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
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003.
2006.
Commission file number: 0-22208
QCR HOLDINGS, INC.
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(Exact
(Exact name of registrant as specified in its charter)
Delaware 42-1397595
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(State of incorporation) (I.R.S. Employer Identification No.)
| Delaware | 42-1397595 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address
(Address of principal executive offices)
(Address of principal executive offices)
(309) 736-3580
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(Registrant's
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Preferred Securities of QCR Holdings Capital Trust I
Common stock, $1 Par Value
Common stock, $1 Par Value
Securities registered pursuant to Section 12(g) of the Exchange Act:
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Common stock, $1 Par Value
None.
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
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. Yeso Noþ
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 ]þ No [ ]
o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’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. [ x ]
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]o No [ x ]
þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The Nasdaq SmallCapCapital Market on June 30, 2003,2006, the last business day of the registrant'sregistrant’s most recently completed second fiscal quarter, was approximately $51,600,000.
$71,342,568.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of March 1, 2007, the Registrant had outstanding 4,565,158 shares of common stock, $1.00 par value per share.
Documents incorporated by reference:
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Part III of Form 10-K-— Proxy statement for annual meeting of stockholders to be held in May 2004.
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2007.
Part III of Form 10-K
QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
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| 13 | ||||
| 13-14 | ||||
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| 14 | ||||
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| 18-38 | ||||
| 38-39 | ||||
| 40-81 | ||||
| 82 | ||||
| 82-84 | ||||
| 84 | ||||
| 84 | ||||
| 84 | ||||
| 84-85 | ||||
| 85 | ||||
| 85 | ||||
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QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX- continued
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Part I
Item 1. Business
General.QCR Holdings, Inc. (the "Company"“Company”) is a multi-bank holding company headquartered in Moline, Illinois that was formed in February 1993 under the laws of the state of Delaware. The Company serves the Quad City, and Cedar Rapids, communities. Its wholly ownedRockford and Milwaukee communities through its four wholly-owned banking subsidiaries, Quad City Bank and Trust Company,
("Quad City Bank & Trust") which is based in Bettendorf, Iowa and commenced
operations in 1994, and Cedar Rapids Bank and Trust Company, ("Cedar Rapids Bank
& Trust") which is based in Cedar Rapids, Iowa and commenced operations in 2001, provide full-service commercial and consumer banking and trust and asset management services. services:
| • | Quad City Bank and Trust Company, (“Quad City Bank & Trust”) which is based in Bettendorf, Iowa and commenced operations in 1994, | ||
| • | Cedar Rapids Bank and Trust Company, (“Cedar Rapids Bank & Trust”) which is based in Cedar Rapids, Iowa and commenced operations in 2001, and | ||
| • | Rockford Bank and Trust Company, (“Rockford Bank & Trust”) which is based in Rockford, Illinois and commenced operations in 2005. | ||
| • | First Wisconsin Bank and Trust Company, (“First Wisconsin Bank & Trust”) which is based in Pewaukee, Wisconsin and commenced operations in 2007. |
The Company also engages in merchant and cardholder credit card processing through its wholly owned subsidiary, Quad City Bancard, Inc. (“Bancard”), based in Moline, Illinois.
Illinois, in direct financing lease contracts through its 80% equity investment in M2 Lease Funds, LLC (“M2 Lease Funds”), based in the Milwaukee, Wisconsin area, and in real estate holdings through its 57% equity investment in Velie Plantation Holding Company, LLC (“Velie Plantation Holding Company”), based in Davenport, Iowa.
Subsidiary Banks.Quad City Bank & Trust was capitalized on October 13, 1993 and commenced operations on January 7, 1994. Quad City Bank & Trust is organized as an
Iowa-chartered commercial bank that is a member of the Federal Reserve System
with depository accounts insured to the maximum amount permitted by law by the
Federal Deposit Insurance Corporation. Quad City Bank & Trust provides full
service commercial and consumer banking, and trust and asset management services
in the Quad Cities and adjacent communities through its four offices that are
located in Bettendorf and Davenport, Iowa and in Moline, Illinois.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation.Corporation (the “FDIC”). Quad City Bank & Trust provides full service commercial and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. At December 31, 2006, Quad City Bank & Trust had total segment assets of $764.4 million. See Note 20. for additional business segment information.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the FDIC. The Company commenced operations in Cedar Rapids in June 2001 operating as a branch of Quad City Bank & Trust. The Cedar Rapids branch operation then began functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its two facilities, which were both completed in the summer of 2005. The headquarters for Cedar Rapids Bank & Trust is located in downtown Cedar Rapids, and its first branch location is located in northern Cedar Rapids. At December 31, 2006, Cedar Rapids Bank & Trust had total segment assets of $334.4 million. See Note 20. for additional business segment information.
On January 3, 2005, Rockford Bank & Trust opened as the Company’s third bank subsidiary. The Company commenced operations in Rockford, Illinois in September 2004 operating as a branch of Quad City Bank & Trust. Rockford Bank & Trust is an Illinois-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the FDIC. It provides full-service commercial and consumer banking to Rockford and adjacent communities through its original office located in downtown Rockford and its recently completed branch facility located on Guilford Road at Alpine Road in Rockford. At December 31, 2006, Rockford Bank & Trust had total segment assets of $106.8 million. See Note 20. for additional business segment information.
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On February 20, 2007, the Company received its fourth bank charter, First Wisconsin Bank & Trust. The Company commenced operations in the Milwaukee area in April 2006, operating initially as a loan production office/deposit production office (LPO/DPO) of Rockford Bank & Trust, until June 2006, at which time it became a branch of Rockford Bank & Trust. In October 2006, the Company announced that it had entered into a series of agreements for the addition of a Wisconsin-chartered bank and the subsequent move of the branch into the charter. This transaction was consummated in February 2007. First Wisconsin Bank & Trust is a Wisconsin-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation. It provides full-service commercial and consumer banking to the Milwaukee, Wisconsin area and adjacent communities through its office located in downtown Cedar Rapids, Iowa.
Quad City Pewaukee, Wisconsin.
Operating Subsidiaries.Bancard Inc. ("Bancard") was capitalized onin April 3, 1995 as a Delaware corporation that provides merchant and cardholder credit card processing services. This operation had previously beenBancard provides credit card processing for merchants and cardholders of the Company’s four subsidiary banks and approximately seventy-five agent banks. During 2006, Bancard processed in excess of 3.6 million merchant transactions with a division ofdollar volume exceeding $368.9 million.
On August 26, 2005, Quad City Bank & Trust since July 1994. On October 22, 2002,acquired 80% of the membership units of M2 Lease Funds. John Engelbrecht, the President and Chief Executive Officer of M2 Lease Funds, retained 20% of the membership units. M2 Lease Funds, which is based in the Milwaukee, Wisconsin area, is engaged in the business of leasing machinery and equipment to commercial and industrial businesses under direct financing lease contracts. Quad City Bank & Trust’s acquisition of M2 Lease Funds resulted in goodwill of $3.4 million and minority interest, which at December 31, 2006, was $797 thousand. In accordance with the provisions of FAS Statement 142, goodwill is not being amortized, but is being evaluated annually for impairment. There was no impairment of goodwill in 2006.
Since 1998, the Company announced
Bancard's sale of its independent sales organization (ISO) related merchant
credit card operations to iPayment, Inc. Until September 24, 2003, Bancard
continued to process transactions for iPayment, Inc., and approximately 32,500
merchants. Since iPayment, Inc. discontinued processing with Bancard, processing
volumes decreased significantly. Bancard does, however, continue to provide
credit card processing for its local merchants and agent banks and for
cardholders of the Company's subsidiary banks.
On March 29, 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), to generate merchant
credit card processing business. Bancard owned 100% of Allied. Ashas held a result of
Bancard's sale of its ISO related merchant credit card operations to iPayment,
Inc. in October 2002, Allied ceased its operations as an ISO. Included in the
sale to iPayment, Inc., were all of the merchant credit card processing
relationships owned by Allied. Allied was liquidated on December 31, 2003.
QCR Holdings Capital Trust I ("Trust I") was formed in April 1999 and
capitalized in June 1999 in connection with the public offering of $12 million
of 9.2% trust preferred capital securities due June 30, 2029, which are callable
on June 30, 2004. As a wholly owned subsidiary of the Company, Trust I's assets
had previously been included in the Company's balance sheet consolidation. A
U.S. Securities and Exchange Commission (SEC) ruling, made on December 19, 2003
based on the Financial Accounting Standards Board Interpretation (FIN) No. 46,
required bank holding companies to deconsolidate trust preferred securities from
the balance sheet as of December 31, 2003 for calendar year end companies.
Therefore, the Company's20% equity investment in Trust IVelie Plantation Holding Company, LLC. In 2006, the Company acquired an additional 37% of the membership units bringing its total investment to 57% in aggregate. Velie Plantation Holding Company is engaged in holding the real estate property known as the Velie Plantation Mansion in Moline, Illinois. Six additional investors in Velie Plantation Holding Company have retained 43% of the membership units. The acquisition of a majority of the membership units resulted in minority interest of $566 thousand at December 31, 2003, of
$390 thousand, was included in other assets on the fiscal 2003 year-end balance
sheet. A detailed explanation of FIN No. 46 and its impact on the Company is
presented in the "Impact of New Accounting Standards" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Additional information related to the Company's adoption of FIN No. 46 is
included in Note 1 to the consolidated financial statements.
2006.
Trust Preferred Subsidiaries.In February 2004, the Company issued $12.0 million of fixed/floating rate trust preferred securities and $8.0 million of floating rate capitaltrust preferred securities and $12.0 million of fixed rate capital securities (together, the
"Trust Preferred Securities") ofthrough two newly formed subsidiaries, QCR Holdings Statutory Trust II ("(“Trust II"II”) and QCR Holdings Statutory Trust III ("(“Trust III"III”). The securities represent
undivided beneficial interests in, respectively. Trust II and Trust III which were established
byare each 100% owned non-consolidated subsidiaries of the Company for the purpose of issuing the Trust Preferred Securities. The
Trust Preferred Securities were sold in a private transaction exempt from
registration under the Securities Act of 1933, as amended (the "Act") and have
not been registered under the Act.
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The securities issued byCompany. Trust II and Trust III mature in 30 years. The floating
rate capital securities are callable at par after five years and the fixed rate
capital securities are callable at par after seven years. The floating rate
capital securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the initial rate set at 3.97%, and the fixed rate capital
securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly. Both Trust II and Trust IIIeach used the proceeds from the sale of the Trust Preferred Securitiestrust preferred securities, along with the funds from their equity, to purchase junior subordinated debentures of the Company in the amounts of $8.2 million and $12.4 million, respectively.
On May 5, 2005, the Company issued $5.0 million of floating rate capital securities through a newly formed subsidiary, QCR Holdings Inc. The Company incurred issuance costs of $410 thousand, which will
be amortized over the livesStatutory Trust IV (“Trust IV”). Trust IV is a 100% owned non-consolidated subsidiary of the securities.
The Company intends to use its netCompany. Trust IV used the proceeds for general corporate purposes,
includingfrom the possible redemption in June 2004sale of the $12.0 million of 9.2%
cumulative trust preferred securities issued by Trust I in 1999. If redeemed, the trust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in the amount of $5.2 million.
On February 24, 2006, the Company issued $10.0 million of fixed/floating rate capital securities through a newly formed subsidiary, QCR Holdings Statutory Trust V (“Trust V”). Trust V is a 100% owned non-consolidated subsidiary of the Company. Trust V used the proceeds from the sale of the trust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in 1999 carry approximately $750 thousandthe amount of unamortized issuance costs, which will be expensed as of June 30, 2004.
$10.3 million.
Conclusion.The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust, Rockford Bank & Trust, First Wisconsin Bank & Trust, and Bancard, and 100% of the common securities of Trust I.II, Trust III, Trust IV, and Trust V. The Company also holds an 80% equity interest in M2 Lease Funds and a 57% equity interest in Velie Plantation Holding Company. In addition to such ownership, the Company invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with the subsidiary banks. In addition, to its wholly -ownedwholly-owned and majority-owned subsidiaries, the Company has an aggregate investment of $307$114 thousand in threetwo associated companies, Nobel Electronic Transfer, LLC, and Nobel Real Estate Investors, LLC, and Velie Plantation Holding
Company, LLC. The Company had previously held an investmentowns 20% equity
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positions in Clarity Merchant
Services Inc., which was liquidated on December 31, 2003.
each of these affiliated companies. In June 2005, Cedar Rapids Bank & Trust entered into a joint venture as a 50% owner of Cedar Rapids Mortgage Company, LLC (“Cedar Rapids Mortgage Company”).
The Company and its subsidiaries collectively employed 233351 individuals at December 31, 2003. No one customer accounts for2006.
Business.The Company’s principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits and borrowings. Its operating results are affected by merchant credit card fees, trust fees, deposit service charge fees, fees from the sale of residential real estate loans and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, insurance, and other administrative expenses. The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities, as described more than 10%fully in this form 10-K.
The Board of revenues, loans
or deposits. In August 2002,Governors of the Company's boardFederal Reserve System (the “Federal Reserve”) is the primary federal regulator of directors elected to change
the Company's fiscal year end from June 30 to December 31. Due to this change, the Company filedand its subsidiaries. In addition, Quad City Bank & Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking (the “Iowa Superintendent”), Rockford Bank & Trust is regulated by the State of Illinois Department of Financial and Professional Regulation (“the Illinois DFPR”), and First Wisconsin Bank & Trust is regulated by the State of Wisconsin Department of Financial Institutions (the “Wisconsin DFI”). In addition, the FDIC, as administrator of the Deposit Insurance Fund, has regulatory authority over the subsidiary banks.
Lending.The Company and its subsidiaries provide a Form 10-Kbroad range of commercial and retail lending and investment services to corporations, partnerships, individuals and government agencies. The subsidiary banks actively market their services to qualified lending customers. Lending officers actively solicit the business of new borrowers entering their market areas as well as long-standing members of the local business community. The subsidiary banks have established lending policies which include a number of underwriting factors to be considered in making a loan, including location, loan-to-value ratio, cash flow, interest rate and the credit history of the borrower.
Quad City Bank & Trust’s current legal lending limit is approximately $11.1 million. As of December 31, 2006, commercial loans made up approximately 81% of the loan portfolio, while residential mortgages comprised approximately 10% and consumer loans comprised approximately 9%.
Cedar Rapids Bank & Trust’s current legal lending limit is approximately $4.3 million. As of December 31, 2006, commercial loans made up approximately 85% of the loan portfolio, while residential mortgages comprised approximately 7% and consumer loans comprised approximately 8%.
Rockford Bank & Trust’s current legal lending limit is approximately $2.4 million. As of December 31, 2006, commercial loans made up approximately 88% of the loan portfolio, while residential mortgages and consumer laons comprised approximately 6%.
At First Wisconsin Bank & Trust, commercial loans made up approximately 95% of the loan portfolio, while residential mortgages comprised approximately 3% and consumer loans comprised approximately 2%, at February 28, 2007.
As part of the loan monitoring activity at the four subsidiary banks, credit administration personnel interact closely with senior bank management. The Company has also instituted a separate loan review function to analyze credits of the subsidiary banks. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of these situations.
As noted above, the subsidiary banks are active commercial lenders. The areas of emphasis include loans to wholesalers, manufacturers, building contractors, developers, business services companies and retailers. The banks provide a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the transition period from July 1, 2002acquisition of facilities, equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, the subsidiary banks often take personal
6
guarantees to December 31, 2002 and now holds its annual meetings in May of each year instead
of October. The 2003 annual meeting willhelp assure repayment. Loans may be heldmade on May 5, 2004. The Company's
subsidiaries have also changed their fiscal years aligning theiran unsecured basis if warranted by the overall financial reporting with thatcondition of the Company. Throughout this document referencesborrower. Terms of commercial business loans generally range from one to fiscal 2003 arefive years. A portion of the subsidiary banks’ commercial business loans has floating interest rates or reprice within one year. The banks also make commercial real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower.
The subsidiary banks sell the majority of their real estate loans in the secondary market. During the year ended December 31, 2003. References to2006, the transition period are forsubsidiary banks originated $134.3 million of real estate loans and sold $84.2 million, or 63%, of these loans. During the six months ended December 31, 2002. References to
fiscal 2002 and fiscal 2001 are for the years ended June 30, 2002 and 2001,
respectively. In most instances, results are shown for the fiscal year ended December 31, 2003 along with2005, the six-month transition periodsubsidiary banks originated $122.1 million of real estate loans and sold $99.6 million, or 82%, of these loans. During the two
previous fiscalyear ended December 31, 2004, the subsidiary banks originated $124.6 million of real estate loans and sold $83.5 million, or 67%, of these loans. Generally, the subsidiary banks’ residential mortgage loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature in one to five years, ended June 30.
and then retain these loans in their portfolios. The subsidiary banks’ real estate loan portfolios, net of loans held for sale, were approximately $75.4 million at December 31, 2006. Servicing rights are not presently retained on the loans sold in the secondary market.
The consumer lending departments of each bank provide all types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines.
Competition.The Company currently operates in the highly competitive Quad City, and Cedar Rapids, Rockford, and Milwaukee markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. Additionally, the Company competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits. These competitive trends are likely to continue and may increase as a result of the continuing reduction on restrictions on the interstate operations of financial institutions. Under the Gramm-Leach-Bliley Act of 1999, effective in March of 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which the Company and its subsidiary banks conduct
business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services.
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") regulates the Company and its subsidiaries. In addition, Quad City Bank
& Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent
of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance
Corporation (the "FDIC").
3
Business. The Company's principal business consists of attracting deposits from
the public and investing those deposits in loans and securities. The deposits of
Quad City Bank & Trust and Cedar Rapids Bank & Trust are insured to the maximum
amount allowable by the FDIC. The Company's results of operations are dependent
primarily on net interest income, which is the difference between the interest
earned on its loans and securities and the interest paid on deposits and
borrowings. Its operating results are affected by merchant credit card fees,
trust fees, deposit service charge fees, fees from the sale of residential real
estate loans and other income. Operating expenses include employee compensation
and benefits, occupancy and equipment expense, professional and data processing
fees, advertising and marketing expenses, bank service charges, insurance, and
other administrative expenses. The Company's operating results are also affected
by economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
Lending. The Company and its subsidiaries provide a broad range of commercial
and retail lending and investment services to corporations, partnerships,
individuals and government agencies. Quad City Bank & Trust and Cedar Rapids
Bank & Trust actively market their services to qualified lending customers.
Lending officers actively solicit the business of new borrowers entering their
market areas as well as long-standing members of the local business community.
The subsidiary banks have established lending policies which include a number of
underwriting factors to be considered in making a loan, including location,
loan-to-value ratio, cash flow, interest rate and the credit history of the
borrower.
Quad City Bank & Trust's current legal lending limit is approximately $7.2
million. Its loan portfolio is comprised primarily of commercial, residential
real estate and consumer loans. As of December 31, 2003, commercial loans made
up approximately 81% of the loan portfolio, while residential mortgages
comprised approximately 8% and consumer loans comprised approximately 11%.
Cedar Rapids Bank & Trust's current corporate lending limit is approximately
$2.5 million. Its loan portfolio is comprised primarily of commercial,
residential real estate and consumer loans. As of December 31, 2003, commercial
loans made up approximately 92% of the loan portfolio, while residential
mortgages comprised approximately 3% and consumer loans comprised approximately
5%.
As part of the loan monitoring activity at both subsidiary banks, credit
administration personnel interact with senior bank management weekly. The
Company has also instituted a separate loan review function to analyze credits
of Quad City Bank & Trust and Cedar Rapids Bank & Trust. Management has
attempted to identify problem loans at an early stage and to aggressively seek a
resolution of these situations.
As noted above, both subsidiary banks are active commercial lenders. The areas
of emphasis include loans to wholesalers, manufacturers, building contractors,
developers, business services companies and retailers. Quad City Bank & Trust
and Cedar Rapids Bank & Trust provide a wide range of business loans, including
lines of credit for working capital and operational purposes and term loans for
the acquisition of facilities, equipment and other purposes. Collateral for
these loans generally includes accounts receivable, inventory, equipment and
real estate. In addition, the subsidiary banks often take personal guarantees to
help assure repayment. Loans may be made on an unsecured basis if warranted by
the overall financial condition of the borrower. Terms of commercial business
loans generally range from one to five years. A significant portion of the
subsidiary banks' commercial business loans has floating interest rates or
reprice within one year. Commercial real estate loans are also made. Collateral
for these loans generally includes the underlying real estate and improvements,
and may include additional assets of the borrower.
Residential mortgage lending has been a focal point of Quad City Bank & Trust
and Cedar Rapids Bank & Trust as they continue to build their real estate
lending business. The subsidiary banks' real estate loan portfolios were
approximately $35.6 million at December 31, 2003. The subsidiary banks currently
have eight mortgage originators.
The subsidiary banks sell the majority of their real estate loans in the
secondary market. They typically sell the majority of the fixed rate loans that
they originate. During the year ended December 31, 2003, the subsidiary banks
originated $268.8 million of real estate loans and sold $241.6 million, or90%,
of these loans. During the six months ended December 31, 2002, the subsidiary
banks originated $145.1 million of real estate loans and sold $121.5 million, or
84%, of these loans. During fiscal 2002, the subsidiary banks originated $175.5
million of real estate loans and sold $144.3 million, or 82%, of these loans.
Generally, the subsidiary banks' residential mortgage loans conform to the
underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary
banks to resell loans in the secondary market. The subsidiary banks structure
most loans that will not conform to those underwriting requirements as
adjustable rate mortgages that mature in one to five years. The subsidiary banks
generally retain these loans in their portfolios. Servicing rights are not
presently retained on the loans sold in the secondary market.
4
The consumer lending departments of each bank provide all types of consumer
loans including motor vehicle, home improvement, home equity, signature loans
and small personal credit lines.
Appendices.The commercial banking business is a highly regulated business. See Appendix A for a brief summary of the federal and state statutes and regulations, which are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative statistical information required pursuant to the industry guides promulgated
under the Securities Act of 1933 and 1934,securities laws, relating to the business of the Company. Consistent with the information presented in Form 10-K, results are presented for the fiscal yearyears ended December 31, 2006, 2005, 2004 and 2003, along with the six-month transition period ended December 31, 2002, and the two previous fiscal yearsyear ended June 30. A second presentation shows comparative financial information
restated in calendar year periods for 1999, 2000, 2001 and 2002 consistent with
the Company's current fiscal year.
Internet Site.The Company maintains Internet sites for itself and its twofour banking subsidiaries and thesubsidiaries. The Company makes available free of charge through these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Also available are many of our corporate governance documents, including our Code of Ethics. The sites arewww.qcrh.com, www.qcbt.com, www.crbt.com,www.rfrdbank.com, andwww.firstwisconsinbank.com.
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Item 1.A. Risk Factors
In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:
Our business is concentrated in and www.crbt.com.
dependent upon the continued growth and welfare of the Quad City, Cedar Rapids, Rockford and Milwaukee markets.
We operate primarily in the Quad City, Cedar Rapids, Rockford, and Milwaukee markets, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a particularly strong presence in Bettendorf, Cedar Rapids and Davenport, Iowa and Moline, Illinois and their surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
We face intense competition in all phases of our business from other banks and financial institutions.
The banking and financial services businesses in all of our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services. Additionally, if the regulatory trend toward reducing restrictions on the interstate operations of financial institutions continues, we will continue to experience increased competition as a result.
Increased competition in our markets may also result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to relax our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets and larger lending limits and offer a broader range of financial services than we can offer.
Our community banking strategy relies heavily on our subsidiaries’ independent management teams, and the unexpected loss of key managers may adversely affect our operations.
We rely heavily on the success of our bank subsidiaries’ independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain executive officers, the current management teams, branch managers and loan officers of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
8
Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. However, we may at some point need to raise additional capital to support our continued growth. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth, branching,de novobank formations and/or acquisitions could be materially impaired.
We may experience difficulties in managing our growth and our growth strategy involves risks that may negatively impact our net income.
While we have no current plans, we may expand into additional communities or attempt to strengthen our position in our current markets by undertaking additionalde novobank formations or branch openings. Based on our experience, we believe that it generally takes several years for new banking facilities to achieve overall profitability, due to the impact of organization and overhead expenses and the start-up phase of generating loans and deposits. If we undertake additional branching andde novobank and business formations, we are likely to continue to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruption to our business.
In addition to branching andde novobank formations, we may acquire banks and related businesses that we believe provide a strategic fit with our business. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses will involve similar risks to those commonly associated with branching andde novobank formations, but may also involve additional risks, including:
| • | potential exposure to unknown or contingent liabilities of banks and businesses we acquire; | ||
| • | exposure to potential asset quality issues of the acquired bank or related business; | ||
| • | difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; and | ||
| • | the possible loss of key employees and customers of the banks and businesses we acquire. |
Interest rates and other conditions impact our results of operations.
Our profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures About Market Risk” included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
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We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.
The majority of our subsidiary banks’ loan/lease portfolios are invested in commercial loans/leases, and we focus on lending to small to medium-sized businesses. The size of the loans/leases we can offer to commercial customers is less than the size of the loans/leases that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area’s largest businesses. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans/leases and tend to make loans/leases to larger businesses. Collateral for these loans/leases generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to commercial loans/leases, our subsidiary banks are also active in residential mortgage and consumer lending.
Commercial and industrial loans/leases make up a large portion of our loan/lease portfolio.
Commercial and industrial loans/leases were $449.2 million, or approximately 47% of our total loan/lease portfolio as of December 31, 2006. Our commercial loans/leases are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory and equipment. Credit support provided by the borrower for most of these loans/leases and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans/leases may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Our loan/lease portfolio has a significant concentration of commercial real estate loans, which involve risks specific to real estate value.
Commercial real estate lending comprised a significant portion of our loan/lease portfolio, $350.3 million or approximately 36%, as of December 31, 2006. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Although a significant portion of such loans are secured by real estate as a secondary form of collateral, adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
Our allowance for loan/lease losses may prove to be insufficient to absorb potential losses in our loan/lease portfolio.
We established our allowance for loan/lease losses in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in
10
interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2006, our allowance for loan/lease losses as a percentage of total gross loans/leases was 1.10% and as a percentage of total non-performing loans/leases was approximately 144%. Although management believes that the allowance for loan/lease losses is adequate to absorb losses on any existing loans/leases that may become uncollectible, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance for loan/lease losses will prove sufficient to cover actual loan/lease losses in the future. Loan/lease losses in excess of our reserves may adversely affect our business, financial condition and results of operations. Additional information regarding our allowance for loan/lease losses and the methodology we use to determine an appropriate level of reserves is located in the “Management’s Discussion and Analysis” section included under Item 5 of Part II of this Form 10-K.
Our Bancard operation faces other risks.
Bancard, our credit card processing subsidiary, is subject to certain risks, which could have a negative impact on its operations. Primarily, for Bancard these risks are competition, credit risks and the possibility that merchants’ willingness to accept credit cards will decline. Many of Bancard’s competitors have greater financial, technological, marketing and personnel resources than Bancard and there can be no assurance that Bancard will be able to compete effectively with such entities.
Bancard is also subject to credit risks. When a billing dispute arises between a cardholder and a merchant, and if the dispute is not resolved in favor of the merchant, the transaction is charged back to the merchant. If Bancard is unable to collect such chargeback from the merchant’s account, and if the merchant refuses or is unable to reimburse Bancard for the chargeback due to bankruptcy or other reasons, Bancard bears the loss for the amount of the refund paid to the cardholder. Bancard, in general, handles processing for smaller merchants, which may present greater risk of loss. Although Bancard maintains a reserve against these losses, there is no assurance that it will be adequate.
Additionally, VISA and MasterCard have the ability to increase the “interchange” rates charged to merchants for credit card transactions. There can be no assurance that merchants will continue to accept credit cards as payment if they feel rates are too high. Bancard is also subject to an approval process by the VISA and MasterCard credit card associations. In the event Bancard fails to comply with these standards, Bancard’s designation as a certified processor could be suspended or terminated. There can be no assurance that VISA or MasterCard will maintain Bancard’s registrations or that the current VISA or MasterCard rules allowing Bancard to provide transaction processing services will remain in effect.
We have a continuing need for technological change and we may not have the resources to effectively implement new technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market areas. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer
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break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
Government regulation can result in limitations on our operations.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the FDIC, the Iowa Superintendent, the Illinois DFPR, and the Wisconsin DFI. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of stockholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect profitability. For example, new legislation or regulation may limit the manner in which we may conduct our business, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
Failure to pay interest on our debt or dividends on our preferred stock may adversely impact our ability to pay common stock dividends.
As of December 31, 2006, we had $36.1 million of junior subordinated debentures held by four business trusts that we control. Interest payments on the debentures, which totaled $2.5 million for 2006, must be paid before we pay dividends on our capital stock, including our Common Stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. In the fourth quarter of 2006, the Company issued 268 shares of its Series B Non-cumulative Perpetual Preferred Stock (the “Preferred Shares”) at $50 thousand per share with a stated rate of 8.00%, although the Preferred Shares will accrue no dividends. Dividends will be payable on the Preferred Shares only if declared, but no dividends may be declared on the Company’s common stock unless and until dividends have been declared on the outstanding shares. Deferral, of either interest payments on the debentures or preferred dividends on the Preferred Shares, could cause a subsequent decline in the market price of our Common Stock because the Company would not be able to pay dividends on its Common Stock.
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There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price stockholders paid for them.
Although our common shares are listed for quotation on The Nasdaq Capital Market, the trading in our common shares has substantially less liquidity than many other companies listed on Nasdaq. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that the volume of trading in our common shares will increase in the future.
Item 1.B. Unresolved Staff Comments
There are no unresolved staff comments.
Item 2. Property
Properties
The original office of Quad City Bank & Trust is in a 6,700 square foot facility, which was completed in January 1994. In March 1994, Quad City Bank & Trust acquired that facility, which is located at 2118 Middle Road in Bettendorf, Iowa.
Construction of a second full service banking facility was completed in July 1996 to provide for the convenience of customers and to expand the market territory. Quad City Bank & Trust also owns that facility which is located at 4500 Brady Street in Davenport, Iowa. The two-story building is in two segments that are separated by an atrium. Originally, Quad City Bank & Trust owned the
south half of the building, while the north half was owned by the developer.
