
Provisions charged to expense		(327,045	)		2,482,327			1,313,767			370,140			531,578			4,370,767
Loans/leases charged off		(682,877	)		(2,232,004	)		(739,755	)		(4,758	)		(717,035	)		(4,376,429	)
Recoveries on loans/leases previously charged off		663,461			222,221			76,887			-			179,035			1,141,604
Balance, ending	$	4,531,545		$	11,069,502		$	1,990,395		$	1,070,328		$	1,263,434		$	19,925,204

	Year Ended December 31, 2011

	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Balance, beginning	$	7,548,922		$	9,087,315		$	1,530,572		$	748,028		$	1,449,819		$	20,364,656
Provisions charged to expense		256,945			4,759,003			907,014			(4,147	)		697,199			6,616,014
Loans/leases charged off		(3,262,742	)		(3,590,868	)		(1,100,886	)		(38,935	)		(1,068,320	)		(9,061,751	)
Recoveries on loans/leases previously charged off		334,881			341,508			2,796			-			191,158			870,343
Balance, ending	$	4,878,006		$	10,596,958		$	1,339,496		$	704,946		$	1,269,856		$	18,789,262

	Year Ended December 31, 2010

	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Balance, beginning	$	5,425,624		$	12,665,721		$	1,681,376		$	685,732		$	2,046,281		$	22,504,734
Provisions charged to expense		5,099,350			1,203,163			684,619			97,723			378,763			7,463,618
Loans/leases charged off		(3,309,273	)		(5,210,444	)		(998,737	)		(35,427	)		(1,146,395	)		(10,700,276	)
Recoveries on loans/leases previously charged off		333,221			428,875			163,314			-			171,170			1,096,580
Balance, ending	$	7,548,922		$	9,087,315		$	1,530,572		$	748,028		$	1,449,819		$	20,364,656

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

The allowance for estimated losses on loans/leases by impairment evaluation and by portfolio segment as of December 31, 2012 and 2011 is presented as follows:

	2012
	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Allowance for loans/leases individually evaluated for impairment	$	280,170		$	4,005,042		$	125,000		$	105,565		$	71,992		$	4,587,769
Allowance for loans/leases collectively evaluated for impairment		4,251,375			7,064,460			1,865,395			964,763			1,191,442			15,337,435
	$	4,531,545		$	11,069,502		$	1,990,395		$	1,070,328		$	1,263,434		$	19,925,204


Loans/leases individually evaluated for impairment	$	1,006,952		$	20,383,846		$	998,802		$	1,217,256		$	687,355		$	24,294,211
Loans/leases collectively evaluated for impairment		393,237,300			573,595,393			102,686,854			114,364,317			76,033,159			1,259,917,023
	$	394,244,252		$	593,979,239		$	103,685,656		$	115,581,573		$	76,720,514		$	1,284,211,234


Allowance as a percentage of loans/leases individually evaluated for impairment		27.82	%		19.65	%		12.51	%		8.67	%		10.47	%		18.88	%
Allowance as a percentage of loans/leases collectively evaluated for impairment		1.08	%		1.23	%		1.82	%		0.84	%		1.57	%		1.22	%
Total allowance as a percentage of total loans/leaess		1.15	%		1.86	%		1.92	%		0.93	%		1.65	%		1.55	%

		2011
	Commercial and Industrial			Commercial Real Estate			Direct Financing Leases			Residential Real Estate			Installment and Other Consumer			Total

Allowance for loans/leases individually evaluated for impairment	$	903,187		$	4,297,738		$	66,675		$	55,884		$	22,819		$	5,346,303
Allowance for loans/leases collectively evaluated for impairment		3,974,819			6,299,220			1,272,821			649,062			1,247,037			13,442,959
	$	4,878,006		$	10,596,958		$	1,339,496		$	704,946		$	1,269,856		$	18,789,262


Loans/leases individually evaluated for impairment	$	2,152,855		$	24,281,365		$	1,306,663		$	1,133,474		$	984,806		$	29,859,163
Loans/leases collectively evaluated for impairment		348,641,423			553,522,485			91,905,699			96,973,577			77,238,274			1,168,281,458
	$	350,794,278		$	577,803,850		$	93,212,362		$	98,107,051		$	78,223,080		$	1,198,140,621


Allowance as a percentage of loans/leases individually evaluated for impairment		41.95	%		17.70	%		5.10	%		4.93	%		2.32	%		17.91	%
Allowance as a percentage of loans/leases collectively evaluated for impairment		1.14	%		1.14	%		1.38	%		0.67	%		1.61	%		1.15	%
Total allowance as a percentage of total loans/leaess		1.39	%		1.83	%		1.44	%		0.72	%		1.62	%		1.56	%

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

Information for impaired loans/leases is presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the years ended December 31, 2012, 2011, and 2010 is presented as follows:

	2012
Classes of Loans/Leases	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received

Impaired Loans/Leases with No Specific Allowance Recorded:
Commercial and Industrial	$	438,355	$	1,203,710	$	-	$	757,286	$	7,910	$	7,910
Commercial Real Estate
Owner-Occupied Commercial Real Estate		503,321		503,321		-		624,766		-		-
Commercial Construction, Land Development, and Other Land		678,523		678,523		-		3,359,435		3,549		3,549
Other Non Owner-Occupied Commercial Real Estate		495,702		495,702		-		5,288,820		2,017		2,017
Direct Financing Leases		777,645		777,645		-		871,076		-		-
Residential Real Estate		944,211		1,127,242		-		1,050,160		6,728		6,728
Installment and Other Consumer		534,368		534,368		-		815,720		629		629
	$	4,372,125	$	5,320,511	$	-	$	12,767,263	$	20,833	$	20,833

Impaired Loans/Leases with Specific Allowance Recorded:
Commercial and Industrial	$	568,597	$	590,849	$	280,170	$	499,036	$	-	$	-
Commercial Real Estate
Owner-Occupied Commercial Real Estate		-		-		-		-		-		-
Commercial Construction, Land Development, and Other Land		3,967,583		3,967,583		1,105,795		2,311,845		5,749		5,749
Other Non Owner-Occupied Commercial Real Estate		14,738,717		14,991,676		2,899,247		10,949,295		308,339		308,339
Direct Financing Leases		221,157		221,157		125,000		90,610		-		-
Residential Real Estate		273,045		273,045		105,565		258,677		-		-
Installment and Other Consumer		152,987		152,987		71,992		101,075		-		-
	$	19,922,086	$	20,197,297	$	4,587,769	$	14,210,538	$	314,088	$	314,088

Total Impaired Loans/Leases:
Commercial and Industrial	$	1,006,952	$	1,794,559	$	280,170	$	1,256,322	$	7,910	$	7,910
Commercial Real Estate
Owner-Occupied Commercial Real Estate		503,321		503,321		-		624,766		-		-
Commercial Construction, Land Development, and Other Land		4,646,106		4,646,106		1,105,795		5,671,280		9,298		9,298
Other Non Owner-Occupied Commercial Real Estate		15,234,419		15,487,378		2,899,247		16,238,115		310,356		310,356
Direct Financing Leases		998,802		998,802		125,000		961,686		-		-
Residential Real Estate		1,217,256		1,400,287		105,565		1,308,837		6,728		6,728
Installment and Other Consumer		687,355		687,355		71,992		916,795		629		629
	$	24,294,211	$	25,517,808	$	4,587,769	$	26,977,801	$	334,921	$	334,921

Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

	2011
Classes of Loans/Leases	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received

Impaired Loans/Leases with No Specific Allowance Recorded:
Commercial and Industrial	$	360,947	$	979,901	$	-	$	3,873,371	$	-	$	-
Commercial Real Estate
Owner-Occupied Commercial Real Estate		736,610		736,610		-		1,909,754		-		-
Commercial Construction, Land Development, and Other Land		-		-		-		2,979,950		-		-
Other Non Owner-Occupied Commercial Real Estate		3,936,826		3,986,820		-		5,568,776		-		-
Direct Financing Leases		1,094,178		1,094,178		-		1,487,570		81,921		81,921
Residential Real Estate		788,685		862,298		-		892,480		-		-
Installment and Other Consumer		593,987		593,987		-		821,889		-		-
	$	7,511,233	$	8,253,794	$	-	$	17,533,790	$	81,921	$	81,921

Impaired Loans/Leases with Specific Allowance Recorded:
Commercial and Industrial	$	1,791,908	$	1,791,908	$	903,187	$	1,175,105	$	36,984	$	36,984
Commercial Real Estate
Owner-Occupied Commercial Real Estate		217,059		217,059		47,911		121,201		-		-
Commercial Construction, Land Development, and Other Land		9,051,455		9,051,455		3,002,450		4,334,241		16,249		16,249
Other Non Owner-Occupied Commercial Real Estate		10,339,415		10,839,415		1,247,377		5,595,044		11,623		11,623
Direct Financing Leases		212,485		212,485		66,675		138,127		5,244		5,244
Residential Real Estate		344,789		344,789		55,884		282,020		-		-
Installment and Other Consumer		390,819		390,819		22,819		51,871		-		-
	$	22,347,930	$	22,847,930	$	5,346,303	$	11,697,609	$	70,100	$	70,100

Total Impaired Loans/Leases:
Commercial and Industrial	$	2,152,855	$	2,771,809	$	903,187	$	5,048,476	$	36,984	$	36,984
Commercial Real Estate
Owner-Occupied Commercial Real Estate		953,669		953,669		47,911		2,030,955		-		-
Commercial Construction, Land Development, and Other Land		9,051,455		9,051,455		3,002,450		7,314,191		16,249		16,249
Other Non Owner-Occupied Commercial Real Estate		14,276,241		14,826,235		1,247,377		11,163,820		11,623		11,623
Direct Financing Leases		1,306,663		1,306,663		66,675		1,625,697		87,165		87,165
Residential Real Estate		1,133,474		1,207,087		55,884		1,174,500		-		-
Installment and Other Consumer		984,806		984,806		22,819		873,760		-		-
	$	29,859,163	$	31,101,724	$	5,346,303	$	29,231,399	$	152,021	$	152,021

Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

	2010
Classes of Loans/Leases	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized for Cash Payments Received

Impaired Loans/Leases with No Specific Allowance Recorded:
Commercial and Industrial	$	1,459,790	$	3,350,036	$	-	$	1,782,357	$	-	$	-
Commercial Real Estate
Owner-Occupied Commercial Real Estate		681,727		681,727		-		553,012		-		-
Commercial Construction, Land Development, and Other Land		2,538,621		2,872,083		-		1,530,324		-		-
Other Non Owner-Occupied Commercial Real Estate		2,942,189		3,792,226		-		1,478,956		-		-
Direct Financing Leases		953,994		953,994		-		1,080,564		27,089		27,089
Residential Real Estate		758,031		758,031		-		721,757		-		-
Installment and Other Consumer		1,561,322		1,561,322		-		569,542		11,825		11,825
	$	10,895,674	$	13,969,419	$	-	$	7,716,512	$	38,914	$	38,914

Impaired Loans/Leases with Specific Allowance Recorded:
Commercial and Industrial	$	7,364,880	$	7,866,634	$	3,331,436	$	5,962,381	$	19,891	$	19,891
Commercial Real Estate
Owner-Occupied Commercial Real Estate		1,074,210		1,074,210		232,194		847,507		45,641		45,641
Commercial Construction, Land Development, and Other Land		7,660,458		7,660,458		1,818,193		9,263,675		3,832		3,832
Other Non Owner-Occupied Commercial Real Estate		9,872,826		10,091,777		1,658,791		9,393,250		235,366		235,366
Direct Financing Leases		811,096		811,096		335,000		663,697		-		-
Residential Real Estate		528,246		528,246		27,355		565,051		-		-
Installment and Other Consumer		49,777		49,777		49,777		432,460		-		-
	$	27,361,493	$	28,082,198	$	7,452,746	$	27,128,021	$	304,730	$	304,730

Total Impaired Loans/Leases:
Commercial and Industrial	$	8,824,670	$	11,216,670	$	3,331,436	$	7,744,738	$	19,891	$	19,891
Commercial Real Estate
Owner-Occupied Commercial Real Estate		1,755,937		1,755,937		232,194		1,400,519		45,641		45,641
Commercial Construction, Land Development, and Other Land		10,199,079		10,532,541		1,818,193		10,793,999		3,832		3,832
Other Non Owner-Occupied Commercial Real Estate		12,815,015		13,884,003		1,658,791		10,872,206		235,366		235,366
Direct Financing Leases		1,765,090		1,765,090		335,000		1,744,261		27,089		27,089
Residential Real Estate		1,286,277		1,286,277		27,355		1,286,808		-		-
Installment and Other Consumer		1,611,099		1,611,099		49,777		1,002,002		11,825		11,825
	$	38,257,167	$	42,051,617	$	7,452,746	$	34,844,533	$	343,644	$	343,644

Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

For commercial and industrial and commercial real estate loans, the Company’s credit quality indicator is internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on as needed basis depending on the specific circumstances of the loan. See Note 1 for further discussion on the Company’s risk ratings.

For direct financing leases, residential real estate loans, and installment and other consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of December 31, 2012 and 2011:

	2012
			Commercial Real Estate
					Non Owner-Occupied
Internally Assigned Risk Rating	Commercial and Industrial		Owner-Occupied Commercial Real Estate		Commercial Construction, Land Development, and Other Land		Other Commercial Real Estate		Total

Pass (Ratings 1 through 5)	$	371,856,380	$	195,567,523	$	38,125,793	$	312,370,393	$	917,920,089
Special Mention (Rating 6)		8,008,866		5,488,602		1,238,152		7,319,902		22,055,522
Substandard (Rating 7)		14,379,006		3,855,183		5,598,436		24,415,255		48,247,880
Doubtful (Rating 8)		-		-		-		-		-
	$	394,244,252	$	204,911,308	$	44,962,381	$	344,105,550	$	988,223,491

	2012
Delinquency Status *		Direct Financing Leases		Residential Real Estate		Installment and Other Consumer		Total

Performing		$	102,686,854	$	114,364,316	$	75,921,358	$	292,972,528
Nonperforming			998,802		1,217,257		799,156		3,015,215
		$	103,685,656	$	115,581,573	$	76,720,514	$	295,987,743

	2011
			Commercial Real Estate
					Non Owner-Occupied
Internally Assigned Risk Rating	Commercial and Industrial		Owner-Occupied Commercial Real Estate		Commercial Construction, Land Development, and Other Land		Other Commercial Real Estate		Total

Pass (Ratings 1 through 5)	$	324,225,905	$	158,955,618	$	46,268,554	$	310,401,972	$	839,852,049
Special Mention (Rating 6)		8,814,497		2,700,496		764,586		13,754,798		26,034,377
Substandard (Rating 7)		17,753,876		6,134,507		13,351,598		25,471,721		62,711,702
Doubtful (Rating 8)		-		-		-		-		-
	$	350,794,278	$	167,790,621	$	60,384,738	$	349,628,491	$	928,598,128

	2011
Delinquency Status *	Direct Financing Leases		Residential Real Estate		Installment and Other Consumer		Total

Performing	$	91,905,699	$	96,973,576	$	77,126,064	$	266,005,339
Nonperforming		1,306,663		1,133,475		1,097,016		3,537,154
	$	93,212,362	$	98,107,051	$	78,223,080	$	269,542,493

*Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing troubled debt restructurings.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

As of December 31, 2012 and 2011, troubled debt restructurings totaled $12,958,374 and $20,526,457, respectively.

For each class of financing receivable, the following presents the number and recorded investment of troubled debt restructurings, by type of concession, that were restructured during the years ended December 31, 2012 and 2011. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of restructuring.

	2012
Classes of Loans/Leases	Number of Loans/Leases		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Specific Allowance

CONCESSION - Extension of maturity
Other Non Owner-Occupied Commercial Real Estate		1	$	733,442	$	733,442	$	176,526

CONCESSION - Significant payment delay
Commercial Construction, Land Development, and Other Land		8	$	1,274,172	$	1,274,172	$	190,997
Other Non Owner-Occupied Commercial Real Estate		2		264,173		264,173		36,724
Residential Real Estate		1		64,722		64,722		-
Installment and Other Consumer		2		35,318		35,318		5,332
		13	$	1,638,385	$	1,638,385	$	233,053

CONCESSION - Interest rate adjusted below market
Commercial Construction, Land Development, and Other Land		1	$	337,500	$	337,500	$	55,295
Other Non Owner-Occupied Commercial Real Estate		2		1,542,784		1,289,825		262,704
Residential Real Estate		1		167,739		167,739		-
Installment and Other Consumer		1		16,043		16,043		-
		5	$	2,064,066	$	1,811,107	$	317,999

TOTAL		19	$	4,435,893	$	4,182,934	$	727,578

Of the troubled debt restructurings reported above, 9 with post-modification recorded investments totaling $1,779,126 were on nonaccrual as of December 31, 2012.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

	2011
Classes of Loans/Leases	Number of Loans/Leases		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Specific Allowance

CONCESSION - Extension of maturity
Other Non Owner-Occupied Commercial Real Estate		1	$	2,851,134	$	2,851,134	$	-

CONCESSION - Significant payment delay
Commercial and Industrial		4	$	1,175,819	$	1,175,819	$	-
Other Non Owner-Occupied Commercial Real Estate		2		4,309,589		4,309,589		308,254
Direct Financing Leases		2		633,621		633,621		-
Installment and Other Consumer		1		187,650		187,650		125,928
		9	$	6,306,679	$	6,306,679	$	434,182

CONCESSION - Interest rate adjusted below market
Commercial Construction, Land Development, and Other Land		5	$	6,549,376	$	6,549,376	$	2,203,438

TOTAL		15	$	15,707,189	$	15,707,189	$	2,637,620

Of the troubled debt restructurings reported above, five with post-modification recorded investments totaling $4,480,398 were on nonaccrual at December 31, 2011. None of the troubled debt restructurings reported above had partial charge-offs.

For the years ended December 31, 2012 and 2011, none of the Company’s troubled debt restructurings had redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

Loans are made in the normal course of business to directors, executive officers, and their related interests. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other persons. An analysis of the changes in the aggregate committed amount of loans greater than or equal to $60,000 during the years ended December 31, 2012, 2011, and 2010, was as follows:

	2012			2011			2010

Balance, beginning	$	19,155,542		$	20,796,427		$	25,532,422
Net increase (decrease) due to change in related parties		2,784,143			(235,000	)		(9,306,435	)
Advances		6,754,970			10,674,567			13,576,200
Repayments		(8,192,597	)		(12,080,452	)		(9,005,760	)
Balance, ending	$	20,502,058		$	19,155,542		$	20,796,427

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Loans/Leases Receivable (Continued)

The Company’s loan portfolio includes a geographic concentration in the Midwest. Additionally, the loan portfolio includes a concentration of loans in certain industries as of December 31, 2012 and 2011 as follows:

	2012					2011
Industry Name	Balance		Percentage of Total Loans/Leases			Balance		Percentage of Total Loans/Leases

Lessors of Non-Residential Buildings	$	178,060,120		14	%	$	179,510,937		15	%
Lessors of Residential Buildings		61,459,574		5	%		50,029,069		4	%
Bank Holding Companies		47,662,055		4	%		38,046,779		3	%

Note 4. Premises and Equipment

The following summarizes the components of premises and equipment as of December 31, 2012 and 2011:

	2012		2011

Land	$	5,583,180	$	5,525,022
Buildings (useful lives 15 to 50 years)		28,368,503		28,124,868
Furniture and equipment (useful lives 3 to 10 years)		20,069,281		18,882,807
		54,020,964		52,532,697
Less accumulated depreciation		22,758,574		20,791,946
	$	31,262,390	$	31,740,751

Certain facilities are leased under operating leases. Rental expense was $372,631, $290,101, and $464,447, for the years ended December 31, 2012, 2011, and 2010, respectively.

Future minimum rental commitments under noncancelable leases are as follows as of December 31, 2012:

Year ending December 31:
2013	$	373,079
2014		374,846
2015		216,844
2016		222,897
2017		224,772
Thereafter		339,102
	$	1,751,540

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 5. Deposits

The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was $249,664,219 and $244,564,702 as of December 31, 2012 and 2011, respectively.

As of December 31, 2012, the scheduled maturities of certificates of deposit were as follows:

Year ending December 31:
2013	$	225,152,331
2014		51,775,136
2015		39,141,526
2016		14,601,275
2017		3,871,506
	$	334,541,774

Note 6. Short-Term Borrowings

Short-term borrowings as of December 31, 2012 and 2011 are summarized as follows:

	2012		2011

Overnight repurchase agreements with customers	$	104,942,961	$	110,236,450
Federal funds purchased		66,140,000		103,300,000
	$	171,082,961	$	213,536,450

Information concerning overnight repurchase agreements with customers is summarized as follows as of December 31, 2012 and 2011:

	2012			2011

Average daily balance during the period	$	111,782,307		$	110,468,792
Average daily interest rate during the period		0.13	%		0.23	%
Maximum month-end balance during the period	$	141,890,506		$	117,901,743
Weighted average rate as of end of period		0.11	%		0.23	%

Securities underlying the agreements as of end of period:
Carrying value	$	160,950,808		$	201,053,829
Fair value		160,950,808			201,053,829

The securities underlying the agreements as of December 31, 2012 and 2011 were under the Company's control in safekeeping at third-party financial institutions.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 6. Short-Term Borrowings (Continued)

Information concerning federal funds purchased is summarized as follows as of December 31, 2012 and 2011:

	2012			2011

Average daily balance during the period	$	52,379,823		$	33,702,904
Average daily interest rate during the period		0.27	%		0.27	%
Maximum month-end balance during the period	$	80,150,000		$	103,300,000
Weighted average rate as of end of period		0.26	%		0.22	%

Note 7. Federal Home Loan Bank Advances

The subsidiary banks are members of the FHLB of Des Moines or Chicago. As of December 31, 2012 and 2011, the subsidiary banks held $11,986,400 and $11,516,800, respectively, of FHLB stock, which is included in restricted investment securities on the consolidated balance sheets.

During the first quarter of 2011, the Company’s largest subsidiary bank, QCBT, prepaid $15,000,000 of FHLB advances with a weighted average interest rate of 4.87% and a weighted average maturity of May 2012. The fees for prepayment totaled $832,099 and are included in noninterest expenses in the Statement of Income. In addition, QCBT modified $20,350,000 of fixed rate FHLB advances with a weighted average interest rate of 4.33% and a weighted average maturity of October 2013 into new fixed rate FHLB advances with a weighted average interest rate of 3.35% and a weighted average maturity of February 2014.

During the fourth quarter of 2011, the Company’s smallest subsidiary bank, RB&T, modified $13,000,000 of fixed rate FHLB advances with a weighted average rate of 3.37% and a weighted average maturity of March 2013 into new fixed rate FHLB advances with a weighted average interest rate of 2.29% and a weighted average maturity of February 2016.

There were no modifications or prepayments during 2012.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7. Federal Home Loan Bank Advances (Continued)

Maturity and interest rate information on advances from FHLB as of December 31, 2012 and 2011 is as follows:

	December 31, 2012
	Amount Due		Weighted Average Interest Rate at Year-End			Amount Due with Putable Option *		Weighted Average Interest Rate at Year-End
Maturity:
Year ending December 31:
2013	$	24,000,000		1.50	%	$	-		-	%
2014		27,850,000		3.16			-		-
2015		16,000,000		2.84			-		-
2016		57,500,000		4.19			47,500,000		4.64
2017		36,000,000		3.89			20,000,000		4.51
Thereafter		41,000,000		3.58			33,000,000		3.64
Total FHLB advances	$	202,350,000		3.45		$	100,500,000		4.29

	December 31, 2011
	Amount Due		Weighted Average Interest Rate at Year-End			Amount Due with Putable Option *		Weighted Average Interest Rate at Year-End
Maturity:
Year ending December 31:
2012	$	15,400,000		3.95	%	$	-		-	%
2013		15,000,000		2.35			-		-
2014		27,850,000		3.16			-		-
2015		16,000,000		3.03			-		-
2016		57,500,000		3.91			47,500,000		4.64
Thereafter		73,000,000		3.85			53,000,000		3.97
Total FHLB advances	$	204,750,000		3.67		$	100,500,000		4.29

*Of the advances outstanding, a large portion have putable options which allow the FHLB, at its discretion, to terminate the advances and require the subsidiary banks to repay at predetermined dates prior to the stated maturity date of the advances.

Advances are collateralized by securities with a carrying value of $18,959,669 and $14,095,430 as of December 31, 2012 and 2011, respectively, and by loans pledged of $423,179,584 and $413,662,493, respectively, in aggregate. On pledged loans, the FHLB applies varying collateral maintenance levels from 125% to 333% based on the loan type.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 8. Other Borrowings and Unused Lines of Credit

Other borrowings as of December 31, 2012 and 2011 are summarized as follows:

	2012		2011

Wholesale structured repurchase agreements	$	130,000,000	$	130,000,000
364-day revolving note		5,600,000		3,600,000
Series A subordinated notes		2,639,762		2,631,663
	$	138,239,762	$	136,231,663

Maturity and interest rate information concerning wholesale structured repurchase agreements is summarized as follows:

	December 31, 2012					December 31, 2011
	Amount Due		Weighted Average Interest Rate at Year-End			Amount Due		Weighted Average Interest Rate at Year-End
Maturity:
Year ending December 31:
2015	$	35,000,000		3.00	%	$	45,000,000		3.11	%
2016		20,000,000		3.46			35,000,000		3.67
2017		10,000,000		3.00			10,000,000		3.00
Thereafter		65,000,000		3.71			40,000,000		4.03
Total Wholesale Structured Repurchase Agreements	$	130,000,000		3.43		$	130,000,000		3.54

Each wholesale structured repurchase agreement has a one-time put option, at the discretion of the counterparty, to terminate the agreement and require the subsidiary bank to repay at predetermined dates prior to the stated maturity date of the agreement.

As of December 31, 2012 and 2011, embedded within $50,000,000 and $65,000,000, respectively, of the wholesale structured repurchase agreements were interest rate cap options with varying terms. Of the $50,000,000 as of December 31, 2012, $20,000,000 matures in 2016 with the caps expiring in 2013 in conjunction with the one-time put option, and $30,000,000 matures in 2019 with the caps expiring in 2014 in conjunction with the one-time put option. Of the $65,000,000 at December 31, 2011, $35,000,000 matures in 2016 with the caps expiring in 2013 in conjunction with the one-time put option, and $30,000,000 matures in 2019 with the caps expiring in 2014 in conjunction with the one-time put option. The interest rate cap options are effected when the 3-month LIBOR rate increases to certain levels. If that situation occurs, the rate paid will be decreased by the difference between the 3-month LIBOR rate and the particular cap level. In no case will the rate paid fall below 0.00%.

During 2012, the Company modified $25,000,000 of fixed rate wholesale structured repurchase agreements with a weighted average rate of 3.77% and a weighted average maturity of December 2015 into new fixed rate wholesale structured repurchase agreements with a weighted average interest rate of 3.21% and a weighted average maturity of April 2019. Of this $25,000,000, $15,000,000 had interest rate cap options embedded that were set to expire in 2013 in conjunction with the one-time put option. Upon modification, the interest rate cap options were cancelled.

The wholesale structured repurchase agreements are collateralized by securities with a carrying value of $160,772,093 and $156,909,176 as of December 31, 2012 and 2011, respectively.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 8. Other Borrowings and Unused Lines of Credit (Continued)

At December 31, 2011, the Company had a single $20,000,000 secured revolving credit note which matures every 364 days. At December 31, 2011, the note carried a balance outstanding of $3,600,000. Interest was payable monthly at the effective LIBOR rate plus 3.00% per annum, as defined by the credit agreement. As of December 31, 2011, the interest rate on the note was 3.27%. The note renewed on March 30, 2012. At December 31, 2012, the note carried a balance outstanding of $5,600,000. Interest is payable monthly at the effective LIBOR rate plus 2.50% per annum, as a result of achieving certain asset quality measures as defined in the credit agreement. As of December 31, 2012, the interest rate on the note was 2.71%.

The current revolving note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various operating ratios.

On March 19, 2010, the Company closed a private placement offering resulting in the issuance of 2,700 units (each, a “Unit”) to accredited investors for an aggregate purchase price of $2,700,000, or $1,000 per Unit. Each Unit consists of a 6.00% Series A Subordinated Note, due September 1, 2018 (collectively, the “Subordinated Notes”), $1,000 principal amount, and a detachable warrant (collectively, the “Warrants”) to acquire 20 shares of the Company’s common stock, par value $1.00 per share (the “Common Stock”), at a per share exercise price equal to $10.00 per share, subject to normal adjustments, as set forth in the Warrants.

The Subordinated Notes have a maturity date of September 1, 2018. The Subordinated Notes bear interest payable semi-annually, in arrears, on June 30 and December 30 of each year, at a fixed interest rate of 6.00% per year. The Company may, at its option, subject to regulatory approvals, redeem some or all of the Subordinated Notes at a redemption price equal to 100% of the principal amount of the redeemed notes, plus any accrued but unpaid interest.

The Warrants will expire on March 19, 2015 and may be exercised at any time prior to their expiration date, at the holder’s option, by payment of the cash exercise price. The Company may require holders of the Warrants to convert each Warrant into 20 shares of Common Stock, if at any time after the first anniversary of their date of issuance, the volume weighted-average per share price of the common stock equals or exceeds 130% of the exercise price for at least 20 trading days in a period of 30 consecutive trading days. The Warrants are detachable from the Subordinated Notes and, subject to any limitations imposed by applicable securities laws, may be transferred separately from the Subordinated Notes at any time after March 19, 2012. During the year ended December 31, 2012, all 54,000 Warrants were exercised by the holders for total proceeds in the amount of $540,000.

The Subordinated Notes are intended to qualify as Tier 2 capital of the Company for regulatory purposes. The Company used the net proceeds from the sale of the Units to further strengthen the capital positions of the Company and specifically RB&T.