Quad City Bank & Trust acquired the northern segment of this facility in August
2003. Each segment has two floors that are 6,000 square feet. In addition, the southern segment has a 6,000 square foot basement level. In the southern segment, Quad City Bank & Trust occupies the first floor and utilizes the basement, for operational functions, item processing and storage. At December 31,
2003, approximately 1,500 square feet on the second floor of the southern
segmentwhich underwent remodeling during 2004 Renovations were leased to a professional services firm, and approximately 4,500
square feet were occupied by various operational and administrative functions,
which prior to January 2003 had been located in an adjacent office building.
Renovations are nearly completealso completed during 2004 on both floors of the northern segment of the building, which will beis now utilized by additional operational and administrative functions of Quad City Bank & Trust and the Company.
Renovation of a third full service banking facility was completed in February 1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near the intersection of 7th Street and John Deere Road in Moline, Illinois near the Rock Island/Moline border. The building is owned by a third party limited liability company, in which the Company has a 20%57% interest. Quad City Bank & Trust and Bancard are the building'sbuilding’s major tenants. Quad City Bank & Trust occupies the main floor of the structure.structure and a portion of the lower level. Bancard relocated its operations to the lower level of the 30,000 square foot building in late 1997. The Company relocated its corporate headquarters to the building in February 1998 and occupies approximately 2,0003,800 square feet on the second floor.
In March 1999, Quad City Bank & Trust acquired a 3,000 square foot office
building adjacent to the Brady Street location. At December 31, 2002, the office
space was utilized for various operational and administrative functions. In
January 2003, this building was sold, and these operations were moved to occupy
vacant space on the second floor of the Brady street facility.
Construction of a fourth full service banking facility was completed in October 2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City Bank & Trust leases approximately 6,000 square feet on the first floor and 2,200 square feet on the lower level of the 24,000 square foot facility. The office opened in October 2000.
Plans were
In September 2003, the Company announced in October 2003plans for a fifth Quad City Bank & Trust to add a fifth
full service banking facility. The facility, is to be located in thewest Davenport, Iowa at Five Points. The facility was completed and began operations in March 2005. Quad City Bank & Trust’s Five Points area of west Davenport, Iowa. Demolition of existing structures on the site has
been completed, and construction of the new facilitybranch is scheduled for completion
in late 2004 or early 2005.
5
a 12,000 square foot facility.
The Company announced plans, in April 2001, to expand its banking operations to the Cedar Rapids, Iowa market. Initially, from June until mid-September 2001, the Cedar Rapids operation functioned as a branch of Quad City Bank & Trust while waiting for regulatory approvals for a new state bank charter. On September 14, 2001, the Cedar Rapids branch operation was converted into the new charter and began operations as Cedar Rapids Bank & Trust Company. Until the summer of 2005, Cedar Rapids Bank & Trust leasesleased approximately 8,200 square feet in the GreatAmerica Building 625 First Street, S.E. in downtown Cedar Rapids, which currently serveshad served as its only office.
In February 2004, Cedar Rapids Bank & Trust announced plans to build a four floor building in downtown Cedar Rapids. The bank'sbank’s main office will be relocated to this site in July 2005, when construction is completed, which is anticipated to
be early in 2005.was completed. Cedar Rapids Bank & Trust will ownowns the lower three floors of the facility, and an unrelated third party will ownowns the fourth floor in a
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condominium arrangement with the bank. The bank isIn the summer of 2005, Cedar Rapids Bank & Trust also considering thecompleted construction ofon a branch office in northern Cedar Rapids during 2004.on Council Street. Cedar Rapids Bank & Trust’s first branch facility began operations on June 2, 2005.
The Company announced plans in June 2004 to expand banking operations to the Rockford, Illinois market. Initially, from September through December 2004, the Rockford operation functioned as a branch of Quad City Bank & Trust while waiting for regulatory approvals for a new state bank charter in Illinois. On January 3, 2005, the Rockford branch operation was converted into the Company’s third charter and began operations as Rockford Bank and Trust Company. Rockford Bank & Trust leases approximately 7,800 square feet in the Morrissey Building at 127 North Wyman Street in downtown Rockford, which serves as its main office. In the third quarter of 2005, Rockford Bank & Trust moved forward with plans for a second banking location on Guilford Road at Alpine Road in Rockford. A temporary modular facility opened in December 2005. In November 2006, the Company completed construction of a 20,000 square foot permanent facility at a cost of $5.5 million.
In April 2006, the Company expanded Rockford Bank & Trust’s banking operation to the Milwaukee, Wisconsin area. Through February 2007, this operation functioned as an arm of Rockford Bank & Trust, initially as a loan production/deposit production office (LPO/DPO), then later as a branch. On February 20, 2007, First Wisconsin Bank and Trust obtained a Wisconsin charter. Under a month-to-month agreement, First Wisconsin Bank & Trust leases approximately 2,100 square feet in a multi-tenant office building on Quail Court in Pewaukee, Wisconsin.
The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company.
Quad City Bank & Trust and Cedar Rapids Bank & Trust intend to limit their
investment in premises to no more than 50% of their capital. The subsidiary
banks frequently invest in commercial real estate mortgages and also invest in
residential mortgages. Quad City Bank & Trust and Cedar Rapids Bank & Trust have
established lending policies which include a number of underwriting factors to
be considered in making a loan including, location, loan-to-value ratio, cash
flow, interest rate and credit worthiness of the borrower.
No individual real estate property or mortgage amounts to 10% or more of consolidated assets.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of the Company for a vote during the fourth quarter of the fiscal year ended December 31, 2003.
2006.
Part II
Item 5. Market for Registrant'sRegistrant’s Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities
The common stock, par value $1.00 per share, of the Company is tradedlisted on The Nasdaq SmallCapCapital Market under the symbol "QCRH"“QCRH”. The stock began trading on October 6, 1993. As of December 31, 2003,2006, there were 2,803,8444,560,629 shares of common stock outstanding held by approximately 2,4002,600 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by The Nasdaq SmallCapCapital Market, for the periods indicated.
| 2006 | 2005 | 2004 | ||||||||||||||||||||||
| sales price | sales price | sales price | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
| First quarter | $ | 19.660 | $ | 17.440 | $ | 22.000 | $ | 20.000 | $ | 22.000 | $ | 18.667 | ||||||||||||
| Second quarter | 19.950 | 16.250 | 22.060 | 19.830 | 19.667 | 17.400 | ||||||||||||||||||
| Third quarter | 18.169 | 16.210 | 22.750 | 20.500 | 19.940 | 17.550 | ||||||||||||||||||
| Fourth quarter | 18.860 | 16.772 | 20.500 | 17.920 | 21.990 | 18.000 | ||||||||||||||||||
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On May 8, 2003,April 27, 2006, the Company declared a cash dividend of $0.04 per share, or $182 thousand, which was paid on July 7, 2006, to stockholders of record on June 23, 2006. On October 26, 2006, the board of directors declared a cash dividend of $0.05 payable
on July 3, 2003, to stockholders of record on June 16, 2003. On October 23,
2003, the board of directors declared a cash dividend of $0.06$0.04 per share payable on January 5, 2004,2007, to stockholders of record on December 15, 2003.22, 2006. In the future, it is the Company'sCompany’s intention to continue to consider the payment of dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital for continued growth, but believes that operating results have reached a level that can sustain dividends to stockholders as well. The Company has issued junior subordinated debentures in twofour private placements and one public offering.placements. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. During the fourth quarter of 2006, the Company issued shares of noncumulative perpetual preferred stock. Also, under the terms of this preferred stock, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances currently exist.
6
Under Iowa law, Quad City Bank & Trust and Cedar Rapids Bank & Trustapplicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Iowa, Illinois and Wisconsin law provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits. Before declaring its first dividend, Rockford Bank & Trust, as ade novoinstitution, is required by Illinois law to carry at least one-tenth of its net profits since the issuance of its charter to its surplus until its surplus is equal to its capital.
The Iowa BankingFederal Reserve Act providesalso imposes limitations on the amount of dividends that an Iowamay be paid by state member banks, such as the banks. Generally, a member bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank’s board of directors deems prudent. Without prior Federal Reserve approval, however, a state member bank may not pay dividends in an amount greater than its undivided profits. Quad Cityany calendar year that, in the aggregate, exceed the bank’s calendar year-to-date net income plus the bank’s retained net income for the two preceding calendar years. The Federal Reserve’s approval for Rockford Bank & Trust and Cedar
Rapidsto become a member bank is conditioned upon Rockford Bank & Trust are membersTrust’s commitment that without prior Federal Reserve approval, it will not pay dividends until after it has been in operation for three years and has received two consecutive satisfactory composite CAMELS ratings. Notwithstanding the availability of funds for dividends, however, the banks’ regulators may prohibit the payment of any dividends by the banks if they determine that such payment would constitute an unsafe or unsound practice. The Company’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve System.applicable to bank holding companies. The total of all
dividends declared by the subsidiary banks in a calendar year may not exceed the
total of their net profits of that year combined with their retained net profits
of the preceding two years. In addition, the Federal Reserve Board, the Iowa
Superintendent and the FDIC are authorized under certain circumstances to
prohibit the payment of dividends by Quad City Bank & Trust and Cedar Rapids
Bank & Trust. In the case of the Company, further restrictions on dividends may
be imposedany financial institution or its holding company is affected by the Federal Reserve Board.
There were no repurchasesrequirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.
The Company did not repurchase any of the Company's ownits common stock during the fourth quarter of 2003.
7
2006.
15
Stockholder Return Performance Presentation
The following graph indicates, for the period commencing December 31, 2001, a comparison of cumulative total returns for QCR Holdings, Inc., the Nasdaq Capital Market (US Companies) and the SNL Midwest Bank Index prepared by SNL Securities, Charlottesville, Virginia. The graph was prepared at the Company’s request by SNL Securities.
QCR Holdings, Inc.
| Period Ending | ||||||||||||||||||||||||
| Index | 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | ||||||||||||||||||
| QCR Holdings, Inc. | 100.00 | 153.13 | 254.91 | 287.94 | 271.19 | 244.20 | ||||||||||||||||||
| NASDAQ Composite | 100.00 | 68.76 | 103.67 | 113.16 | 115.57 | 127.58 | ||||||||||||||||||
| SNL NASDAQ Bank Index | 100.00 | 102.85 | 132.76 | 152.16 | 147.52 | 165.62 | ||||||||||||||||||
Item 6. Selected Financial Data
The following "Selected“Selected Consolidated Financial Data"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
and Supplementary Data."“Financial Statements.” Results for past periods are not necessarily indicative of results to be expected for any future period.
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SELECTED CONSOLIDATED FINANCIAL DATA
(dollars
(dollars in thousands, except per share data)
(dollars in thousands, except per share data)
| Years Ended December 31, | ||||||||||||||||||||||||||||
| Six Months | Year | |||||||||||||||||||||||||||
| Ended | Ended | |||||||||||||||||||||||||||
| December | June 30, | |||||||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 31, 2002 | 2002 | |||||||||||||||||||||||
Statement of Income Data: | ||||||||||||||||||||||||||||
| Interest income | $ | 68,803 | $ | 48,688 | $ | 38,017 | $ | 33,378 | $ | 16,120 | $ | 28,520 | ||||||||||||||||
| Interest expense | 38,907 | 21,281 | 13,325 | 11,950 | 6,484 | 12,870 | ||||||||||||||||||||||
| Net interest income | 29,896 | 27,407 | 24,692 | 21,428 | 9,636 | 15,650 | ||||||||||||||||||||||
| Provision for loan/lease losses | 3,284 | 877 | 1,372 | 3,405 | 2,184 | 2,265 | ||||||||||||||||||||||
| Noninterest income | 11,983 | 10,073 | 8,682 | 11,168 | 8,840 | 7,915 | ||||||||||||||||||||||
| Noninterest expenses | 34,669 | 29,433 | 24,281 | 21,035 | 11,413 | 17,023 | ||||||||||||||||||||||
| Pre-tax net income | 3,926 | 7,170 | 7,721 | 8,156 | 4,879 | 4,277 | ||||||||||||||||||||||
| Minority interest in income of consolidated subsidiaries | 266 | 78 | — | — | — | — | ||||||||||||||||||||||
| Income tax expense | 858 | 2,282 | 2,504 | 2,695 | 1,683 | 1,315 | ||||||||||||||||||||||
| Net income | 2,802 | 4,810 | 5,217 | 5,461 | 3,196 | 2,962 | ||||||||||||||||||||||
Per Common Share Data: | ||||||||||||||||||||||||||||
| Net income-basic | $ | 0.57 | $ | 1.06 | $ | 1.23 | $ | 1.31 | $ | 0.77 | $ | 0.74 | ||||||||||||||||
| Net income-diluted | 0.57 | 1.04 | 1.20 | 1.28 | 0.76 | 0.72 | ||||||||||||||||||||||
| Cash dividends declared | 0.08 | 0.08 | 0.08 | 0.07 | 0.03 | — | ||||||||||||||||||||||
| Dividend payout ratio | 14.04 | % | 7.55 | % | 6.50 | % | 5.34 | % | 3.90 | % | — | % | ||||||||||||||||
Balance Sheet: | ||||||||||||||||||||||||||||
| Total assets | $ | 1,271,675 | $ | 1,042,614 | $ | 870,084 | $ | 710,040 | $ | 604,600 | $ | 518,828 | ||||||||||||||||
| Securities | 194,774 | 182,365 | 149,561 | 128,843 | 81,654 | 76,231 | ||||||||||||||||||||||
| Loans/leases | 960,747 | 756,254 | 648,351 | 522,471 | 449,736 | 390,594 | ||||||||||||||||||||||
| Allowance for estimated losses on loans/leases | 10,612 | 8,884 | 9,262 | 8,643 | 6,879 | 6,111 | ||||||||||||||||||||||
| Deposits | 875,447 | 698,504 | 588,016 | 511,652 | 434,748 | 376,317 | ||||||||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||||||||||||
| Preferred | 12,884 | — | — | — | — | — | ||||||||||||||||||||||
| Common | 57,999 | 54,467 | 50,774 | 41,823 | 36,587 | 32,578 | ||||||||||||||||||||||
Key Ratios: | ||||||||||||||||||||||||||||
| Return on average assets | 0.24 | % | 0.51 | % | 0.65 | % | 0.83 | % | 1.13 | % | 0.64 | % | ||||||||||||||||
| Return on average common equity | 5.02 | 9.14 | 11.89 | 13.93 | 18.41 | 10.07 | ||||||||||||||||||||||
| Return on average total equity | 4.85 | 9.14 | 11.89 | 13.93 | 18.41 | 10.07 | ||||||||||||||||||||||
| Net interest margin (TEY) (1) | 2.87 | 3.25 | 3.41 | 3.55 | 3.68 | 3.74 | ||||||||||||||||||||||
| Efficiency ratio (2) | 82.78 | 78.53 | 72.75 | 64.53 | 61.71 | 72.20 | ||||||||||||||||||||||
| Nonperforming assets to total assets | 0.58 | 0.36 | 1.23 | 0.70 | 0.83 | 0.44 | ||||||||||||||||||||||
| Allowance for estimated losses on loans/leases to total loans/leases | 1.10 | 1.17 | 1.43 | 1.65 | 1.53 | 1.56 | ||||||||||||||||||||||
| Net charge-offs to average loans/leases | 0.18 | 0.25 | 0.13 | 0.34 | 0.34 | 0.12 | ||||||||||||||||||||||
| Average total stockholders’ equity to average assets | 5.01 | 5.63 | 5.49 | 5.94 | 6.12 | 6.38 | ||||||||||||||||||||||
| Earnings to fixed charges | ||||||||||||||||||||||||||||
| Excluding interest on deposits | 1.31 | x | 1.78 | x | 2.11 | x | 2.51 | x | 2.90 | x | 1.95 | x | ||||||||||||||||
| Including interest on deposits | 1.10 | 1.32 | 1.56 | 1.66 | 1.73 | 1.32 | ||||||||||||||||||||||
| (1) | Interest | |
| (2) | Noninterest expenses divided by the sum of net interest income before provision for |
17
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides additional information regarding our operations for the twelve months endedtwelve-month periods ending December 31, 20032006, 2005, and 2002, the six
months ended December 31, 2002 and 2001, and the fiscal years ended June 30,
2002 and 2001,2004, and financial condition at December 31, 2003, December 31, 2002,2006 and June 30, 2002. In August 2002, the Company's board of directors elected to
change the Company's fiscal year end from June 30 to December 31. Due to this
change, the Company filed last year for the transition period from July 1, 2002
to December 31, 2002. Throughout this document, reference to fiscal 2003, the
transition period, fiscal 2002 and 2001 are for the year ended December 31,
2003, the six months ended December 31, 2002, and the years ended June 30, 2002
and 2001, respectively.2005. This discussion should be read in conjunction with "Selected“Selected Consolidated Financial Data"Data” and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.
Overview
The Company was formed in February 1993 for the purpose of organizing Quad City Bank & Trust andTrust. Over the past fourteen years, the Company has grown to $710.0 million in consolidated assets asinclude three additional banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2003. Management expects continued opportunities for growth, even
though2006, the rate of growth may be slower than that experienced to date.
Company had $1.27 billion in consolidated assets.
The Company reported earnings of $5.5$2.8 million or $1.96$0.57 basic earnings per share for fiscal 2003 as2006, compared to $4.8 million or $1.75 basic earnings per share
for the twelve months ended December 31, 2002, $3.2 million or $1.16 basic
earnings per share for the six-month transition period ended December 31, 2002,
$3.0 million or $1.10 basic earnings per share for fiscal 2002, and $2.4 million or $1.06 basic earnings per share for fiscal 2001.2005, and $5.2 million or $1.23 basic earnings per share for 2004. In October 2002,2006, increased costs for funding, increased operating expenses, primarily salaries and employee benefits, and the write-off of a single credit relationship combined to more than offset the solid growth in revenue, of 37%, experienced from the previous year. Also, during the second half of 2006, the Company’s results reflected the start-up losses experienced by the Milwaukee branch of Rockford Bank & Trust. Earnings for 2005 were negatively impacted by anticipated increases in both personnel and facilities costs, as the subsidiary banks opened four new banking locations during the year, and by a related write-off of $332 thousand of tenant improvements at a previously occupied facility. Also during 2005, the Company sold its ISO-related merchant credit card portfolioabsorbed the start-up losses experienced by Rockford Bank & Trust, which opened at the beginning of 2005. Earnings for 2004 reflected the Company’s issuance of $8.0 million in floating rate and $12.0 million in fixed/floating rate trust preferred securities. In connection with this issuance, the Company redeemed, on June 30, 2004, $12.0 million of trust preferred securities originally issued in 1999. Prior to iPayment, Inc., however
Bancard continued to processthis redemption, the portfolio's transactions through September
2003.Company had expensed $747 thousand of unamortized issuance costs associated with the 1999 trust preferred securities in March 2004. The Company's earnings for fiscal 2003 were positively impacted by the
continued processingwrite-off of these ISO volumes. This continued ISO processingcosts, combined with the additional interest costs of supporting both the original and the new securities from February through June, resulted in additionalan after-tax reduction to net income in fiscal 2003during 2004 of $900$729 thousand, or $0.32 per
share. The sale in October 2002 resulted in a gain of $1.3 million, after income
tax and related expenses, or $0.47$0.17 in diluted earnings per share, and was a
significant contributor to the 139% increase in earnings for the six-months
ended December 31, 2002 whenshare.
When compared to the same period2005, there was solid growth in 2001. The 24%
increase in fiscal 2002 earnings from fiscal 2001 was attributable primarily to
significant increases2006 in both net interest income and noninterest income partially offset by an increase in noninterest expense.
Excluding both the one-time gain from the sale of the ISO portfolio in October
2002, as well as the non-recurring revenue from the continued processing through
September 2003, net income for the twelve months ended December 31, 2002 would
have been $3.5 million, or diluted earnings per share of $1.24, and net income
for the twelve months ended December 31, 2003 would have been $4.6 million, or
diluted earnings per share of $1.61. This represents a 30% improvement in
adjusted diluted earnings per share year to year. Although excluding the impact
of these events is a non-GAAP measure, management believes that it is important
to provide such information due to the non-recurring nature of this income and
to more accurately compare the results of the periods presented.
When compared to the same period in 2002, the fiscal year ended December 31,
2003 reflected significant growth in bothCompany. For 2006, net interest income and gains on sales
of loans, net, for the Company. For fiscal 2003, net interestnoninterest income and gains
on sales of loans, net, improved by 19%9% and 40%19%, respectively, for a combined increase of $4.4 million when compared to 2005. A marked increase in the twelve months ended December 31,
2002. Both Quad City Bank & Trust and Cedar Rapids Bank & Trust generated markedprovision for loan/lease losses of $2.4 million from 2005 to 2006 essentially offset the improvement in net interest margin, as well as increasesincome from year-to-year. A negative development with a single credit relationship in the gainsMilwaukee portfolio prompted a write-off, which resulted in an additional loan loss provision of $992 thousand during the fourth quarter of 2006. Gains on sales of residential real estate loans for fiscal 2003. Bancard's continued processing
throughforeclosed assets and deposit service fees contributed an additional $972 thousand, in aggregate, to the first nine months of 2003 of the ISO-related merchant credit card
portfolio that was sold, contributed $1.3 million ofCompany’s noninterest income. PartiallyMore than offsetting theseadditional revenue contributions for the Company was an increaseduring 2006 were increases in noninterest expense of $845 thousand.$5.2 million. The primary contributor to the increase in noninterest expense was salaries and employee benefits, which increased $1.3$4.8 million from 2005. During 2006, the same periodCompany experienced a 15% increase in 2002. Stock appreciation rights (SAR) expense
was $915 thousand for the year, asaverage number of employees to 329, in tandem with increases in the Company's stock price grew from $16.90 to
$28.00cost of several employee compensation programs. Also, during 2003. For the fiscal year ended December 31, 2003, net income for
Cedar Rapids Bank & Trust was $192 thousand as compared to a net losssecond half of $753
thousand for2006, the same period in 2002. Management is pleasedCompany incurred $2.0 million of pretax operating costs associated with the outstanding
progress that Cedar Rapids Bank & Trust has madestart-up of the new banking operation in only its second full year of
operation.
9
Milwaukee, Wisconsin.
The Company'sCompany’s results of operations are dependent primarily on net interest income, which is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The Company's
Net interest income increased $2.5 million, or 9%, to $29.9 million for 2006, from $27.4 million for 2005. For 2006, average tax equivalent yield on interest earning assets decreased 0.80% for the
twelve months ended December 31, 2003 as compared to the same period in 2002.
With the same comparison, theincreased by $205.8 million, or 24%, and average cost of interest-bearing liabilities decreased 0.74%increased by $200.4
18
million, or 26%, which resulted in a 0.06% decrease in the net interest spreadwhen compared with average balances for 2005. A comparison of 3.21% at December 31, 2002 compared to 3.15% at December 31, 2003. Resultingyields, spreads and margins from the prolonged low rate environment,2006 to 2005 shows the relative stability in the net
interest spread from year to year did not carry over to the net interest margin.
For the fiscal year ended December 31, 2003, net interest margin was 3.55%
compared to 3.72% for the like period in 2002. Management continuesfollowing:
| • | The average yield on interest-earning assets increased 80 basis points to 6.55%. | ||
| • | The average cost of interest-bearing liabilities increased 125 basis points to 4.04%. | ||
| • | The net interest spread declined 45 basis points from 2.96% to 2.51%. | ||
| • | The net interest margin declined 38 basis points from 3.25% to 2.87%. |
The Company’s management closely monitormonitors and managemanages net interest margin. From a profitability standpoint, an important challenge for the Company’s subsidiary banks is to maintainthe maintenance of their net interest margins. Management continues to addresscontinually addresses this issue with the use of alternative funding sources and pricing strategies.
The Company'sCompany’s operating results are also affected by sources of noninterest income, including merchant credit card fees, trust fees, deposit service charge fees, gains from the sales of residential real estate loans and other income. Operating expenses of the Company include employee compensation and benefits, occupancy and equipment expense and other administrative expenses. The Company'sCompany’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The majority of the subsidiary banks'banks’ loan portfolios are invested in commercial loans. Deposits from commercial customers represent a significant funding source, as well.
The Company has addedcontinued to add facilities and employees to accommodate both itsour historical growth and anticipated future growth. As such, overhead expenses have had a significant impact on earnings. This trend is likely to continue as boththe Company and our four banks continue to add the facilities and resources necessary to attract and serve additional customers
During 1994, Quad City Bank & Trust began to develop internally a merchant
credit card processing operation and in 1995 transferred this function to
Bancard, a separate subsidiary of the Company. Bancard initially had an
arrangement to provide processing services exclusively to merchants of a single
independent sales organization or ISO. This ISO was sold in 1998, and the
purchaser requested a reduction in the term of the contract. Bancard agreed to
amend the contract to reduce the term and accept a fixed monthly processing fee
of $25 thousand for merchants existing at the time the agreement was signed, and
a lower transaction fee for new merchants, in exchange for a payment of $2.9
million, the ability to transact business with other ISOs and the assumption of
the credit risk by the ISO. Approximately two thirds of the income from this
settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of
$732 thousand being recognized during fiscal 1999. Bancard terminated its
processing for this ISO in May 2000, eliminating approximately 64% of its
average monthly processing volume. Prior to this ISO's termination, Bancard's
average monthly processing volume for fiscal 2000 was $91 million. During both
fiscal 2001 and 2002, Bancard worked to establish additional ISO relationships
and further develop the relationships with existing ISOs successfully rebuilding
and expanding processing volumes. Bancard's average monthly dollar volume of
transactions processed during fiscal 2001 was $76 million. During fiscal 2002,
the average monthly dollar volume of transactions processed by Bancard increased
36% to $104 million. Monthly processing volumes at Bancard during fiscal 2002
climbed to a level above that existing prior to the termination of all
processing with the initial ISO.
10
On October 22, 2002, the Company announced Bancard's sale of its ISO related
merchant credit card operations to iPayment, Inc. for $3.5 million. After
contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a net gain of $1.3 million, or $0.47
per share, which was realized during the quarter ended December 31, 2002. Also
included in the sale were all of the merchant credit card processing
relationships owned by Bancard's subsidiary, Allied. Bancard will continue to
provide credit card processing for its local merchants and cardholders of the
subsidiary banks and agent banks. The Company anticipated that the termination
of the ISO-related merchant credit card processing would reduce Bancard's future
earnings. Bancard continued to process transactions for iPayment, Inc. through
September 2003. As anticipated, the reduced processing volumes that Bancard
experienced during the fourth quarter of 2003 resulted in a decline in quarterly
merchant credit card fees, net of processing costs for the Company. The fourth
quarter of 2003 generated $416 thousand of merchant credit card fees, net of
processing costs, as compared to $784 thousand for the third quarter of 2003.
Regardless of this decline in processing volumes and fees and the resulting
reduction in operating results from prior quarters, the Company believes that on
a smaller scale Bancard will remain profitable with its narrowed business focus
of providing credit card processing for its local merchants and agent banks and
for cardholders of the Company's subsidiary banks.
During fiscal 1998, Quad City Bank & Trust expanded its presence in the mortgage
banking market by hiring several experienced loan originators and an experienced
underwriter, and now has eight loan originators on staff. Quad City Bank & Trust
and Cedar Rapids Bank & Trust originate mortgage loans on personal residences
and sell the majority of these loans into the secondary market to avoid the
interest rate risk associated with long-term fixed rate financing. The
subsidiary banks realize revenue from this mortgage banking activity from a
combination of loan origination fees and gains on the sale of the loans in the
secondary market. During the twelve months ended December 31, 2003, the
subsidiary banks originated $268.8 million of real estate loans and sold $241.6
million, or90%, of these loans resulting in gains of $3.7 million. During the
six months ended December 31, 2002, the subsidiary banks originated $145.1
million of real estate loans and sold $121.5 million, or 84%, of these loans
resulting in gains of $1.9 million. During fiscal 2002, the subsidiary banks
originated $175.5 million of real estate loans and sold $144.3 million, or 82%,
of these loans, which resulted in gains of $2.0 million. The depressed interest
rates during these periods have caused a significant increase in the subsidiary
banks' mortgage origination volume. In fiscal 2001, Quad City Bank & Trust
originated $97.6 million of real estate loans and sold $92.9 million, or 95%, of
these loans resulting in gains of $1.1 million.
customers.
Trust department income continues to be a significant contributor to noninterest income. During 2006, trust department fees contributed $3.0 million. During 2005, trust department fees totaled $2.8 million. Trust department fees contributed $2.2$2.5 million in revenues during fiscal
2003. In the six months ended December 31, 2002, trust department fees
contributed $1.0 million in revenues. Trust department fees grew from $2.1
million in fiscal 2001 to $2.2 million in fiscal 2002.2004. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. Assets under administration at December 31, 20032006 increased $82.9 million during the year to $673.5$894.1 million, resulting primarily from the development of existing relationships and the addition of new trust relationships. AtAssets under administration at December 31, 2002, assets under administration2005 were $642.7
million. The decrease$811.2 million, which was an increase of $23.0$32.8 million in trust assets from June 30 to December 31, 2002 was a reflection of the reduced market values of securities held in
trust accounts. Primarily as a result of new trust relationships,2004, when assets under
administration had grown from $617.5 at June 30, 2001 to $665.7 million at June
30, 2002.
The Company's initial public offering during the fourth calendar quarter of 1993
raised approximately $14totaled $778.4 million. In order to provide additional capital to
support the growth of Quad City Bank & Trust, the Company formed a statutory
business trust, which issued $12 million of capital securities to the public for
cash in June 1999. In conjunction with the formation of Cedar Rapids Bank &
Trust, the Company sold approximately $5.0 million of its common stock through a
private placement offering in September 2001, primarily to investors in the
Cedar Rapids area. In February 2004, the Company formed two additional trusts,
which, in a private transaction, issued $8.0 million of floating rate capital
securities and $12.0 million of fixed rate capital securities. The Company
intends to use the net proceeds for general corporate purposes, including the
possible redemption, in June 2004, of the $12.0 million of capital securities
issued in 1999.
11
Critical Accounting Policy
The Company'sCompany’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 loanloan/lease losses. The Company'sCompany’s allowance for loanloan/lease loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loanloan/lease loss that management believes is appropriate at each reporting date. Quantitative factors include the Company'sCompany’s historical loss experience, delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans,loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans,loans/leases, including borrowers'borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company'sCompany’s markets, including economic conditions throughout the Midwest and in particular, the state of certain industries. Size and complexity of individual credits in relation to loanloan/lease structure, existing loanloan/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 loanloan/lease portfolio, it will enhanceenhances its methodology accordingly. Management may report a materially different amount for the provision for loanloan/lease losses in the statement of operations to change the allowance for loanloan/lease losses if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company'sCompany’s financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Management'sManagement’s Discussion and
19
Analysis section entitled "Financial”Financial Condition -– Allowance for LoanLoan/Lease Losses."” Although management believes the levels of the allowance as of both December 31, 20022006, 2005, and 2003 and both June 30, 2002 and 20012004 were adequate to absorb losses inherent in the loanloan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
Results of Operations
Fiscal 2003
2006 compared with the twelve months ended December 31, 2002
2005
Overview.Net income for the twelve months ended December 31, 20032006 was $5.5$2.8 million as compared to net income of $4.8 million for the twelve-month period
ended December 31, 20022005 for an increasea decrease of $640 thousand$2.0 million, or 13%42%. Basic earnings per share for fiscal 20032006 were $1.96 as$0.57 compared to $1.75$1.06 for the comparable
period in 2002.2005. The increasedecrease in net income was comprised of an increase in net interest income after provision for loan losses of $3.4$81 thousand in combination with an increase in aggregate noninterest income of $1.9 million partially
offset byand a decrease in noninterest income of $1.5 million, and increases in
noninterest expenses of $845 thousand and federal and state income taxes of $327
thousand.$1.4 million, offset by an increase in noninterest expenses of $5.2 million. Several specific factors contributed to the improvementdecline in net income from 20022005 to 2003 for the twelve-month periods.2006. Primary factors included a 19%
improvement in net interest income prompted by increased volume, and a 40%$2.4 million, or 274%, increase in gains on salesthe provision for loan/lease losses, an increase in salaries and employee benefits of real estate loans.
29%, or $4.8 million, and $2.0 million of pretax operating costs associated with the start-up of the new banking operation in Milwaukee.
Interest income.Interest income grew from $30.8$48.7 million for the twelve months
ended December 31, 20022005 to $33.4$68.8 million for fiscal 2003.2006. The 41% increase in interest income was attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, partially offset by a
decrease in interest rates.combination with an improved aggregate asset yield. The average yield on interest earning assets for the
twelve months ended December 31, 20032006 was 5.50% as6.55% compared to 6.30%5.75% for the
twelve-month period ended December 31, 2002.
2005.
Interest expense. expense.Interest expense decreasedincreased by $770 thousand,$17.6 million, from $12.7$21.3 million for the twelve months ended December 31, 20022005 to $11.9$38.9 million for fiscal 2003.2006. The 6% decrease83% increase in interest expense was primarily attributable to a
reductionan aggregate increase in interest rates, which was almost entirely offset byin combination with greater average outstanding balances in interest-bearing liabilities.liabilities, primarily customer deposits. The average cost on interest bearing liabilities was 2.35%4.04% for the twelve months ended December 31,
2003 as2006 compared to 3.09%2.79% for the like period in 2002.
12
2005.
Provision for loanloan/lease losses.The provision for loanloan/lease losses is established based on a number of factors, including the local and national economy and the risk associated with the loansloans/leases in the portfolio. The Company had an allowance for estimated losses on loansloans/leases of approximately 1.65%1.10% of total gross loans/leases at December 31, 2006, compared to approximately 1.17% of total gross loans at December 31, 2003, as compared to approximately 1.53%2005, and 1.43% at December 31, 2002,
1.56% at June 30, 2002 and 1.48% at June 30, 2001.2004. The provision for loanloan/lease losses remained stable at $3.4increased significantly to $3.3 million for fiscal 2003, as it had been2006, compared to $877 thousand for the twelve
months ended December 31, 2002.2005. During both periods, management made monthly provisions for loanloan/lease losses based upon a number of factors,factors; principally the increase in loansloans/leases and a detailed analysis of the loanloan/lease portfolio. In 2006, along with more than $204 million of growth within the loan/lease portfolio, the Company experienced the write-off of a single credit relationship for $992 thousand. During fiscal
2003,2006, the $3.4net growth in the loan/lease portfolio generated a provision expense of $2.3 million, and 31%, or $1.0 million of provision expense, was the result of adjustments to the allowance for loanestimated losses was attributed
35%,on loans/leases based on write-offs, payoffs, or $1.2 million, to net growth in the loan portfolio, and 65%, or $2.2
million, to downgrades and write-offsrestructures of credits within the Company’s portfolio. During 2005, the successful resolution of several large credits primarily in Quad City Bank & Trust’s loan/lease portfolio, through foreclosure, payoff, or restructuring, resulted in reductions to both provision expense and the level of allowance for loan/lease losses. During 2006, there were transfers totaling $130 thousand of loans to other real estate owned. For the twelve
months ended December 31, 2003,2006, commercial loansloans/leases had total charge-offs of $1.8$1.4 million, of which $992 thousand, or 70%, resulted primarily from a single customer relationship at Quad
CityRockford Bank & Trust, and there were $192$262 thousand of commercial recoveries, due
primarily to this same relationship. The net write-off of this relationship
accounted for 17% of the provision for loans losses during fiscal 2003 and was
in addition to a $1.1 million charge-off, which occurred during the quarter
ended December 31, 2002. The additional losses were a result of environmental
issues associated with the collateral for the loan, which were identified during
the first quarter of 2003. The Company believed that these environmental issues
negatively impacted the value and salability of the business and determined that
it was appropriate to take a conservative approach and write down the loan
balance to reflect no value in the real estate and equipment collateral. During
the second quarter of 2003, all of the collateral, including the real estate and
equipment, was sold resulting in a $120 thousand recovery. In the third and
fourth quarters, there were recoveries of $50 thousand, as Quad City Bank &
Trust realized gain from the sale of other real estate, which had been deferred
in accordance with current accounting rules.recoveries. Consumer loan charge-offs and recoveries totaled $298$460 thousand and $242$50 thousand, respectively, for 2006. For 2006, credit cards accounted for 27% of the twelve
months ended December 31, 2003.consumer loan net charge-offs. Real estate loans had no charge-off or$45 thousand of charge-offs and $52 thousand of recovery activity during fiscal 2003.2006. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. The Company is focusingManagement continually focuses its efforts at itsthe subsidiary banks in anto attempt to improve the overall quality of the Company's loanCompany’s loan/lease portfolio.
20
Noninterest income. NoninterestThe following table sets forth the various categories of noninterest income decreased by $1.5 million from $12.7
million for the twelve monthsyears ended December 31, 2002 to $11.2 million for
fiscal 2003. In the twelve months ended December 31, 2002, the largest component
of2006 and 2005.
Noninterest Income
| Years ended | ||||||||||||
| December 30, | ||||||||||||
| 2006 | 2005 | % change | ||||||||||
| Credit card fees, net of processing costs | $ | 1,947,984 | $ | 1,782,452 | 9.3 | % | ||||||
| Trust department fees | 3,049,440 | 2,818,832 | 8.2 | % | ||||||||
| Deposit service fees | 1,948,246 | 1,582,530 | 21.9 | % | ||||||||
| Gains on sales of loans, net | 991,536 | 1,254,242 | (21.0 | )% | ||||||||
| Securities gains/(losses), net | (142,866 | ) | 50 | NA | ||||||||
| Gains on sales of foreclosed assets | 664,223 | 42,380 | 1467.3 | % | ||||||||
| Earnings on bank-owned life insurance | 759,100 | 656,005 | 15.7 | % | ||||||||
| Investment advisory and management fees | 1,216,350 | 691,800 | 75.8 | % | ||||||||
| Other | 1,569,092 | 1,244,212 | 26.1 | % | ||||||||
| Total noninterest income | $ | 11,983,105 | $ | 10,072,503 | 19.0 | % | ||||||
Analysis concerning changes in noninterest income was the gain on sale of the ISO related portion of the
merchant credit card portfolio of $3.5 million, which accounted for 27% of the
total. Noninterest income for both periods consisted of income from the merchant
credit card operation, fees from the trust department, depository service fees,
gains on the sale of residential real estate mortgage loans, and other
miscellaneous fees. Making significant improvements from year to year in the
noninterest income category were increases in gains on sales of loans and other
miscellaneous fees.
During the twelve-month period ended December 31, 2003, merchant credit card
fees net of processing costs, decreased by $172 thousand to $2.2 million, from
$2.4 million for the comparable period in 2002, reflecting little effect of the
sale of the independent sales organization (ISO) related merchant credit card
activity to iPayment, Inc. In October 2002, the Company sold Bancard's
ISO-related merchant credit card operations to iPayment, Inc. for $3.5 million.
After contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a gain of $1.3 million, or $0.47 per
share, which was realized during the quarter, ended December 31, 2002. Also
included in the sale were all of the merchant credit card processing
relationships owned by Allied. Bancard continues to provide credit card
processing for its local merchants and cardholders of the subsidiary banks and
agent banks. Through September 24, 2003, Bancard also temporarily continued to
process ISO related transactions for iPayment, Inc. for a fixed monthly fee
rather than a percentage of transaction volumes. Built into the sales contract
with iPayment was an agreement that the fixed monthly fee would increase as the
temporary processing period was extended. Extensions to the processing period
and the resulting growth in the fixed monthly fee mitigated the drop in
Bancard's earnings that was expected to occur. The transfer of this ISO
processing to another provider occurred in September 2003, just prior to the
close of the third quarter. As the Company anticipated, Bancard's monthly
earnings were reduced significantly in the final quarter of 2003. For the three
quarters through September 30, 2003, Bancard's net income was $741 thousand, and
for the fourth quarter of fiscal 2003, Bancard's net income was $125 thousand.
While future operating results are anticipated to be reduced, the Company
believes that Bancard will, on a smaller scale, remain profitable with its
narrowed business focus of continuing to provide credit card processing for its
local merchants and agent banks and for cardholders of the Company's subsidiary
banks.
13
For the twelve-month periods ended both December 31, 2003 and 2002, trust
department fees were $2.2 million. The $33 thousand, or 2%, increase from year
to year was primarily a reflection of the further development of existing trust
relationships throughout 2003 and the addition of a significant volume of new
trust relationships occurring late in the fourth quarter, which were almost
entirely offset by the reduction of approximately $50.0 million during the first
quarter of a single trust account and its resulting impact on the calculation of
trust fees for the remainder of the year.
Deposit service fees increased $377 thousand, or 33%, to $1.5 million from $1.1
million for the twelve-month periods ended December 31, 2003 and December 31,
2002, respectively. This increase was primarily a result of the growth in
noninterest bearing demand deposit accounts of $41.3 million, or 46%, since
December 31, 2002. Service charges and NSF (non-sufficient funds) charges
related to demand deposit accounts were the main components of deposit service
fees.
Gains on sales of loans were $3.7 million for fiscal 2003, which reflected an
increase of 40%, or $1.1 million, from $2.6 million for the same period in 2002.
The increase resulted from the lower mortgage rates that originated in calendar
2002 and continued throughout 2003. This situation created significantly more
home refinances during the period and the subsequent sale of the majority of
these loans into the secondary market. Because the gains on sales of loans
typically have an inverse relationship with mortgage interest rates, it is
unlikely that the subsidiary banks will continue to maintain this level of
activity in the long term. During the fourth quarter of fiscal 2003, refinancing
volumes slowed dramatically from the pace that had existed in the three previous
quarters.
For the twelve months ended December 31, 2003, other noninterest income
increased $700 thousand, or 82%, to $1.6 million from $857 thousand for the same
period in 2002. The increase was primarily due to a combination of improved
earnings on the cash surrender value of life insurance, gain realized on the
sale of foreclosed property, increased earnings realized by Nobel Electronic
Transfer, LLC, one of the three associated companies in which the Company holds
an interest, dividends earned on Federal Reserve Bank and Federal Home Loan Bank
stock, and increased fees generated from investment services offered at the
subsidiary banks.
Noninterest expenses. For the fiscal year ended December 31, 2003, the main
components of noninterest expenses were primarily salaries and benefits,
occupancy and equipment expenses, and professional and data processing fees. For
the twelve months ended December 31, 2002, the main components of noninterest
expenses were primarily salaries and benefits, compensation and other expenses
related to sale of merchant credit card portfolio, occupancy and equipment
expenses, and professional and data processing fees. Noninterest expenses for
the twelve-month period ended December 31, 2003 were $21.0 million as2006, when compared to $20.2 million for the same period in 2002 for an increase of $845 thousand or
4%2005, is as follows:
| • | Bancard’s credit card fees, net of processing costs, improved $166 thousand. Increases during 2006 in Bancard’s cardholder processing operation provided essentially all of the improvement in credit card fees, net of processing costs. The year-to-year increase in local and agent bank merchant processing volumes and the subsequent increase in merchant processing fee income during 2006 was masked by aggregate reversals during 2005 of $134 thousand of specific allocations to the allowance for local merchant chargeback losses, and $118 thousand in recoveries during 2005 of prior period expenses. | ||
| • | Trust department fees increased $231 thousand. This was the result of the continued development of existing trust relationships and the addition of new trust customers throughout the past twelve months. Total trust assets under administration were $894.1 million at December 31, 2006 compared to $811.2 million at December 31, 2005. | ||
| • | Deposit service fees increased $346 thousand. This increase was primarily a result of an increase in service fees collected on the demand deposit accounts in a unique program at Cedar Rapids Bank & Trust. The twelve-month average balance of the Company’s consolidated demand deposits at December 31, 2006 increased $85.6 million from December 31, 2005. Service charges and NSF (non-sufficient funds or overdraft) charges related to the Company’s demand deposit accounts were the main components of deposit service fees. | ||
| • | Gains on sales of loans, net, decreased $263 thousand. Loans originated for sale during 2006 were $87.7 million and during 2005 were $98.7 million. Proceeds on the sales of loans during 2006 and 2005 were $85.2 million and $100.8 million, respectively. | ||
| • | In March 2006, the Company recognized an impairment loss of $143 thousand on a mortgage-backed mutual fund investment held in Quad City Bank & Trust’s securities portfolio, and in April, incurred an additional loss of $71 thousand on the subsequent sale of that security. In July 2006, the losses were partially offset when the Company recognized a gain of $71 thousand on the partial redemption of class B common stock of Mastercard Incorporated held by Quad City Bank & Trust, as a member bank of Mastercard International Incorporated. |
21
| • | During 2006, a foreclosed asset, determined by litigation to be property of Quad City Bank & Trust, was sold at auction for a net gain of $650 thousand. During 2006, the Company realized an additional net gain of $14 thousand on the sale of three other foreclosed assets at Quad City Bank & Trust. | ||
| • | Earnings on the cash surrender value of life insurance increased $103 thousand. At December 31, 2006, levels of bank-owned life insurance (BOLI) on key executives at the subsidiary banks was $13.9 million at Quad City Bank & Trust, $4.2 million at Cedar Rapids Bank & Trust, and $825 thousand at Rockford Bank & Trust. | ||
| • | Investment advisory and management fees increased $525 thousand. Beginning January 1, 2006, the investment representatives at Quad City Bank & Trust, who had previously been employees of LPL Financial Services, were brought on as staff of the bank. As a result of this organizational change, fees are now reported gross rather than net of representative commissions, as in previous years. Approximately 70% of the year-to-year increase was due to this change. The balance of the increase was due to the increased volume of investment services provided by representatives of LPL Financial Services at the subsidiary banks, primarily at Quad City Bank & Trust. | ||
| • | Other noninterest income increased $325 thousand. During 2006, M2 Lease Funds had $93 thousand in gains on the disposal of leased assets, which contributed to other noninterest income. M2 Lease Funds was acquired during the third quarter of 2005. Other noninterest income in each period consisted primarily of income from affiliated companies, earnings on other assets, Visa check card fees, and ATM fees. |
Noninterest expenses.The following table sets forth the various categories of noninterest expenses for the twelve monthsyears ended December 31, 20032006 and 2002.
2005.
Noninterest Expenses
| Years ended | ||||||||||||
| December 31, | ||||||||||||
| 2006 | 2005 | % change | ||||||||||
| Salaries and employee benefits | $ | 21,262,541 | $ | 16,458,860 | 29.2 | % | ||||||
| Professional and data processing fees | 3,192,326 | 2,865,064 | 11.4 | % | ||||||||
| Advertising and marketing | 1,367,545 | 1,221,039 | 12.0 | % | ||||||||
| Occupancy and equipment expense | 4,762,827 | 4,316,443 | 10.3 | % | ||||||||
| Stationery and supplies | 670,915 | 645,985 | 3.9 | % | ||||||||
| Postage and telephone | 961,394 | 842,779 | 14.1 | % | ||||||||
| Bank service charges | 583,687 | 516,537 | 13.0 | % | ||||||||
| Insurance | 612,058 | 594,282 | 3.0 | % | ||||||||
| Loss on disposals/sales of fixed assets | 36,305 | 332,283 | (89.1 | )% | ||||||||
| Other | 1,219,386 | 1,639,876 | (25.6 | )% | ||||||||
| Total noninterest expenses | $ | 34,668,984 | $ | 29,433,148 | 17.8 | % | ||||||
Analysis concerning changes in noninterest expenses for 2006, when compared to 2005, is as follows:
Salaries and benefits increased $4.8 million. The increase was primarily due to an increase in the average number of employees from 286 full time equivalents (FTEs) to 329 from year-to-year, as a result of the Company’s continued expansion. Also, the Company experienced increases in the expense for several employee compensation programs, such as the SERPs, the deferred compensation program and stock-based compensation programs during 2006, primarily related to a combination of the application of the provisions of SFAS 123R and a senior officer’s planned retirement in 2009. As the result of a previously described organizational change at Quad City Bank & Trust, commissions for investment representatives, previously net from fees, are now included as a portion of salaries and benefits expense. The Company’s application of the
22
| provisions of SFAS 123R is described in detail in Note 1, Nature of Business and |
| • | Professional and data processing fees | ||
| • | Advertising and marketing | ||
| • | Occupancy and equipment expense | ||
| • | Loss on disposals/sales of fixed assets decreased $296 thousand. During the third quarter of 2005, in conjunction with Cedar Rapids Bank | ||
| • | Other |
Income tax expense.The provision for income taxes was $2.7 million$858 thousand for the
fiscal year ended December 31, 20032006 compared to $2.4$2.3 million for the comparable
period in 2002, an increaseyear ended December 31, 2005 for a decrease of $327 thousand$1.4 million, or 14%62%. The increasedecrease was primarily
attributable to increasedthe result of a decrease in income before income taxes of $967 thousand$3.2 million, or 13%46%, for the twelve-month period ended December 31, 2003, in combination with a slight2006 when compared to 2005. Primarily due to an increase in the Company'sproportionate share of tax-exempt income to total income from year to year, the Company experienced a decrease in the effective tax rate from 31.8% for the 2003 period2005 to 33.0% from
32.9%21.8% for the same period in 2002.
Six months ended December 31, 20022006.
2005 compared with six months ended December 31,
2001
2004
Overview.Net income for the six months ended December 31, 20022005 was $3.2$4.8 million
as compared to net income of $1.3$5.2 million for the six-month period ended
December 31, 20012004 for an increasea decrease of $1.9 million$407 thousand, or 139%8%. Basic earnings per share for the six-month period ended December 31, 20022005 were $1.16 as$1.06 compared to $0.51$1.23 for the comparable period in 2001.2004. The increasedecrease in net income was comprised of an increase in net interest income after provision for loan losses of $1.3$3.2 million andin combination with an increase in aggregate noninterest income of $4.8 million, partially
offset by increases in noninterest expenses of $3.2$1.4 million and an increasea decrease in federal and state income taxes of $1.1$222 thousand, offset by an increase in noninterest expenses of $5.1 million. Several specific factors contributed to the improvementdecline in net income from 20012004 to 2002 for the six-month
periods.2005. Primary factors included a $2.8 million, or 21%, increase in salaries and employee benefits, an increase in occupancy and equipment expense of 32%, or $1.0 million, and $1.9 million of pretax operating costs associated with the $3.5 million gain on salestart-up of the merchant
credit card portfolio, a 34% improvementnew banking operation in net interest income prompted by
increased volume, and a 51% increase in gains on sales of real estate loans.
Rockford.
Interest income.Interest income grew from $13.8$38.0 million for the six months
ended December 31, 20012004 to $16.1$48.7 million for the comparable period in 2002.2005. The 28% increase in interest income was attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, partially
offset by a decrease in interest rates.combination with an improved aggregate asset yield. The average yield on interest earning assets for the six months ended December 31, 20022005 was 6.13% as5.75% compared to 7.05%5.22% for the six-month period ended December 31, 2001.
2004.
Interest expense. expense.Interest expense decreasedincreased by $150 thousand,$8.0 million, from $6.6$13.3 million for the six months ended December 31, 20012004 to $6.5$21.3 million for the same period
in 2002.2005. The 2% decrease60% increase in interest expense was primarily attributable to a
reductionan aggregate increase in interest rates, almost entirely offset byin combination with greater average outstanding balances in interest-bearing liabilities. The average cost on interest bearing liabilities was 2.90%2.79% for the six months ended December 31,
2002 as2005 compared to 3.89%2.09% for the like period in 2001.
15
2004.
23
Provision for loanloan/lease losses.The provision for loanloan/lease losses is established based on a number of factors, including the local and national economy and the risk associated with the loansloans/leases in the portfolio. The Company had an allowance for estimated losses on loansloans/leases of approximately 1.53%1.17% of total gross loans/leases at December 31, 2005, compared to approximately 1.43% of total gross loans at December 31, 2002, as compared to approximately 1.56% at June 30, 20022004, and 1.43%1.65% at December 31, 2001.2003. The provision for loanloan/lease losses increased by $1.2 million,
from $1.0declined significantly to $877 thousand for 2005, compared to $1.4 million for the six months ended December 31, 2001 to $2.2 million for
the six-month period ended December 31, 2002.2004. During the period,both periods, management made monthly provisions for loanloan/lease losses based upon a number of factors, principally the increase in loansloans/leases and a detailed analysis of the loanloan/lease portfolio. During 2005, the six months ended December 31, 2002, $786successful resolution of several large credits primarily in Quad City Bank & Trust’s loan/lease portfolio, through foreclosure, payoff, or restructuring, resulted in reductions to both provision expense and the level of allowance for loan/lease losses. During 2005, the net growth in the loan/lease portfolio generated a provision expense of $889 thousand; however, 44%, or $394 thousand, was offset by adjustments to the allowance for estimated losses on loans/leases based on the write-offs, payoffs, or restructures of several large credits within the portfolio. During 2005, there were transfers totaling $169 thousand of loans to other real estate owned. For 2005, commercial loans/leases had total charge-offs of $1.5 million, of which $926 thousand, or 36%61%, of the provision for
loan losses resulted from the deterioration of a single, significant loan
relationshiptwo customer relationships at Quad City Bank & Trust, and Trust. For the six-month period ended
December 31, 2002,there were $245 thousand of commercial loans had total, net charge-offs of $1.3 million.
The charge-off of a single commercial loan relationship at Quad City Bank and
Trust accounted for $1.1 million, or 82%, of the commercial loan charge-offs for
the period.recoveries. Consumer loan charge-offs and recoveries totaled $105$359 thousand and $37$90 thousand, respectively, for 2005. For 2005, credit cards accounted for 49% of the six months ended December 31, 2002.consumer loan, net charge-offs. Real estate loans had no charge-off or$160 thousand of charge-offs and $25 thousand of recovery activity during this period in 2002.2005. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income. Noninterest income increased by $4.8 million from $4.0
million for the six months ended December 31, 2001 to $8.8 million for the same
period in 2002. In the six months ended December 31, 2002, the primary component
of the increase in noninterest income was the gain on sale of the ISO related
portion of the merchant credit card portfolio of $3.5 million, which accounted
for 72% of the increase. Noninterest income for both periods consisted of income
from the merchant credit card operation, fees from the trust department,
depository service fees, gains on the sale of residential real estate mortgage
loans, and other miscellaneous fees. Also making significant contributions to
the 119% increase in noninterest income from year to year were increases in
gains on sales of loans and merchant credit card fees net of processing costs.
During the six-month period ended December 31, 2002, merchant credit card fees
net of processing costs, increased by $270 thousand to $1.3 million, from $1.0
million for the comparable period in 2001. The increase was due to a 66%
improvement from year to year in the volume of credit card transactions
processed during the six months ended December 31. During the six-month period
ended December 31, 2001, Bancard processed $568.3 million of transactions, which
grew to $941.6 million for the same period in 2002. As a result of the sale of
the ISO-related merchant credit card operations, processing volumes are expected
to decrease dramatically in future months. Bancard will operate with a narrowed
focus of processing forManagement continually focuses its local merchants and agent banks and for cardholders
of the Company's subsidiary banks.
For the six-month periods ended both December 31, 2002 and 2001, trust
department fees were $1.0 million. The $48 thousand, or 5%, increase from year
to year was primarily a reflection of the further development of existing trust
relationships and the addition of new trust relationships during the 2002
period, almost entirely offset by the reduced market value of securities held in
trust accounts and the resulting impact on the calculation of trust fees.
Gains on sales of loans were $1.9 million for the six months ended December 31,
2002, which reflected an increase of 51%, or $632 thousand, from $1.2 million
for the like period in 2001. The increase resulted from the decline in mortgage
rates during calendar year 2002. This situation created significantly more home
refinances during the period and the subsequent sale of the majority of these
loans into the secondary market. Because the gains on sales of loans have an
indirect relationship with interest and mortgage rates, it is unlikely thatefforts at the subsidiary banks will continue to maintain this level of activity inattempt to improve the long
term.
The $3.5 million gain on sale of merchant credit card portfolio made the most
significant contribution to the increase in noninterest income for the six
months ended December 31, 2002 over the comparable period in 2001. In October
2002, the Company sold Bancard's ISO related merchant credit card operations to
iPayment, Inc. Also included in the sale were alloverall quality of the merchant credit card
processing relationships owned by Allied.
16
Company’s loan/lease portfolio.
Noninterest expenses. For the six months ended December 31, 2002, the main
components of noninterest expenses were primarily salaries and benefits,
compensation and other expenses related to sale of merchant credit card
portfolio, occupancy and equipment expenses, and professional and data
processing fees. For the six months ended December 31, 2001 noninterest expenses
were comprised predominately of salaries and benefits, occupancy and equipment
expenses, and professional and data processing fees. Noninterest expenses for
the six-month period ended December 31, 2002 were $11.4 million as compared to
$8.2 million for the same period in 2001 for an increase of $3.2 million or 38%.
income.The following table sets forth the various categories of noninterest expensesincome for the six monthsyears ended December 31, 20022005 and 2001.
Compensation and other expenses related to the sale of the merchant credit card
portfolio of $1.4 million accounted for 45% of the $3.2 million increase
experienced in noninterest expenses in aggregate. Contractual bonus and
severance payments were based on the gain realized from the sale of Bancard's
ISO related merchant credit card operations to iPayment, Inc. in October 2002.
For the six months ended December 31, 2002, total salaries and benefits
increased to $6.1 million or $1.3 million over the $4.8 million for the
comparable period in 2001. The change was attributable to increased incentive
compensation to real estate officers and processors proportionate to the
increased volumes of gains on sales of loans, in combination with the addition
of employees at Cedar Rapids Bank & Trust and a slight increase in the number of
Quad City Bank & Trust employees. Occupancy and equipment expense increased $185
thousand, or 16%, for the period. The increase was predominately due to
increased levels of rent, property taxes, utilities, depreciation, maintenance,
and other occupancy expenses. Professional and data processing fees increased
$88 thousand, or 11%, when comparing the six months ended December 31, 2001 to
the comparable period in 2002. The increase was primarily attributable to the
additional data processing fees incurred by the subsidiary banks. From 2001 to
2002, postage and telephone expense for the six months ended December 31,
increased 27%, or $62 thousand. The growth at Cedar Rapids Bank & Trust
accounted for $40 thousand, or 65% of this increase. For the six-month period
ended December 31, 2002, bank service charges increased $34 thousand, or 19%.
Growth at Cedar Rapids Bank & Trust contributed $20 thousand, or 59% of this
increase.2004.
Noninterest Income tax expense. The provision for income taxes was $1.7 million for the six
months ended December 31, 2002 compared to $630 thousand for the comparable
period in 2001, an increase of $1.1 million or 167%. The increase was primarily
attributable to increased income before income taxes of $2.9 million or 148% for
the six-month period ended December 31, 2002, in combination with an increase in
the Company's effective tax rate for the 2002 period to 34.5% from 32.0% for the
same period in 2001. The increase in the Company's effective tax rate was due to
a much lower percentage of the Company's income coming from federal tax-exempt
securities, (primarily tax-free municipal bonds) in 2002 versus 2001.
17
Fiscal 2002 compared with fiscal 2001
Overview. Net income for fiscal 2002 was $3.0 million as compared to net income
of $2.4 million in fiscal 2001 for an increase of $567 thousand or 24%. Basic
earnings per share for fiscal 2002 were $1.10 as compared to $1.06 for fiscal
2001. The increase in net income was comprised of an increase in net interest
income after provision for loan losses of $2.3 million and an increase
| Years ended | ||||||||||||
| December 30, | ||||||||||||
| 2005 | 2004 | % change | ||||||||||
| Credit card fees, net of processing costs | $ | 1,782,452 | $ | 1,409,237 | 26.5 | % | ||||||
| Trust department fees | 2,818,832 | 2,530,907 | 11.4 | % | ||||||||
| Deposit service fees | 1,582,530 | 1,631,713 | (3.0 | )% | ||||||||
| Gains on sales of loans, net | 1,254,242 | 1,149,791 | 9.1 | % | ||||||||
| Securities losses, net | 50 | (45,428 | ) | (100.1 | )% | |||||||
| Gains on sales of foreclosed assets | 42,380 | — | NA | |||||||||
| Earnings on bank-owned life insurance | 656,005 | 627,796 | 4.5 | % | ||||||||
| Investment advisory and management fees | 691,800 | 509,988 | 35.7 | % | ||||||||
| Other | 1,244,212 | 867,437 | 48.3 | % | ||||||||
| Total noninterest income | $ | 10,072,503 | $ | 8,681,441 | 16.0 | % | ||||||
Analysis concerning changes in noninterest income for the 2005, when compared to 2004, is as follows:
Merchant credit card fees, net of $1.6processing costs for 2005 increased by 26% to $1.8 million partially offset by increases in noninterest
expensesfrom $1.4 million for 2004. Through September 2003, Bancard processed ISO-related Visa/Mastercard activity and carried ISO-specific reserves, which provided coverage for the related exposure. In the first and third quarters of $3.2 million and an increase in federal and state income taxes2004, the Company recognized aggregate recoveries of $155 thousand. Several factors contributed to$277 thousand from the improvement in net income
during fiscal 2002. Primary factors included the significant improvementreduction of 36
basis points in net interest margin and the 75% increase in gains on sales of
real estate loans.