Unused lines of credit of the subsidiary banks as of December 31, 2012 and 2011 are summarized as follows:

	2012		2011

Secured	$	52,703,791	$	72,929,607
Unsecured		259,000,000		152,500,000
	$	311,703,791	$	225,429,607

The Company pledges the eligible portion of its municipal securities portfolio and select commercial and industrial and commercial real estate loans to the Federal Reserve Bank of Chicago for borrowing at the Discount Window.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9. Junior Subordinated Debentures

Junior subordinated debentures are summarized as of December 31, 2012 and 2011 as follows:

	2012		2011

Note Payable to Trust II	$	12,372,000	$	12,372,000
Note Payable to Trust III		8,248,000		8,248,000
Note Payable to Trust IV		5,155,000		5,155,000
Note Payable to Trust V		10,310,000		10,310,000
	$	36,085,000	$	36,085,000

A schedule of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities including the amounts outstanding as of December 31, 2012 and 2011, is as follows:

Name	Date Issued	Amount Issued		Interest Rate	Interest Rate as of 12/31/12			Interest Rate as of 12/31/11

QCR Holdings Statutory Trust II	February 2004	$	12,372,000	2.85% over 3-month LIBOR *		3.21	%		3.22	%
QCR Holdings Statutory Trust III	February 2004		8,248,000	2.85% over 3-month LIBOR		3.21	%		3.22	%
QCR Holdings Statutory Trust IV	May 2005		5,155,000	1.80% over 3-month LIBOR		2.14	%		2.20	%
QCR Holdings Statutory Trust V	February 2006		10,310,000	1.55% over 3-month LIBOR **		1.89	%		1.95	%
		$	36,085,000	Weighted Average Rate		2.68	%		2.71	%

*Rate was fixed at 6.93% until March 31, 2011 when it became variable based on 3-month LIBOR plus 2.85%, reset quarterly.

**Rate was fixed at 6.62% until April 7, 2011, when it became variable based on 3-month LIBOR plus 1.55%, reset quarterly.

Securities issued by Trust II, Trust III, Trust IV, and Trust V mature 30 years from the date of issuance, but all are currently callable at par at anytime.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10. Preferred Stock

Preferred stock is summarized as of December 31, 2012 and 2011 as follows:

	2012		2011

Series E Non-Cumulative Convertible Perpetual Preferred Stock		25,000		25,000
Series F Non-Cumulative Perpetual Preferred Stock		29,867		40,090
	$	54,867	$	65,090

Series B Non-Cumulative Perpetual Preferred Stock: The 268 shares of Series B Non-Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”) had a stated dividend rate of 8.00%. On June 30, 2010, the 268 shares of Series B Preferred Stock were exchanged in the issuance of Series E Non-Cumulative Convertible Perpetual Preferred Stock (“Series E Preferred Stock”). See below for detailed discussion of the issuance of Series E Preferred Stock.

Series C Non-Cumulative Perpetual Preferred Stock: The 300 shares of Series C Non-Cumulative Perpetual Preferred Stock (“Series C Preferred Stock”) had a stated dividend rate of 9.50%. On June 30, 2010, the 300 shares of Series C Preferred Stock were exchanged in the issuance of Series E Preferred Stock. See below for detailed discussion of the issuance of Series E Preferred Stock.

Series D Cumulative Perpetual Preferred Stock and Common Stock Warrant: On February 13, 2009, the Company issued 38,237 shares of Series D Cumulative Perpetual Preferred Stock (the “Series D Preferred Stock”) to the U.S. Department of the Treasury (the “Treasury”) for an aggregate purchase price of $38,237,000. The sale of Series D Preferred Stock was a result of the Company’s participation in the Treasury’s voluntary Capital Purchase Program (“CPP”). The Series D Preferred Stock qualified as Tier 1 capital and paid cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. This sale also included the issuance of a warrant (“CPP Warrant”) that allowed Treasury to purchase up to 521,888 shares of the Company’s common stock at an exercise price of $10.99. The CPP Warrant had a ten-year term and was immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $10.99 per share of the Company’s common stock.

The proceeds received from the Treasury were allocated to the Series D Preferred Stock and the CPP Warrant based on relative fair value. The fair value of the Series D Preferred Stock was determined through a discounted future cash flows model using a discount rate of 12%. The fair value of the CPP Warrant was calculated using the Black-Scholes option pricing model, which includes assumptions regarding the Company’s dividend yield, stock price volatility, and the risk-free interest rate. The relative fair value of the Series D Preferred Stock and the CPP Warrant on February 13, 2009, the date of issuance, was $35.8 million and $2.4 million, respectively.

The Company calculated a discount on the Series D Preferred Stock in the amount of $2.4 million, which was being amortized over a 5 year period. The effective cost on the Series D Preferred Stock, including the accretion of the discount, was approximately 6.23%. In determining net income (loss) attributable to the Company’s common stockholders, the periodic accretion and the cash dividend on the preferred stock were subtracted from net income (loss) attributable to the Company.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10. Preferred Stock (Continued)

On September 15, 2011, the Company redeemed the 38,237 shares of Series D Preferred Stock simultaneously upon the issuance of the Senior Non-Cumulative Perpetual Preferred Stock, Series F (the “Series F Preferred Stock”). See below for a detailed discussion of the issuance of Series F Preferred Stock. Upon redemption, accretion of the remaining discount, or $1,252,023, was recognized.

Separately, on November 16, 2011, the Company repurchased the CPP Warrant from the Treasury for an aggregate price of $1,100,000. Simultaneous with the repurchase, the Company cancelled the CPP Warrant.

Series E Non-Cumulative Convertible Perpetual Preferred Stock: On June 30, 2010, the Company closed a private placement offering resulting in the issuance of 25,000 shares of Series E Preferred Stock for an aggregate purchase price of $25,000,000, or $1,000 per share (the liquidation amount). The private placement was fully subscribed and involved the exchange of $20.9 million (gross amount before related issuance costs) of the Company’s previously outstanding Series B Preferred Stock and Series C Preferred Stock and $4.1 million (gross amount before related issuance costs) of new capital from cash investors.

The Series E Preferred Stock carries a stated dividend rate of 7.00% and is perpetually convertible by the holder into shares of common stock at a per share conversion price of $12.15, subject to anti-dilution adjustments upon the occurrence of certain events. In addition, the Company can exercise a conversion option on or after the third anniversary of the issue date, at the same $12.15 conversion price if the Company’s common stock price equals or exceeds $17.22 for at least 20 trading days in a period of 30 consecutive trading days. The Series E Preferred Stock was not registered under the Securities Act of 1933, as amended (the “Act”), and was issued pursuant to an exemption from registration under Regulation D of the rules promulgated under the Act.

The Company has the right, at any time after the fifth anniversary of the issuance date, to redeem all, but not less than all, of the shares of Series E Preferred Stock, for an amount per share equal to: (i) $1,000; plus (ii) any declared but unpaid dividends for the then-current dividend period.

The Company’s previously outstanding Series B Preferred Stock and Series C Preferred Stock carried stated dividend rates of 8.00% and 9.50%, respectively. All of the outstanding shares of Series B and Series C Preferred Stock were exchanged for the newly issued shares of Series E Preferred Stock.

The Series E Preferred Stock is intended to qualify as Tier 1 capital of the Company for regulatory purposes. The Company used the net proceeds from the issuance to further strengthen its capital and liquidity positions.

Series F Non-Cumulative Perpetual Preferred Stock: On September 15, 2011, the Company issued 40,090 shares of Series F Preferred Stock to the Treasury for an aggregate purchase price of $40,090,000. The sale of Series F Preferred Stock is the result of an investment by the Treasury from the Small Business Lending Fund (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010 that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. As a requirement of the SBLF, simultaneously, the Company redeemed the 38,327 shares of Series D Preferred Stock, at an aggregate price of $38,237,000, plus accrued and unpaid dividends to the date of redemption of $159,321.

100

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10. Preferred Stock (Continued)

The Series F Preferred Stock qualifies as Tier 1 capital of the Company. Non-cumulative dividends are payable quarterly on the Series F Preferred Stock, and the dividend rate is based on changes in the level of “Qualified Small Business Lending” or “QSBL” by the Company’s wholly owned bank subsidiaries, QCBT, CRBT and RB&T. Based upon the change in the banks’ level of QSBL over the baseline level (as defined by SBLF, the baseline is the average of QSBL for the last two quarters of 2009 and the first two quarters of 2010), the dividend rate for the initial dividend period, which was from the date of issuance through September 30, 2011, was set at 5%, and the dividend rate for the fourth quarter of 2011 has also been set at 5%. For the 2nd through 10th calendar quarters, the annual dividend rate may be adjusted to between 1% and 5%, to reflect the amount of change in the banks’ level of QSBL. For the 11th calendar quarter through 4.5 years after issuance, the dividend rate will be fixed at between 1% and 5%, based upon the increase in QSBL from the baseline level to the level as of the end of the ninth dividend period (i.e., as of September 30, 2013), or will be fixed at 7% if there is no increase or there is a decrease in QSBL during such period. In addition, beginning on April 1, 2014 and ending on April 1, 2016, if there is no increase or there is a decrease in QSBL from the baseline level to the level as of the end of the ninth dividend period (i.e., as of September 30, 2013), because of the Company’s participation in the CPP, the Company will be subject to an additional lending incentive fee of 2% per year. After 4.5 years from issuance, the dividend rate will increase to 9%.

In accordance with SBLF, the Company may pay dividends on all stock assuming Tier 1 capital levels remain at least 90% of the level existing upon the date of issuance, or September 15, 2011. This threshold is subject to reduction depending on increases in the Company’s QSBL.

The Series F Preferred Stock is nonvoting, other than for consent rights granted to the Treasury with respect to (i) any authorization or issuance of shares ranking senior to the Series F Preferred Stock, (ii) any amendment to the rights of the Series F Preferred Stock, (iii) any merger, exchange, dissolution, or similar transaction that would affect the rights of the Series F Preferred Stock and (iv) any sale of all, or any material portion of, the Company’s assets if in conjunction with such sale, the Series F Preferred Stock will not be redeemed in full.

If the Company misses five dividend payments, whether or not consecutive, the holder of the Series F Preferred Stock will have the right, but not the obligation, to appoint a representative as an observer on the Company’s Board of Directors. If the Company misses six dividend payments, whether or not consecutive, and if the then outstanding aggregate liquidation amount of the Series F Preferred Stock is at least $25,000,000, then the holder of the Series F Preferred Stock will have the right to designate two directors to the Board of Directors of the Company.

The Series F Preferred Stock was issued in a private placement exempt from registration pursuant to Section 4(2) of the Act.

On June 29, 2012, the Company redeemed 10,223 shares of Series F Preferred Stock from the Treasury for an aggregate redemption amount of $10,223,000 plus unpaid dividends to the date of redemption of $124,948. The remaining Series F Preferred Stock may be redeemed at any time at the option of the Company, subject to the approval of the Company’s primary federal banking regulator. All redemptions must be in amounts equal to at least the lesser of 25% of the number of originally issued shares, or 100% of the then-outstanding shares.

101

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11. Federal and State Income Taxes

Federal and state income tax expense was comprised of the following components for the years ended December 31, 2012, 2011, and 2010:

	2012		2011		2010

Current	$	1,850,234	$	195,135	$	1,193,245
Deferred		2,684,367		3,673,064		1,256,004
	$	4,534,601	$	3,868,199	$	2,449,249

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended December 31, 2012, 2011, and 2010:

	Years Ended December 31,
	2012						2011						2010
	Amount			% of Pretax Income			Amount			% of Pretax Income			Amount			% of Pretax Income

Computed "expected" tax expense	$	6,174,295			35.0	%	$	4,899,324			35.0	%	$	3,239,941			35.0	%
Effect of graduated tax rates interest		(20,775	)		(0.1	)		(139,981	)		(1.0	)		(92,570	)		(1.0	)
Tax exempt income, net		(1,243,660	)		(7.0	)		(692,742	)		(4.9	)		(556,682	)		(6.0	)
Bank-owned life insurance		(544,292	)		(3.1	)		(490,491	)		(3.5	)		(451,457	)		(4.9	)
State income taxes, net of federal benefit, current year		730,865			4.1			533,250			3.8			330,917			3.6
Change in unrecognized tax benefits		(149,183	)		(0.8	)		2,074			-			71,671			0.8
Noncontrolling interests		(166,081	)		(0.9	)		(148,995	)		(1.1	)		(75,156	)		(0.8	)
Other		(246,568	)		(1.5	)		(94,240	)		(0.7	)		(17,415	)		(0.2	)
	$	4,534,601			25.7	%	$	3,868,199			27.6	%	$	2,449,249			26.5	%

Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended December 31, 2012 and 2011:

	2012			2011

Balance, beginning	$	1,148,549		$	1,034,025
Impact of tax positions taken during current year		202,341			245,441
Gross increase related to tax positions of prior years		21,781			89,310
Reduction as a result of a lapse of the applicable statute of limitations		(378,593	)		(220,227	)
Balance, ending	$	994,078		$	1,148,549

Included in the unrecognized tax benefits liability at December 31, 2012 are potential benefits of approximately $692,000 that, if recognized, would affect the effective tax rate.

102

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11. Federal and State Income Taxes (Continued)

The liability for unrecognized tax benefits includes accrued interest for tax positions, which either do not meet the more-likely-than-not recognition threshold or where the tax benefit is measured at an amount less than the tax benefit claimed or expected to be claimed on an income tax return. At December 31, 2012 and 2011, accrued interest on uncertain tax positions was approximately $302,000 and $343,500, respectively. Estimated interest related to the underpayment of income taxes is classified as a component of “income taxes” in the statements of income.

The Company’s federal income tax returns are open and subject to examination from the 2009 tax return year and forward. Various state franchise and income tax returns are generally open from the 2008 and later tax return years based on individual state statute of limitations.

The net deferred tax assets (liabilities) included with other assets on the consolidated balance sheets consisted of the following as of December 31, 2012 and 2011:

	2012			2011
Deferred tax assets:
Alternative minimum tax credits	$	3,075,372		$	1,955,270
New markets tax credits		1,000,000			500,000
Compensation		5,756,439			4,934,312
Loan/lease losses		5,927,442			5,130,551
Net operating loss carryforwards, federal and state		876,769			6,342,415
Deferred loan origination fees, net		285,794			240,063
Other		379,523			285,590
		17,301,339			19,388,201
Deferred tax liabilities:
Net unrealized gains on securities available for sale		2,905,784			2,940,792
Premises and equipment		1,532,602			1,580,272
Equipment financing leases		20,516,189			19,897,412
Investment accretion		43,740			43,648
Other		444,302			417,996
		25,442,617			24,880,120
Net deferred tax asset (liability)	$	(8,141,278	)	$	(5,491,919	)

The change in deferred income taxes was reflected in the consolidated financial statements as follows for the years ended December 31, 2012, 2011, and 2010:

	2012			2011		2010

Provision for income taxes	$	2,684,367		$	3,673,064	$	1,256,004
Statement of stockholders' equity- accumulated other comprehensive income,unrealized gains (losses) on securities available for sale, net		(35,008	)		2,510,006		348,376
	$	2,649,359		$	6,183,070	$	1,604,380

103

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 12. Employee Benefit Plans

The Company has a profit sharing plan which includes a provision designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions. All employees are eligible to participate in the plan. The Company matches 100% of the first 3% of employee contributions, and 50% of the next 3% of employee contributions, up to a maximum amount of 4.5% of an employee's compensation. Additionally, at its discretion, the Company may make additional contributions to the plan which are allocated to the accounts of participants in the plan based on relative compensation. Company contributions for the years ended December 31, 2012, 2011, and 2010 were as follows:

	2012		2011		2010

Matching contribution	$	1,014,418	$	929,869	$	875,138
Discretionary contribution		188,700		150,000		99,400
	$	1,203,118	$	1,079,869	$	974,538

The Company has entered into nonqualified supplemental executive retirement plans (“SERPs”) with certain executive officers. The SERPs allow certain executives to accumulate retirement benefits beyond those provided by the qualified plans. During the years ended December 31, 2012, 2011, and 2010, the Company expensed $289,437, $190,105, and $157,261, respectively, related to these plans. As of December 31, 2012 and 2011, the liability related to the SERPs, included in other liabilities, was $2,802,497 and $2,630,060, respectively. Payments in the amount of $117,000 were made in both 2012 and 2011.