Interest income. Interestthese ISO-specific reserves. For 2004, Bancard’s ISO-related income was $28.5 million for fiscal 2001 and fiscal
2002. The stability in interest income was attributable to greater average
outstanding balances in interest-earning assets, principally loans receivable,
that was offset by the reduction in interest rates. The average yield on
interest earning assets for fiscal 2002 was 6.77% as compared to 8.04% for
fiscal 2001.
Interest expense. Interest expense decreased by $3.7 million, from $16.6 million
for fiscal 2001 to $12.9 million for fiscal 2002. The 23% decrease in interest
expense was primarily attributable to significant reductions in interest rates
partially offset by greater average outstanding balances in interest-bearing
liabilities. The average cost on interest bearing liabilities was 3.56% for
fiscal 2002 as compared to 5.32% for fiscal 2001.
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.56% of total loans at June 30, 2002
as compared to approximately 1.48% at June 30, 2001. The provision for loan
losses increased by $1.4 million, from $900 thousand for fiscal 2001 to $2.3
million for fiscal 2002. During fiscal 2002, management made monthly provisions
for loan losses based upon a number of factors, principally the increase in
loans and a detailed analysis of the loan portfolio. For fiscal 2002, commercial
loans had total charge-offs of $437$327 thousand, and total recoveries of $101
thousand. Consumer loan charge-offs and recoveries totaled $204 thousand and
$138 thousand, respectively, for fiscal 2002. Real estate loans had no
charge-off or recovery activity during fiscal 2002. The ability to grow
profitably is, in part, dependent upon the ability to maintain asset quality.
Noninterest income. Noninterest income increased by $1.6 million, from $6.3
million for fiscal 2001 to $7.9 million for fiscal 2002. Noninterest income for
fiscal 2002 and 2001 consisted of income from the merchant credit card
operation, fees from the trust department, depository service fees, gains on the
sale of residential real estate mortgage loans, and other miscellaneous fees.
The 25% increase was primarily due to the increases in gains on sales of loans,Bancard’s core merchant credit card fees, net of processing costs, and deposit service fees
received duringwere $1.1 million, which included the period.
During fiscal 2002,expense of specific provisions of $196 thousand that were made for local merchant chargeback losses. For 2005, Bancard’s core merchant credit card fees, net of processing costs, increased
by $424 thousand to $2.1were $1.8 million, from $1.7 million for fiscal 2001. The
increase was due to a 36% increase in the volume of credit card transactions
processed during fiscal 2002, partially offset by the one-time charge during the
third quarter related to an arbitration settlement involving Bancard.
For fiscal 2002, trust department fees increased $90 thousand, or 4%, to $2.2
million from $2.1 million for fiscal 2001. The increase was primarily a
reflection of the development of existing trust relationships and the addition
of new trust relationships during the period, almost entirely offset by the
reduced market value of securities held in trust accounts and the resulting
impact on the calculation of trust fees.
Gains on sales of loans were $2.0 million for fiscal 2002, which reflected an
increase of 75%, or $855 thousand, from $1.1 million for fiscal 2001. The
increase resulted from a significant decline in mortgage rates, which was driven
by corresponding cuts by the Federal Reserve during calendar 2001. This created
significantly more home refinances and home purchases during the fiscal year and
the subsequent salean improvement of the majority of these loans into the secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 2002 were
$17.0 million as$373 thousand when compared to $13.8 million for2004. Significantly contributing to the same period in 2001 for an26% increase from year to year were aggregate reversals during 2005 of $3.2 million or 23%$134 thousand of specific allocations to the
24
| allowance for local merchant chargeback losses, and $118 thousand in recoveries during 2005 of prior period expenses. |
| • | In 2005, trust department fees grew to $2.8 million from $2.5 million in 2004. The $288 thousand, or 11%, increase from year to year was primarily a reflection of continued development of existing trust relationships and the addition of new trust customers, as well as an improvement in the market values of securities held in trust accounts, when compared to one year ago. Each of these factors had a resulting impact in the calculation and realization of trust fees. Total trust assets under administration were $811.2 million at December 31, 2005 compared to $778.4 million at December 31, 2004. | ||
| • | Deposit service fees decreased $49 thousand, or 3%, remaining at $1.6 million for 2005, as well as for 2004. This decrease was primarily a result of the reduction in collected service fees on commercial noninterest bearing demand deposit accounts at Quad City Bank & Trust due to earnings credit rates which more than doubled during 2005. The year-to-date average balance of consolidated noninterest bearing demand deposits at December 31, 2005 decreased $2.6 million from December 31, 2004. Service charges and NSF (non-sufficient funds or overdraft) charges related to demand deposit accounts were the main components of deposit service fees. | ||
| • | Gains on sales of loans, net, were $1.2 million for 2005, which reflected an increase of 9%, or $104 thousand, from $1.1 million for 2004. The slight increase was a result of stagnant volumes of residential real estate loan originations from year to year, and the effect on the subsequent sale of the majority of residential mortgages into the secondary market. | ||
| • | During 2005, earnings on the cash surrender value of life insurance grew $28 thousand, or 4%, to $656 thousand from $628 thousand for 2005. During the first quarter of 2004, the Company made significant investments in bank-owned life insurance (“BOLI”) on key executives at the two existing subsidiary banks. Quad City Bank & Trust purchased $8.6 million of BOLI, and Cedar Rapids Bank & Trust made a purchase of $3.6 million of BOLI. During 2005, Rockford Bank & Trust purchased $777 thousand of BOLI. | ||
| • | Investment advisory and management fees increased $182 thousand from $510 thousand for 2004 to $692 thousand for 2005. The 36% increase from year to year was due to the increased volume of investment services provided by representatives of LPL Financial Services at the subsidiary banks, primarily at Quad City Bank & Trust. | ||
| • | For 2005, other noninterest income increased $419 thousand, or 48%, to $1.3 million from $867 thousand for 2004. The increase in 2005 was primarily due to income from affiliated companies. During the first quarter of 2005, one of the Company’s affiliated companies, Nobel Electronic Transfer, LLC, completed a large, one-time sales transaction, which contributed $219 thousand to other noninterest income. Income from affiliated companies, earnings on other assets, Visa check card fees, and ATM fees were primary contributors to other noninterest income during 2005. |
25
Noninterest expenses.
18
June 30, 2002December 31, 2005 and 2001.
2004.
Noninterest Expenses
| Years ended | ||||||||||||
| December 31, | ||||||||||||
| 2005 | 2004 | % change | ||||||||||
| Salaries and employee benefits | $ | 16,458,860 | $ | 13,773,439 | 19.5 | % | ||||||
| Professional and data processing fees | 2,865,064 | 2,199,984 | 30.2 | % | ||||||||
| Advertising and marketing | 1,221,039 | 1,014,664 | 20.3 | % | ||||||||
| Occupancy and equipment expense | 4,316,443 | 3,263,540 | 32.3 | % | ||||||||
| Stationery and supplies | 645,985 | 543,904 | 18.8 | % | ||||||||
| Postage and telephone | 842,779 | 684,964 | 23.0 | % | ||||||||
| Bank service charges | 516,537 | 570,374 | (9.4 | )% | ||||||||
| Insurance | 594,282 | 420,080 | 41.5 | % | ||||||||
| Loss on disposals/sales of fixed assets | 332,283 | 1,048 | NA | |||||||||
| Loss on redemption of junior subordinated debentures | — | 747,490 | (100.0 | )% | ||||||||
| Other | 1,639,876 | 1,061,364 | 54.5 | % | ||||||||
| Total noninterest expenses | $ | 29,433,148 | $ | 24,280,851 | 21.2 | % | ||||||
Analysis concerning changes in noninterest expenses for 2005, when compared to 2004, is as follows:
| • | For 2005, total salaries and | ||
| • | Professional and data processing fees | ||
| • | For 2005, advertising and marketing | ||
| • | Occupancy and equipment expense | ||
| • | As a result of overall growth at the subsidiary banks, in combination with their increased investments in facilities throughout 2005, as well as an increase in the level of directors and officers insurance coverage, insurance expense grew 41% from $420 thousand in 2004 to $594 thousand in 2005. | ||
| • | In conjunction with Cedar Rapids Bank | ||
| • | Fiscal 2004 reflected a $747 thousand loss on the redemption of the trust preferred securities issued in 1999 at their earliest call date of June 30, 2004. In February 2004, the Company issued $8.0 million in floating rate |
26
| and $12.0 million in fixed/floating rate trust preferred securities. In connection with this issuance, the Company redeemed, on June 30, 2004, $12.0 million of trust preferred securities originally issued in 1999. Prior to the redemption, the Company had expensed $747 thousand of unamortized issuance costs associated with the 1999 trust preferred securities in March 2004. |
Other .................................................. 926,633 736,928 26%
----------------------------------------
Total noninterest expenses ............... $17,022,428 $13,799,953 23%
========================================
Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For fiscal 2002, total salaries and benefits
increased $579 thousand to $10.1$1.6 million or $2.1for 2005 from $1.1 million over the fiscal 2001 total of $8.0
million. The change was primarily attributable to the addition of employees to
staff the Cedar Rapids Bank & Trust operation, which accounted for $1.7 million,
or 82%, of the increase. A slight increase in the number of Quad City Bank &
Trust employees, and increased incentive compensation to real estate officers
proportionate to the increased volumes of gains on sales of loans, comprised the
balance of the change. Occupancy and equipment expense increased $406 thousand
or 21% for the period. The increase was predominately due to the addition of
Quad City Bank & Trust's fourth full service banking facility in late October
2000, and Cedar Rapids Bank & Trust's permanent full service banking facility in
September 2001, and the resulting increased levels of rent, utilities,
depreciation, maintenance, and other occupancy expenses. Professional and data
processing fees increased $251 thousand, or 22%, during fiscal 2002.2004. The increase was primarily attributable to legal fees resulting from an arbitration
involving Bancard, combined with the additional professional and data processing
fees related to Cedar Rapids Bank & Trust. During fiscal 2002, stationary and
supplies increased 35%, or $124 thousand. The additionresult of Cedar Rapids Bank &
Trust accounted for $85$327 thousand or 68% of this increase. Other noninterest
expense increased $190 thousand, or 26% for the fiscal year. Significantly
contributing to this increase was a $170 thousand merchant credit card loss
resulting from the settlementwrite-downs on property values of an arbitration dispute between Bancard and Nova
Information Services, Inc. A settlement amount was paid to Bancard, which was
the receivable due from Nova less an amount that approximated the costs of
continued arbitration. For fiscal 2002, postage and telephone expense grew $76
thousand and bank service charges increased $65 thousand. Both reflected the
growth ofother real estate owned (OREO) at the subsidiary banks, during$128 thousand of other expense incurred on OREO property, $442 of other loan expense at the period.
subsidiary banks, and $122 thousand of cardholder program expense at Bancard.
Income tax expense.The provision for income taxes was $1.3$2.3 million for fiscal
20022005 compared to $1.2$2.5 million for fiscal 2001, an increase2004, a decrease of $155$222 thousand or 13%9%. The increasedecrease was primarily attributable to increaseddecreased income before income taxes of $722$551 thousand or 20%7% for fiscal 2002, partially offset by2005, in combination with a reductionslight decrease in the Company'sCompany’s effective tax rate for fiscal 2002 of 30.7% versus 32.6%2005 to 31.9% from 32.4% for fiscal 2001.
2004.
Financial Condition
Total assets of the Company increased by $105.4$229.1 million, or 17%22%, to $710.0 million$1.27 billion at December 31, 20032006 from $604.6 million$1.04 billion at December 31, 2002. The growth
primarily resulted from an increase in the loan portfolio funded by deposits
received from customers and by proceeds from short-term and other borrowings.2005. Total assets of the Company increased by $85.8$172.5 million, or 17%20%, to $604.6$1.04 billion at December 31, 2005 from $870.1 million at December 31, 2002 from $518.8 million at June 30, 2002. During this period
the2004. The growth over these years primarily resulted from an increase in the loan portfolio funded by deposits received from customers and by proceeds from Federal Home Loan Bank advances.
Cash and Cash Equivalent Assets. Cash and due from banks decreased by $461
thousand or 2% to $24.4 million at December 31, 2003 from $24.9 million at
December 31, 2002. Cash and due from banks increased by $6.5$3.5 million, or 35%9%, to $24.9$42.5 million at December 31, 20022006 from $18.4$39.0 million at June 30, 2002.December 31, 2005. Cash and due from banks increased by $17.6 million, or 82%, to $39.0 million at December 31, 2005 from $21.4 million at December 31, 2004. Cash and due from banks represented both cash maintained at the subsidiary banks, as well as funds that the Company and its subsidiaries had deposited in other banks in the form of noninterest-bearing demand deposits. 19
At December 31, 2006 and December 31, 2005, cash maintained at the subsidiary banks totaled $23.0 million and $15.4 million. At December 31, 2006 and December 31, 2005, funds maintained as noninterest-bearing deposits at other banks totaled $19.5 million and $23.5 million.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold decreased by $10.4$2.2 million to $4.0$2.3 million at December 31, 20032006 from $14.4$4.5 million at December 31, 2002.2005. Federal funds sold increased by $13.6$1.6 million to $14.4$4.5 million at December 31, 20022005 from $760 thousand$2.9 million at June 30, 2002. These
fluctuations were attributableDecember 31, 2004. Fluctuations occur due to the Company'sa combination of varying demands for Federal funds purchases by Quad City Bank & Trust’s downstream correspondent banks and of varying levels of liquidity at the Company’s subsidiary banks.
Interest-bearing deposits at financial institutions decreasedincreased by $4.2 million$859 thousand, or 29%68%, to $10.4$2.1 million at December 31, 20032006 from $14.6$1.3 million at December 31, 2002.2005. Included in interest-bearing deposits at financial institutions are demand accounts, money market accounts, and certificates of deposit. During fiscal
2003,The increase was the certificateresult of increases in money market accounts of $955 thousand and a net decrease in certificates of deposit portfolio had 35 maturities totaling $3.4
million and 30 purchases totaling $2.8 million.$96 thousand. Interest-bearing deposits at financial institutions decreased by $502 thousand$2.6 million, or 3%67%, to $14.6$1.3 million at December 31, 20022005 from $15.1$3.9 million at June 30, 2002. During the six months
ended December 31, 2002, the certificate of deposit portfolio had 19 maturities
totaling $1.9 million and no purchases. As2004. The decrease was the result of lower short-term
interest ratesdecreases in money market accounts of $1.8 million and a strong loan demand during 2002 and 2003, the subsidiary
banks reduced their deposits in other banks in the formmaturities of certificates of deposit and increased their utilization of Federal funds sold.
totaling $822 thousand.
Investments.Securities increased by $47.1$12.4 million, or 58%7%, to $128.8$194.8 million at December 31, 20032006 from $81.7$182.4 million at December 31, 2002.2005. The net increase was the result of a number of transactions in the securities portfolio. The Company purchased additional securities, classified as available for sale, in the amount of $91.7 million. This$79.8 million, and there was an increase was partially offset by paydowns of $4.0 million
that were received on mortgage-backed securities, proceeds from calls and
maturities of $39.2 million, the amortization of premiums, net of the accretion
of discounts, of $788 thousand, and the recognition a decrease in unrealized gains on securities available for sale, before applicable income tax of $549$923 thousand. These increases were partially offset by paydowns of $706 thousand that were received on mortgage-backed securities, proceeds from calls, maturities and redemptions of $62.4 million, proceeds from sales of $4.8 million, net losses of $143 thousand, and the amortization of premiums, net of the accretion of discounts, of $252 thousand.
27
Securities increased by $5.5$32.8 million, or 7%22%, to $81.7$182.4 million at December 31, 20022005 from $76.2$149.6 million at June 30, 2002.December 31, 2004. The net increase was the result of a number of transactions in the securities portfolio. The Company purchased additional securities, classified as available for sale, in the amount of $14.8 million,
and recognized an$82.3 million. This increase in unrealized gains on securities available for sale,
before applicable income tax of $1.4 million. These increases werewas partially offset by paydowns of $1.2 million that were received on mortgage-backed securities, proceeds from the sales of securities available for sale of $2.1
million, proceeds from calls and maturities of $7.3$45.8 million, andthe amortization of premiums, net of the accretion of discounts, of $149 thousand.
$525 thousand, and a decrease in unrealized gains on securities available for sale, before applicable income tax of $2.0 million.
Certain investment securities of the subsidiary banks areat Quad City Bank & Trust were purchased with the intent to hold the securities until they mature. These held to maturity securities, comprised of municipal securities and other bonds, were recorded at amortized cost at December 31, 2003, December 31, 2002,2006, 2005, and June 30, 2002.2004. The balance at December 31, 20032006 was $400$350 thousand, which was a decreasean increase of $25$200 thousand from the balance of $425$150 thousand at both December 31, 2002 and June
30, 2002.2005. The December 31, 2005 balance was an increase of $50 thousand from the balance of $100 thousand at December 31, 2004. Market values at December 31, 2005, 2004, and 2003 December 31, 2002, and June 30,
2002 were $417 thousand, $451$358, $155 thousand, and $437$108 thousand, respectively.
All of the Company's andCompany’s, Cedar Rapids Bank & Trust'sTrust’s and Rockford Bank & Trust’s securities, and a majority of Quad City Bank & Trust'sTrust’s securities are placed in the available for sale category as the securities may be liquidated to provide cash for operating, investing or financing purposes. These securities were reported at fair value and increased by $47.2$12.2 million, or 58%7%, to $128.4$194.4 million at December 31, 2003,2006, from $81.2$182.2 million at December 31, 2002.2005. These securities were reported at fair value and increased by $5.4$32.8 million, or 7%22%, to $81.2$182.2 million at December 31, 2002,2005, from $75.8$149.5 million at June 30, 2002.December 31, 2004. The amortized cost of such securities at December 31, 2003, December 31, 2002,2006, 2005, and June 30, 20022004 was $125.6 million,
$77.8 million,$194.4, $183.1, and $73.7 million, respectively.
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk and as$148.4 million.
As of December 31, 20032006, there existed no security in the investment portfolio (other than U.S. Government and U.S. Government agency securities) that exceeded 10% of stockholders'stockholders’ equity at that date.
Loans.
Loans/leases.Total gross loansloans/leases receivable increased by $72.8$204.5 million, or 16%27%, to $522.5$960.7 million at December 31, 20032006 from $449.7$756.3 million at December 31, 2002.2005. The increase was the result of the origination or purchase of $691.1$515.7 million of commercial business, consumer and real estate loans/leases, less loans less loantransferred to other real estate owned (OREO) of $130 thousand, loan/lease charge-offs, net of recoveries, of $1.6 million and loanloan/lease repayments or sales of loans of $616.7$309.5 million. During the fiscal year ended December 31, 2003,2006, Quad City Bank & Trust contributed $536.3$259.5 million, or 78%50%, and Cedar Rapids Bank & Trust contributed $154.8$124.4 million, or 22%24%, Rockford Bank & Trust contributed $96.5 million, or 19%, and M2 Lease Funds contributed $35.3, or 7%, of the Company's loanCompany’s loan/lease originations or purchases. The
majority of residential real estate loans originated by the subsidiary banks
were sold on the secondary market to avoid the interest rate risk associated
with long-term fixed rate loans. As of December 31, 2003,2006, Quad City Bank & Trust'sTrust’s legal lending limit was approximately $7.2$11.1 million, and Cedar Rapids Bank & Trust'sTrust’s legal lending limit was approximately $2.5$4.3 million, and Rockford Bank & Trust’s legal lending limit, which included our Wisconsin operations at that time, was approximately $2.4 million.
20
At December 31, 2006, no one customer accounted for more than 10% of revenues or loans.
Total gross loansloans/leases receivable increased by $59.1$107.9 million, or 15%17%, to $449.7$756.3 million at December 31, 20022005 from $390.6$648.4 million at June 30, 2002.December 31, 2004. The increase was the result of the origination or purchase of $305.1$716.9 million of commercial business, consumer and real estate loans/leases, less loans less loantransferred to other real estate owned (OREO) of $169 thousand, loan/lease charge-offs, net of recoveries, of $1.4$1.7 million and loanloan/lease repayments or sales of loans of $244.6$607.4 million. Included in purchases, was the acquisition on August 26, 2005 of M2 Lease Fund’s lease portfolio of $32.0 million. During the
six months ended December 31, 2002,2005, Quad City Bank & Trust contributed $231.4$370.5 million, or 76%52%, and Cedar Rapids Bank & Trust contributed $73.7$271.3 million, or 24%38%, Rockford Bank & Trust contributed $35.7 million, or 5%, and M2 Lease Funds contributed $39.3, or 5%, of the company's loanCompany’s loan/lease originations or purchases. The majority of residential
real estate loans originated by the subsidiary banks were sold on the secondary
market to avoid the interest rate risk associated with long-term fixed rate
loans. As of December 31, 2002,2005, Quad City Bank & Trust'sTrust’s legal lending limit was approximately $6.4$9.4 million, and Cedar Rapids Bank & Trust'sTrust’s legal lending limit was approximately $1.6$3.5 million, and Rockford Bank & Trust’s legal lending limit was approximately $2.3 million.
Allowance for Loan Losses. Loan/Lease Losses.The allowance for estimated losses on loansloans/leases was $8.6$10.6 million at December 31, 20032006 compared to $6.9$8.9 million at December 31, 2002,2005, for an increase of $1.7 million, or 26%19%. The allowance for estimated losses on loansloans/leases was $6.9$8.9 million at December 31, 20022005 compared to $6.1$9.3 million at June 30, 2002,December 31, 2004, for an increasea decrease of $800$378 thousand, or 13%4%. The adequacy of the allowance for estimated losses on loansloans/leases was determined by management based on factors that included the overall composition of the loanloan/lease portfolio, types of loans,loans/leases, past loss experience, loanloan/lease delinquencies, potential substandard and doubtful credits, economic
28
conditions and other factors that, in management'smanagement’s judgment, deserved evaluation in estimating loanloan/lease losses. To ensure that an adequate allowance was maintained, provisions were made based on the increase in loansloans/leases and a detailed analysis of the loanloan/lease portfolio. The loanloan/lease portfolio was reviewed and analyzed monthly utilizing the percentage allocation method with specific detailed reviews completed on all credits risk-rated less than "fair quality"“fair quality” and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance for estimated losses on loansloans/leases was monitored by the credit administration staff, and reported to management and the board of directors.
Net charge-offs for the years ended December 31, 20032006, 2005, and 2002,2004, were $1.6 million, and $1.5 million, respectively. Net charge-offs for the six months ended
December 31, 2002 and 2001, were $1.4$1.7 million, and $349$753 thousand, respectively. One measure of the adequacy of the allowance for estimated losses on loansloans/leases is the ratio of the allowance to the total loanloan/lease portfolio. Provisions were made monthly to ensure that an adequate level was maintained. The allowance for estimated losses on loansloans/leases as a percentage of total gross loansloans/leases was 1.65%1.10% at December 31, 2003, 1.53%2006, 1.17% at December 31, 2002,2005, and 1.56%1.43% at June 30, 2002.
December 31, 2004.
Although management believes that the allowance for estimated losses on loansloans/leases at December 31, 20032006 was at a level adequate to absorb probable losses on existing loans,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 loanloan/lease losses in the future. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company is focusing efforts at its subsidiary banks in an attempt to improve the overall quality of the Company's
loanCompany’s loan/lease portfolio. A slowdown in economic activity beginning in 2001 severely
impacted several major industries as well as the economy as a whole. Even though
there are numerous indications of emerging strength, it is not certain that this
strength is sustainable. In addition, consumer confidence may still be
negatively impacted by the substantial decline in equity security prices
experienced in the period from 2000 through 2002. TheseFuture events could stillat any time adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Company could experience increases in problem assets, delinquencies and losses on loans,loans/leases, and require further increases in the provision.
Nonperforming Assets.The policy of the Company is to place a loanloan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status.
21
Nonaccrual loansloans/leases were $4.2$6.5 million at December 31, 20032006 compared to $4.6$2.6 million at December 31, 2002,2005, for an increase of $3.9 million, or 154%. The increase in nonaccrual loans/leases was comprised of increases in commercial loans of $3.8 million and real estate loans of $160 thousand, and a decrease in consumer loans of $30 thousand. Nonaccrual commercial loans totaled $5.5 million, of which $4.0 million was due to a single large lending relationship at Quad City Bank & Trust. Nonaccrual loans at December 31, 2006 represented less than 1% of the Company’s held for investment loan portfolio. At December 31, 2006, 82% of the Company’s nonaccrual loans/leases were held in Quad City Bank & Trust’s portfolio, 13% were held in M2 Lease Funds’ portfolio, and 5% were held in Cedar Rapids Bank & Trust’s portfolio.
Nonaccrual loans/leases were $2.6 million at December 31, 2005 compared to $7.6 million at December 31, 2004, for a decrease of $404 thousand$5.0 million, or 9%66%. The decrease in nonaccrual loansloans/leases was comprised of decreases in commercial loans of $302 thousand$4.9 million and real estate loans of $139$205 thousand, partially offset byand an increase in consumer loans of $36$69 thousand. The decrease in nonaccrualNonaccrual commercial loans totaled $1.7 million, of which $1.5 million was due primarily to the write-off of a single customer relationship at Quad City
Bank for $1.3 million, partially offset by the transfer to nonaccrual status of
another commercialthree large lending relationshiprelationships at Quad City Bank & Trust with an
outstanding balance at December 31, 2003 of $702 thousand.Trust. Nonaccrual loans at December 31, 20032005 represented less than one percent0.3% of the Company'sCompany’s held for investment loan portfolio. All of the Company's nonperforming assetsCompany’s nonaccrual loans were located in the loan portfolio at Quad City Bank & Trust. TheNone of the loans in the Cedar Rapids Bank & Trust
loan portfolio have been made since its inception in 2001, and none of the loans
have been categorized as nonperforming assets. As the loan portfolioportfolios at Cedar Rapids Bank & Trust matures, it is likely that there will be nonperforming loans
or charge-offs associated with the portfolio.
Nonaccrual loansRockford Bank & Trust were $4.6 millionin nonaccrual status at December 31, 2002 compared to $1.6 million
at June 30, 2002, for an increase of $3.0 million or 196%. The increase in
nonaccrual loans was comprised of increases in commercial loans of $2.9 million
and real estate loans of $143 thousand, partially offset by a decrease in
consumer loans of $10 thousand. The increase in nonaccrual commercial loans was
due primarily to the transfer to nonaccrual status of two commercial lending
relationships at Quad City Bank & Trust with an outstanding balance of $2.7
million. Nonaccrual loans at December 31, 2002 represented approximately one
percent of the Company's loan portfolio. All of the Company's nonperforming
assets were located in the loan portfolio at Quad City Bank & Trust.
2005.
As of December 31, 2003, December 31, 2002,2006, 2005, and June 30, 2002,2004, past due loans of 30 days or more amounted to $6.9$8.2 million, $9.6$8.7 million, and $4.3$10.2 million, respectively. Past due loans as a percentage of gross loans receivable were 1.3%0.9% at December 31, 2003, 2.1%2006, 1.2% at December 31, 20022005, and 1.1%1.6 % at June 30, 2002.
December 31, 2004.
29
During 2006, the Company transferred $130 thousand from the loan portfolio into other real estate owned. At December 31, 2006, $93 thousand of other real estate was held at Quad City Bank & Trust. No assets were held in other real estate owned at Cedar Rapids Bank & Trust or Rockford Bank & Trust at December 31, 2006. During 2005, the Company transferred $169 thousand from the loan portfolio into other real estate owned. At December 31, 2005, $545 thousand of other real estate was held at Quad City Bank & Trust. No assets were held in other real estate owned at Cedar Rapids Bank & Trust or Rockford Bank & Trust at December 31, 2005. During 2004, the Company transferred $1.9 million from the loan portfolio into other real estate owned. At December 31, 2004, $1.4 million was held at Quad City Bank & Trust and $506 thousand was held at Cedar Rapids Bank & Trust.
Other Assets. Assets.Premises and equipment increased by $2.8$6.9 million, or 30%27%, to $12.0$32.5 million at December 31, 20032006 from $9.2$25.6 million at December 31, 2002.2005. This increase resulted primarily from Quad City$4.0 million in construction costs incurred for Rockford Bank & Trust's purchases of the
northern segment of its Brady StreetTrust’s first branch facility, and the land for its fifth
location,which opened in November 2006, in combination with a $4.0 million real estate acquisition, resulting from a majority ownership in Velie Plantation Holding Company at December 31, 2006. Additionally, there were Company purchases of additional furniture, fixtures and equipment of $1.3 million offset by depreciation expense. Premises and equipment
increased by $18 thousand, or less than 1%, to remain at $9.2$2.4 million at
December 31, 2002 as at June 30, 2002. This increase resulted from the purchase
of additional furniture, fixtures and equipment offset by depreciation expense. Additional information regarding the composition of this account and related accumulated depreciation is described in Note 5 to the consolidated financial statements.
Premises and equipment increased by $7.5 million, or 42%, to $25.6 million at December 31, 2005 from $18.1 million at December 31, 2004. During the year, there were purchases of additional land, furniture, fixtures and equipment and leasehold improvements of $9.8 million, which were partially offset by both depreciation expense of $2.0 million and a one-time $332 thousand write-off of Cedar Rapids Bank & Trust tenant improvements made to the Great America Building, which had initially served as that subsidiary’s main office, but was vacated during the year.