The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements, the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company’s matching contribution varies by officer and is a maximum of between $10,000 and $20,000 annually. Interest on the deferred amounts is earned at The Wall Street Journal’s prime rate subject to a minimum of 6% and a maximum of 12% with such limits differing by officer. The Company has also entered into deferred compensation agreements with certain management officers. Under the provisions of the agreements the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company’s matching contribution differs by officer and is a maximum between 4% and 10% of officer’s compensation. Interest on the deferred amounts is earned at The Wall Street Journal’s prime rate plus one percentage point, and has a minimum of 4% and shall not exceed 8%. Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. As of December 31, 2012 and 2011, the liability related to the agreements totaled $5,151,630 and $4,202,733, respectively.

Changes in the deferred compensation agreements, included in other liabilities, are as follows for the years ended December 31, 2012, 2011 and 2010:

	2012			2011			2010

Balance, beginning	$	4,202,733		$	3,469,525		$	2,734,989
Company expense		555,407			414,478			369,950
Employee deferrals		405,788			381,616			371,374
Cash payments made		(12,298	)		(62,886	)		(6,788	)
Balance, ending	$	5,151,630		$	4,202,733		$	3,469,525

104

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13. Stock-Based Compensation

Stock-based compensation expense was reflected in the consolidated financial statements as follows for the years ended December 31, 2012, 2011, and 2010.

	2012		2011		2010

Stock option and incentive plans	$	798,929	$	587,900	$	475,835
Stock purchase plan		50,831		58,519		57,436
Stock appreciation rights		-		49,988		(45,159	)
	$	849,760	$	696,407	$	488,112

Stock option and incentive plans:

The Company’s Board of Directors adopted in January 2008, and the stockholders approved in May 2008, the QCR Holdings, Inc. 2008 Equity Incentive Plan (“2008 Equity Incentive Plan”). Up to 250,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock options and restricted stock granted under the 2008 Equity Incentive Plan. As of December 31, 2012, there were 14,922 remaining options available for grant under this plan. The Company’s Board of Directors adopted in February 2010, and the stockholders approved in May 2010, the QCR Holdings, Inc. 2010 Equity Incentive Plan (“2010 Equity Incentive Plan”). Up to 350,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of the nonqualified stock options and restricted stock granted under the 2010 Equity Incentive Plan. As of December 31, 2012, there were 57,872 remaining options available for grant under this plan. The 2008 Equity Incentive Plan and the 2010 Equity Incentive Plan (collectively, “the stock option plans”) are administered by the Compensation Committee of the Board of Directors (the “Committee”).

The number and exercise price of options granted under the stock option plans is determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for incentive stock options. All options have a 10-year life and will vest and become exercisable from 1-to-5 years after the date of the grant. Only nonqualified stock options have been issued to date.

In the case of nonqualified stock options, the stock option plans provide for the granting of "Tax Benefit Rights" to certain participants at the same time as these participants are awarded nonqualified options. Each Tax Benefit Right entitles a participant to a cash payment, which is expensed by the Company, equal to the excess of the fair market value of a share of common stock on the exercise date over the exercise price of the related option multiplied by the difference between the rate of tax on ordinary income over the rate of tax on capital gains (federal and state).

105

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13. Stock-Based Compensation (Continued)

A summary of the stock option plans as of December 31, 2012, 2011, and 2010 and changes during the years then ended is presented below:

	December 31,
	2012					2011					2010
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price

Outstanding, beginning		535,130		$	13.85		510,612		$	14.04		474,416		$	14.44
Granted		102,722			9.30		73,250			8.23		67,760			9.00
Exercised		(17,876	)		9.68		(36,459	)		8.30		(5,754	)		10.24
Forfeited		(11,124	)		10.57		(12,273	)		8.28		(25,810	)		9.68
Outstanding, ending		608,852			13.27		535,130			13.85		510,612			14.04

Exercisable, ending		391,378					355,398					321,336


Weighted average fair value per option of options granted during the period	$	2.79				$	2.74				$	2.89

A further summary of options outstanding as of December 31, 2012 is presented below:

	Options Outstanding
			Weighted				Options Exercisable
Range of Exercise Prices	Number Outstanding		Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price

$7.72 to $8.93		65,530		7.90	$	8.10		16,730	$	8.22
$9.00 to $11.64		239,692		7.75		9.21		78,098		9.19
$13.25 to $16.85		157,205		4.68		15.94		150,125		15.96
$17.00 to $18.60		49,840		2.73		18.06		49,840		18.06
$18.67 to $20.90		67,885		2.16		19.48		67,885		19.48
$21.00 to $22.00		28,700		2.16		21.28		28,700		21.28
		608,852						391,378

106

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13. Stock-Based Compensation (Continued)

Stock purchase plan:

The Company’s Board of Directors and its stockholders adopted in October 2002 the QCR Holdings, Inc. Employee Stock Purchase Plan (the “Purchase Plan”). On May 2, 2012, the Company's stockholders approved a complete amendment and restatement of the Purchase Plan. As of January 1, 2012, there were 32,266 shares of common stock available for issuance under the Purchase Plan. For each six-month offering period, the Board of Directors will determine how many of the total number of available shares will be offered. The purchase price is the lesser of 90% of the fair market value at the date of the grant or the investment date. The investment date, as established by the Board of Directors, is the date common stock is purchased after the end of each calendar quarter during an offering period. The maximum dollar amount any one participant can elect to contribute in an offering period is $7,500. Additionally, the maximum percentage that any one participant can elect to contribute is 8% of his or her compensation for the years ended December 31, 2012, 2011, and 2010. Information for the stock purchase plan for the years ended December 31, 2012, 2011, and 2010 is presented below:

	2012		2011		2010

Shares granted		29,671		34,860		31,718
Shares purchased		31,554		36,174		28,907
Weighted average fair value per share granted	$	1.71	$	1.68	$	1.81

Stock appreciation rights:

The 1997 Stock Incentive Plan and 2004 Stock Incentive Plan allowed the granting of stock appreciation rights (“SARs”). SARs are rights entitling the grantee to receive cash equal to the fair market value of the appreciation in the market value of a stated number of shares from the date of grant. Like options, the number and exercise price of SARs granted is determined by the Committee. The SARs vested 20% per year, and the term of the SARs was not to exceed 10 years from the date of the grant. As of December 31, 2011, all SARs have expired or been paid out; therefore, there was no further liability related to the SARs as of December 31, 2012 and 2011. Previously, there were 36,350 SARs outstanding and exercisable as of December 31, 2010. Payments made on SARs were $0, $67,326, and $35,040 during the years ended December 31, 2012, 2011 and 2010, respectively.

107

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 14. Regulatory Capital Requirements and Restrictions on Dividends

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of December 31, 2012 and 2011, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of December 31, 2012 and 2011 are also presented in the following table (dollars in thousands). As of December 31, 2012 and 2011, the subsidiary banks met the requirements to be “well capitalized”.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2012:
Company:
Total risk-based capital	$	188,841		12.71	%	$	118,878	>	8.0	%		N/A		N/A
Tier 1 risk-based capital		167,475		11.27	%		59,439	>	4.0	%		N/A		N/A
Tier 1 leverage		167,475		8.13	%		82,357	>	4.0	%		N/A		N/A
Quad City Bank & Trust:
Total risk-based capital	$	98,789		12.12	%	$	65,218	>	8.0	%	$	81,522		10.00	%
Tier 1 risk-based capital		90,533		11.11	%		32,609	>	4.0			48,913	>	6.00	%
Tier 1 leverage		90,533		7.74	%		46,784	>	4.0			58,480	>	5.00	%
Cedar Rapids Bank & Trust:
Total risk-based capital	$	55,736		12.87	%	$	34,652	>	8.0	%	$	43,315	>	10.00	%
Tier 1 risk-based capital		50,297		11.61	%		17,326	>	4.0			25,989	>	6.00	%
Tier 1 leverage		50,297		8.49	%		23,685	>	4.0			29,606	>	5.00	%
Rockford Bank & Trust:
Total risk-based capital	$	36,894		15.33	%	$	19,255	>	8.0	%	$	24,609	>	10.00	%
Tier 1 risk-based capital		33,870		14.07	%		9,628	>	4.0			14,441		6.00	%
Tier 1 leverage		33,870		11.13	%		12,177	>	4.0			15,221	>	5.00	%

108

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 14. Regulatory Capital Requirements and Restrictions on Dividends (Continued)

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2011:
Company:
Total risk-based capital	$	191,419		13.84	%	$	110,686	>	8.0	%		N/A		N/A
Tier 1 risk-based capital		169,360		12.24	%		55,343	>	4.0	%		N/A		N/A
Tier 1 leverage		169,360		8.70	%		77,857	>	4.0	%		N/A		N/A
Quad City Bank & Trust:
Total risk-based capital	$	98,382		13.03	%	$	60,391	>	8.0	%	$	75,488	>	10.00	%
Tier 1 risk-based capital		90,336		11.97	%		30,195	>	4.0			45,293	>	6.00	%
Tier 1 leverage		90,336		8.21	%		44,009	>	4.0			55,012	>	5.00	%
Cedar Rapids Bank & Trust:
Total risk-based capital	$	56,312		14.44	%	$	31,198	>	8.0	%	$	38,998	>	10.00	%
Tier 1 risk-based capital		51,415		13.18	%		15,599	>	4.0			23,399	>	6.00	%
Tier 1 leverage		51,415		9.02	%		22,807	>	4.0			28,509	>	5.00	%
Rockford Bank & Trust:
Total risk-based capital	$	36,259		15.27	%	$	19,001	>	8.0	%	$	23,752	>	10.00	%
Tier 1 risk-based capital		33,277		14.01	%		9,501	>	4.0			14,251	>	6.00	%
Tier 1 leverage		33,277		11.31	%		11,770	>	4.0			14,713	>	5.00	%

The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.

The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the subsidiary banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice.

The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debentures in four private placements. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. Additionally, the Company has issued shares of non-cumulative perpetual preferred stock and under the terms of this preferred stock, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances existed at December 31, 2012 or 2011.

109

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 15. Earnings Per Common Share

The following information was used in the computation of basic and diluted earnings per common share for the years ended December 31, 2012, 2011, and 2010:

	2012		2011			2010

Net income	$	13,106,240	$	10,129,869		$	6,807,726
Less: Net income attributable to noncontrolling interests		488,473		438,221			221,047
Net income attributable to QCR Holdings, Inc.	$	12,617,767	$	9,691,648		$	6,586,679

Less: Preferred stock dividends and discount accretion		3,496,085		5,283,885	*		4,128,104
Net income attributable to QCR Holdings, Inc. common stockholders	$	9,121,682	$	4,407,763		$	2,458,575

Earnings per common share attributable to QCR Holdings, Inc. common stockholders
Basic	$	1.88	$	0.93		$	0.54
Diluted	$	1.85	$	0.92		$	0.53

Weighted average common shares outstanding		4,844,776		4,724,781			4,593,096

Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan **		74,783		64,245			25,146
Weighted average common and common equivalent shares outstanding		4,919,559		4,789,026			4,618,242

*For the year ended December 31, 2011, includes approximately $1.2 million of accelerated accretion of discount on the redemption of Series D Preferred Stock during the third quarter of 2011. See Note 10 for additional information.

**Excludes anti-dilutive shares of 158,375 and 546,521 at December 31, 2012 and 2011, respectively.

Note 16. Commitments and Contingencies

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary banks upon extension of credit, is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the subsidiary banks would be required to fund the commitments. The maximum potential amount of future payments the subsidiary banks could be required to make is represented by the contractual amount. If the commitment is funded, the subsidiary banks would be entitled to seek recovery from the customer. At December 31, 2012 and 2011, no amounts had been recorded as liabilities for the subsidiary banks’ potential obligations under these guarantees.

110

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 16. Commitments and Contingencies (Continued)

As of December 31, 2012 and 2011, commitments to extend credit aggregated $430,058,000 and $393,559,000, respectively. As of December 31, 2012 and 2011, standby letters of credit aggregated $15,179,000 and $8,250,000, respectively. Management does not expect that all of these commitments will be funded.

The Company has also executed contracts for the sale of mortgage loans in the secondary market in the amount of $4,577,233 and $3,832,760 as of December 31, 2012 and 2011, respectively. These amounts are included in loans held for sale at the respective balance sheet dates.

Residential mortgage loans sold to investors in the secondary market are sold with varying recourse provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by the seller in situations such as, breach of representation, warranty, or covenant, untimely document delivery, false or misleading statements, failure to obtain certain certificates or insurance, unmarketability, etc. Certain loan sales agreements contain repurchase requirements based on payment-related defects that are defined in terms of the number of days/months since the purchase, the sequence number of the payment, and/or the number of days of payment delinquency. Based on the specific terms stated in the agreements of investors purchasing residential mortgage loans from the Company’s subsidiary banks, the Company had $38,846,068 and $51,129,561 of sold residential mortgage loans with recourse provisions still in effect at December 31, 2012 and 2011, 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, 2012, 2011, and 2010. In the opinion of management, the risk of recourse and the subsequent requirement of loan repurchase to the subsidiary banks is not significant, and accordingly no liabilities have been established related to such.

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 $30,020,230 and $22,455,000 as of December 31, 2012 and 2011, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks. In addition, some of the Company’s cash maintained at upstream correspondent banks is in non-interest bearing deposit accounts. In accordance with the FDIC’s Transaction Account Guarantee (“TAG”) Program, cash maintained in non-interest bearing deposit accounts was fully insured through December 31, 2012. As scheduled, the unlimited coverage for noninterest-bearing transaction accounts provided under the Dodd-Frank Act expired on December 31, 2012. Effective January 1, 2013, deposits held in noninterest-bearing transaction accounts are now aggregated with interest-bearing deposits the owner holds, and the combined total is insured up to $250,000.

In an arrangement with Goldman Sachs and Company (“Goldman Sachs”), certain subsidiary banks offer a cash management program for select customers. 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 administered by Goldman Sachs. At December 31, 2012 and 2011, the Company had $66,783,049 and $57,332,572, respectively of customer funds invested in this cash management program.

111

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 17. Quarterly Results of Operations (Unaudited)

	Year Ended December 31, 2012
	March 2012		June 2012		September 2012		December 2012

Total interest income	$	19,373,804	$	19,534,528	$	19,487,525	$	18,980,016
Total interest expense		5,170,351		5,019,035		4,858,007		4,679,220
Net interest income		14,203,453		14,515,493		14,629,518		14,300,796
Provision for loan/lease losses		780,446		1,048,469		1,496,194		1,045,658
Noninterest income		3,956,878		4,067,509		4,117,182		4,479,726
Noninterest expense		12,738,080		13,109,083		13,031,517		13,380,267
Income before taxes		4,641,805		4,425,450		4,218,989		4,354,597
Federal and state income tax expense		1,238,956		1,152,071		1,034,479		1,109,095
Net income	$	3,402,849	$	3,273,379	$	3,184,510	$	3,245,502
Less net income (loss) attributable to noncontrolling interests		166,031		201,223		127,177		(5,958	)
Net income attributable to QCR Holdings, Inc.	$	3,236,818	$	3,072,156	$	3,057,333	$	3,251,460

Earnings per common share:
Basic	$	0.48	$	0.44	$	0.45	$	0.50
Diluted	$	0.48	$	0.44	$	0.44	$	0.49

	Year Ended December 31, 2011
		March 2011		June 2011		September 2011			December 2011

Total interest income	$	18,651,232	$	19,862,076	$	19,569,430		$	19,640,510
Total interest expense		6,442,430		5,911,021		5,740,726			5,484,215
Net interest income		12,208,802		13,951,055		13,828,704			14,156,295
Provision for loan/lease losses		1,067,664		1,672,221		2,456,965			1,419,164
Noninterest income		5,057,124		4,173,381		4,335,307			3,896,066
Noninterest expense		13,012,271		12,555,547		12,773,149			12,651,685
Income before taxes		3,185,991		3,896,668		2,933,897			3,981,512
Federal and state income tax expense		954,507		1,123,454		667,296			1,122,942
Net income	$	2,231,484	$	2,773,214	$	2,266,601		$	2,858,570
Less net income attributable to noncontrolling interests		106,524		98,245		103,446			130,006
Net income attributable to QCR Holdings, Inc.	$	2,124,960	$	2,674,969	$	2,163,155		$	2,728,564

Earnings per common share:
Basic	$	0.23	$	0.35	$	(0.01	)	$	0.36
Diluted	$	0.23	$	0.34	$	(0.01	)	$	0.35

112

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 18. Parent Company Only Financial Statements

The following is condensed financial information of QCR Holdings, Inc. (parent company only):

Condensed Balance Sheets

December 31, 2012 and 2011

Assets	2012			2011

Cash and due from banks	$	1,072,434		$	3,542,484
Interest-bearing deposits at financial institutions		185,113			183,176
Securities available for sale, at fair value		1,406,876			1,252,658
Investment in bank subsidiaries		182,465,733			181,045,066
Investment in nonbank subsidiaries		1,202,791			2,510,382
Premises and equipment, net		3,318,757			-
Other assets		7,720,933			5,196,321
Total assets	$	197,372,637		$	193,730,087

Liabilities and Stockholders' Equity
Liabilities:
Other borrowings	$	10,077,769		$	6,231,663
Junior subordinated debentures		36,085,000			36,085,000
Other liabilities		10,776,047			9,032,260
Total liabilities		56,938,816			51,348,923

Stockholders' Equity:
Preferred stock		54,867			65,090
Common stock		5,039,448			4,879,435
Additional paid-in capital		78,912,791			89,702,533
Retained earnings		53,326,542			44,585,902
Accumulated other comprehensive income		4,706,683			4,754,714
Treasury stock		(1,606,510	)		(1,606,510	)
Total stockholders' equity		140,433,821			142,381,164
Total liabilities and stockholders' equity	$	197,372,637		$	193,730,087

113

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 18. Parent Company Only Financial Statements (Continued)

Condensed Statements of Income

Years Ended December 31, 2012, 2011, and 2010

	2012		2011		2010

Total interest income	$	57,136	$	62,521	$	43,157
Equity in net income of bank subsidiaries		17,206,086		14,449,843		11,223,115
Equity in net income of nonbank subsidiaries		168,934		174,058		199,285
Other *		657,733		129,773		46,030
Total income		18,089,889		14,816,195		11,511,587

Interest expense		1,408,948		1,562,323		2,296,446
Salaries and employee benefits		4,717,609		4,078,474		3,153,062
Professional fees		988,306		1,103,910		1,192,225
Other-than-temporary impairment losses on securities		62,400		118,847		-
Other		760,618		783,460		743,859
Total expenses		7,937,881		7,647,014		7,385,592

Income before income tax benefit		10,152,008		7,169,181		4,125,995

Income tax benefit		2,465,759		2,522,467		2,460,684
Net income	$	12,617,767	$	9,691,648	$	6,586,679

*For the year ended December 31, 2012, includes pre-tax gain of approximately $580 thousand on the sale of a 2.25% equity interest in a company providing data processing services to merchant credit card acquiring businesses.

114

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 18. Parent Company Only Financial Statements (Continued)

Condensed Statements of Cash Flows

Years Ended December 31, 2012, 2011, and 2010

	2012			2011			2010
Cash Flows from Operating Activities:
Net income	$	12,617,767		$	9,691,648		$	6,586,679
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions in excess of (less than) earnings of:
Bank subsidiaries		(3,706,086	)		(4,449,843	)		(4,573,115	)
Nonbank subsidiaries		(132,911	)		133,951			(141,234	)
Depreciation		-			54			590
Other-than-temporary impairment losses on securities		62,400			118,847			-
Stock-based compensation expense		849,760			646,419			533,271
Increase in other assets		(437,827	)		(65,205	)		(2,935,064	)
Increase in other liabilities		1,930,733			658,610			926,645
Net cash provided by operating activities		11,183,836			6,734,481			397,772

Cash Flows from Investing Activities:
Net increase in interest-bearing deposits at financial instituions		(1,937	)		(1,227	)		(940	)
Purchase of securities available for sale		(53,501	)		(58,149	)		(27,980	)
Capital infusion, bank subsidiaries		-			(1,693,679	)		(2,700,000	)
Increase in cash from dissolution of VPHC		99,645			-			-
Net cash provided by (used in) investing activities		44,207			(1,753,055	)		(2,728,920	)
Cash Flows from Financing Activities:
Net increase (decrease) in other borrowings		2,008,099			1,107,630			(2,491,727	)
Proceeds from issuance of Series A Subordinated Notes and detachable warrants to purchase 54,000 shares of common stock		-			-			2,700,000
Payment of cash dividends on common and preferred stock		(4,088,949	)		(3,712,493	)		(4,052,089	)
Redemption of 10,223 shares of Series F Noncumulative Perpetual Preferred Stock, net		(10,223,000	)		-			-
Proceeds from issuance of 40,090 shares of Series F Noncumulative Perpetual Preferred Stock, net		-			39,996,922			-
Redemption of Series D Cumulative Perpetual Preferred Stock, net		-			(38,237,000	)		-
Repurchase of 521,888 shares of common stock warrants issued in conjunction with Series D Cumulative Perpetual Preferred Stock		-			(1,100,000	)		-
Proceeds from issuance of Series E Noncumulative Convertible Perpetual Preferred Stock, net		-			-			3,187,233
Proceeds from issuance of common stock, net		994,174			477,339			261,547
Purchase of noncontrolling interests		(2,388,417	)		-			(149,032	)
Net cash used in financing activities		(13,698,093	)		(1,467,602	)		(544,068	)

Net increase (decrease) in cash and due from banks		(2,470,050	)		3,513,824			(2,875,216	)

Cash and due from banks:
Beginning		3,542,484			28,660			2,903,876
Ending	$	1,072,434		$	3,542,484		$	28,660

Supplemental Schedule of Noncash Investing Activities:
Dissolution of VPHC (see Note 1)

Assets acquired:
Cash	$	99,645		$	-		$	-
Premises		3,318,757			-			-
Other assets		12,473			-			-
Total assets		3,430,875			-			-
Liabilities assumed:
Other borrowings		1,838,007			-			-
Other liabilities		14,461			-			-
Total liabilities		1,852,468			-			-
Net		1,578,407			-			-

115

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 19. Fair Value

Accounting guidance on fair value measurements uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement

Assets measured at fair value on a recurring basis comprise the following at December 31, 2012 and 2011:

			Fair Value Measurements at Reporting Date Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

December 31, 2012:
Securities available for sale:
U.S. govt. sponsored agency securities	$	338,609,371	$	-	$	338,609,371	$	-
Residential mortgage-backed securities		163,601,103		-		163,601,103		-
Municipal securities		26,185,736		-		26,185,736		-
Trust preferred securities		139,400		-		139,400		-
Other securities		1,624,376		234,453		1,389,923		-
	$	530,159,986	$	234,453	$	529,925,533	$	-

December 31, 2011:
Securities available for sale:
U.S. govt. sponsored agency securities	$	428,955,220	$	-	$	428,955,220	$	-
Residential mortgage-backed securities		108,853,749		-		108,853,749		-
Municipal securities		25,689,364		-		25,689,364		-
Trust preferred securities		80,800		-		80,800		-
Other securities		1,450,158		191,506		1,258,652		-
	$	565,029,291	$	191,506	$	564,837,785	$	-

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy during the years ended December 31, 2012 or 2011.

A small portion of the securities available for sale portfolio consists of common stocks issued by various unrelated bank holding companies and mutual funds. The fair values used by the Company are obtained from an independent pricing service, which represent quoted market prices for the identical securities (Level 1 inputs).

116

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 19. Fair Value (Continued)

The remainder of the securities available for sale portfolio consist of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Assets measured at fair value on a non-recurring basis comprise the following at December 31, 2012 and 2011:

			Fair Value Measurements at Reporting Date Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012:
Impaired loans/leases	$	18,054,234	$	-	$	-	$	18,054,234
Other real estate owned		4,270,901		-		-		4,270,901
	$	22,325,135	$	-	$	-	$	22,325,135

December 31, 2011:
Impaired loans/leases	$	19,603,360	$	-	$	-	$	19,603,360
Other real estate owned		9,056,619		-		-		9,056,619
	$	28,659,979	$	-	$	-	$	28,659,979

Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value and are classified as a Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.

Other real estate owned in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as a Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the property.

For impaired loans/leases and other real estate owned, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.

There have been no changes in valuation techniques used for any assets measured at fair value during the years ended December 31, 2012 or 2011.

117

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 19. Fair Value (Continued)

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company’s consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

		As of December 31, 2012				As of December 31, 2011
	Fair Value Heirarchy Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value

Cash and due from banks	Level 1	$	61,568,446	$	61,568,446	$	53,136,710	$	53,136,710
Federal funds sold	Level 2		26,560,000		26,560,000		20,785,000		20,785,000
Interest-bearing deposits at financial institutions	Level 2		22,359,490		22,359,490		26,750,602		26,750,602
Investment securities:
Held to maturity	Level 3		72,079,385		73,005,706		200,000		200,000
Available for sale	See Previous Table		530,159,986		530,159,986		565,029,291		565,029,291
Loans/leases receivable, net	Level 3		16,716,883		18,054,234		18,151,259		19,603,360
Loans/leases receivable, net	Level 2		1,250,745,552		1,262,090,766		1,163,804,976		1,183,213,640
Deposits:
Nonmaturity deposits	Level 2		1,039,572,326		1,039,572,326		867,972,148		867,972,148
Time deposits	Level 2		334,541,774		337,343,000		337,485,640		341,224,852
Short-term borrowings	Level 2		171,082,961		171,082,961		213,536,450		213,536,450
Federal Home Loan Bank advances	Level 2		202,350,000		220,815,000		204,750,000		223,678,000
Other borrowings	Level 2		138,239,762		154,101,000		136,231,663		151,813,000
Junior subordinated debentures	Level 2		36,085,000		18,786,000		36,085,000		18,444,000

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include: cash and due from banks, federal funds sold, interest-bearing deposits at financial institutions, non-maturity deposits, and short-term borrowings. The Company used the following methods and assumptions in estimating the fair value of the following instruments:

Securities held to maturity: The fair values are estimated using pricing models that consider certain observable market data, however, as most of the securities have limited or no trading activity and are not rated, the fair value is partially dependent upon unobservable inputs.

Loans/leases receivable: The fair values for all types of loans/leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans/leases with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market.

Deposits: The fair values disclosed for demand deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits.

FHLB advances and junior subordinated debentures: The fair value of these instruments is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

118

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 19. Fair Value (Continued)

Other borrowings: The fair value for the wholesale repurchase agreements and fixed rate other borrowings is estimated using rates currently available for debt with similar terms and remaining maturities. The fair value for variable rate other borrowings is equal to its carrying value.

Commitments to extend credit: The fair value of these commitments is not material.

Note 20. Business Segment Information

Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of QCR Holdings, Inc. have been defined by the structure of the Company’s internal organization, focusing on the financial information that the Company’s operating decision-makers routinely use to make decisions about operating matters.

The Company’s primary segment, Commercial Banking, is geographically divided by markets into the secondary segments which are the three subsidiary banks wholly-owned by the Company: QCBT, CRBT, and RB&T. Each of these secondary segments offer similar products and services, but are managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

The Company’s Wealth Management segment represents trust and asset management and investment management and advisory services offered at the Company’s three subsidiary banks in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts, custodial services, and investments managed. No assets of the subsidiary banks have been allocated to the Wealth Management segment.

The Company’s All Other segment includes the operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds. This segment includes the corporate operations of the parent and VPHC, which was dissolved and liquidated effective December 31, 2012.

119

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 20. Business Segment Information (Continued)

Selected financial information on the Company's business segments, with all intercompany accounts and transactions eliminated, is presented as follows for the years ended December 31, 2012, 2011, and 2010:

	Commercial Banking
	Quad City Bank & Trust		Cedar Rapids Bank & Trust		Rockford Bank & Trust		Wealth Management		All other			Intercompany Eliminations			Consolidated Total

Twelve Months Ended December 31, 2012
Total revenue	$	47,984,123	$	26,697,921	$	12,955,951	$	5,993,437	$	745,682		$	(379,946	)	$	93,997,168
Net interest income		33,770,092		15,717,038		9,630,481		-		(1,468,351	)		-			57,649,260
Net income attributable to QCR Holdings, Inc.		9,915,267		5,786,446		857,610		646,762		(4,577,566	)		(10,752	)		12,617,767
Total assets		1,177,294,502		625,713,218		313,824,607		-		14,906,904			(38,008,739	)		2,093,730,492
Provision for loan/lease losses		1,527,767		1,275,000		1,568,000		-		-			-			4,370,767
Goodwill		3,222,688		-		-		-		-			-			3,222,688

Twelve Months Ended December 31, 2011
Total revenue	$	47,952,867	$	28,406,789	$	13,518,534	$	5,477,913	$	228,900		$	(399,877	)	$	95,185,126
Net interest income		30,831,946		15,856,555		9,085,293		-		(1,628,938	)		-			54,144,856
Net income attributable to QCR Holdings, Inc.		8,176,665		5,154,769		329,251		789,159		(4,733,869	)		(24,327	)		9,691,648
Total assets		1,113,435,783		560,076,246		294,382,640		-		14,826,484			(16,111,099	)		1,966,610,054
Provision for loan/lease losses		2,735,014		1,655,000		2,226,000		-		-			-			6,616,014
Goodwill		3,222,688		-		-		-		-			-			3,222,688

Twelve Months Ended December 31, 2010
Total revenue	$	47,708,698	$	29,221,682	$	13,718,493	$	5,103,747	$	147,577		$	(396,943	)	$	95,503,254
Net interest income		28,664,024		15,568,717		8,041,016		-		(2,409,989	)		-			49,863,768
Net income attributable to QCR Holdings, Inc.		5,767,982		3,565,637		729,714		1,159,782		(4,581,870	)		(54,566	)		6,586,679
Total assets		1,025,699,414		546,789,724		271,378,714		-		11,622,441			(18,855,077	)		1,836,635,216
Provision for loan/lease losses		2,457,618		4,200,000		806,000		-		-			-			7,463,618
Goodwill		3,222,688		-		-		-		-			-			3,222,688

Note 21. Acquisition of 20% Noncontrolling Interest in m2 Lease Funds

On August 27, 2012, the Company’s largest subsidiary bank, QCBT, entered into an amendment to the operating agreement of m2 and purchased the remaining 20% noncontrolling interest in m2 for $4,501,442. The purchase price and related acquisition costs exceeded the book value by $2,133,417. This excess is reflected as a reduction in additional paid in capital. The acquisition is structured in two payments with the initial payment of $1,653,755 made on September 11, 2012 and the final payment of $3,307,509 due in September 2015. QCBT calculated the present value of this future payment using a discount rate of 5% and recorded a resulting liability of $2,847,687. QCBT is accreting the discount of $459,822 using the effective yield method over the three year period to the final payment date. During the year ended December 31, 2012, accretion totaled $47,758, and, as a result, the liability related to the final payment due totals $2,895,445 at December 31, 2012.