In September 2003, the Company announced plans for a fifth Quad City Bank & Trust banking facility, to be located in west Davenport at Five Points. Costs incurred during 2005 were $1.2 million, and total costs were approximately $3.6 million, when the facility was completed and began operations in March 2005. In February 2004, Cedar Rapids Bank & Trust announced plans to build a facility in downtown Cedar Rapids. The Bank’s main office was relocated to this site in July 2005. Costs for this facility during 2005 were $4.0 million, and total costs for this project were $6.7 million. Cedar Rapids Bank & Trust also completed construction of a branch office located on Council Street, which opened for business in June 2005. The Company has incurred costs for this project of $1.7 million during 2005 and $2.4 million in total. During 2005, costs associated with the establishment of the full-service banking facility in leased space in downtown Rockford, which opened as the Company’s third bank subsidiary on January 3, 2005, were $259 thousand, and total costs were $472 thousand. In the third quarter of 2005, Rockford Bank & Trust moved forward with plans for a second banking location on Guilford Road at Alpine Road in Rockford. A temporary modular facility opened in December 2005. During 2005, $1.5 million of initial costs were incurred on the construction of a 20,000 square foot permanent facility, which was completed in 2006.
On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of M2 Lease Funds. The purchase price of $5.0 million resulted in $3.2 million in goodwill. In accordance with the provisions of FAS statement 142, goodwill is not being amortized, but is evaluated annually for impairment.
Accrued interest receivable on loans, securities, and interest-bearing deposits at financial institutions increased by $425 thousand$2.4 million, or 13%48%, to $3.6$7.2 million at December 31, 20032006 from $3.2$4.8 million at December 31, 2002.2005. Accrued interest receivable on loans, securities, and interest-bearing deposits at financial institutions increased by $95$777 thousand, or 3%19%, to $3.2$4.8 million at December 31, 20022005 from $3.1$4.1 million at June 30, 2002.December 31, 2004. Increases were primarily due to a combination of greater average outstanding balances in interest-bearing assets.
Other assets, decreasedas well as increased average yields on interest-bearing assets.
Bank-owned life insurance (“BOLI”) increased by $965 thousand or 7% to $12.8$1.5 million from $17.4 million at December 31, 2003 from $13.82005 to $18.9 million at December 31, 2002.2006. BOLI increased by $1.5 million from $15.9 million at December 31, 2004 to $17.4 million at December 31, 2005. Banks may generally buy BOLI as a financing or cost recovery vehicle for pre-and post-retirement employee benefits. During 2004, the subsidiary banks purchased $8.0 million of BOLI to finance the expenses associated with the establishment of supplemental retirement benefits plans (“SERPs”) for the executive officers. Additionally in 2004, the subsidiary banks purchased BOLI totaling $4.2 million on the lives of a number of senior management personnel for the purpose of funding the expenses of new deferred compensation arrangements for
30
senior officers. During the first quarter of 2005, Rockford Bank & Trust purchased $777 thousand of BOLI. During the 2006, Quad City Bank & Trust purchased an additional $751 thousand of BOLI. These purchases combined with existing BOLI, resulted in each subsidiary bank holding investments in BOLI policies near the regulatory maximum of 25% of capital. As the owners and beneficiaries of these holdings, the banks monitor the associated risks, including diversification, lending-limit, concentration, interest rate risk, credit risk, and liquidity. Quarterly financial information on the insurance carriers is provided to the Company by its compensation-consulting firm. Benefit expense associated with the supplemental retirement benefits and deferred compensation arrangements was $533 thousand and $269 thousand, respectively, for 2006. The threeannouncement early in 2006 of a senior officer’s planned retirement in 2009 resulted in accelerated accruals to each of these executive compensation programs. Earnings on BOLI totaled $759 thousand for 2006. Benefit expense associated with both the supplemental retirement benefits and deferred compensation arrangements was $176 thousand and $170 thousand, respectively, for 2005. Earnings on BOLI totaled $656 thousand for 2005.
Other assets increased by $888 thousand, or 5%, to $18.0 million at December 31, 2006 from $17.1 million at December 31, 2005. The largest components of other assets at December 31, 20032006 were $5.5$10.3 million in Federal Reserve Bank and Federal Home Loan Bank stocks, $3.1$3.8 million in cash surrender value of life
insurance contractsdeferred tax assets, $1.7 million in various prepaid expenses, $1.2 million in net equity in unconsolidated subsidiaries and $752$679 thousand in prepaidaccrued trust preferred offering
expense.department fees. Other assets increased by $2.3$1.9 million, or 19%13%, to $13.8$17.1 million at December 31, 20022005 from $11.5$15.2 million at June 30, 2002.December 31, 2004. The three largest components of other assets at December 31, 20022005 were $4.3$8.8 million in Federal Reserve Bank and Federal Home Loan Bank stocks, $2.8$3.7 million in cash surrender
value of life insurance contracts, and $3.3deferred tax assets, $1.7 million in various prepaid Visa/Mastercard
processing fees.expenses, $1.1 million in net equity in unconsolidated subsidiaries and $545 thousand in net other real estate owned (OREO). At both December 31, 20032006 and 2002,2005, other assets also included net other real estate owned (OREO), accrued trust department fees, and other miscellaneous receivables, and various
prepaid expenses.
receivables.
Deposits.Deposits increased by $77.0$176.9 million, or 18%25%, to $511.7$875.4 million at December 31, 20032006 from $434.7$698.5 million at December 31, 2002.2005. The increase resulted from a $75.0$67.7 million net increase in noninterestnon-interest bearing, NOW, money market and other savings accounts andcombined with a $2.0$109.2 million net increase in interest-bearing certificates of deposit. The subsidiary banks experienced a net increase in brokered certificates of deposit of $35.4 million during 2006.
United Fire Group accounted for 10%, or $87.7 million, of the Company’s consolidated deposits at December 31, 2006.
Deposits increased by $58.4$110.5 million, or 16%19%, to $434.7$698.5 million at December 31, 20022005 from $376.3$588.0 million at June 30, 2002.December 31, 2004. The increase resulted from a $43.8$95.9 million net increase in noninterestnon-interest bearing, NOW, money market and other savings accounts andcombined with a $14.6 million net increase in interest-bearing certificates of deposit. 22
The subsidiary banks experienced a net increase in brokered certificates of deposit of $7.2 million during 2005.
Short-term Borrowings.Short-term borrowings increased by $18.7$4.2 million, or 57%4%, from $32.9$107.5 million as of December 31, 20022005 to $51.6$111.7 million as of December 31, 2003.2006. Short-term borrowings decreasedincreased by $1.7$2.7 million, or 5%3%, from $34.6 million
as of June 30, 2002 to $32.9$104.8 million as of December 31, 2002.2004 to $107.5 million as of December 31, 2005. The subsidiary banks offer short-term repurchase agreements to some of their significant
depositmajor customers. Also, on occasion, the subsidiary banks must purchase Federal funds for short-term funding needs from the Federal Reserve Bank, or from atheir correspondent bank.banks. Short-term borrowings were comprised of customer repurchase agreements of $34.7$62.3 million, $32.9$54.7 million, and $29.1$47.6 million at December 31, 2003, December 31, 2002,2006, 2005, and June 30, 2002,2004, respectively, as well as federal funds purchased from correspondent banks of $16.9$49.4 million at December 31, 2003,
none2006, $52.8 million at December 31, 2002,2005, and $5.5$57.2 million at June 30, 2002.
December 31, 2004.
FHLB Advances and Other Borrowings.FHLB advances increased $1.2$21.9 million, or 2%17%, from $75.0$130.0 million as of December 31, 20022005 to $76.2$151.9 million as of December 31, 2003.2006. FHLB advances increased $22.6$38.0 million, or 43%41%, from $52.4 million as of June
30, 2002 to $75.0$92.0 million as of December 31, 2002.2004 to $130.0 million as of December 31, 2005. As of December 31, 2003,2006, the subsidiary banks held $4.3$8.5 million of FHLB stock in aggregate. As a result of their memberships in the FHLB of Des Moines and Chicago, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. Both Quad City Bank & Trust and Cedar Rapids Bank & TrustThe subsidiary banks utilized FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provided a less costly source of funds than customer deposits.
Other borrowings increased to $10.0decreased $7.0 million, or 65%, from $10.8 million at December 31, 2003 for an increase
of $5.0 million, or 100%, from December 31, 2002. In February and July 2003, the
Company drew additional advances of $2.0 million and $3.0 million, respectively,
as funding2005 to maintain the required level of regulatory capital at Cedar Rapids
Bank & Trust in light of the bank's growth. Other borrowings were $5.0$3.8 million at December 31, 2002 and at June 30, 2002.2006. In September 2001,February 2006, with proceeds from the issuance of the trust preferred securities of Trust V, the
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Company drewmade a $5.0 million advancepayment to reduce the balance on a line of credit at its primaryan upstream correspondent bank by $10.0 million. In March 2006, the Company drew an advance of $8.5 million, primarily to provide $3.0 million of additional capital to Quad City Bank & Trust and $4.5 million of additional capital to Cedar Rapids Bank & Trust for capital maintenance purposes at each of these subsidiaries. During the third quarter of 2006, the Company drew additional advances totaling $6.0 million, primarily to provide $3.2 million of additional capital to Quad City Bank & Trust and $1.5 million of additional capital to Rockford Bank & Trust for capital maintenance purposes at each of these subsidiaries. During the fourth quarter of 2006, with proceeds from the issuance $12.9 million of noncumulative perpetual preferred stock, the Company reduced the balance on the line of credit by $12.5 million. In December 2006, the Company drew an additional $1.0 million for general corporate purposes.
Other borrowings increased to $10.8 million at December 31, 2005 for an increase of $4.8 million, or 79%, from December 31, 2004. In January 2005, the Company drew an additional $5.0 million advance as partial funding for the initial capitalization of Rockford Bank & Trust. In May 2005, with proceeds from the issuance of trust preferred securities, the Company made a payment to reduce the balance on the line of credit by $5.0 million. As part of the acquisition of M2 Lease Funds in August 2005, the Company acquired $289 thousand of nonrecourse loans. In September 2005, the Company drew an advance of $4.0 million to provide $2.5 million of additional capital to Quad City Bank & Trust and $1.5 million of additional capital to Cedar Rapids Bank & Trust.Trust for capital maintenance purposes at each of the subsidiaries. In June 1999,December 2005, the Company drew an additional $500 thousand for general corporate purposes.
Junior subordinated debentures increased $10.3 million, or 40%, from $25.8 million at December 31, 2005 to $36.1 million at December 31, 2006. On February 4, 2006, the Company issued 1,200,000 shares$10,000,000 of trust preferred securities
through its newly formed Capital Trust I subsidiary. On the Company's financial
statements, these securities are listed as junior subordinated debentures and
were $12,000,000 at December 31, 2003 and 2002, and June 30, 2002. Previously,
these securities had been listed on financial statements as company obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
subordinated debentures, however upon adoption of Financial Accounting Standards
Board Interpretation (FIN) No. 46 on December 31, 2003, prior years' financial
statements were restated. Under current regulatory guidelines, these securities
are considered to be Tier 1 capital, with certain limitations that are
applicable to the Company. A detailed explanation of FIN No. 46 and its impact
on the Company is presented in the "Impact of New Accounting Standards" section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations. Additional information regarding the Company's adoption of FIN No.
46 is included in Note 1 to the consolidated financial statements.
In February 2004, the Company issued, in a private transaction, $8.0 million of
fixed/floating rate capital securities and $12.0 million of fixed rate capital
securities (together, the "Trust Preferred Securities") ofthrough a newly formed subsidiary, QCR Holdings Statutory Trust II ("V (“Trust II"V”) and QCR Holdings Statutory. Trust III ("V is a 100% owned non-consolidated subsidiary of the Company. Trust III"), respectively. The securities represent undivided beneficial interests in
Trust II and Trust III, which were established by the Company for the purpose of
issuing the Trust Preferred Securities. Both Trust II and Trust IIIV used the proceeds from the sale of the Trust Preferred Securitiestrust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in the amount of $10.3 million.
Junior subordinated debentures increased $5.2 million, or 25%, from $20.6 million at December 31, 2004 to $25.8 million at December 31, 2005. On May 5, 2005, the Company issued $5,000,000 of floating rate capital securities through a newly formed subsidiary, QCR Holdings Statutory Trust IV (“Trust IV”). Trust IV is a 100% owned non-consolidated subsidiary of the Company. Trust IV used the proceeds from the sale of the trust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in the amount of $5.2 million. Additional information regarding the composition of this account is described in Note 10 to the consolidated financial statements.
Other liabilities decreasedincreased by $1.7$5.6 million, or 20%37%, to $6.7$20.6 million as of December 31, 20032006 from $8.4$15.0 million as of December 31, 2002.2005. The decreaseincrease was primarily due to the resultincreased balances in accounts payable leases and accrued interest payable. Other liabilities increased by $7.1 million, or 90%, to $15.0 million as of the payment during 2003December 31, 2005 from $7.9 million as of income taxes andDecember 31, 2004. The increase was primarily due to $3.6 million in accounts payable leases that was a large portion of the accrued severance compensation relatedacquisition of M2 Lease Funds. In the normal course of business, M2 Lease Funds often makes arrangements with vendors to Bancard's salepay for asset purchases in installments over periods of its
ISO related merchant credit card operations in October 2002.time, primarily less than one year. Other liabilities were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At both December 31, 20032006 and 2002,December 31, 2005, the largest single component of other liabilities was interestaccounts payable at $1.2leases of $6.4 million and $1.8accrued expenses of $4.5 million, respectively. Other liabilities increased by $2.5
Stockholders’ Equity.In the fourth quarter of 2006, the Company issued 268 shares of Series B Non Cumulative Perpetual Preferred Stock at $50 thousand per share for a total of $12.9 million or 43%with a stated rate of 8.00%. The Preferred Shares will accrue no dividends,and dividends will be payable on the Preferred Shares only if declared. The capital raised was used to $8.4pay down the balance on the Company’s line of credit.
Common stock of $4.5 million as of December 31, 2002 from $5.92005 increased by $29 thousand, or less than 1%, to $4.6 million as of June 30, 2002.at December 31, 2006. The slight increase was primarily the net result of accrued severance compensationstock issued from the net exercise of stock options and income taxes related to Bancard's sale of its ISO related merchant credit card
operations in October 2002. At both December 31, 2002 and June 31, 2002,stock purchased under the largest single component of other liabilities was interest payable at $1.8
million and $1.9 million, respectively.
Stockholders' Equity.employee stock purchase plan. Common stock of $2.8$4.5 million as of December 31, 20022004 increased by $41$34 thousand, or 1%, to $2.9remain at $4.5 million at December 31, 2003.2005. The slight increase was the result of stock issued from the net exercise of stock options and stock purchased under the employee stock purchase plan. Common stock
at December 31, 2002 was $2.8 million, which was unchanged from June 30, 2002. A
slight increase of $13 thousand was the result of proceeds received from the
exercise of stock options.
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Additional paid-in capital increased to $17.1$34.3 million as of December 31, 20032006 from $16.7$20.8 million at December 31, 2002.2005. The increase of $382 thousand,$13.5 million, or 2%65%, resulted primarily from $12.9 million in proceeds received in excess of the $1.00 per share par value for the 40,929268 shares of Preferred Stock issued. Also contributing to the increase in additional paid-in capital, were proceeds received in excess of the $1.00 per share par value for the 29,405 net shares of common stock issued as the result of the exercise of stock options and purchases of stock under the employee stock purchase plan. Additional paid-in capital totaled $16.8increased to $20.8 million as of December 31, 2005 from $20.3 million at December 31, 2002 compared
to $16.7 million at June 30, 2002. An2004. The increase of $76$447 thousand, or 2%, resulted primarily from proceeds received in excess of the $1.00 per share par value for the 13,46834,494 net shares of common stock issued as the result of the exercise of stock options.
options and purchases of stock under the employee stock purchase plan.
Retained earnings increased by $5.2$2.3 million, or 33%8%, to $20.9$32.0 million at December 31, 20032006 from $15.7$29.7 million at December 31, 2002.2005. The increase reflected net income for the fiscal year reduced by the $307a combination of $364 thousand in common dividends declared during 2003. The Company paid a2006 and $164 thousand in preferred dividends declared in December 2006. A cash dividend of $0.05 per
share on$0.04 was paid in July 3, 2003.2006. On October 23, 2003,26, 2006, the board of directors declared a cash dividend of $0.06$0.04 per share payable on January 5, 2004,2007, to stockholders of record on December 15, 2003.22, 2006. Retained earnings increased by $3.0$4.4 million, or 24%18%, to $15.7$29.7 million at December 31, 20022005 from $12.7$25.3 million at June 30, 2002.December 31, 2004. The increase reflected net income for the six-month periodyear reduced by the $138$362 thousand dividendin dividends declared in December. The Company also paidduring 2005. On April 28, 2005, the board of directors declared a cash dividend of $0.05$0.04 payable on July 6, 2005, to stockholders of record on June 15, 2005. On October 27, 2005, the board of directors declared a cash dividend of $0.04 per share payable on January 3, 2003.
6, 2006, to stockholders of record on December 23, 2005.
Accumulated other comprehensive income was $1.8 million$28 thousand as of December 31, 2003
as2006 compared to $2.1 milliona loss of $567 thousand as of December 31, 2002.2005. The decreaseincrease was attributable to the increase during the period in the gainsfair value of the securities identified as available for sale, primarily as a result of the relatively unchanged market interest rates during 2006. Accumulated other comprehensive loss was $567 thousand as of December 31, 2005, compared to $669 thousand of accumulated other comprehensive income as of December 31, 2004. The turnaround from comprehensive income to loss was attributable to the decrease during the period in the fair value of the securities identified as available for sale, primarily as a result of a slight
recoverythe steady climb in market interest rates. Accumulated other comprehensive income
consisting of net unrealized gains on securities available for sale, net of
related income taxes, was $2.1 million as of December 31, 2002 as compared to
$1.3 million as of June 30, 2002. The increase in the gains was attributable to
the increase during the period in the fair value of the securities identified as
available for sale, primarily as a result of a decline in market interest rates.
In April 2000, the Company announced that the board of directors approved a
stock repurchase program enabling the Company to repurchase approximately 60,000
shares of its common stock. This stock repurchase program was completed in the
fall of 2000 and at both December 31, 2003 and 2002 and at June 30, 2002 the
Company held in treasury 60,146 shares at a total cost of $855 thousand. The
weighted average cost was $14.21 per share.
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'customers’ credit needs. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $38.9$47.0 million at December 31, 2003, $53.92006, $44.7 million at December 31, 2002,2005, and $34.2$28.1 million at June 30, 2002.
Quad City Bank & Trust and Cedar Rapids Bank & TrustDecember 31, 2004. The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities.
The liquidity of the Company is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities, comprised predominately of proceeds on the sale of loans,increase in other liabilities, was $30.2$7.2 million for fiscal 2003 compared to net cash used in operating activities, primarily for the
origination of loans to be sold, of $9.8 million for the twelve months ended
December 31, 2002. Net cash used in operating activities, consisting primarily
of loan originations for sale, was $12.9 million for the six months ended
December 31, 20022006 compared to net cash provided by operating activities, primarily net income and net proceeds on the sale of $470
thousandloans, of $9.6 million for 2005. Net cash provided by operating activities, comprised predominately of net income and net proceeds on the six months ended December 31, 2001.sale of loans, was $9.6 million for 2005 compared to $7.4 million for 2004. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $132.5$222.9 million for fiscal 20032006 and $117.0$127.7 million for the
comparable period in 2002,2005, comprised predominately of loan originations.originations and the purchase of securities. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, and federal funds was $59.9$127.7 million for the six-month
period ended December 31, 20022005 and $59.7$165.1 million for the comparable period in
2001. Net cash provided by financing activities, consisting primarily of deposit
growth and proceeds from short-term borrowings, was $101.8 million for fiscal
2003 compared to $132.1 million, comprised predominately of growth in deposits
and proceeds from short-term borrowings, for the twelve months ended December
31, 2002.2004. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from Federal Home Loan Bank advances, was $79.2$219.2 million for the six months ended December 31, 20022006 compared to $60.2$135.8 million, comprised predominately of growth in deposits and proceeds from Federal Home Loan Bank advances for 2005. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from Federal Home Loan Bank advances, was $135.8 million for the same period2005 compared to $154.6 million, comprised predominately of growth in 2001.
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deposits and proceeds from short-term borrowings, for 2004.
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At December 31, 2003,2006, the subsidiary banks had seven unusedfourteen lines of credit totaling $41.0$104.5 million, of which $4.0$13.0 million was secured and $37.0$91.5 million was unsecured. At December 31, 2002,2006, the subsidiary banks had seven unused lineswere not drawn on any of credit totaling $38.0 million of which $4.0 million was secured and $34.0
million was unsecured.these available lines. At the close of fiscal 2003,December 31, 2006, the Company had a $15.0 million unsecured revolving credit note. The note with a maturity date of April 6, 2007. In April 2006, a single 364-day revolving note was written in substitution and replacement of the two existing notes, which matures Julywere a 364-day revolving note for $10.0 million maturing on December 21, 2004,
had2006 and a 3-year revolving note for $5.0 million, maturing on December 30, 2007. At December 31, 2006, the replacement note carried a balance outstanding of $10.0 million at December 31, 2003.$3.5 million. Interest is payable monthly at the Federal Funds rate plus one percent1% per annum, as defined in the credit note agreement. As of December 31, 2003,2006, the interest rate on the replacement note was 1.97%6.25%.
At December 31, 2002,2005, the Companysubsidiary banks had a $10.0fourteen lines of credit totaling $104.5 million, revolving credit
note,of which $13.0 million was secured by all of the outstanding stock ofand $91.5 million was unsecured. At December 31, 2005, Quad City Bank & Trust.Trust had drawn $19.5 million of their available balance of $83.0 million. As of December 31, 2005, the Company had two unsecured revolving credit notes totaling $15.0 million in aggregate. The Company had a 364-day revolving note, which matured July 1, 2003,matures December 21, 2006, for $10.0 million and had a balance outstanding if $5.0of $5.5 million at December 31, 2002. Interest was payable quarterly at the adjusted
LIBOR rates, as defined in the credit note agreement. As of December 31, 2002,
the interest rate was 3.8%.
At December 31, 2002, the subsidiary banks had seven unused lines of credit
totaling $38.0 million of which $4.0 million was secured and $34.0 million was
unsecured. At June 30, 2002, the subsidiary banks had seven unused lines of
credit totaling $36.0 million of which $4.0 million was secured and $32.0
million was unsecured. At both December 31, 2002 and June 30, 2002, the2005. The Company also had a secured line of credit3-year revolving note, which matures December 30, 2007, for $10.0 million, of which $5.0 million had
been usedand carried a balance of $5.0 million as of December 31, 2005. On January 3, 2005, the 3-year note was fully drawn as partial funding for the capitalization of Cedar RapidsRockford Bank and& Trust. For both notes, interest is payable monthly at the Federal Funds rate plus 1% per annum, as defined in the credit agreements. As of December 31, 2005, the interest rate on both notes was 5.19%.
On February 18, 2004, the Company issued $12.0 million of fixed/floating rate capital securities and $8.0 million of floating rate capital securities and $12.0 million of fixed rate capital securities (together, the
"Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II")
and QCR Holdings Statutory Trust III ("Trust III"). The securities represent
undivided beneficial interests in Trust II and Trust III, which were established
by the Company for the purpose of issuing the Trust Preferred Securities.respectively. The securities issued by Trust II and Trust III mature in 30 years. The fixed/floating rate capital securities are callable at par after seven years, and the floating rate capital securities are callable at par after five years and the fixed rate
capital securities are callable at par after seven years. The fixed/floating rate
capital securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the initial rate set at 3.97%, and the fixed rate capital securities have a fixed rate of 6.93%, payable quarterly, for seven years, at which time they have a variable rate based on the three-month LIBOR, reset quarterly.quarterly, and the floating rate capital securities have a variable rate based on the three-month LIBOR, reset quarterly, with the rate set at 4.83% at December 31, 2004. Both Trust II and Trust III used the proceeds from the sale of the Trust Preferred Securitiestrust preferred securities to purchase junior subordinated debentures of QCR Holdings, Inc. The Company incurredPartial proceeds from the issuance costs of $410 thousand, which will
be amortized over the lives of the securities.
The Company intends to use its net proceedswere used for general corporate purposes,
including the possible redemption in June 2004 of the $12.0 million of 9.2% cumulative trust preferred securities issued by Trust I in 1999. If redeemed,
On May 5, 2005, the Company issued $5.0 million of floating rate capital securities through a newly formed subsidiary, Trust IV. The securities issued by Trust IV mature in 30 years, but are callable at par after five years. The floating rate capital securities have a variable rate based on the three-month LIBOR, reset quarterly, with the rate set at 6.40% for the first quarter of 2006. Interest is payable quarterly. Trust IV is a 100% owned non-consolidated subsidiary of the Company. Trust IV used the proceeds from the sale of the trust preferred securities, along with the funds from its equity, to purchase junior subordinated debentures of the Company in the amount of $5.2 million. The Company used the net proceeds for general corporate purposes, including the paydown of its other borrowings.
On February 24, 2006, the Company issued of $10.0 million of fixed/floating rate capital securities of QCR Holdings Statutory Trust V. The securities issued by Trust V mature in 1999 carry approximately $750thirty years, but are callable at par after five years. The trust preferred securities have a fixed rate of 6.62%, payable quarterly, for five years, at which time they have a variable rate based on the three-month LIBOR plus 1.55%, reset and payable quarterly. Trust V used the $10.0 million of proceeds from the sale of the trust preferred securities, in combination with $310 thousand of unamortizedproceeds from its own equity to purchase $10.3 million of junior subordinated debentures of the Company. The Company incurred no issuance costs which will be expensed as a result of June 30, 2004.
the transaction. The Company used the net proceeds for general corporate purposes, including the paydown of its other borrowings.
In the first quarter of 2007, the Company opened a private placement offering of common stock in connection with the addition of the Wisconsin-chartered bank. The Company is offering up to $3,000,000 of common stock, net of expenses. The total number of shares offered is 182,353 at an offering price of $17.00 per share. The offering terminates on March 31, 2007. The Company intends to use the net proceeds for general corporate purposes, including the paydown of its other borrowings.
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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'scustomer’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'smanagement’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.
25
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, 20032006 and 20022005, no amounts had been recorded as liabilities for the banks'banks’ potential obligations under these guarantees.
As of December 31, 20032006 and 2002,2005, commitments to extend credit aggregated $194.9$459.3 million and $165.2$385.8 million, respectively. As of December 31, 20032006 and 2002,2005, standby letters of credit aggregated $6.0$18.6 million and $4.9$15.2 million, respectively. Management does not expect that all of these commitments will be funded.
The Company had also executed contracts for the sale of mortgage loans in the secondary market in the amount of $3.8$6.2 million and $23.7$2.6 million as of December 31, 20032006 and 2002,2005, respectively. These amounts were included in loans held for sale at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold with varying recourse provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by the seller in situations such as, breach of representation, warranty, or covenant, untimely document delivery, false or misleading statements, failure to obtain certain certificates or insurance, unmarketability, etc. Certain loan sales agreements contain repurchase requirements based on payment-related defects that are defined in terms of the number of days/months since the purchase, the sequence number of the payment, and/or the number of days of payment delinquency. Based on the specific terms stated in the agreements of investors purchasing residential mortgage loans from the Company’s subsidiary banks, the Company had $39.7 million and $43.4 million of sold residential mortgage loans with recourse provisions still in effect at December 31, 2006 and December 31, 2005, respectively. The subsidiary banks did not repurchase any loans from secondary market investors under the terms of loans sales agreements during the years ended December 31, 2006, 2005 or 2004. In the opinion of management, the risk of recourse to the subsidiary banks is not significant, and accordingly no liabilities have been established related to such.
During 2004, Quad City Bank & Trust joined the Federal Home Loan Bank’s (FHLB) Mortgage Partnership Finance (MPF) Program, which offers a “risk-sharing” alternative to selling residential mortgage loans to investors in the secondary market. Lenders funding mortgages through the MPF Program manage the credit risk of the loans they originate. The loans are funded by the FHLB and held within their portfolio, thereby managing the liquidity, interest rate, and prepayment risks of the loans. Lenders participating in the MPF Program receive monthly credit enhancement fees for managing the credit risk of the loans they originate. Any credit losses incurred on those loans will be absorbed first by private mortgage insurance, second by an allowance established by the FHLB, and third by withholding monthly credit enhancements due to the participating lender. At both December 31, 2006 and 2005, Quad City Bank & Trust had funded $13.8 million of mortgages through the FHLB’s MPF Program with an attached credit exposure of
35
$279 thousand. In conjunction with its participation in this program, Quad City Bank & Trust had both a credit enhancement receivable and a credit enhancement liability for $31 thousand at December 31, 2006. In conjunction with its participation in this program, Quad City Bank & Trust had an allowance for credit losses on these off-balance sheet exposures of $48 thousand at December 31, 2005.
Bancard is subject to the risk of cardholder chargebacks and its local merchants being incapable of refunding the amount charged back. Management attempts to mitigate such risk by regular monitoring of merchant activity and in appropriate cases, holding cash reserves deposited by the local merchant. Throughout 2006 monthly provisions were made to the allowance for chargeback losses based on the dollar volumes of merchant credit card and related chargeback activity. For the year ended December 31, 2006, monthly provisions were made totaling $4 thousand. At December 31, 2006 and 2005, Bancard had a merchant chargeback reserve of $81 thousand and $77 thousand, respectively. Management will continually monitor merchant credit card volumes, related chargeback activity, and Bancard’s level of the allowance for chargeback losses.
The Company also has a limited guarantee to MasterCard International Incorporated, which is backed by a performance bond in the amount$750 thousand letter of $1.0 million.credit from Northern Trust Company. As of December 31, 20032006 and 2005, there were no significant pending liabilities.
A significant portion of residential mortgage loans sold to investors in
Aside from cash on-hand and in-vault, the secondary market is sold with recourse. Specifically, certain loan sales
agreements provide that if the borrower becomes delinquent a number of payments
or a number of days, within six months to one yearmajority of the sale, the subsidiary
banks must repurchase the loan from the subject investor.Company’s cash is maintained at upstream correspondent banks. The banks did not
repurchase any loans from secondary market investors under the termstotal amount of these
loan sales agreements during the year endedcash on deposit, certificates of deposit, and federal funds sold exceeded federal insured limits by approximately $7.0 million and $9.8 million as of December 31, 2003, six months ended
December 31, 2002, or the years ended June 30, 2002 or 2001.2006 and 2005, respectively. In the opinion of management, theno material risk of recourseloss exists due to the banks wasfinancial condition of the upstream correspondent banks.