In conjunction with the purchase agreement, the Company also entered into an agreement with the Chief Executive Officer and former 20% owner of m2, whereby he will be provided additional consideration equal to 20% of the earnings of m2 for the period from September 2012 through the earlier of August 2015 or his separation from service. The payment under this arrangement will also be due in September 2015. Because the payment is contingent upon future service, QCBT is accruing the liability and related compensation expense over the service period. As of December 31, 2012, $195,715 has been accrued and expensed related to this obligation.

Note 22. Sale of Credit Card Loan Receivables and Credit Card Issuing Operations for QCBT

On January 31, 2013, QCBT entered into an agreement to sell its credit card loan receivables totaling approximately $10,180,000. This transaction closed on February 15, 2013 and resulted in a pre-tax gain, net of expenses, of approximately $435,000. As a part of the agreement, QCBT also agreed to sell its credit card issuing operations to the purchaser. The gain to be realized on this transaction is wholly dependent upon successful re-contracting of QCBT’s agent bank customer base with the purchaser. The re-contracting period expires March 15, 2013 and the maximum pre-tax gain expected to be realized is approximately $440,000.

120

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 23. Acquisition of Community National Bancorporation and Community National Bank

On February 13, 2013, the Company signed a definitive agreement to acquire Community National Bancorporation (“Community National”) and Community National Bank (“CNB”). Community National is a bank holding company providing bank and bank related services through its wholly-owned bank subsidiary, CNB. CNB is a commercial bank headquartered in Waterloo, Iowa and serves Waterloo, Cedar Falls, and Mason City, Iowa and Austin, Minnesota. As a de novo bank, CNB commenced its operations in 1997. As of December 31, 2012, Community National had total assets of $287.7 million, net loans receivable of $205.2 million, deposits of $247.8 million, and stockholders’ equity of $19.3 million.

The Company will acquire 100% of Community National’s outstanding common stock for aggregate consideration consisting of 70% Company common stock and 30% cash. Subject to certain adjustments, each share of Community National common stock will receive 0.40 shares of the Company’s common stock and cash consideration of $3.00. Based on the closing price of the Company’s common stock on February 13, 2013, the implied valuation of the acquisition is approximately $20.1 million. The transaction is subject to approval by banking regulators, approval by Community National shareholders, and certain closing conditions.

121

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of December 31, 2012. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting includes controls and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. Management’s assessment is based on the criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the Company maintained effective internal control over financial reporting as of December 31, 2012. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2012.

McGladrey LLP, the Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2012, which is included on the following pages of this Form 10-K.

Changes in Internal Control Over Financial Reporting. During 2005, the Company underwent a comprehensive effort to ensure compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002. Continuing enhancements to the Company’s control environment were made during 2012 as part of the Company’s ongoing efforts to improve internal control over financial reporting. There have been no significant changes to the Company’s internal control over financial reporting during the period covered by this report that have materially effected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

122

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

QCR Holdings, Inc.

We have audited QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. QCR Holdings, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, QCR Holdings, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

123

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of QCR Holdings, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2012 and our report dated March 11, 2013 expressed an unqualified opinion.

Davenport, Iowa

March 11, 2013

124

Item 9B. Other Information

None.

Part III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is set forth under the captions “Proposal 1: Election of Directors,” “Corporate Governance and the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2013 Proxy Statement and is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this item is set forth under the captions “Executive Compensation” and “Director Compensation” in the Company’s 2013 Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is set forth under the captions “Security Ownership of Certain Beneficial Owners” and “Equity Compensation Plan Information” in the Company’s 2013 Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is set forth under the captions “Corporate Governance and the Board of Directors” and “Transactions with Management and Directors” in the Company’s 2013 Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this item is set forth under the caption “Proposal 6: Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s 2013 Proxy Statement and is incorporated herein by reference.

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a) 1. Financial Statements

These documents are listed in the Index to Consolidated Financial Statements under Item 8.

(a) 2. Financial Statement Schedules

Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the consolidated financial statements and the accompanying notes thereto.

125

(a)

3. Exhibits

The following exhibits are either filed as a part of this Annual Report on Form 10-K or are incorporated herein by reference:


Exhibit Number										Exhibit Description

3.1										Certificate of Incorporation of QCR Holdings, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q/A Amendment No. 1 for the period ended September 30, 2011).

3.2										Bylaws of QCR Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K dated May 18, 2010).
4.1										Form of 6.00% Series A Subordinated Note due September 1, 2018 (incorporated by reference to Exhibit 4.1 of Registrant’s Form 8-K filed on March 22, 2010).
4.2										Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.2 of Registrant’s Form 8-K filed March 22, 2010).
10.1										Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated January 1, 2004 (incorporated by reference to Exhibit 10.2 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.2										Employment Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated January 1, 2004 (incorporated by reference to Exhibit 10.6 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.3										Employment Agreement between QCR Holdings, Inc. and Todd A. Gipple dated January 1, 2004 (incorporated by reference to Exhibit 10.11 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.4										QCR Holdings, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 of Registrant’s Form S-8, file No. 333-101356 dated November 20, 2002).
10.5										Dividend Reinvestment Plan of QCR Holdings, Inc. (incorporated by reference to Exhibit 99.1 of Registrant’s Form S-3D, File No. 333-102699 dated January 24, 2003).
10.6										Indenture by and between QCR Holdings, Inc. / QCR Holdings Statutory Trust II and U.S. Bank National Association, as debenture and institutional trustee, dated February 18, 2004 (incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
10.7										Indenture by and between QCR Holdings, Inc. / QCR Holdings Statutory Trust III and U.S. Bank National Association, as debenture and institutional trustee, dated February 18, 2004 (incorporated by reference to Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
10.8										Lease Agreement between Quad City Bank and Trust Company and 127 North Wyman Development, L.L.C. dated November 3, 2004 (incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2004).

126

10.9

2004 Stock Incentive Plan of QCR Holdings, Inc. (incorporated by reference to Exhibit B of Registrant’s Form Pre 14A, filed March 5, 2004, File No. 000-22208).

10.10		QCR Holdings, Inc. 2008 Equity Incentive Plan (incorporated by reference to Appendix A to QCR Holdings, Inc.’s Definitive Proxy Statement on Schedule 14A dated March 25, 2008).

10.11		Indenture by and between QCR Holdings, Inc./QCR Holdings Statutory Trust IV and Wells Fargo Bank, National Association, as debenture and institutional trustee, dated May 4, 2005 (incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
10.12		Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht dated August 26, 2005 (incorporated by reference to Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
10.13		Indenture by and between QCR Holdings, Inc./QCR Holdings Statutory Trust V and Wells Fargo Bank, National Association, as debenture and institutional trustee, dated February 24, 2006 (incorporated by reference to Exhibit 10.27 of the Registrant’s Annual Report on form 10-K for the year ended December 31, 2005).

10.14		First Amendment to the Employment Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated December 27, 2008 (incorporated by reference to Exhibit 10.19 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.15		First Amendment to the Employment Agreement between Cedar Rapids Bank and Trust Companyand Larry J. Helling dated December 30, 2008 (incorporated by reference to Exhibit 10.20 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.16		First Amendment to the Employment Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 30, 2008 (incorporated by reference to Exhibit 10.21 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.17		Executive Deferred Compensation Plan of QCR Holdings, Inc. (incorporated by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.18		Executive Deferred Compensation Plan Participation Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated October 24, 2008 (incorporated by reference to Exhibit 10.23 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.19		Executive Deferred Compensation Plan Participation Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated October 24, 2008 (incorporated by reference to Exhibit 10.24 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.20		Executive Deferred Compensation Plan Participation Agreement between QCR Holdings, Inc. and Todd A. Gipple dated October 24, 2008 (incorporated by reference to Exhibit 10.25 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).
10.21		Amended and Restated Non-Qualified Supplemental Executive Retirement Plan of QCR Holdings, Inc. (incorporated by reference to Exhibit 10.27 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

127

10.22		Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated December 31, 2008 (incorporated by reference to Exhibit 10.28 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.23		Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 31, 2008 (incorporated by reference to Exhibit 10.29 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.24		Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 31, 2008 (incorporated by reference to Exhibit 10.30 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.25		Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer dated December 31, 2008 (incorporated by reference to Exhibit 10.31 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.26		QCR Holdings, Inc. 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A dated March 22, 2010).

10.27		Securities Purchase Agreement, dated September 15, 2011, between the Registrant and the Secretary of the Treasury, with respect to the issuance and sale of the Series F Preferred Stock (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K dated September 16, 2011).

10.28		Repurchase Document, dated September 15, 2011, between the Registrant and the United States Department of the Treasury, with respect to the repurchase of the Series D Preferred Stock (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K dated September 16, 2011).

10.29		Warrant Letter Agreement, dated November 16, 2011, between the Registrant and the United States Department of the Treasury, with respect to the repurchase of the warrant (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K dated November 17, 2011).

10.30		Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A dated March 21, 2012).

10.31		Amendment No. 1 to the Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht, dated August 26, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).

10.32		Agreement and Plan of Merger among QCR Holdings, Inc., QCR Acquisition, LLC and Community National Bancorporation, dated February 13, 2013 (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 8-K dated February 14, 2013).

21.1		Subsidiaries of QCR Holdings, Inc. (exhibit is being filed herewith).

23.1		Consent of Independent Registered Public Accounting Firm - McGladrey, LLP (exhibit is being filed herewith).

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) (exhibit is being filed herewith).

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) (exhibit is being filed herewith).

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).

128

101**

Interactive Data File

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at December 31, 2012 and December 31, 2011; (ii) Consolidated Statements of Income for the years ended December 31, 2012, December 31, 2011 and December 31, 2010; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, December 31, 2011, and December 31, 2010; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012, December 31, 2011 and December 31, 2010; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2012, December 31, 2011 and December 31, 2010; and (vi) Notes to Consolidated Financial Statements.

**As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise subject to liability under those sections.

129

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	QCR HOLDINGS, INC.

Dated: March 11, 2013	By:	/s/ Douglas M. Hultquist
		Douglas M. Hultquist
		President and Chief Executive Officer



Dated: March 11, 2013	By:	/s/ Todd A. Gipple
		Todd A. Gipple
		Executive Vice President, Chief Operating Officer, and
		Chief Financial Officer

130

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title	Date

/s/ James J. Brownson	Chairman of the Board of Directors	March 11, 2013
James J. Brownson


/s/ Douglas M. Hultquist	President, Chief Executive	March 11, 2013
Douglas M. Hultquist	Officer and Director

/s/ Pat S. Baird	Director	March 11, 2013
Pat S. Baird

/s/ Lindsay Y. Corby	Director	March 11, 2013
Lindsay Y. Corby

/s/ Todd A. Gipple	Director	March 11, 2013
Todd A. Gipple

/s/ Larry J. Helling	Director	March 11, 2013
Larry J. Helling

/s/ Mark C. Kilmer	Director	March 11, 2013
Mark C. Kilmer

/s/ John K. Lawson	Director	March 11, 2013
John K. Lawson

/s/ Charles M. Peters	Director	March 11, 2013
Charles M. Peters

/s/ Ronald G. Peterson	Director	March 11, 2013
Ronald G. Peterson

/s/ Donna J. Sorensen, J.D.	Director	March 11, 2013
Donna J. Sorensen, J.D.

/s/ John D. Whitcher	Director	March 11, 2013
John D. Whitcher

/s/ Marie Z. Ziegler	Director	March 11, 2013
Marie Z. Ziegler

131

APPENDIX A

SUPERVISION AND REGULATION

General

Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including the Iowa Superintendent of Banking (the “Iowa Superintendent”), the Illinois Department of Financial and Professional Regulation (the “DFPR”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”) and the newly-created Bureau of Consumer Financial Protection (the “CFPB”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (the “FASB”) and securities laws administered by the Securities and Exchange Commission (the “SEC”) and state securities authorities have an impact on the business of the Company. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the operations and results of the Company and its subsidiary Banks, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of financial institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than stockholders. These federal and state laws, and the regulations of the bank regulatory authorities issued under them, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends. Moreover, turmoil in the credit markets in recent years prompted the enactment of unprecedented legislation that has allowed the U.S. Department of the Treasury (the “Treasury”) to make equity capital available to qualifying financial institutions to help restore confidence and stability in the U.S. financial markets, which imposes additional requirements on institutions in which the Treasury invests.

The Company and its subsidiary Banks are also subject to regular examination by their respective regulatory authorities, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provision.

Financial Regulatory Reform

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a sweeping reform of the supervisory and regulatory framework applicable to financial institutions and capital markets in the United States, certain aspects of which are described below in more detail. The Dodd-Frank Act creates new federal governmental entities responsible for overseeing different aspects of the U.S. financial services industry, including identifying emerging systemic risks. It also shifts certain authorities and responsibilities among federal financial institution regulators, including the supervision of holding company affiliates and the regulation of consumer financial services and products. In particular, and among other things, the Dodd-Frank Act: creates the CFPB, which is authorized to regulate providers of consumer credit, savings, payment and other consumer financial products and services; narrows the scope of federal preemption of state consumer laws enjoyed by national banks and federal savings associations and expands the authority of state attorneys general to bring actions to enforce federal consumer protection legislation; imposes more stringent capital requirements on bank holding companies and subjects certain activities, including interstate mergers and acquisitions, to heightened capital conditions; significantly expands underwriting requirements applicable to loans secured by 1-4 family residential real property; restricts the interchange fees payable on debit card transactions for issuers with $10 billion in assets or greater; requires the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards to be determined by regulation; creates a Financial Stability Oversight Council as part of a regulatory structure for identifying emerging systemic risks and improving interagency cooperation; provides for enhanced regulation of advisers to private funds and of the derivatives markets; enhances oversight of credit rating agencies; and prohibits banking agency requirements tied to credit ratings.

Numerous provisions of the Dodd-Frank Act are required to be implemented through rulemaking by the appropriate federal regulatory agencies. Many of the required regulations have been issued and others have been released for public comment, but there remain a number that have yet to be released in any form. Furthermore, while the reforms primarily target systemically important financial service providers, their influence is expected to filter down in varying degrees to smaller institutions over time. Management of the Company will continue to evaluate the effect of the changes; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative changes, will not have a negative impact on the results of operations and financial condition of the Company and its subsidiaries.

The Increasing Regulatory Emphasis on Capital

The Company is subject to various regulatory capital requirements administered by the federal and state banking regulators noted above. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), the Company must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. Our capital amounts and classifications are also subject to judgments by the regulators regarding qualitative components, risk weightings and other factors.

While capital has historically been one of the key measures of the financial health of both bank holding companies and depository institutions, its role is becoming fundamentally more important in the wake of the financial crisis, as the regulators have recognized that the amount and quality of capital held by banking organizations was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, will ultimately establish strengthened capital standards for banks and bank holding companies, will require more capital to be held in the form of common stock and will disallow certain funds from being included in capital determinations. Once fully implemented, these provisions will represent regulatory capital requirements that are meaningfully more stringent than those in place currently.