In an arrangement with Goldman, Sachs and Company, Cedar Rapids Bank & Trust offers a cash management program for select customers. Using this cash management tool, the customer’s demand deposit account performs like an investment account. Based on a predetermined minimum balance, which must be maintained in the account, excess funds are automatically swept daily to an institutional money market fund distributed by Goldman Sachs. As with a traditional demand deposit account, customers retain complete check-writing and withdrawal privileges. If the demand deposit account balance drops below the predetermined threshold, funds are automatically swept back from the money market fund at Goldman Sachs to the account at Cedar Rapids Bank & Trust to maintain the required minimum balance. Balances swept into the money market funds are not significantbank deposits, are not insured by any U.S. government agency, and accordingly, no liability has been established relateddo not require cash reserves to such.
be set against the balances. At December 31, 2006 and December 31, 2005, the Company had $23.5 million and $36.1 million, respectively, of customer funds invested in this cash management program.
36
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, 2003,2006, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
26
| Payments Due by Period | ||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Description and | One year | After 5 | ||||||||||||||||||
| Note reference | Total | Or less | 1-3 years | 4-5 years | years | |||||||||||||||
| Deposits without a stated maturity | $ | 458,569 | $ | 458,569 | $ | — | $ | — | $ | — | ||||||||||
| Certificates of deposits (6) | 416,878 | 332,666 | 54,574 | 29,638 | — | |||||||||||||||
| Short-term borrowings (7) | 111,684 | 111,684 | — | — | — | |||||||||||||||
| Federal Home Loan Bank advances (8) | 151,859 | 42,200 | 29,300 | 16,100 | 64,259 | |||||||||||||||
| Other borrowings (9) | 3,762 | 3,762 | — | — | — | |||||||||||||||
| Junior subordinated debentures (10) | 36,085 | — | — | — | 36,085 | |||||||||||||||
| Rental commitments (5) | 4,352 | 552 | 1,107 | 1,029 | 1,664 | |||||||||||||||
| Purchase obligations (16) | — | — | — | — | — | |||||||||||||||
| Operating contracts (16) | 4,190 | 1,738 | 2,379 | 69 | 4 | |||||||||||||||
| Total contractual cash obligations | $ | 1,187,379 | $ | 951,171 | $ | 87,360 | $ | 46,836 | $ | 102,012 | ||||||||||
Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The Company had no purchase obligation amounts presented primarily
relate to certain contractual payments for capital expenditures of data
processing technology and facilities expansion.obligations at December 31, 2006. The Company'sCompany’s operating leasecontract obligations represent short and long-term lease payments for data processing equipment and services, software, and other equipment and professional services.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been prepared in accordance with Generally Accepted Accounting Principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company'sCompany’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'sCompany’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
The Financial Accounting Standards Board has
In July 2006, FASB issued Statement 148, "AccountingFASB Interpretation No. 48, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
No. 123"Uncertainty in Income Taxes” (FIN 48). This Statement amends Statement No. 123 to provide alternative methods
of transition for a voluntary change toFIN 48 clarifies the fair value based method of
accounting for stock-based employee compensation. The alternative methods were
effective for transitions during 2003 and the Company did not make any such
voluntary changes in accounting. The disclosure requirements of the Statement
were effective for and adopted in the consolidated financial statements for the
fiscal year ending December 31, 2002.
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embeddedincome taxes recognized in other contracts,accordance with SFAS 109, “Accounting for
37
Income Taxes.” This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company is currently evaluating the impact of FIN 48. The Company will adopt this Interpretation in the first quarter of 2007.
In September 2006, the FASB ratified Emerging Issues Task Force 06-4, “Accounting for hedging activities under Statement 133. The Statement wasDeferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 addresses accounting for split-dollar life insurance arrangements after the employer purchases a life insurance policy on the covered employee, and will be effective for contracts entered into or modifiedfiscal years beginning after June 30, 2003 and for hedging
relationships designated after June 30, 2003. ImplementationDecember 15, 2007. The Company is currently evaluating the impact of the Statement on
July 1, 2003 did not have a significant impact on the consolidated financial
statements, as the Company had no such instruments or contracts.
The Financial Accounting Standards Board has issued Statement 150, "Accounting
for Certain Financial Instruments with Characteristicsadoption of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and requires that certain freestanding financial instruments be
reported as liabilities in the balance sheet. For the Company, the Statement was
effective July 1, 2003 and implementation had no significant impact on the
consolidated financial statements
The Financial Accounting Standard Board has issued Interpretation (FIN) No. 46
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51.", which, for the Company, is effective for the year
ending December 31, 2003. FIN 46 establishes accounting guidance for
consolidation of variable interest entities (VIE), that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46, VIEs were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity. Under the provisions of FIN 46, QCR Holdings Capital Trust I no longer
meets the criteria for consolidation and, as such, has not been consolidated in
these financial statements. FIN 46 was adopted on December 31, 2003 via a
retroactive restatement of the prior year's financial statements. There was no
cumulative effect on stockholders' equity from this adoption.
27
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include
trust preferred securities in their Tier I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of this accounting change and, if necessary
or warranted, provide further appropriate guidance. No further guidance has been
issued to date and, as such, the $12 million in trust preferred securities
issued by QCR Capital Trust I were included in Tier I capital for regulatory
capital purposes at December 31, 2003. There can be no assurance that the
Federal Reserve will continue to permit institutions to include trust preferred
securities in Tier I capital in the future. Assuming the Company was not
permitted to include these securities in Tier I capital at December 31, 2003,
the Company would still exceed the regulatory required minimums for capital
adequacy purposes.
In February 2004, the Company issued, in a private transaction, $8.0 million of
floating rate capital securities and $12.0 million of fixed rate capital
securities (together, the "Trust Preferred Securities") of QCR Holdings
Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust
III"), respectively. The securities represent undivided beneficial interests in
Trust II and Trust III, which were established by the Company for the purpose of
issuing the Trust Preferred Securities. Trust II and Trust III used the proceeds
from the sale of the Trust Preferred Securities to purchase junior subordinated
debentures of the Company. In February 2004, the Federal Reserve provided
confirmation to the Company for their treatment of these new issuances as Tier 1
capital for regulatory capital purposes, subject to established limitations.
The Accounting Standards Executive Committee has issued Statement of Position
(SOP) 03-3 "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer". This Statement applies to all loans acquired in a transfer, including
those acquired in the acquisition of a bank or a branch, and provides that such
loans be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are less than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective for calendar year 2005 and, early adoption, although permitted, is not
planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
EITF 06-4.
FORWARD LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995.
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company'sCompany’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," "appear," "plan," "intend," "estimate," "may," "will," "would,"
"could," "should"“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'sCompany’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. FactorsThe factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A. of Part I of this Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
28
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
| • | The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks. | ||
| • | The costs, effects and outcomes of existing or future litigation. | ||
| • | Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board. | ||
| • | The ability of the Company to manage the risks associated with the foregoing as well as anticipated. | ||
| • | These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company'sCompany’s net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management monitors the Company'sCompany’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'sbank’s interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank . Management also reviews Quad City Bank & Trust and Cedar Rapids Bank &
Trust'sthe subsidiary banks’ securities portfolios, formulates
38
investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board'sboard’s objectives in the most effective manner. Notwithstanding the Company'sCompany’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'sCompany’s asset/liability position, the board and management attempt to manage the Company'sCompany’s interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board and management may decide to increase the Company'sCompany’s interest rate risk position somewhat in order to increase its net interest margin. The Company'sCompany’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.
29
One approachmethod 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 portfolio value
analysis. In essence, this analysis calculatesinterest income to sustained interest rate changes. This simulation model captures the difference betweenimpact of changing interest rates on the present value of liabilitiesinterest income received and the present value of expected cash flows frominterest expense paid on all interest sensitive assets and off-balance-sheet contracts.liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure over a one year horizon, assuming no balance sheet growth and a 200 basis point upward and a 200 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. The following table sets forth,model assumes a parallel and pro rata shift in interest rates over a twelve-month period. Application of the simulation model analysis at December 31, 2003 and 2002, an analysis of the Company's2006 demonstrated a 3.64% decrease in interest rate risk as
measured by the estimated changes in the net portfolio value resulting from
instantaneous and sustained parallel shifts in the yield curve (+ or -income with a 200 basis points).
The Company does not currently engagepoint increase in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permittedrates, and a 1.41% increase in interest income with a 200 basis point decrease in interest rates. Both simulations are within the approvalboard-established policy limits of the board of directors, the Company does not
intend to engagea 10% decline in such activities in the immediate future. value.
Interest rate risk is the most significant market risk affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and their risk management system to monitor and control the Company’s interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company'sCompany’s business activities.
30
39
Item 8. Financial Statements
QCR Holdings, Inc.
Index to Consolidated Financial Statements
| 41 | ||||
Financial Statements | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45-46 | ||||
| 47-81 |
40
Report of Independent Auditor's Report 32
Financial Statements
Consolidated balance sheets as of December 31, 2003 and 2002 33
Consolidated statements of income for the year ended December 31,
2003, six months ended December 31, 2002 and the year ended
June 30, 2002 and 2001 34
Consolidated statements of changes in stockholders' equity for
the year ended December 31, 2003, six months ended December 31,
2002 and the years ended June 30, 2002 and 2001 35
Consolidated statements of cash flows for the year ended
December 31, 2003, six months ended December 31, 2002 and the
years ended June 30, 2002 and 2001 36 - 37
Notes to consolidated financial statements 38 - 61
31
Independent Auditor's Report
Registered Public Accounting Firm
To the Board of Directors and Stockholders
QCR Holdings, Inc.
Moline, Illinois
QCR Holdings, Inc.
Moline, Illinois
We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and subsidiaries as of December 31, 20032006 and 2002,2005, and the related consolidated statements of income, changes in stockholders'stockholders’ equity, and cash flows for each of the yearthree years in the period ended December 31, 2003, six months ended December 31, 2002,
and the years ended June 30, 2002 and 2001.2006. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditingthe standards generally accepted
inof the United States of America.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, 20032006 and 2002,2005, and the results of their operations and their cash flows for each of the yearthree years in the period ended December 31, 2003, six months
ended December 31, 2002, and the years ended June 30, 2002 and 2001,2006, in conformity with accounting principlesU.S. generally accepted accounting principles.
We also have audited, in accordance with the United Statesstandards of America.
/s/ McGladrey & Pullen, LLP
the Public Company Accounting Oversight Board (United States), the effectiveness of QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting and an unqualified opinion on the effectiveness of QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting.
Davenport, Iowa
January 23, 2004
March 15, 2007
March 15, 2007
McGladrey & Pullen, LLP is a member firm of RSM International - –
an affiliation of separate and independent legal entities.
32
an affiliation of separate and independent legal entities.
41
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Balance Sheets
December 31,20032006 and 2002
2005
December 31,
| 2006 | 2005 | |||||||
Assets | ||||||||
| Cash and due from banks | $ | 42,502,770 | $ | 38,956,627 | ||||
| Federal funds sold | 2,320,000 | 4,450,000 | ||||||
| Interest-bearing deposits at financial institutions | 2,130,096 | 1,270,666 | ||||||
| Securities held to maturity, at amortized cost | 350,000 | 150,000 | ||||||
| Securities available for sale, at fair value (Note 3) | 194,423,893 | 182,214,719 | ||||||
| 194,773,893 | 182,364,719 | |||||||
| Loans receivable, held for sale (Note 4) | 6,186,632 | 2,632,400 | ||||||
| Loans/leases receivable, held for investment (Note 4) | 954,560,692 | 753,621,630 | ||||||
| 960,747,324 | 756,254,030 | |||||||
| Less allowance for estimated losses on loans/leases (Note 4) | 10,612,082 | 8,883,855 | ||||||
| 950,135,242 | 747,370,175 | |||||||
| Premises and equipment, net (Note 5) | 32,524,840 | 25,621,741 | ||||||
| Goodwill | 3,222,688 | 3,222,688 | ||||||
| Accrued interest receivable | 7,160,298 | 4,849,378 | ||||||
| Bank-owned life insurance | 18,877,526 | 17,367,660 | ||||||
| Other assets | 18,027,603 | 17,139,874 | ||||||
Total assets | $ | 1,271,674,956 | $ | 1,042,613,528 | ||||
Liabilities and Stockholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 124,184,486 | $ | 114,176,434 | ||||
| Interest-bearing | 751,262,781 | 584,327,465 | ||||||
Total deposits (Note 6) | 875,447,267 | 698,503,899 | ||||||
| Short-term borrowings (Note 7) | 111,683,951 | 107,469,851 | ||||||
| Federal Home Loan Bank advances (Note 8) | 151,858,749 | 130,000,854 | ||||||
| Other borrowings (Note 9) | 3,761,636 | 10,764,914 | ||||||
| Junior subordinated debentures (Note 10) | 36,085,000 | 25,775,000 | ||||||
| Other liabilities | 20,592,953 | 14,981,346 | ||||||
Total liabilities | 1,199,429,556 | 987,495,864 | ||||||
| Minority interest in consolidated subsidiaries | 1,362,820 | 650,965 | ||||||
| Commitments and Contingencies (Note 16) | ||||||||
| Stockholders’ Equity (Note 14): | ||||||||
| Preferred stock, stated value of $1 and stated dividend rate of 8.00% per share; shares authorized 250,000 | 268 | — | ||||||
| December 2006 — 268 shares issued and outstanding | ||||||||
| December 2005 — 0 shares issued and outstanding | ||||||||
| Common stock, $1 par value; shares authorized 10,000,000 | 4,560,629 | 4,531,224 | ||||||
| December 2006 — 4,560,629 shares issued and outstanding | ||||||||
| December 2005 — 4,531,224 shares issued and outstanding | ||||||||
| Additional paid-in capital | 34,293,511 | 20,776,254 | ||||||
| Retained earnings | 32,000,213 | 29,726,700 | ||||||
| Accumulated other comprehensive income (loss) | 27,959 | (567,479 | ) | |||||
Total stockholders’ equity | 70,882,580 | 54,466,699 | ||||||
Total liabilities and stockholders’ equity | $ | 1,271,674,956 | $ | 1,042,613,528 | ||||
See Notes to Consolidated Financial Statements.
33
42
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2006, 2005, and 2004
Years Ended December 31, 2006, 2005, and 2004
| 2006 | 2005 | 2004 | ||||||||||
| Interest and dividend income: | ||||||||||||
| Loans/leases, including fees | $ | 60,098,090 | $ | 42,427,118 | $ | 33,111,498 | ||||||
| Securities: | ||||||||||||
| Taxable | 6,995,972 | 5,345,980 | 4,067,826 | |||||||||
| Nontaxable | 914,128 | 579,817 | 571,405 | |||||||||
| Interest-bearing deposits at financial institutions | 319,491 | 129,460 | 224,293 | |||||||||
| Federal funds sold | 475,345 | 205,893 | 41,818 | |||||||||
Total interest and dividend income | 68,803,026 | 48,688,268 | 38,016,840 | |||||||||
| Interest expense: | ||||||||||||
| Deposits | 27,064,755 | 12,842,421 | 6,852,108 | |||||||||
| Short-term borrowings | 3,169,069 | 2,181,997 | 1,208,494 | |||||||||
| Federal Home Loan Bank advances | 5,609,114 | 4,168,077 | 3,464,122 | |||||||||
| Other borrowings | 574,517 | 501,241 | 159,165 | |||||||||
| Junior subordinated debentures | 2,489,879 | 1,587,049 | 1,640,879 | |||||||||
Total interest expense | 38,907,334 | 21,280,785 | 13,324,768 | |||||||||
Net interest income | 29,895,692 | 27,407,483 | 24,692,072 | |||||||||
| Provision for loan/lease losses (Note 4) | 3,284,242 | 877,084 | 1,372,208 | |||||||||
Net interest income after provision for loan/lease losses | 26,611,450 | 26,530,399 | 23,319,864 | |||||||||
| Noninterest income: | ||||||||||||
| Merchant credit card fees, net of processing costs | 1,947,984 | 1,782,452 | 1,409,237 | |||||||||
| Trust department fees | 3,049,440 | 2,818,832 | 2,530,907 | |||||||||
| Deposit service fees | 1,928,246 | 1,582,530 | 1,631,713 | |||||||||
| Gains on sales of loans, net | 991,536 | 1,254,242 | 1,149,791 | |||||||||
| Securities gains (losses), net | (142,866 | ) | 50 | (45,428 | ) | |||||||
| Gains on sales of foreclosed assets | 664,223 | 42,380 | — | |||||||||
| Earnings on bank-owned life insurance | 759,100 | 656,005 | 627,796 | |||||||||
| Investment advisory and management fees | 1,216,350 | 691,800 | 509,988 | |||||||||
| Other | 1,569,092 | 1,244,212 | 867,437 | |||||||||
Total noninterest income | 11,983,105 | 10,072,503 | 8,681,441 | |||||||||
| Noninterest expenses: | ||||||||||||
| Salaries and employee benefits | 21,262,541 | 16,458,860 | 13,773,439 | |||||||||
| Professional and data processing fees | 3,192,326 | 2,865,064 | 2,199,984 | |||||||||
| Advertising and marketing | 1,367,545 | 1,221,039 | 1,014,664 | |||||||||
| Occupancy and equipment expense | 4,762,827 | 4,316,443 | 3,263,540 | |||||||||
| Stationery and supplies | 670,915 | 645,985 | 543,904 | |||||||||
| Postage and telephone | 961,394 | 842,779 | 684,964 | |||||||||
| Bank service charges | 583,687 | 516,537 | 570,374 | |||||||||
| Insurance | 612,058 | 594,282 | 420,080 | |||||||||
| Loss on disposals/sales of fixed assets | 36,305 | 332,283 | 1,048 | |||||||||
| Loss on redemption of junior subordinated debentures | — | — | 747,490 | |||||||||
| Other | 1,219,386 | 1,639,876 | 1,061,364 | |||||||||
Total noninterest expenses | 34,668,984 | 29,433,148 | 24,280,851 | |||||||||
Income before income taxes | 3,925,571 | 7,169,754 | 7,720,454 | |||||||||
| Federal and state income taxes (Note 11) | 857,842 | 2,282,201 | 2,503,782 | |||||||||
Income before minority interest in net income of consolidated subsidiaries | 3,067,729 | 4,887,553 | 5,216,672 | |||||||||
| Minority interest in income of consolidated subsidiaries | 265,524 | 77,538 | — | |||||||||
Net Income | $ | 2,802,205 | $ | 4,810,015 | $ | 5,216,672 | ||||||
| Net Income | $ | 2,802,205 | $ | 4,810,015 | $ | 5,216,672 | ||||||
| Less: preferred stock dividends | 164,373 | — | — | |||||||||
Net income available to common stockholders | $ | 2,637,832 | $ | 4,810,015 | $ | 5,216,672 | ||||||
| Earnings per common share (Note 15): | ||||||||||||
| Basic | $ | 0.57 | $ | 1.06 | $ | 1.23 | ||||||
| Diluted | $ | 0.57 | $ | 1.04 | $ | 1.20 | ||||||
| Weighted average common shares outstanding | 4,609,626 | 4,518,162 | 4,234,345 | |||||||||
| Weighted average common and common equivalent shares outstanding | 4,653,229 | 4,616,556 | 4,344,765 | |||||||||
| Cash dividends declared per common share | $ | 0.08 | $ | 0.08 | $ | 0.08 | ||||||
See Notes to Consolidated Financial Statements.
34
43
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Changes in Stockholders'Stockholders’ Equity
Year
Years Ended December 31,2003, Six Months Ended December 31, 20022006, 2005, and Years Ended June 30, 2002 and 2001
2004
Years Ended December 31,
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Preferred | Common | Paid-In | Retained | Comprehensive | Treasury | |||||||||||||||||||||||
| Stock | Stock | Capital | Earnings | Income (Loss) | Stock | Total | ||||||||||||||||||||||
Balance, December 31, 2003 | — | 3,132,752 | 16,875,106 | 20,866,749 | 1,802,664 | (854,536 | ) | 41,822,735 | ||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | — | — | — | 5,216,672 | — | — | 5,216,672 | |||||||||||||||||||||
| Other comprehensive (loss), net of tax (Note 2) | — | — | — | — | (1,133,293 | ) | — | (1,133,293 | ) | |||||||||||||||||||
Comprehensive income | 4,083,379 | |||||||||||||||||||||||||||
| Retirement of 90,219 treasury shares, April 30, 2004 | — | (60,146 | ) | (341,028 | ) | (453,362 | ) | — | 854,536 | — | ||||||||||||||||||
| 3:2 common stock split, May 28, 2004 | — | 1,133,019 | (1,133,019 | ) | (2,549 | ) | — | — | (2,549 | ) | ||||||||||||||||||
| Proceeds from issuance of 250,506 shares of common stock | — | 250,506 | 4,537,713 | — | — | — | 4,788,219 | |||||||||||||||||||||
| Cash dividends declared, $0.08 per share | — | — | — | (348,844 | ) | — | — | (348,844 | ) | |||||||||||||||||||
| Proceeds from issuance of 9,057 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 13) | — | 9,057 | 127,653 | — | — | — | 136,710 | |||||||||||||||||||||
| Proceeds from issuance of 38,604 shares of common stock as a result of stock options exercised (Note 14) | — | 38,604 | 206,636 | — | — | — | 245,240 | |||||||||||||||||||||
| Exchange of 7,062 shares of common stock in connection with options exercised | — | (7,062 | ) | (134,276 | ) | — | — | — | (141,338 | ) | ||||||||||||||||||
| Tax benefit of nonqualified stock options exercised | — | — | 190,248 | — | — | — | 190,248 | |||||||||||||||||||||
Balance, December 31, 2004 | — | 4,496,730 | 20,329,033 | 25,278,666 | 669,371 | — | 50,773,800 | |||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | — | — | — | 4,810,015 | — | — | 4,810,015 | |||||||||||||||||||||
| Other comprehensive (loss), net of tax (Note 2) | — | — | — | — | (1,236,850 | ) | — | (1,236,850 | ) | |||||||||||||||||||
Comprehensive income | 3,573,165 | |||||||||||||||||||||||||||
| Cash dividends declared, $0.08 per share | — | — | — | (361,981 | ) | — | — | (361,981 | ) | |||||||||||||||||||
| Proceeds from issuance of 10,584 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 13) | — | 10,584 | 181,458 | — | — | — | 192,042 | |||||||||||||||||||||
| Proceeds from issuance of 25,335 shares of common stock as a result of stock options exercised (Note 13) | — | 25,335 | 167,764 | — | — | — | 193,099 | |||||||||||||||||||||
| Exchange of 1,425 shares of common stock in connection with options exercised | — | (1,425 | ) | (27,994 | ) | — | — | — | (29,419 | ) | ||||||||||||||||||
| Tax benefit of nonqualified stock options exercised | — | — | 125,993 | — | — | — | 125,993 | |||||||||||||||||||||
Balance, December 31, 2005 | $ | — | $ | 4,531,224 | $ | 20,776,254 | $ | 29,726,700 | $ | (567,479 | ) | $ | — | $ | 54,466,699 | |||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | — | — | — | 2,802,205 | — | — | 2,802,205 | |||||||||||||||||||||
| Other comprehensive income, net of tax (Note 2) | — | — | — | — | 595,438 | — | 595,438 | |||||||||||||||||||||
Comprehensive income | 3,397,643 | |||||||||||||||||||||||||||
| Common cash dividends declared, $0.08 per share | — | — | — | (364,319 | ) | — | — | (364,319 | ) | |||||||||||||||||||
| Preferred cash dividends declared | — | — | — | (164,373 | ) | — | — | (164,373 | ) | |||||||||||||||||||
| Proceeds from issuance of 268 shares of preferred stock | 268 | — | 12,884,146 | — | — | — | 12,884,414 | |||||||||||||||||||||
| Proceeds from issuance of 14,552 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 13) | — | 14,552 | 223,901 | — | — | — | 238,453 | |||||||||||||||||||||
| Proceeds from issuance of 16,221 shares of common stock as a result of stock options exercised (Note 13) | — | 16,221 | 109,522 | — | — | — | 125,743 | |||||||||||||||||||||
| Exchange of 1,368 shares of common stock in connection with options exercised | — | (1,368 | ) | (23,458 | ) | — | — | — | (24,826 | ) | ||||||||||||||||||
| Tax benefit of nonqualified stock options exercised | — | — | 37,795 | — | — | — | 37,795 | |||||||||||||||||||||
| Stock compensation expense | — | — | 285,351 | — | — | — | 285,351 | |||||||||||||||||||||
Balance, December 31, 2006 | $ | 268 | $ | 4,560,629 | $ | 34,293,511 | $ | 32,000,213 | $ | 27,959 | $ | — | $ | 70,882,580 | ||||||||||||||
See Notes to Consolidated Financial Statements.
35
44
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2006, 2005, and 2004
Years Ended December 31, 2006, 2005, and 2004
| 2006 | 2005 | 2004 | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net income | $ | 2,802,205 | $ | 4,810,015 | $ | 5,216,672 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation | 2,395,174 | 2,008,773 | 1,475,453 | |||||||||
| Provision for loan/lease losses | 3,284,242 | 877,084 | 1,372,208 | |||||||||
| Deferred income taxes | (394,934 | ) | (109,452 | ) | (185,676 | ) | ||||||
| Amortization of offering costs on subordinated debentures | 14,317 | 14,317 | 17,933 | |||||||||
| Loss on redemption of junior subordinated debentures | — | — | 747,490 | |||||||||
| Stock-based compensation expense | 171,125 | — | — | |||||||||
| Minority interest in income of consolidated subsidiaries | 265,524 | 77,538 | — | |||||||||
| Gain on sale of foreclosed assets | (664,223 | ) | (42,380 | ) | — | |||||||
| Amortization of premiums on securities, net | 252,457 | 524,808 | 983,256 | |||||||||
| Investment securities losses (gains), net | 142,866 | (50 | ) | 45,428 | ||||||||
| Loans originated for sale | (87,721,100 | ) | (98,719,913 | ) | (83,176,326 | ) | ||||||
| Proceeds on sales of loans | 85,161,720 | 100,840,794 | 84,617,339 | |||||||||
| Net gains on sales of loans | (991,536 | ) | (1,254,242 | ) | (1,149,791 | ) | ||||||
| Net losses on disposals/sales of premises and equipment | 36,305 | 332,283 | 1,048 | |||||||||
| Tax benefit of nonqualified stock options exercised | — | 125,993 | 190,248 | |||||||||
| Increase in accrued interest receivable | (2,310,920 | ) | (776,616 | ) | (426,654 | ) | ||||||
| (Increase) decrease in other assets | (819,095 | ) | (2,113,950 | ) | (3,461,144 | ) | ||||||
| Increase (decrease) in other liabilities | 5,560,811 | 2,973,423 | 1,146,173 | |||||||||
Net cash provided by operating activities | 7,184,938 | 9,568,425 | 7,413,657 | |||||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Net decrease (increase) in federal funds sold | 2,130,000 | (1,560,000 | ) | 1,140,000 | ||||||||
| Net (increase) decrease in interest-bearing deposits at financial institutions | (859,430 | ) | 2,586,897 | 6,568,529 | ||||||||
| Proceeds from sale of foreclosed assets | 1,220,942 | 1,272,757 | ||||||||||
| Activity in securities portfolio: | ||||||||||||
| Purchases | (79,759,340 | ) | (82,280,843 | ) | (86,743,594 | ) | ||||||
| Calls, maturities and redemptions | 62,386,012 | 45,787,488 | 53,006,001 | |||||||||
| Paydowns | 705,794 | 1,197,070 | 1,754,343 | |||||||||
| Sales | 4,786,122 | — | 8,428,590 | |||||||||
| Activity in bank-owned life insurance: | ||||||||||||
| Purchases | (750,766 | ) | (776,634 | ) | (12,221,428 | ) | ||||||
| Increase in cash value | (759,100 | ) | (656,026 | ) | (627,775 | ) | ||||||
| Net loans/leases originated and held for investment | (202,624,972 | ) | (78,520,322 | ) | (128,849,187 | ) | ||||||
| Purchase of premises and equipment | (9,334,578 | ) | (9,779,493 | ) | (7,611,586 | ) | ||||||
| Proceeds from sales of premises and equipment | — | — | 63,027 | |||||||||
| Payment for acquisition of M2 Lease Funds, LLC | — | (4,967,300 | ) | — | ||||||||
Net cash used in investing activities | $ | (222,859,316 | ) | $ | (127,696,406 | ) | $ | (165,093,080 | ) | |||
(Continued)
36
45
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2006, 2005, and 2004
Years Ended December 31, 2006, 2005, and 2004
| 2006 | 2005 | 2004 | ||||||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Net increase in deposit accounts | $ | 176,943,368 | $ | 110,488,216 | $ | 76,363,820 | ||||||
| Net increase in short-term borrowings | 4,214,100 | 2,698,673 | 53,161,377 | |||||||||
| Activity in Federal Home Loan Bank advances: | ||||||||||||
| Advances | 61,500,000 | 49,700,000 | 35,500,000 | |||||||||
| Payments | (39,642,105 | ) | (11,721,023 | ) | (19,710,471 | ) | ||||||
| Net (decrease) increase in other borrowings | (7,003,278 | ) | (20,603,724 | ) | (4,000,000 | ) | ||||||
| Proceeds from issuance of junior subordinated debentures | 10,310,000 | 5,155,000 | 20,620,000 | |||||||||
| Redemption of junior subordinated debentures | — | — | (12,000,000 | ) | ||||||||
| Tax benefit of nonqualified stock options exercised | 37,795 | — | — | |||||||||
| Payment of cash dividends | (363,143 | ) | (360,598 | ) | (336,816 | ) | ||||||
| Proceeds from issuance of preferred stock, net | 12,884,414 | — | (2,549 | ) | ||||||||
| Proceeds from issuance of common stock, net | 339,370 | 355,722 | 5,028,831 | |||||||||
Net cash provided by financing activities | 219,220,521 | 135,712,266 | 154,624,192 | |||||||||
Net increase (decrease) in cash and due from banks | 3,546,143 | 17,584,285 | (3,055,231 | ) | ||||||||
| Cash and due from banks, beginning | 38,956,627 | 21,372,342 | 24,427,573 | |||||||||
| Cash and due from banks, ending | $ | 42,502,770 | $ | 38,956,627 | $ | 21,372,342 | ||||||
| Supplemental Disclosures of Cash Flow Information, cash payments for: | ||||||||||||
| Interest | $ | 36,621,518 | $ | 20,407,363 | $ | 13,024,698 | ||||||
| Income and franchise taxes | 1,496,155 | 1,340,742 | 2,566,493 | |||||||||
| Supplemental Schedule of Noncash Investing Activities: | ||||||||||||
| Change in accumulated other comprehensive income, unrealized losses on securities available for sale, net | 595,438 | (1,236,850 | ) | (1,133,293 | ) | |||||||
| Exchange of shares of common stock in connection with options exercised | (24,826 | ) | (29,419 | ) | (141,338 | ) | ||||||
| Transfers of loans to other real estate owned | 129,895 | 169,441 | 1,925,320 | |||||||||
| Acquisition of M2 Lease Funds, LLC, cash paid at settlement | $ | 4,967,300 | ||||||||||
| Fair value of assets acquired and liabilities assumed: | ||||||||||||
| Leases receivable held for investment, net | 31,673,951 | |||||||||||
| Premises and equipment, net | 82,714 | |||||||||||
| Goodwill | 3,222,688 | |||||||||||
| Other assets | 47,177 | |||||||||||
| Other borrowings | (25,368,638 | ) | ||||||||||
| Other liabilities | (4,117,165 | ) | ||||||||||
| Minority interest | (573,427 | ) | ||||||||||
| $ | 4,967,300 | |||||||||||
See Notes to Consolidated Financial Statements.
37
46
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
QCR Holdings, Inc. (Company)(the Company) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (Quad City Bank & Trust), Cedar Rapids Bank and Trust Company (Cedar Rapids Bank & Trust), Rockford Bank and Trust Company (Rockford Bank & Trust), Quad City Bancard, Inc. (Bancard), M2 Lease Funds, LLC (M2 Lease Funds), Velie Plantation Holding Company, LLC (Velie Plantation Holding Company), QCR Holdings Statutory Trust II (Trust II), QCR Holdings Statutory Trust III (Trust III), QCR Holdings Statutory Trust IV (Trust IV), and QCR Holdings CapitalStatutory Trust IV (Trust I)V). Quad City Bank & Trust is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. Cedar Rapids Bank & Trust is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities. Both
banksRockford Bank & Trust is a commercial bank that serves Rockford, Illinois, and adjacent communities. During 2006, Rockford Bank & Trust also served the Milwaukee, Wisconsin area through a temporary branch facility. Effective February 20, 2007, the company’s fourth bank charter, First Wisconsin Bank and Trust Company (First Wisconsin Bank & Trust) began serving this market (See Note 21). Quad City Bank & Trust and Cedar Rapids Bank & Trust are chartered and regulated by the state of Iowa, and Rockford Bank & Trust is chartered and regulated by the state of Illinois. All three subsidiary banks are insured and subject to regulation by the Federal Deposit Insurance Corporation, and are members of and regulated by the Federal Reserve System. Bancard is an entity
formed in April 1995 to conductconducts the Company'sCompany’s credit card operation and is regulated by the Federal Reserve System. Bancard's wholly-ownedM2 Lease Funds, which is an 80% owned subsidiary, Allied Merchant Services, Inc. (Allied), was liquidated on December 31, 2003.
Allbased in the Milwaukee, Wisconsin, area is engaged in the business of direct financing lease contracts. Velie Plantation Holding Company, LLC, which is a 55.6% owned subsidiary, based in Davenport, Iowa, is engaged in holding the merchant credit card relationships owned by Alliedreal estate property known as the Velie Plantation Mansion in Moline, Illinois. Trust II, III, IV and V were included
in Bancard's sale of its ISO-related merchant credit card operations to
iPayment, Inc. in October 2002. QCR Holdings Capital Trust I was capitalized
in June 1999formed for the purpose of issuing Company Obligated Mandatorily
Redeemable Preferred Securities.
various trust preferred securities (see Note 10).
Significant accounting policies:
Accounting estimates: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. TheLease residual values and the allowance for estimated losses on loans isloans/leases are inherently subjective as it requiresthey require material estimates that are susceptible to significant change. The fair value disclosure of financial instruments is an estimate that can be computed within a range.
Principles of consolidation:consolidation: The accompanying consolidated financial statements include the accounts of the Company and all wholly-ownedits subsidiaries, except QCR Holdings Capital Trust I,II, III, IV and V, which doesdo not meet the criteria for consolidation. All material intercompany accounts and transactions have been eliminated in consolidation.
Presentation of cash flows:flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and non-interest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans,loans/leases, deposits, and short-term and other borrowings are treated as net increases or decreases.
Cash and due from banks:banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $12,216,000$8,800,000 and $7,721,000$9,500,000 as of December 31, 20032006 and 2002,2005, respectively.
47
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Investment securities: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'sCompany’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.
38
Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Banks(s)/Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans receivable held for sale: Residential real estate loans, which are originated and allowanceintended 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 lossesmarket value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on loans: 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 reduced by anadjusted for charge-offs, the allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans is classified as an investing activity in the statement of cash flows.
Direct finance leases receivable held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment. Lease income is recognized on the interest method. Residual is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends. The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts.
When collection of lease payments is considered doubtful, income recognition is ceased and the lease receivable is placed on nonaccrual status. Previously recorded but uncollected amounts on nonaccrual leases are reversed at the time the lease is placed on nonaccrual status. Cash collected on nonaccrual leases is recorded as income unless the principal is doubtful of collection in which case cash received is applied to principal.
48
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company defers and amortizes fees and certain incremental direct costs over the contractual term of the lease as an adjustment to the yield. These initial direct leasing costs generally approximate 3% of the leased asset’s cost. The unamortized direct costs are recorded as a reduction of unearned lease income.
Allowance for estimated losses on loans/leases: The allowance for estimated losses on loansloans/leases is maintained at the level considered adequate by management of the Company and the subsidiary bankssubsidiaries to provide for losses that are probable. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance, the Company, and the subsidiary banks, and M2 Lease Funds consider the overall composition of the loan portfolio, types of loans,
pastloan/lease portfolio. Loans/leases which have identified weaknesses are classified into higher risk groups, or are identified for continued monitoring. Historical loss experience, loan delinquencies, potential substandardpercentages are then applied to various classifications and, doubtful
credits,considering economic conditions and other factors that in management'smanagement’s judgment deserve evaluation.
Loansevaluation, additional identified and unidentified loss amounts are added.
Loans/leases are considered impaired when, based on current information and events, it is probable the Company and the bank involved will not be able to collect all amounts due. The portion of the allowance for loanloan/lease losses applicable to an impaired loanloan/lease is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan'sloan’s/lease’s effective interest rate or on the fair value of the collateral for collateral dependent loans.loans/leases. The entire change in present value of expected cash flows of impaired loansloans/leases is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Company and the Bankssubsidiaries recognize interest income on impaired loansloans/leases on a cash basis.
Direct loan origination fees and costs are deferred and the net amounts
amortized as an adjustment of the related loan's yield.
Sales of loans: As part of its management of assets and liabilities, the
Company routinely sells residential real estate loans. Loans which are
expected to be sold in the foreseeable future are classified as held for sale
and are carried at the lower of cost or estimated market value in the
aggregate.
Credit related financial instruments: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:assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Premises and equipment: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.
Goodwill: In August 2005, the Quad City Bank & Trust acquired 80% of the membership units of M2 Lease Funds. The President and Chief Executive Officer of M2 Lease Funds retained 20% of the membership units. Quad City Bank & Trust acquired assets and assumed liabilities totaling $31.7 million and $29.5 million, respectively, for a purchase price of $5.0 million, which resulted in goodwill of $3.2 million and minority interest of $573 thousand. In accordance with the provisions of FAS Statement 142, goodwill is not being amortized, but is evaluated annually for impairment. An impairment charge is recognized only when the calculated fair value of the reporting unit, including goodwill, is less than its carrying amount. Based on an analysis completed in July 2006, the Company believes that no goodwill impairment existed.
49
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Bank-owned life insurance: Bank-owned life insurance is carried at cash surrender value with increases/decreases reflected as income/expense in the statement of income.
Foreclosed assets: Assets acquired through, or in lieu of, loan foreclosures, which are included in other assets on the consolidated balance sheets are held for sale and are recorded at the lower of cost or fair value. 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.
Preferred Stock: In the fourth quarter of 2006, the Company closed a private placement offering resulting in the issuance of 268 shares of Series B Non-Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”) to accredited investors for an aggregate purchase price of $13,400,000, or $50,000 per share. The shares of Series B Preferred Stock have a stated dividend rate of 8.00%. Dividends are not accrued and are payable only 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 of Series B Preferred Stock. The Company has the right at any other time after the first anniversary of the issuance of the shares of Series B Preferred Stock, subject to all required regulatory approvals, to redeem all, but not less than all, of the shares then outstanding. Any such redemption shall be made by the Company upon at least 30 days’ prior written notice. The shares can redeemed for an amount per share in cash which is equal to: (i) the sum of (A) $50,000; plus (B) a premium in the amount of $4,000 multiplied by a fraction the numerator of which is the total number of calendar days the shares being redeemed have been outstanding and the denominator of which is 365; but (ii) less the aggregate amount of any dividends that have been paid on the shares. The Series B Preferred Stock was not registered under the Securities Act of 1933 (the “Act”) and was issued pursuant to an exemption from registration under Regulation D of the rules promulgated under the Act.
Stock-based compensation plans: At December 31, 2003,2006, the Company has three stock-based employee compensation plans, which are described more fully in Note 14. The13. Prior to January 1, 2006, the Company accountsaccounted for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No
The Company adopted the provisions of Statement of Financial Accounting Standard 123R (“SFAS 123R”) effective as of January 1, 2006. SFAS 123R eliminates the ability to account for stock-based employeecompensation using APB 25 and requires that all share-based awards made to employees and directors, including stock options, SARs and stock purchase plan transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is reflectedgenerally the date of the grant. The Company transitioned to fair-value based accounting for stock-based compensation using a modified version of prospective application (“modified prospective application”). Under the modified prospective application, compensation cost included in net income, asnoninterest expenses for the year ended December 31, 2006 includes 1) compensation cost for unvested share-based payments granted prior to January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standard 123 (“SFAS 123”), and 2) compensation cost for all share-based payments granted subsequent to January 1, 2006, and any modifications to existing awards, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.
As a result of applying the provisions of SFAS 123R during the year ended December 31, 2006, the Company recognized additional stock-based compensation expense related to stock options, granted understock purchases, and SARs of $171 thousand. As required by SFAS 123R, management made an estimate of expected forfeitures and is recognizing compensation costs only for those plans had
anequity awards expected to vest.
50
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the price at which the options are sold over the exercise price equalof the options. Prior to adoption of SFAS 123R, the marketCompany reported all tax benefits resulting from the exercise of stock options as operating cash flows in our consolidated statements of cash flows. In accordance with SFAS 123R, for the year ended December 31, 2006, the Company revised its consolidated statements of cash flows presentation to report the tax benefits from the exercise of stock options as financing cash flows.
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:
| 2006 | 2005 | 2004 | ||||||||||
| Dividend yield | 0.42% to 0.48% | 0.36% to 0.41% | 0.38% to 0.49% | |||||||||
| Expected volatility | 24.46% to 26.55% | 24.49% to 24.81% | 24.25% to 24.88% | |||||||||
| Risk-free interest rate | 4.47% to 5.26% | 4.23% to 4.48% | 4.10% to 4.73% | |||||||||
| Expected life of option grants | 6 years | 10 years | 10 years | |||||||||
| Weighted-average grant date fair value | $ | 6.48 | $ | 8.99 | $ | 8.29 | ||||||
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:
| 2006 | 2005 | 2004 | ||||||||||
| Dividend yield | 0.41% to 0.46% | 0.38% | 0.43% to 0.44% | |||||||||
| Expected volatility | 10.93% to 13.06% | 15.85% to 24.81% | 24.25% to 27.18% | |||||||||
| Risk-free interest rate | 4.17% to 5.21% | 2.21% to 3.31% | .95% to 1.59% | |||||||||
| Expected life of option grants | 3 to 6 months | 3 to 6 months | 3 to 6 months | |||||||||
| Weighted-average grant date fair value | $2.44 | $3.09 | $2.90 | |||||||||
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 is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of grants is derived using the `simplified” method as allowed under the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 and represents the period of time that options 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.
As of December 31, 2006, there was $407 thousand of unrecognized compensation cost related to share based payments, which is expected to be recognized over a weighted average period of 2.8 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 143,524 options that were in-the-money at December 31, 2006. The aggregate intrinsic value at December 31, 2006 was $1,171,125 on options outstanding and $1,125,267 on options exercisable. During the year ended December 31, 2006, 2005 and 2004, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $95,735, $143,982 and $83,246, respectively, determined as of the date of grant. the option exercise.
51
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), to stock-based employee compensation.
39
In determining compensation cost usingfor periods prior to the fair value method prescribed in
Statement No. 123,January 1, 2006 adoption date. For purposes of this pro forma disclosure, the value of each grant isthe option and purchase plan grants were estimated atusing a Black-Scholes option pricing model and amortized on a straight-line basis over the grant date
withrespective vesting period of the following weighted-average assumptions for grants during the year
ended December 31, 2003, six months ended December 31, 2002, and the years
ended June 30, 2002 and 2001: dividend rate of .44% to .61% for the year
ended December 31, 2003, .59% for the six months ended December 31, 2002, and
0% for the years ended June 30, 2002 and 2001; risk-free interest rates based
upon current rates at the date of grant (3.68% to 6.22% for stock options and
.82% to 1.29% for the employee stock purchase plan); expected lives of 10
years for stock options and 3 months to 6 months for the employee stock
purchase plan; and expected price volatility of 23.09% to 24.69%.
awards.
| 2005 | 2004 | |||||||
| Net income, as reported | $ | 4,810,015 | $ | 5,216,672 | ||||
| Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (174,598 | ) | (132,297 | ) | ||||
Net income | $ | 4,635,417 | $ | 5,084,375 | ||||
| Earnings per share: | ||||||||
| Basic: | ||||||||
| As reported | $ | 1.06 | $ | 1.23 | ||||
| Pro forma | 1.03 | 1.20 | ||||||
| Diluted: | ||||||||
| As reported | 1.04 | 1.20 | ||||||
| Pro forma | 1.01 | 1.18 | ||||||
Income taxes: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.
Trust assets:assets: Trust assets held by Quad City Bank & Trust, Cedar Rapids Bank & Trust and Rockford Bank & Trust in a fiduciary, agency, or custodial capacity for itstheir customers, other than cash on deposit at the Bank,subsidiary banks, are not included in the accompanying consolidated financial statements since such items are not assets of the Bank.
subsidiary banks.
Earnings per common share:share: Basic earnings per share is computed by dividing net income, less preferred stock dividends declared, by the weighted average number of common stock shares outstanding for the respective period. Diluted earnings per share is computed by dividing net income, less preferred stock dividends declared, by the weighted average number of common stock and common stock equivalents outstanding for the respective period.
Change in year-end: In August 2002, the Company changed its fiscal year-end
from June 30th to December 31st. The change in year-end resulted in a short
fiscal year covering the six-month transition period from July 1, 2002 to
December 31, 2002. References to the transition period, fiscal 2002 and, 2001
throughout these consolidated financial statements are for the six months
ended December 31, 2002 and the years ended June 30, 2002 and 2001,
respectively.
In connection with the Company's change in fiscal year, presented below is
the financial data for comparable six month and twelve month periods:
40
Restatement of financial statements: Under the provisions of FIN 46,
Consolidation of Variable Interest Entities, and FASB Interpretation No. FIN
46R, QCR Holdings Capital Trust I, a 100%-owned subsidiary of the Company, no
longer meets the criteria for consolidation. FIN 46 was adopted on December
31, 2003 via a retroactive restatement of the prior year's financial
statements. As a result, the balance sheet includes $12,000,000 of junior
subordinated debentures, which were previously included in the balance sheet
as Company Obligated Mandatorily Redeemable Preferred Securities. There was
no cumulative effect on stockholders' equity from this adoption.
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include
trust preferred securities in their Tier I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends
to review the regulatory implications of this accounting change and, if
necessary or warranted, provide further appropriate guidance. No further
guidance has been issued to date and the $12,000,000 in trust preferred
securities issued by QCR Capital Trust I, which are no longer included on the
Company's consolidated balance sheet as such, but are now represented by
junior subordinated debentures, were included in Tier I capital for
regulatory capital purposes at December 31, 2003. See also Notes 10 and 15.
There can be no assurance that the Federal Reserve will continue to permit
institutions to include trust preferred securities in regulatory capital in
the future. Assuming the Company was not permitted to include these
securities in regulatory capital at December 31, 2003, the Company would
still exceed the regulatory required minimums for capital adequacy purposes.
Reclassification:
Reclassifications: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders'stockholders’ equity, to conform with the current period presentation.
52
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
New Accounting Pronouncements: In July 2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes recognized in accordance with SFAS 109, “Accounting for Income Taxes.” This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company is currently evaluating the impact of FIN 48. The Company will adopt this Interpretation in the first quarter of 2007.
In September 2006, the FASB ratified Emerging Issues Task Force 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 addresses accounting for split-dollar life insurance arrangements after the employer purchases a life insurance policy on the covered employee, and will be effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of the adoption of EITF 06-4.
Note 2. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income (loss), which for the Company is comprised entirely of unrealized gains and losses on securities available for sale.
Other comprehensive income (loss) for the yearyears ended December 31, 2003, six
months ended December 31, 2002,2006, 2005, and the years ended June 30, 2002 and 20012004 is comprised as follows:
41
| Tax | ||||||||||||
| Before | Expense | Net | ||||||||||
| Tax | (Benefit) | of Tax | ||||||||||
| Year ended December 31, 2006: | ||||||||||||
| Unrealized gains (losses) on securities available for sale: | ||||||||||||
| Unrealized holding gains arising during the period | $ | 780,219 | $ | 276,937 | $ | 503,282 | ||||||
| Less reclassification adjustment for (losses) included in net income | (142,866 | ) | (50,710 | ) | (92,156 | ) | ||||||
Other comprehensive income | $ | 923,085 | $ | 327,647 | $ | 595,438 | ||||||
| Year ended December 31, 2005: | ||||||||||||
| Unrealized (losses) on securities available for sale: | ||||||||||||
| Unrealized holding (losses) arising during the period | $ | (1,967,594 | ) | $ | (730,775 | ) | $ | (1,236,819 | ) | |||
| Less reclassification adjustment for gains included in net income | 50 | 19 | 31 | |||||||||
Other comprehensive (loss) | $ | (1,967,644 | ) | $ | (730,794 | ) | $ | (1,236,850 | ) | |||
| Year ended December 31, 2004: | ||||||||||||
| Unrealized (losses) on securities available for sale: | ||||||||||||
| Unrealized holding (losses) arising during the period | $ | (1,853,560 | ) | $ | (691,794 | ) | $ | (1,161,766 | ) | |||
| Less reclassification adjustment for (losses) included in net income | (45,428 | ) | (16,955 | ) | (28,473 | ) | ||||||
Other comprehensive (loss) | $ | (1,808,132 | ) | $ | (674,839 | ) | $ | (1,133,293 | ) | |||
53
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of December 31, 20032006 and 20022005 are summarized as follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | (Losses) | Value | |||||||||||||
December 31, 2006: | ||||||||||||||||
| Securities held to maturity: | ||||||||||||||||
| Other bonds | $ | 350,000 | $ | 8,149 | $ | (307 | ) | $ | 357,842 | |||||||
| Securities available for sale: | ||||||||||||||||
| U.S. Treasury securities | $ | 2,106,899 | $ | 3,840 | $ | (276 | ) | $ | 2,110,463 | |||||||
| U.S. govt. sponsored agency securities | 157,623,292 | 199,173 | (843,448 | ) | 156,979,017 | |||||||||||
| Mortgage-backed securities | 2,084,340 | — | (51,627 | ) | 2,032,713 | |||||||||||
| Municipal securities | 28,583,691 | 372,314 | (79,013 | ) | 28,876,992 | |||||||||||
| Corporate securities | 2,366,594 | 27,773 | — | 2,394,367 | ||||||||||||
| Trust preferred securities | 450,000 | 10,800 | — | 460,800 | ||||||||||||
| Other securities | 1,176,467 | 400,382 | (7,308 | ) | 1,569,541 | |||||||||||
| $ | 194,391,283 | $ | 1,014,282 | $ | (981,672 | ) | $ | 194,423,893 | ||||||||
December 31, 2005: | ||||||||||||||||
| Securities held to maturity: | ||||||||||||||||
| Other bonds | $ | 150,000 | $ | 5,063 | $ | (235 | ) | $ | 154,828 | |||||||
| Securities available for sale: | ||||||||||||||||
| U.S. Treasury securities | $ | 100,090 | $ | — | $ | (58 | ) | $ | 100,032 | |||||||
| U.S. govt. sponsored agency securities | 150,114,707 | 54,821 | (1,629,892 | ) | 148,539,636 | |||||||||||
| Mortgage-backed securities | 2,720,059 | 4,218 | (54,532 | ) | 2,669,745 | |||||||||||
| Municipal securities | 18,485,304 | 368,495 | (40,330 | ) | 18,813,469 | |||||||||||
| Corporate securities | 4,672,242 | 72,117 | (1,877 | ) | 4,742,482 | |||||||||||
| Trust preferred securities | 850,000 | 68,700 | — | 918,700 | ||||||||||||
| Other securities | 6,162,792 | 372,582 | (104,719 | ) | 6,430,655 | |||||||||||
| $ | 183,105,194 | $ | 940,933 | $ | (1,831,408 | ) | $ | 182,214,719 | ||||||||
54
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. 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, 20032006 and 2005, are summarized as follows:
42
For all of
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
December 31, 2006: | ||||||||||||||||||||||||
| Securities held to maturity: | ||||||||||||||||||||||||
| Other bonds | $ | — | $ | — | $ | 49,693 | $ | (307 | ) | 49,693 | (307 | ) | ||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| U.S. Treasury securities | — | — | 99,748 | (276 | ) | 99,748 | (276 | ) | ||||||||||||||||
| U.S. govt. sponsored agency securities | 47,615,026 | (217,030 | ) | 75,540,891 | (626,418 | ) | 123,155,917 | (843,448 | ) | |||||||||||||||
| Mortgage-backed securities | 316,950 | (54 | ) | 1,715,763 | (51,573 | ) | 2,032,713 | (51,627 | ) | |||||||||||||||
| Municipal securities | 3,990,590 | (19,116 | ) | 5,365,926 | (59,897 | ) | 9,356,516 | (79,013 | ) | |||||||||||||||
| Other securities | 752,409 | (7,308 | ) | — | — | 752,409 | (7,308 | ) | ||||||||||||||||
| $ | 52,674,975 | $ | (243,508 | ) | $ | 82,722,328 | $ | (738,164 | ) | $ | 135,397,303 | $ | (981,672 | ) | ||||||||||
December 31, 2005: | ||||||||||||||||||||||||
| Securities held to maturity: | ||||||||||||||||||||||||
| Other bonds | $ | 49,765 | $ | (235 | ) | $ | — | $ | — | 49,765 | (235 | ) | ||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| U.S. Treasury securities | 100,032 | (58 | ) | — | — | 100,032 | (58 | ) | ||||||||||||||||
| U.S. govt. sponsored agency securities | 72,540,169 | (550,284 | ) | 63,436,475 | (1,079,608 | ) | 135,976,644 | (1,629,892 | ) | |||||||||||||||
| Mortgage-backed securities | 304,813 | (1,756 | ) | 1,934,980 | (52,776 | ) | 2,239,793 | (54,532 | ) | |||||||||||||||
| Municipal securities | 6,408,329 | (38,636 | ) | 684,743 | (1,694 | ) | 7,093,072 | (40,330 | ) | |||||||||||||||
| Corporate securities | — | — | 500,877 | (1,877 | ) | 500,877 | (1,877 | ) | ||||||||||||||||
| Other securities | — | — | 4,895,855 | (104,719 | ) | 4,895,855 | (104,719 | ) | ||||||||||||||||
| $ | 79,353,343 | $ | (590,734 | ) | $ | 71,452,930 | $ | (1,240,674 | ) | $ | 150,806,273 | $ | (1,831,408 | ) | ||||||||||
At December 31, 2006, the above investment portfolio included 313 securities. Of this number, 106 securities thehave current unrealized losses, are generally
due to changes in interest rates and, as such,which have existed for twelve months or more. All of these securities are considered to be acceptable credit risks. Based upon an evaluation of the available evidence, including recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for those securities are temporary. In addition, the Bank(s)/Company have the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery.
55
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (Continued)
Should the impairment of any of these securities become other than temporary, by the Company.
There were no salescost basis of securities during the year ended December 31, 2003.investment will be reduced and the resulting loss recognized in net earnings in the period on which the other-than-temporary impairment is identified.
In March 2006, the company recognized an impairment loss of $142,586 on a mortgage-backed mutual fund investment held in the available for sale security portfolio at Quad City Bank & Trust. In April 2006, the company recognized an additional loss of $71,293 on the sale of this investment. All sales of securities, duringas applicable, for the six monthsyears ended December 31, 20022006, 2005 and the years
ended June 30, 2002 and 20012004, respectively, were from securities identified as available for sale. Information on proceeds received, as well as the gains and losses from the sale of those securities is as follows:
| 2006 | 2005 | 2004 | ||||||||||
| Proceeds from sales of securities | $ | 4,786,122 | $ | — | $ | 8,428,590 | ||||||
| Gross gains from sales of securities | — | — | 26,188 | |||||||||
| Gross losses from sales of securities | 71,293 | — | 71,616 | |||||||||
The amortized cost and fair value of securities as of December 31, 20032006 by contractual maturity are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the mortgage-backed securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary. Other securities are excluded from the maturity categories as there is no fixed maturity date.
Amortized
Cost Fair Value
-----------------------------
Securities held to maturity:
Due in one year or less ...................... $ 300,116 $ 306,145
Due after one year through five years ........ 50,000 53,612
Due after five years ......................... 50,000 56,994
-----------------------------
$ 400,116 $ 416,751
=============================
Securities available for sale:
Due in one year or less ...................... $ 16,752,367 $ 17,009,472
Due after one year through five years ........ 72,512,056 74,027,539
Due after five years ......................... 24,949,446 25,830,894
-----------------------------
114,213,869 116,867,905
Mortgage-backed securities ................... 5,656,092 5,714,732
Other securities ............................. 5,687,664 5,860,289
-----------------------------
$125,557,625 $128,442,926
=============================
| Amortized | ||||||||
| Cost | Fair Value | |||||||
| Securities held to maturity: | ||||||||
| Due in one year or less | $ | 50,000 | $ | 50,035 | ||||
| Due after one year through five years | $ | 150,000 | $ | 151,170 | ||||
| Due after five years | 150,000 | 156,637 | ||||||
| $ | 350,000 | $ | 357,842 | |||||
| Securities available for sale: | ||||||||
| Due in one year or less | $ | 64,804,302 | $ | 64,460,901 | ||||
| Due after one year through five years | 78,372,047 | 78,245,431 | ||||||
| Due after five years | 47,954,127 | 48,115,307 | ||||||
| 191,130,476 | 190,821,639 | |||||||
| Mortgage-backed securities | 2,084,340 | 2,032,713 | ||||||
| Other securities | 1,176,467 | 1,569,541 | ||||||
| $ | 194,391,283 | $ | 194,423,893 | |||||
As of December 31, 20032006 and 2002,2005, investment securities with a carrying value of $83,068,190$149,381,225 and $55,974,583,$135,757,114, respectively, were pledged on securities sold under agreements to repurchase and for other purposes as required or permitted by law.
56
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. LoansLoans/Leases Receivable
The composition of the loanloan/lease portfolio as of December 31, 20032006 and 20022005 is presented as follows:
43
Loans
| 2006 | 2005 | |||||||
| Real estate loans held for sale — residential mortgage | $ | 6,186,632 | $ | 2,632,400 | ||||
| Real estate loans — residential mortgage | 68,913,610 | 54,124,667 | ||||||
| Real estate loans — construction | 6,534,234 | 2,810,610 | ||||||
| Commercial | 396,598,398 | 323,732,114 | ||||||
| Commercial real estate loans | 350,339,235 | 269,729,967 | ||||||
| Direct financing leases | 52,627,879 | 34,911,537 | ||||||
| Installment and other consumer loans | 78,058,107 | 67,089,900 | ||||||
| 959,258,095 | 755,031,195 | |||||||
| Plus deferred loan/lease orgination costs, net of fees | 1,489,229 | 1,222,835 | ||||||
| 960,747,324 | 756,254,030 | |||||||
| Less allowance for estimated losses on loans/leases | (10,612,082 | ) | (8,883,855 | ) | ||||
| $ | 950,135,242 | $ | 747,370,175 | |||||
| Direct financing leases: | ||||||||
| Net minimum lease payments to be received | $ | 54,895,703 | $ | 35,447,343 | ||||
| Estimated residual values of leased assets | 9,929,091 | 7,633,646 | ||||||
| Unearned lease/residual income | (11,810,512 | ) | (7,661,027 | ) | ||||
| Fair value adjustment from acquisition | (386,403 | ) | (508,425 | ) | ||||
| $ | 52,627,879 | $ | 34,911,537 | |||||
Loans/leases on nonaccrual status amounted to $4,204,078$6,538,109 and $4,608,391$2,578,862 as of December 31, 20032006 and 2002,2005, respectively. Interest income in the amount of $468,758,
$311,519,$613,250, $570,055, and $156,478$490,866 for the yearyears ended December 31, 2003, six months ended
December 31, 2002,2006, 2005, and the year ended June 30, 2002,2004, respectively, would have been earned on the nonaccrual loansloans/leases had they been performing in accordance with their original terms. Cash interest collected on nonaccrual loans was $262,819,
$69,503,$246,124, $298,168, and $122,303$230,810 for the yearyears ended December 31, 2003, six months ended
December 31, 2002,2006, 2005 and the year ended June 30, 2002,2004, respectively. Foregone
interest income and cash interest collected on nonaccrual loans was not material
for the year ended June 30, 2001.