Company and Bank Required Capital Levels. Bank holding companies have historically had to comply with less stringent capital standards than their bank subsidiaries and were able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for bank holding companies on a consolidated basis that are as stringent as those required for insured depository institutions. As a consequence, over a phase-in period of three years, the components of holding company permanent capital known as “Tier 1 capital” are being restricted to capital instruments that are considered to be Tier 1 capital for insured depository institutions. A result of this change is that the proceeds of trust preferred securities are being excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets. Because the Company has assets of less than $15 billion, it is able to maintain its trust preferred proceeds as Tier 1 capital but will have to comply with new capital mandates in other respects, and will not be able to raise Tier 1 capital in the future through the issuance of trust preferred securities. In addition, the Basel III proposal, discussed below, includes a phase-out of trust preferred securities for all bank holding companies, including the Company.

The Company owns three subsidiary banks (collectively, the “Banks”): Quad City Bank and Trust Company (“QCBT”), Cedar Rapids Bank and Trust Company (“CRBT”), and Rockford Bank and Trust Company (“RB&T”). Under current federal regulations, the Banks are subject to, and, after the phase-in period, the Company will be subject to, the following minimum capital standards:

a leverage requirement, consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others, and

a risk-based capital requirement, consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. For this purpose, “Tier 1 capital” consists primarily of common stock, noncumulative perpetual preferred stock and related surplus less intangible assets (other than certain loan servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus “Tier 2 capital,” which includes other non-permanent capital items, such as certain other debt and equity instruments that do not qualify as Tier 1 capital, and a portion of the Banks’ allowance for loan and leases losses.

The capital standards described above are minimum requirements. Federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is “well-capitalized” may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept brokered deposits. Under the capital regulations of the Federal Reserve, in order to be “well-capitalized,” a banking organization must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater. The Federal Reserve’s guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve will continue to consider a “tangible tier 1 leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or to engage in new activity.

Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.

Prompt Corrective Action. A banking organization’s capital plays an important role in connection with regulatory enforcement as well. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

As of December 31, 2012: (i) none of the Banks was subject to a directive from the Federal Reserve to increase capital to an amount in excess of the minimum regulatory capital requirements; (ii) each Bank exceeded its minimum regulatory capital requirements under Federal Reserve capital adequacy guidelines; and (iii) each Bank was “well-capitalized,” as defined by Federal Reserve regulations. As of December 31, 2012, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Dodd-Frank capital requirements.

Basel III. The current risk-based capital guidelines described above, which apply to the Banks and are being phased in for the Company, are based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, as implemented by the U.S. federal banking regulators on an interagency basis. In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more). Basel II emphasized internal assessment of credit, market and operational risk, as well as supervisory assessment and market discipline in determining minimum capital requirements.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis. Basel III requires, among other things:

a new required ratio of minimum common equity equal to 4.5% of risk-weighted assets,

an increase in the minimum required amount of Tier 1 capital from the current level of 4% of total assets to 6% of risk-weighted assets, and

a continuation of the current minimum required amount of total capital at 8% of risk-weighted assets.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in common equity attributable to a capital conservation buffer to be phased in over three years. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the ratios depicted above to 7% for common equity, 8.5% for Tier 1 capital and 10.5% for total capital.

On June 12, 2012, the federal banking regulators (the Office of the Comptroller of the Currency, the Federal Reserve and the FDIC) (the “Agencies”) formally proposed for comment, in three separate but related proposals, rules to implement Basel III in the United States. The proposals are: (i) the “Basel III Proposal,” which applies the Basel III capital framework to almost all U.S. banking organizations; (ii) the “Standardized Approach Proposal,” which applies certain elements of the Basel II standardized approach for credit risk weightings to almost all U.S. banking organizations; and (iii) the “Advanced Approaches Proposal,” which applies changes made to Basel II and Basel III in the past few years to large U.S. banking organizations subject to the advanced Basel II capital framework. The comment period for these notices of proposed rulemaking ended October 22, 2012.

The Basel III Proposal and the Standardized Approach Proposal are expected to have a direct impact on the Company and the Banks. The Basel III Proposal is applicable to all U.S. banks that are subject to minimum capital requirements, including federal and state banks, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million). There will be separate phase-in/phase-out periods for: (i) minimum capital ratios; (ii) regulatory capital adjustments and deductions; (iii) nonqualifying capital instruments; (iv) capital conservation and countercyclical capital buffers; (v) a supplemental leverage ratio for advanced approaches banks; and (vi) changes to the FDIC’s prompt corrective action rules.

The criteria in the U.S. proposal for common equity and additional Tier 1 capital instruments, as well as Tier 2 capital instruments, are broadly consistent with the Basel III criteria. A number of instruments that now qualify as Tier 1 capital will not qualify, or their qualification will change, if the Basel III Proposal becomes final. For example, cumulative preferred stock and certain hybrid capital instruments, including trust preferred securities, which the Company may retain under the Dodd-Frank Act, will no longer qualify as Tier 1 capital of any kind. Noncumulative perpetual preferred stock, which now qualifies as simple Tier 1 capital, would not qualify as common equity Tier 1 capital, but would qualify as additional Tier 1 capital.

In addition to the changes in capital requirements included within the Basel III Proposal, the Standardized Approach Proposal revises a large number of the risk weightings (or their methodologies) for bank assets that are used to determine the capital ratios. For nearly every class of assets, the proposal requires a more complex, detailed and calibrated assessment of credit risk and calculation of risk weightings. For example, under the current risk-weighting rules, residential mortgages have a risk weighting of 50%. Under the proposed new rules, two categories of residential mortgage lending would be created: (i) traditional lending would be category 1, where the risk weightings range from 35 to 100%; and (ii) nontraditional loans would fall within category 2, where the risk weightings would range from 50 to 150%. There is concern in the U.S. that the proposed methodology for risk weighting residential mortgage exposures and the higher risk weightings for certain types of mortgage products will increase costs to consumers and reduce their access to mortgage credit.

In addition, there is significant concern noted by the financial industry in connection with the Basel III rulemaking as to the proposed treatment of accumulated other comprehensive income (“AOCI”). The proposed treatment of AOCI would require unrealized gains and losses on available-for-sale securities to flow through to regulatory capital as opposed to the current treatment, which neutralizes such effects. There is concern that this treatment would introduce capital volatility, due not only to credit risk but also to interest rate risk, and affect the composition of firms’ securities holdings.

While the Basel III accord called for national jurisdictions to implement the new requirements beginning January 1, 2013, in light of the volume of comments received by the Agencies and the concerns expressed above, the Agencies have indicated that the commencement date for the proposed Basel III rules has been delayed and it is unclear when the Basel III regime, as it may be implemented by final rules, will become effective in the United States.

The Company

General. The Company, as the sole stockholder of the Banks, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”). In accordance with Federal Reserve policy, and as now codified by the Dodd-Frank Act, the Company is legally obligated to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require.

Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “—The Increasing Regulatory Emphasis on Capital” above.

The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority would permit the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, the Company has not elected to operate as a financial holding company.

Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines, as affected by the Dodd-Frank Act and Basel III. For a discussion of capital requirements, see “—The Increasing Regulatory Emphasis on Capital” above. If capital levels fall below the minimum required levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.

U.S. Government Investment in Bank Holding Companies. Events in the U.S. and global financial markets in 2008 and 2009, including the deterioration of the worldwide credit markets, created significant challenges for financial institutions throughout the country. In response to this crisis affecting the U.S. banking system and financial markets, on October 3, 2008, the U.S. Congress passed, and the President signed into law, the Emergency Economic Stabilization Act of 2008 (the “EESA”). The EESA authorized the Secretary of the Treasury to implement various temporary emergency programs designed to strengthen the capital positions of financial institutions and stimulate the availability of credit within the U.S. financial system. Financial institutions participating in certain of the programs established under the EESA are required to adopt the Treasury’s standards for executive compensation and corporate governance.

On October 14, 2008, the Treasury announced that it would provide Tier 1 capital (in the form of perpetual preferred stock) to eligible financial institutions. This program, known as the TARP Capital Purchase Program (the “TCPP”), allocated $250 billion from the $700 billion authorized by the EESA to the Treasury for the purchase of senior preferred shares from qualifying financial institutions (the “TCPP Preferred Stock”). Under the program, eligible institutions were able to sell equity interests to the Treasury in amounts equal to between 1% and 3% of the institution’s risk-weighted assets. In conjunction with the purchase of the TCPP Preferred Stock, the Treasury received warrants to purchase common stock from the participating public institutions with an aggregate market price equal to 15% of the preferred stock investment. Participating financial institutions were required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TCPP.

Pursuant to the TCPP, on February 13, 2009, the Company entered into a Letter Agreement with the Treasury, pursuant to which the Company issued (i) 38,237 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series D (the “Series D Preferred Stock”) and (ii) a warrant to purchase 521,888 shares of the Company’s common stock for an aggregate purchase price of $38.237 million in cash.

Small Business Lending Fund and TCPP Redemption. Under the Small Business Jobs Act of 2010, the Treasury established a Small Business Lending Fund (the “SBLF”), a $30 billion fund that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. The Company applied for the SBLF program, was accepted, and on September 15, 2011, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the Treasury, pursuant to which it issued and sold to the Treasury 40,090 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series F (the “Series F Preferred Stock”), having a liquidation preference of $1,000 per share (the “Liquidation Amount”), for aggregate proceeds of $40,090,000. On the same date, the Company redeemed from the Treasury, using the proceeds from the issuance of the Series F Preferred Stock, all 38,237 outstanding shares of its Series D Preferred Stock issued under the TCPP, for a redemption price of approximately $38.4 million, including accrued but unpaid dividends to the date of redemption. The Treasury remitted a cash payment to the Company in the amount of approximately $1.7 million to cover the difference between the outstanding balance of the Series D Preferred Stock and the proceeds from the issuance of the Series F Preferred Stock. As a result of its redemption of the Series D Preferred Stock, the Company is no longer subject to the limits on executive compensation and other restrictions stipulated under the TCPP. The Company also repurchased the warrant issued to the Treasury in November of 2011 for an aggregate purchase price of $1.1 million.

On June 29, 2012, the Company redeemed 10,223 shares of the Series F Preferred Stock from the Treasury for an aggregate redemption amount of $10,223,000 plus unpaid dividends to the date of redemption of $124,948. The remaining Series F Preferred Stock may be redeemed at any time at the option of the Company, subject to the approval of the Company’s primary federal banking regulator. All redemptions must be in amounts equal to at least 25% of the number of originally issued shares, or 100% of the then-outstanding shares (if less than 25% of the originally issued shares).

Dividend Payments. The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the Company is subject to the limitations of the Delaware General Corporation Law (the “DGCL”), which allow the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

As a general matter, the Federal Reserve indicates that the board of directors of a bank holding company should eliminate, defer or significantly reduce the dividends if: (i) the company’s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

The terms of the Series F Preferred Stock issued in connection with the SBLF impose limits on the Company’s ability to pay dividends on and repurchase shares of its common stock and other securities. In general, the Company may declare and pay dividends on its common stock or any other stock junior to the Series F Preferred Stock, or repurchase shares of any such stock, only, if after payment of such dividends or repurchase of such shares, the Company’s Tier 1 Capital would be at least 90% of the Signing Date Tier 1 Capital (as defined and set forth in the Certificate of Designation), excluding any subsequent net charge-offs and any redemption of the Series F Preferred Stock (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the 2nd anniversary and ending on the 10th anniversary of issuance of the Series F Preferred Stock, by 10% for each one 1% increase in the Banks’ QSBL over the baseline level. If, however, the Company fails to declare and pay dividends on the Series F Preferred Stock in a given quarter, then during such quarter and for the next three quarters following such missed dividend payment the Company may not pay dividends on or repurchase any common stock or any other securities that are junior to (or in parity with) the Series F Preferred Stock, except in very limited circumstances. If any Series F Preferred Stock remains outstanding on the 10th anniversary of issuance, the Company may not pay any further dividends on its common stock or any other junior stock until the Series F Preferred Stock is redeemed in full.

Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Corporate Governance. The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.

The Banks

General. The Company owns three subsidiary banks: QCBT and CRBT are chartered under Iowa law (collectively, the “Iowa Banks”) and RB&T is chartered under Illinois law. The deposit accounts of the Banks are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations. The Banks are also members of the Federal Reserve System (“member banks”).

As Iowa-chartered, FDIC-insured member banks, the Iowa Banks are subject to the examination, supervision, reporting and enforcement requirements of the Iowa Superintendent, as the chartering authority for Iowa banks. As an Illinois-chartered, FDIC-insured member bank, RB&T is subject to the examination, supervision, reporting and enforcement requirements of the DFPR, as the chartering authority for Illinois banks. The Banks are also subject to the examination, reporting and enforcement requirements of the Federal Reserve, as the primary federal regulator of member banks. In addition, the FDIC, as administrator of the DIF, has regulatory authority over the Banks.

Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.

On November 12, 2009, the FDIC adopted a final rule that required insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. As such, on December 31, 2009, the Banks prepaid the FDIC its assessments. The FDIC determined each institution’s prepaid assessment based on the institution’s: (i) actual September 30, 2009 assessment base, increased quarterly by a 5% annual growth rate through the fourth quarter of 2012; and (ii) total base assessment rate in effect on September 30, 2009, increased by an annualized three basis points beginning in 2011. The FDIC began to offset prepaid assessments on March 30, 2010, representing payment of the regular quarterly risk-based deposit insurance assessment for the fourth quarter of 2009. Any prepaid assessment not exhausted after collection of the amount due on June 30, 2013, will be returned to the institution.

Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. This may shift the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The FDIC is given until September 3, 2020 to meet the 1.35% reserve ratio target. Several of these provisions could increase the Banks’ FDIC deposit insurance premiums.

The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per insured depositor, retroactive to January 1, 2009. Although the legislation provided that non-interest-bearing transaction accounts had unlimited deposit insurance coverage through December 31, 2012.

FICO Assessments. The Financing Corporation (“FICO”) is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued 30-year noncallable bonds of approximately $8.1 billion that mature in 2017 through 2019. FICO’s authority to issue bonds ended on December 12, 1991. Since 1996, federal legislation has required that all FDIC-insured depository institutions pay assessments to cover interest payments on FICO’s outstanding obligations. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2012, the FICO assessment rate was approximately 0.0066%, which reflects the change from an assessment base computed on deposits to an assessment base computed on assets as required by the Dodd-Frank Act.

Supervisory Assessments. Each of the Banks is required to pay supervisory assessments to its respective state banking regulator to fund the operations of that agency. The amount of the assessment payable by each Bank is calculated on the basis of that Bank’s total assets. During the year ended December 31, 2012, the Iowa Banks paid supervisory assessments to the Iowa Superintendent totaling $160 thousand and RB&T paid supervisory assessments to the DFPR totaling $48 thousand.

Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “—The Increasing Regulatory Emphasis on Capital” above.

Liability of Commonly Controlled Institutions. Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in danger of default. Because the Company controls each of the Banks, the Banks are commonly controlled for purposes of these provisions of federal law.

Dividend Payments. The primary source of funds for the Company is dividends from the Banks. In general, the Banks may only pay dividends either out of their historical net income after any required transfers to surplus or reserves have been made or out of their retained earnings. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state member banks, such as the Banks. Without prior Federal Reserve approval, 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 payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Banks exceeded its minimum capital requirements under applicable guidelines as of December 31, 2012. As of December 31, 2012, approximately $10.9 million was available to be paid as dividends by the Banks. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the Banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice.

Insider Transactions. The Banks are subject to certain restrictions imposed by federal law on “covered transactions” between the Banks and their “affiliates.” The Company is an affiliate of each Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Banks. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates as of July 21, 2011, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to directors and officers, to directors and officers of the Company, to principal stockholders of the Company and to “related interests” of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Banks, or a principal stockholder of the Company, may obtain credit from banks with which the Banks maintain correspondent relationships.

Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.

Branching Authority. The Iowa Banks have the authority under Iowa law to establish branches anywhere in the State of Iowa, subject to receipt of all required regulatory approvals. In 1997, the Company formed a de novo Illinois bank that was merged into QCBT, resulting in QCBT establishing a branch office in Illinois. Under Illinois law, QCBT may continue to establish offices in Illinois to the same extent permitted for an Illinois bank (subject to certain conditions, including certain regulatory notice requirements). Similarly, RB&T has the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals.

Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) has historically been permitted only in those states the laws of which expressly authorize such expansion. However, the Dodd-Frank Act permits well-capitalized and well-managed banks to establish new branches across state lines without these impediments.

State Bank Investments and Activities. The Banks are permitted to make investments and engage in activities directly or through subsidiaries as authorized by Iowa or Illinois law, as applicable. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Banks.

Transaction Account Reserves. Federal Reserve regulations require depository institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2013: the first $12.4 million of otherwise reservable balances are exempt from the reserve requirements; for transaction accounts aggregating more than $12.4 million to $79.5 million, the reserve requirement is 3% of total transaction accounts; and for net transaction accounts in excess of $79.5 million, the reserve requirement is $2,013,000 plus 10% of the aggregate amount of total transaction accounts in excess of $79.5 million. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Banks are in compliance with the foregoing requirements.

Consumer Financial Services

There are numerous developments in federal and state laws regarding consumer financial products and services that impact the Banks’ business. Importantly, the current structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Banks, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like the Banks, will continue to be examined by their applicable bank regulators.

Ability-to-Repay Requirement and Qualified Mortgage Rule. The Dodd-Frank Act contains additional provisions that affect consumer mortgage lending. First, it significantly expands underwriting requirements applicable to loans secured by 1-4 family residential real property and augments federal law combating predatory lending practices. In addition to numerous new disclosure requirements, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” Most significantly, the new standards limit the total points and fees that the Banks and/or a broker may charge on conforming and jumbo loans to 3% of the total loan amount. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans that the lender sells and other asset-backed securities that the securitizer issues if the loans have not complied with the ability-to-repay standards. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation.

On January 10, 2013, the CFPB issued a final rule, effective January 10, 2014, which implements the Dodd-Frank Act’s ability-to-repay requirements and clarifies the presumption of compliance for “qualified mortgages.” In assessing a borrower’s ability to repay a mortgage-related obligation, lenders generally must consider eight underwriting factors: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) monthly payment on the subject transaction; (iv) monthly payment on any simultaneous loan; (v) monthly payment for all mortgage-related obligations; (vi) current debt obligations, alimony, and child support; (vii) monthly debt-to-income ratio or residual income; and (viii) credit history. The final rule also includes guidance regarding the application of, and methodology for evaluating, these factors.

Further, the final rule also clarifies that qualified mortgages do not include “no-doc” loans and loans with negative amortization, interest-only payments, balloon payments, terms in excess of 30 years, or points and fees paid by the borrower that exceed 3% of the loan amount, subject to certain exceptions. In addition, for qualified mortgages, the monthly payment must be calculated on the highest payment that will occur in the first five years of the loan, and the borrower’s total debt-to-income ratio generally may not be more than 43%. The final rule also provides that certain mortgages that satisfy the general product feature requirements for qualified mortgages and that also satisfy the underwriting requirements of Fannie Mae and Freddie Mac (while they operate under federal conservatorship or receivership) or the U.S. Department of Housing and Urban Development, Department of Veterans Affairs, or Department of Agriculture or Rural Housing Service are also considered to be qualified mortgages. This second category of qualified mortgages will phase out as the aforementioned federal agencies issue their own rules regarding qualified mortgages, the conservatorship of Fannie Mae and Freddie Mac ends, and, in any event, after seven years.

As set forth in the Dodd-Frank Act, subprime (or higher-priced) mortgage loans are subject to the ability-to-repay requirement, and the final rule provides for a rebuttable presumption of lender compliance for those loans. The final rule also applies the ability-to-repay requirement to prime loans, while also providing a conclusive presumption of compliance (i.e., a safe harbor) for prime loans that are also qualified mortgages. Additionally, the final rule generally prohibits prepayment penalties (subject to certain exceptions) and sets forth a 3-year record retention period with respect to documenting and demonstrating the ability-to-repay requirement and other provisions.

Changes to Mortgage Loan Originator Compensation. Effective April 2, 2011, previously existing regulations concerning the compensation of mortgage loan originators were amended. As a result of these amendments, mortgage loan originators may not receive compensation based on a mortgage transaction’s terms or conditions other than the amount of credit extended under the mortgage loan. Further, the new standards limit the total points and fees that a bank and/or a broker may charge on conforming and jumbo loans to 3% of the total loan amount. Mortgage loan originators may receive compensation from a consumer or from a lender, but not both. These rules contain requirements designed to prohibit mortgage loan originators from “steering” consumers to loans that provide mortgage loan originators with greater compensation. In addition, the rules contain other requirements concerning recordkeeping.

Foreclosure and Loan Modifications. Federal and state laws further impact foreclosures and loan modifications, with many of such laws having the effect of delaying or impeding the foreclosure process on real estate secured loans in default. Mortgages on commercial property can be modified, such as by reducing the principal amount of the loan or the interest rate, or by extending the term of the loan, through plans confirmed under Chapter 11 of the Bankruptcy Code. In recent years, legislation has been introduced in the U.S. Congress that would amend the Bankruptcy Code to permit the modification of mortgages secured by residences, although at this time the enactment of such legislation is not presently proposed. The scope, duration and terms of potential future legislation with similar effect continue to be discussed. We cannot predict whether any such legislation will be passed or the impact, if any, it would have on our business.

Appendix B

GUIDE 3 INFORMATION

The following tables and schedules show selected comparative financial information required by the Securities and Exchange Commission Securities Act Guide 3, regarding the business of QCR Holdings, Inc. (the "Company") for the periods shown.

I. Distribution of Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differential

A. and B. Consolidated Average Balance Sheets and Analysis of Net Interest Earnings

The information requested is disclosed in Management's Discussion and Analysis section of the the Company's Form 10-K for the fiscal year ended December 31, 2012.

C. Analysis of Changes of Interest Income/Interest Expense

The information requested is disclosed in Management's Discussion and Analysis section of the the Company's Form 10-K for the fiscal year ended December 31, 2012.

B-1

II. Investment Portfolio

A. Investment Securities

The following tables present the amortized cost and fair value of investment securities as of December 31, 2012, 2011, and 2010

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	(dollars in thousands)

December 31, 2012

Securities held to maturity:
Municipal securities	$	71,429	$	998	$	(71	)	$	72,356
Other bonds		650		-		-			650

Totals	$	72,079	$	998	$	(71	)	$	73,006

Securities available for sale:
U.S. gov't.sponsored agency securities	$	336,571	$	2,198	$	(160	)	$	338,609
Residential mortgage-backed and related securitiies		160,035		3,737		(171	)		163,601
Municipal securities		24,508		1,697		(19	)		26,186
Trust preferred securities		86		53		-			139
Other securities		1,347		301		(23	)		1,625

Totals	$	522,547	$	7,986	$	(373	)	$	530,160



December 31, 2011

Securities held to maturity:
Other bonds	$	200	$	-	$	-		$	200

Totals	$	200	$	-	$	-		$	200

Securities available for sale:
U.S. gov't.sponsored agency securities	$	426,582	$	2,429	$	(56	)	$	428,955
Residential mortgage-backed and related securitiies		105,374		3,488		(8	)		108,854
Municipal securities		23,937		1,752		-			25,689
Trust preferred securities		86		-		(5	)		81
Other securities		1,355		140		(45	)		1,450

Totals	$	557,334	$	7,809	$	(114	)	$	565,029



December 31, 2010

Securities held to maturity:
Other bonds	$	300	$	-	$	-		$	300

Totals	$	300	$	-	$	-		$	300

Securities available for sale:
U.S. gov't.sponsored agency securities	$	401,711	$	3,219	$	(2,705	)	$	402,225
Municipal securities		20,135		579		(110	)		20,604
Residential mortgage-backed securities		65		6		-			71
Trust preferred securities		86		-		(8	)		78
Other securities		1,415		168		(14	)		1,569

Totals	$	423,412	$	3,972	$	(2,837	)	$	424,547

NOTE: Stock of the Federal Home Loan Bank and Federal Reserve Bank are NOT included in the above. The Company reports these investments separately on the consolidated balance sheets. Following is the carrying value as of December 31, 2012, 2011, and 2010:

	As of December 31,
	2012		2011		2010
	(dollars in thousands)

Federal Home Loan Bank	$	11,987	$	11,517	$	12,980
Federal Reserve Bank		3,761		3,737		3,689
Totals	$	15,748	$	15,254	$	16,669

B-2

B. Investment Securities, Maturities, and Yields

The following table presents the maturity of securities held on December 31, 2012 and the weighted average stated coupon rates by range of maturity:

	Amortized Cost		Weighted Average Yield
	(dollars in thousands)

U.S. gov't.sponsored agency securities:
After 1 but within 5 years	$	27,498		1.29	%
After 5 but within 10 years		291,300		1.69	%
After 10 years		17,773		2.85	%

Total	$	336,571		1.72	%


Residential mortgage-backed and related securities:
Within 1 year	$	9		6.08	%
After 10 years		160,026		2.09	%

Total	$	160,035		2.09	%


Municipal securities:
Within 1 year	$	1,749		2.62	%
After 1 but within 5 years		14,956		2.33	%
After 5 but within 10 years		27,584		3.17	%
After 10 years		51,648		3.35	%

Total	$	95,937		3.13	%


Trust preferred securities:
After 10 years	$	86		7.80	%


Other bonds:
Within 1 year	$	100		5.50	%
After 1 but within 5 years		550		2.81	%

Total	$	650		3.22	%


Other securities with no maturity or stated face rate	$	1,347

NOTE: Yields above are NOT computed on a tax equivalent basis.

C. As of December 31, 2012, there were no securities with aggregate book value and market value purchased from a single issuer (as defined by Sction 2(4) of the Securities Act of 1933) that exceeded 10% of stockholders' equity.

B-3

III.	Loan/Lease Portfolio

A.	Types of Loans/Leases

The information requested is disclosed in Management's Discussion and Analysis section of the the Company's Form 10-K for the fiscal year ended December 31, 2012.

B.	Maturities and Sensitivities of Loans/Leases to Changes in Interest Rates

The information requested is disclosed in Management's Discussion and Analysis section of the the Company's Form 10-K for the fiscal year ended December 31, 2012.

C.	Risk Elements

1.	Nonaccrual, Past Due and Restructured Loans/Leases

The gross interest income that would have been recorded if nonaccrual loans/leases and performing troubled debt restructurings had been current in accordance with their original terms was $618,733 and $277,576, respectively, for the year ended December 31, 2012. The amount of interest collected on nonaccrual loans/leases and performing troubled debt restructurings that was included in interest income was none and $334,921, respectively, for the year ended December 31, 2012.

The remaining information requested is disclosed in Management's Discussion and Analysis section of the the Company's Form 10-K for the fiscal year ended December 31, 2012.

2.	Potential Problem Loans/Leases.

To management's best knowledge, there are no such significant loans/leases that have not been disclosed in the table presented in the Management's Discussion and Analysis section of the Company's Form 10-K for the fiscal year ended December 31, 2012.

3.	Foreign Outstandings. None.

4.	Loan/Lease Concentrations.

As of December 31, 2012, there was a single concentration of loans/leases exceeding 10% of total loans/leases, which is not otherwise disclosed in Item III. A. That concentration is Lessors of Non-Residential Buildings & Dwellings at 14%.

D.	Other Interest-Bearing Assets

As of December 31, 2012, there are no interest-bearing assets required to be disclosed in this Appendix.

IV.	Summary of Loan/Lease Loss Experience

A.	Analysis of the Allowance for Estimated Losses on Loans/Leases

The information requested is disclosed in Management's Discussion and Analysis section of the the Company's Form 10-K for the fiscal year ended December 31, 2012.

B.	Allocation of the Allowance for Estimated Losses on Loans/Leases

The information requested is disclosed in Management's Discussion and Analysis section of the the Company's Form 10-K for the fiscal year ended December 31, 2012.

B-4

V. Deposits.

The average amount of and average rate paid for the categories of deposits for the years ended December 31, 2012, 2011, and 2010 are included in the consolidated average balance sheets and can be found in the Management's Discussion and Analysis section of the Company's Form 10-K for the fiscal year ended December 31, 2012.

The Company has no deposits by foreign depositors in domestic offices as of December 31, 2012.

Included in interest bearing deposits at December 31, 2012, were certificates of deposit totaling $249,664,000 that were $100,000 or greater. Maturities of these certificates were as follows:

	December 31,
	2012
	(dollars in thousands)

One to three months	$	69,777
Three to six months		48,478
Six to twelve months		53,078
Over twelve months		78,331

Total certificates of deposit greater than $100,000	$	249,664

VI. Return on Equity and Assets.

The following tables present the return on assets and equity and the equity to assets ratio of the Company:

	Years ended December 31,
	2012			2011			2010
	(dollars in thousands)

Average total assets	$	2,025,691		$	1,907,038		$	1,839,318
Average equity		141,793			136,700			131,066
Net income attributable to QCR Holdings, Inc.		12,618			9,692			6,587
Return on average assets		0.62	%		0.51	%		0.36	%
Return on average common equity		10.84	%		5.82	%		3.58	%
Return on average total equity		8.90	%		7.09	%		5.03	%
Dividend payout ratio		4.26	%		8.60	%		14.81	%
Average equity to average assets ratio		7.00	%		7.17	%		7.13	%

B-5

VII. Short Term Borrowings.

The following tables present the information requested on short-term borrowings of the Company:

Short-term borrowings as of December 31, 2012, 2011, and 2010 are summarized as follows:

	2012		2011		2010
	(dollars in thousands)
Overnight repurchase agreements with customers	$	104,943	$	110,236	$	118,904
Federal funds purchased		66,140		103,300		22,250
	$	171,083	$	213,536	$	141,154

Information concerning overnight repurchase agreements with customers is summarized as follows:

	2012			2011			2010
	(dollars in thousands)
Average daily balance during the period	$	111,782		$	110,469		$	108,232
Average daily interest rate during the period		0.13	%		0.23	%		0.41	%
Maximum month-end balance during the period	$	141,891		$	117,902		$	135,143
Weighted average rate as of end of period		0.11	%		0.23	%		0.50	%

Securities underlying the agreements as of end of period:
Carrying value	$	160,951		$	201,054		$	157,042
Fair value		160,951			201,054			157,042

Information concerning federal funds purchased is summarized as follows:

	2012			2011			2010
	(dollars in thousands)
Average daily balance during the period	$	52,380		$	33,703		$	33,897
Average daily interest rate during the period		0.27	%		0.27	%		0.31	%
Maximum month-end balance during the period	$	80,150		$	103,300		$	46,990
Weighted average rate as of end of period		0.26	%		0.22	%		0.27	%

B-6