Changes in the allowance for estimated losses on loansloans/leases for the yearyears ended December 31, 2003, six months ended December 31, 2002,2006, 2005, and the years ended June
30, 2002 and 20012004 are presented as follows:
Loans
| 2006 | 2005 | 2004 | ||||||||||
| Balance, beginning | $ | 8,883,855 | $ | 9,261,991 | $ | 8,643,012 | ||||||
| Provisions charged to expense | 3,284,242 | 877,084 | 1,372,208 | |||||||||
| Loans/leases charged off | (1,919,515 | ) | (2,045,846 | ) | (964,708 | ) | ||||||
| Recoveries on loans/leases previously charged off | 363,500 | 357,172 | 211,479 | |||||||||
| Acquisition of M2 Lease Funds | — | 433,454 | — | |||||||||
| Balance, ending | $ | 10,612,082 | $ | 8,883,855 | $ | 9,261,991 | ||||||
57
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (Continued)
Loans/leases considered to be impaired as of December 31, 20032006, 2005 and 20022004 are as follows:
2003 2002
----------------------
| 2006 | 2005 | 2004 | ||||||||||
| Impaired loans/leases for which an allowance has been provided | $ | 5,617,727 | $ | 1,826,429 | $ | 92,653 | ||||||
| Allowance provided for impaired loans/leases, included in the allowance for loan/lease losses | $ | 2,032,801 | $ | 1,096,493 | $ | 90,153 | ||||||
| Impaired loans/leases for which no allowance has been provided | $ | 665,785 | $ | — | $ | 96,944 | ||||||
Impaired loans for which an allowance has been provided $3,355,017 $2,478,393
======================
Allowance provided for impaired loans, included in
the allowance for loan losses ....................... $ 539,105 $ 786,301
======================
Impaired loans for which no allowance has been provided $ 932,064 $2,434,463
======================
Impaired loansloans/leases for which no allowance has been provided have adequate collateral, based on management'smanagement’s current estimates.
The average recorded investment in impaired loansloans/leases during the yearyears ended December 31, 2003, six months ended December 31, 2002,2006, 2005, and the year ended June 30, 20022004 was $5,213,072, $5,795,054,$5,020,599, $1,508,112, and $1,157,939,$3,485,989, respectively. Interest income on impaired loans of $205,366, $123,882,$212,027, $120,120, and $42,414$56,532 was recognized for cash payments received for the yearyears ended December 31, 2003, six months ended
December 31, 2002,2006, 2005, and the year ended June 30, 2002,2004, respectively. Average
impaired loans and cash interest income on impaired loans were not material for
the year ended June 30, 2001.
Loans past due 90 days or more and still accruing interest totaled $755,757$754,685 and $430,745$603,637 as of December 31, 20032006 and 2002,2005, respectively. There were no direct financing leases which were past due 90 days or more and still accruing interest as of December 31, 2006.
Loans are made in the normal course of business to directors, officers, and their related interests. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other persons. An analysis of the changes in the aggregate amount of these loans during the yearyears ended December 31, 2003, six months ended2006, 2005, and 2004, was as follows:
| 2006 | 2005 | 2004 | ||||||||||
| Balance, beginning | $ | 11,386,193 | $ | 17,533,546 | $ | 23,925,005 | ||||||
| Net increase (decrease) due to change in related parties | 5,402,821 | 248,623 | — | |||||||||
| Advances | 4,379,210 | 7,801,170 | 6,414,002 | |||||||||
| Repayments | (2,763,256 | ) | (14,197,146 | ) | (12,805,461 | ) | ||||||
| Balance, ending | $ | 18,404,968 | $ | 11,386,193 | $ | 17,533,546 | ||||||
The Company’s loan portfolio includes a geographic concentration in the Midwest. Additionally, the loan portfolio included a concentration of loans in certain industries as of December 31, 2002, and
year ended June 30, 2002 was2006 as follows:
44
| Industry Name | Balance | |||
| Lessors of Non-Residential Buildings & Dwellings | $ | 130,690,793 | ||
| Lessors of Residential Buildings & Dwellings | 39,148,582 | |||
| Land Subdivision | 36,945,496 | |||
| Lessors of Other Real Estate Property | 19,474,201 | |||
| Offices of Physicians | 16,034,714 | |||
58
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of December 31, 20032006 and 2002:
2003 2002
-----------------------------
Land ....................................... $ 1,639,080 $ 813,400
Buildings .................................. 7,711,335 6,143,269
Furniture and equipment .................... 8,023,725 6,618,773
-----------------------------
17,374,140 13,575,442
Less accumulated depreciation .............. 5,345,608 4,350,900
-----------------------------
$12,028,532 $ 9,224,542
=============================
2005:
| 2006 | 2005 | |||||||
| Land | $ | 5,088,125 | $ | 4,088,126 | ||||
| Buildings (useful lives 15 to 50 years) | 25,053,432 | 17,726,327 | ||||||
| Furniture and equipment (useful lives 3 to 10 years) | 13,710,682 | 12,185,429 | ||||||
| 43,852,239 | 33,999,882 | |||||||
| Less accumulated depreciation | 11,327,399 | 8,378,141 | ||||||
| $ | 32,524,840 | $ | 25,621,741 | |||||
Certain facilities are leased under operating leases. Rental expense was $837,271, $430,576, $795,768,$584,813, $1,037,747, and $615,058$866,581 for the yearyears ended December 31, 2003,
six months ended December 31, 2002,2006, 2005, and the years ended June 30, 2002 and 2001,2004, respectively.
Future minimum rental commitments under noncancelable leases are as follows as of December 31, 2003:
Year ending December 31:
2004 $ 513,889
2005 504,459
2006 472,282
2007 150,915
2008 102,501
Thereafter 181,795
-----------
$ 1,925,841
===========
2006:
| Year ending December 31: | ||||
| 2007 | $ | 551,882 | ||
| 2008 | 552,626 | |||
| 2009 | 554,858 | |||
| 2010 | 540,085 | |||
| 2011 | 488,820 | |||
| Thereafter | 1,663,715 | |||
| $ | 4,351,986 | |||
Note 6. Deposits
The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was $73,799,534$251,349,867 and $69,373,970$170,994,735 as of December 31, 20032006 and 2002,2005, respectively.
As of December 31, 2003,2006, the scheduled maturities of certificates of deposit were as follows:
Year ending December 31:
2004 $ 157,187,962
2005 25,259,419
2006 9,406,064
2007 2,636,926
2008 1,349,605
-------------
$ 195,839,976
=============
| Year ending December 31: | ||||
| 2007 | $ | 332,665,619 | ||
| 2008 | 40,544,265 | |||
| 2009 | 14,029,445 | |||
| 2010 | 15,429,461 | |||
| 2011 | 14,208,952 | |||
| $ | 416,877,742 | |||
59
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Short-Term Borrowings
Short-term borrowings as of December 31, 20032006 and 20022005 are summarized as follows:
2003 2002
--------------------------
Overnight repurchase agreements with customers ... $34,699,801 $32,862,446
Federal funds purchased .......................... 16,910,000 --
--------------------------
$51,609,801 $32,862,446
==========================
| 2006 | 2005 | |||||||
| Overnight repurchase agreements with customers | $ | 62,273,951 | $ | 54,659,851 | ||||
| Federal funds purchased | 49,410,000 | 52,810,000 | ||||||
| $ | 111,683,951 | $ | 107,469,851 | |||||
Information concerning repurchase agreements is summarized as follows as of December 31, 20032006 and 2002:
45
2005:
| 2006 | 2005 | |||||||
| Average daily balance during the period | $ | 62,906,621 | $ | 55,092,272 | ||||
| Average daily interest rate during the period | 2.96 | % | 1.43 | % | ||||
| Maximum month-end balance during the period | $ | 66,448,872 | $ | 60,024,590 | ||||
| Weighted average rate as of end of period | 2.25 | % | 1.47 | % | ||||
| Securities underlying the agreements as of end of period: | ||||||||
| Carrying value | $ | 101,410,110 | $ | 104,145,318 | ||||
| Fair value | 101,410,110 | 104,145,318 | ||||||
The securities underlying the agreements as of December 31, 20032006 and 20022005 were under the Company'sCompany’s control in safekeeping at third-party financial institutions.
Information concerning federal funds purchased is summarized as follows as of December 31, 2006 and 2005:
| 2006 | 2005 | |||||||
| Average daily balance during the period | $ | 34,673,281 | $ | 43,631,005 | ||||
| Average daily interest rate during the period | 4.87 | % | 3.07 | % | ||||
| Maximum month-end balance during the period | $ | 68,450,000 | $ | 75,070,000 | ||||
| Weighted average rate as of end of period | 5.11 | % | 3.15 | % | ||||
60
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Federal Home Loan Bank Advances
The Bankssubsidiary banks are members of the Federal Home Loan Bank (FHLB) of Des Moines (FHLB).or Chicago. As of December 31, 20032006 and 2002,2005, the Bankssubsidiary banks held $4,251,000$8,450,700 and $3,926,800,$7,270,300, respectively, of FHLB stock. Maturity and interest rate information on advances from the FHLB as of December 31, 20032006 and 20022005 is as follows:
December 31, 2003
--------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
--------------------------
Maturity:
Year ending December 31:
2004 $ 19,500,000 3.21%
2005 4,000,000 3.27
2006 9,410,000 3.43
2007 8,700,000 3.95
2008 10,600,000 3.74
Thereafter 24,022,348 4.61
------------
Total FHLB advances $ 76,232,348 3.84
============
| December 31, 2006 | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Interest Rate | ||||||||
| Amount Due | at Year-End | |||||||
| Maturity: | ||||||||
| Year ending December 31: | ||||||||
| 2007 | 42,200,000 | 3.84 | % | |||||
| 2008 | 15,100,000 | 3.40 | ||||||
| 2009 | 14,200,000 | 3.99 | ||||||
| 2010 | 8,100,000 | 5.16 | ||||||
| 2011 | 8,000,000 | 5.08 | ||||||
| Thereafter | 64,258,749 | 4.50 | ||||||
Total FHLB advances | $ | 151,858,749 | 4.22 | |||||
Of the advances maturing after December 31, 2003, $19,000,000outstanding, $71,500,000 have options which allow the Banks the right, but not the obligation,FHLB, at its discretion, to "put"terminate the advances backand require the subsidiary banks to repay at predetermined dates prior to the FHLB.
December 31, 2002
--------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
--------------------------
Maturity:
Year ending December 31:
2003 $ 7,865,000 3.93%
2004 20,701,166 3.34
2005 4,750,000 3.68
2006 7,610,000 4.18
2007 8,200,000 4.02
Thereafter 25,862,154 4.70
------------
Total FHLB advances $ 74,988,320 4.05
============
stated maturity date of the advances.
| December 31, 2005 | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Interest Rate | ||||||||
| Amount Due | at Year-End | |||||||
| Maturity: | ||||||||
| Year ending December 31: | ||||||||
| 2006 | $ | 19,410,000 | 3.02 | % | ||||
| 2007 | 42,200,000 | 3.84 | ||||||
| 2008 | 17,100,000 | 3.69 | ||||||
| 2009 | 14,200,000 | 4.05 | ||||||
| 2010 | 8,100,000 | 5.16 | ||||||
| Thereafter | 28,990,854 | 4.22 | ||||||
Total FHLB advances | $ | 130,000,854 | 3.89 | |||||
Advances are collateralized by securities with a carrying value of $3,196,119$29,236,702 and $2,109,106$14,978,433 as of December 31, 20032006 and 2002,2005, respectively. AdvancesAt December 31, 2006 and 2005, advances are also collateralized by total loans pledged of $271,824,874 and $247,864,749, respectively, in aggregate. On pledged loans, the FHLB applies varying collateral maintenance levels from 135% to 220% based on the loan type.
61
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Other Borrowings
Other borrowings as of December 31, 20032006 and 20022005 are also collateralized by 1-to-4 unit residential,
home equity 2nd mortgages, commercial real estate, home equity lines of credit,
and business loans equal to 135%, 175%, 175%, 200%, and 250%, respectively, of
total outstanding notes. summarized as follows:
| 2006 | 2005 | |||||||
| 364-day revolving note | $ | 3,500,000 | $ | 5,500,000 | ||||
| 3-year revolving note | — | 5,000,000 | ||||||
| Non-recourse notes | 261,636 | 264,914 | ||||||
| $ | 3,761,636 | $ | 10,764,914 | |||||
At December 31, 2003, the aggregate total of loans
pledged was $229,843,419.
Note 9. Other Borrowings
As of December 31, 2003,2006, the Company had a single $15,000,000 unsecured revolving credit note. The note with a maturity date of April 6, 2007. In April 2006, this 364-day revolving note was written in substitution and replacement of two previous notes, which matures Julywere a 364-day revolving note for $10,000,000 maturing on December 21, 2004, had2006 and a 3-year revolving note for $5,000,000, maturing on December 30, 2007. At December 31, 2006, the replacement note carried a balance outstanding of $10,000,000 as of December 31, 2003.$3,500,000. Interest is payable monthly at the Federal Funds rate plus 1% per annum, as defined in the credit note agreement. As of December 31, 2003,2006, the interest rate on the replacement note was 1.97%6.25%.
At December 31, 2006, the Company had two, fixed rate, non-recourse notes totaling $261,636, which are held at M2 Lease Funds. Each of these notes is collateralized by leased machinery and equipment, and the terms of the notes are determined by the terms of the related leases. As of December 31, 2006, one note had an outstanding balance of $104,401 at an interest rate of 8.00% and a maturity date in February 2009. As of December 31, 2006, the second note had an outstanding balance of $157,235 at an interest rate of 6.00% and a maturity date in July 2007.
The current revolving credit note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various operating ratios.
As of December 31, 2002,2005, the Company had a $10,000,000two unsecured revolving credit notes totaling $15,000,000 in aggregate. There was a 364-day revolving note, which was secured by all of the outstanding stock of Quad City Bank & Trust. The
noteto mature December 21, 2006, for $10,000,000 and had a balance outstanding of $5,500,000 at December 31, 2005. There was also a 3-year revolving note, which was to mature December 30, 2007, for $5,000,000 and carried a balance of $5,000,000 at December 31, 2002. Interest2005. For both notes, interest was payable quarterlymonthly at the adjusted LIBOR ratesFederal Funds rate plus 1% per annum, as defined in the credit note
agreement.agreements. As of December 31, 2002,2005, the interest rate on each of the notes was 3.8%5.19%.
46
At December 31, 2005, the Company held two, fixed rate, non-recourse notes totaling $264,914, which were assumed in the acquisition of M2 Lease Funds in August 2005. Each of these notes were collateralized by leased machinery and equipment, and the terms of the notes are determined by the terms of the related leases. As of December 31, 2005, one note had an outstanding balance of $64,385 at an interest rate of 8.48% and a maturity date in May 2006. As of December 31, 2005, the second note had an outstanding balance of $200,529 at an interest rate of 6.00% and a maturity date in July 2007.
Unused lines of credit of the subsidiary banks as of December 31, 20032006 and 20022005 are summarized as follows:
2003 2002
--------------------------
Secured ........................................... $ 4,000,000 $ 4,000,000
Unsecured ......................................... 37,000,000 34,000,000
--------------------------
$41,000,000 $38,000,000
==========================
| 2006 | 2005 | |||||||
| Secured | $ | 13,000,000 | $ | 13,000,000 | ||||
| Unsecured | 91,500,000 | 91,500,000 | ||||||
| $ | 104,500,000 | $ | 104,500,000 | |||||
62
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 10. Junior Subordinated Debentures
Junior subordinated debentures are duesummarized as of December 31, 2006 and 2005 as follows:
| 2006 | 2005 | |||||||
| 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 | — | ||||||
| $ | 36,085,000 | $ | 25,775,000 | |||||
In February 2004, the Company issued, in a private transaction, $12,000,000 of fixed/floating rate capital securities and $8,000,000 of floating rate capital securities through two newly formed subsidiaries, Trust II and Trust III, respectively. The securities issued by Trust II and Trust III mature in thirty years. The fixed/floating rate capital securities are callable at par after seven years, and the floating rate capital securities are callable at par after five years. The fixed/floating rate capital securities have a fixed rate of 6.93%, payable quarterly, for seven years, at which time they have a variable rate based on the three-month LIBOR, reset quarterly, and the floating rate capital securities have a variable rate based on the three-month LIBOR, reset quarterly, with the rate currently set at 8.21%. Trust II and Trust III used the proceeds from the sale of the trust preferred securities, along with the funds from their equity, to purchase junior subordinated debentures of the Company in the amounts of $12,400,000 and $8,200,000, respectively. These securities were $20,000,000 in aggregate at December 31, 2006. On June 30, 2004, the Company redeemed $12,000,000 of 9.2% cumulative trust preferred securities issued by Trust I in 1999. During 2004, the Company recognized a loss of $747,000 on the redemption of these trust preferred securities at their earliest call date, which resulted from the one-time write-off of unamortized costs related to the original issuance of the securities in 1999.
In May 2005, the Company issued $5,000,000 of floating rate capital securities of QCR Holdings CapitalStatutory Trust I,IV. The securities represent the undivided beneficial interest in Trust IV, which was established by the Company for the sole purpose of issuing the trust preferred securities. The securities issued by Trust IV mature in thirty years, but are callable at par after five years. The trust preferred securities have a 100%
owned non-consolidated subsidiaryvariable rate based on the three-month LIBOR, reset quarterly, with the current rate set at 7.16%. Interest is payable quarterly. Trust IV used the $5,000,000 of proceeds from the sale of the trust preferred securities, in combination with $155,000 of proceeds from its own equity to purchase $5,200,000 of junior subordinated debentures of the Company.
On February 24, 2006, the Company announced the issuance of $10,000,000 of fixed/floating rate capital securities of QCR Holdings Statutory Trust V. The securities represent the undivided beneficial interest in Trust V, which was established by the Company for the sole purpose of issuing the trust preferred securities. The trust preferred securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended and were not registered under the Act.
The securities issued by Trust V mature in thirty years, but are callable at par after five years. The trust preferred securities have a fixed rate of 6.62%, payable quarterly, for five years, at which time they have a variable rate based on the three-month LIBOR plus 1.55%, reset and payable quarterly. Trust V used the $10,000,000 of proceeds from the sale of the trust preferred securities, in combination with $310,000 of proceeds from its own equity to purchase $10,300,000 of junior subordinated debentures of the Company. The debentures were issued in
1999 in conjunction withCompany incurred no issuance costs as a result of the Trust's issuance of 1,200,000 shares oftransaction. The Company Obligated Mandatorily Redeemable Preferred Securities. The debentures bearused the same interest rate and terms asnet proceeds for general corporate purposes, including the preferred securities. Distributions on the
trust preferred securities are paid quarterly. Cumulative cash distributions are
calculated at a 9.2% annual rate. The capital securities have a maturity date of
June 30, 2029; however, the Trust has the option to shorten the maturity date to
a date not earlier than June 30, 2004.
The debentures are included on the balance sheets as liabilities; however for
regulatory purposes, approximately $12,000,000 and $11,480,000, are allowed in
the calculation of Tier I capital as of December 31, 2003 and 2002,
respectively, with the remainder allowed as Tier II capital. The required
deconsolidation of trust preferred subsidiaries, such as QCR Capital Trust I,
under FIN 46R, has called into question the permissibility of including these
securities in regulatory capital in the future. See further information in Note
1.
Note 11. Sale of Merchant Credit Card Portfolio
On October 22, 2002, the Company announced Bancard's salepaydown of its ISO-related
merchant credit card operationsother borrowings.
63
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to iPayment, Inc. for the price of $3,500,000.
After contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a gain of approximately $1,300,000 or
$0.47 per share. Also included in the sale were all of the merchant credit card
processing relationships owned by Allied. Bancard continues to provide credit
card processing for its local merchants and cardholders of the subsidiary banks
and agent banks. It is anticipated that the Company's termination of ISO-related
merchant credit card processing will reduce Bancard's future earnings. However,
the Company believes that Bancard can be profitable with its narrowed business
focus of continuing to provide credit card processing for its local merchants
and agent banks and for cardholders of the Company's subsidiary banks.
Consolidated Financial Statements
Note 12.11. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components for the yearyears ended December 31, 2003, six months ended December 31, 2002,2006, 2005, and the years ended June 30, 2002 and 2001:
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, ----------------------------
2003 2002 2002 2001
------------------------------------------------------------
Current ........ $ 3,369,368 $ 2,086,103 $ 1,948,841 $ 1,522,895
Deferred ....... (674,681) (403,312) (634,045) (362,995)
------------------------------------------------------------
$ 2,694,687 $ 1,682,791 $ 1,314,796 $ 1,159,900
============================================================
47
2004:
| 2006 | 2005 | 2004 | ||||||||||
| Current | $ | 1,252,776 | $ | 2,391,653 | $ | 2,689,458 | ||||||
| Deferred | (394,934 | ) | (109,452 | ) | (185,676 | ) | ||||||
| $ | 857,842 | $ | 2,282,201 | $ | 2,503,782 | |||||||
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 yearyears ended December 31, 2003, six months ended December 31, 2002,2006, 2005, and the years
ended June 30, 2002 and 2001:
2004:
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| Pretax | Pretax | Pretax | ||||||||||||||||||||||
| Amount | Income | Amount | Income | Amount | Income | |||||||||||||||||||
| Computed “expected” tax expense | $ | 1,373,950 | 35.0 | % | $ | 2,509,414 | 35.0 | % | $ | 2,702,159 | 35.0 | % | ||||||||||||
| Effect of graduated tax rates interest | (39,256 | ) | (1.0 | ) | (71,698 | ) | (1.0 | ) | (77,205 | ) | (1.0 | ) | ||||||||||||
| Tax exempt income, net | (360,351 | ) | (9.2 | ) | (231,370 | ) | (3.2 | ) | (220,560 | ) | (2.9 | ) | ||||||||||||
| Bank-owned life insurance | (234,667 | ) | (6.0 | ) | (213,388 | ) | (3.0 | ) | (212,060 | ) | (2.7 | ) | ||||||||||||
| State income taxes, net of federal benefit | 182,958 | 4.7 | 262,850 | 3.7 | 303,735 | 3.9 | ||||||||||||||||||
| Other | (64,792 | ) | (1.7 | ) | 26,393 | 0.4 | 7,713 | 0.1 | ||||||||||||||||
| $ | 857,842 | 21.8 | % | $ | 2,282,201 | 31.8 | % | $ | 2,503,782 | 32.4 | % | |||||||||||||
The net deferred tax assets included with other assets on the consolidated balance sheets consisted of the following as of December 31, 20032006 and 2002:
2003 2002
-----------------------
Deferred tax assets:
Compensation ........................................ $1,058,111 $ 628,825
Loan 2005:
| 2006 | 2005 | |||||||
| Deferred tax assets: | ||||||||
| Net unrealized losses on securities available for sale | $ | — | $ | 322,996 | ||||
| Compensation | 1,859,693 | 1,465,821 | ||||||
| Loan and merchant credit card losses | 3,732,247 | 3,039,498 | ||||||
| Other | 30,066 | 120,704 | ||||||
| 5,622,006 | 4,949,019 | |||||||
| Deferred tax liabilities: | ||||||||
| Net unrealized gains on securities available for sale | 4,651 | — | ||||||
| Premises and equipment | 1,532,501 | 920,329 | ||||||
| Investment accretion | 33,101 | 33,098 | ||||||
| Deferred loan origination fees, net | 136,068 | 168,177 | ||||||
| Other | 127,865 | 106,881 | ||||||
| 1,834,186 | 1,228,485 | |||||||
Net deferred tax asset | $ | 3,787,820 | $ | 3,720,534 | ||||
64
QCR Holdings, Inc.
andcredit card losses ......................... 3,038,140 2,481,400
Other ............................................... 70,609 66,978
-----------------------
4,166,860 3,177,203
-----------------------
Deferred tax liabilities:
Net unrealized gains on securities available for sale 1,082,637 1,290,725
PremisesSubsidiaries
and
Notes to Consolidated Financial Statements
Note 11. Federal and equipment .............................. 736,021 609,785
Investment accretion ................................ 36,226 36,242
Deferred loan origination fees, net ................. 198,945 102,177
Other ............................................... 93,258 1,270
-----------------------
2,147,087 2,040,199
-----------------------
Net deferred tax asset ........................ $2,019,773 $1,137,004
=======================
State Income Taxes (Continued)
The change in deferred income taxes was reflected in the consolidated financial statements as follows for the yearyears ended December 31, 2003, six months ended
December 31, 2002,2006, 2005, and the years ended June 30, 2002 and 2001:
48
2004:
| 2006 | 2005 | 2004 | ||||||||||
| Provision for income taxes | $ | (394,934 | ) | $ | (109,452 | ) | $ | (185,676 | ) | |||
| Statement of stockholders’ equity-accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net | 327,647 | (730,794 | ) | (674,839 | ) | |||||||
| $ | (67,287 | ) | $ | (840,246 | ) | $ | (860,515 | ) | ||||
Note 13.12. 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'semployee’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 yearyears ended December 31, 2003, six months2006, 2005, and 2004 were as follows:
| 2006 | 2005 | 2004 | ||||||||||
| Matching contribution | $ | 674,786 | $ | 557,299 | $ | 415,582 | ||||||
| Discretionary contribution | 52,300 | 90,100 | 89,000 | |||||||||
| $ | 727,086 | $ | 647,399 | $ | 504,582 | |||||||
The Company has offered nonqualified supplemental executive retirement plans (SERPs) with certain executive officers. The SERPs allow certain executives to accumulate retirement benefits beyond those provided by the qualified plans. During the years ended December 31, 2002,2006, 2005 and 2004, the years ended June 30, 2002Company’s contributions were $533,239, $176,313 and 2001 were as follows:
$134,000, respectively. As of December 31, 2006 and 2005, the liability related to the SERPs was $843,552 and $310,313, respectively.
The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company'sCompany’s matching contribution differsvaries by officer and is a maximum of between $10,000 and $20,000 annually. Interest on the deferred amounts is earned atThe Wall Street Journal’s prime rate and also differs by officer, withsubject to a minimum of 6% and a maximum of 12% with such limits differing by officer. Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. During the years ended December 31, 2006, 2005 and 2004 the Company expensed $169,015, $124,562, and $107,420, respectively, related to the agreements. As of December 31, 2006 and 2005 the liability related to the agreements totals $1,009,230 and $830,222, respectively.
65
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Employee Benefit Plans (Continued)
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 atThe Wall Street Journal’s prime rate plus one percentage point, and has a minimum of 4% and shall not exceed 8%. Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. During the yearyears ended December 31, 2003, six
months ended December 31, 2002,2006, 2005 and the years ended June 30, 2002 and 20012004, the Company expensed $86,275, $41,041, $67,273,$98,674, $44,111 and $27,791,$21,488, respectively related to the agreements. As of December 31, 20032006 and 20022005, the liability related to the agreements totals $459,240totaled $445,206 and $320,965,$170,949, respectively.
Note 14.13. Stock Based Compensation
Stock option and incentive plans:
The Company'sCompany’s Board of Directors and its stockholders adopted in June 1993 the QCR Holdings, Inc. Stock Option Plan (Stock Option Plan). Up to 150,000225,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive stock options or nonqualified stock options granted under the Stock Option Plan. All of the options have been granted under this plan, and on June 30, 2003, the plan expired. The Company'sCompany’s Board of Directors adopted in November 1996 the QCR Holdings, Inc. 1997 Stock Incentive Plan (Stock(1997 Stock Incentive Plan). Up to 150,000225,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock options and restricted stock granted under the 1997 Stock Incentive Plan. As of December 31, 2003,2006, there are 24,917no remaining options available for grant under this plan. The Company’s Board of Directors adopted in January 2004, and the stockholders approved in May 2004, the QCR Holdings, Inc. 2004 Stock Incentive Plan (2004 Stock Incentive Plan). Up to 225,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock options and restricted stock granted under the 2004 Stock Incentive Plan. As of December 31, 2006, there are 124,996 remaining options available for grant under this plan. The Stock Option Plan, and the 1997 Stock Incentive Plan, and the 2004 Stock Incentive Plan (stock option plans) are administered by the Executive Committee appointed by the Board of Directors (Committee).
The number and exercise price of options granted under the Stock Option Plan
and the Stock Incentive Planstock 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 Plan and the
Stock Incentive Planstock option plans provide for the granting of "Tax“Tax Benefit Rights"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).
49
66
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Stock Based Compensation (Continued)
A summary of the stock option plans as of December 31, 20032006, 2005, and 2002 and June
30, 2002 and 20012004 and changes during the six monthsyears then ended and years ended on
those dates is presented below:
| December 31, | ||||||||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
| Outstanding, beginning | 252,658 | $ | 13.25 | 244,816 | $ | 11.56 | 224,800 | $ | 8.57 | |||||||||||||||
| Granted | 54,650 | 18.73 | 34,400 | 21.08 | 60,100 | 19.33 | ||||||||||||||||||
| Exercised | (16,221 | ) | 17.82 | (25,335 | ) | 20.62 | (38,604 | ) | 6.35 | |||||||||||||||
| Forfeited | (9,493 | ) | 18.72 | (1,223 | ) | 12.63 | (1,480 | ) | 8.99 | |||||||||||||||
| Outstanding, ending | 281,594 | 14.43 | 252,658 | 13.25 | 244,816 | 11.56 | ||||||||||||||||||
| Exercisable, ending | 167,455 | 146,979 | 135,210 | |||||||||||||||||||||
| Weighted average fair value per option of options granted during the period | $ | 6.48 | $ | 8.99 | $ | 8.29 | ||||||||||||||||||
A further summary of options outstanding as of December 31, 20032006 is presented below:
| Options Outstanding | ||||||||||||||||||||
| Weighted | Options Exercisable | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||
| Exercise Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $6.90 | 15,120 | 4.50 | $ | 6.90 | 15,120 | $ | 6.90 | |||||||||||||
| $7.00 to $7.13 | 33,650 | 4.25 | 7.01 | 33,650 | 7.01 | |||||||||||||||
| $7.45 to $9.39 | 34,773 | 1.83 | 8.84 | 34,323 | 8.86 | |||||||||||||||
| $9.87 to $11.64 | 33,215 | 4.78 | 10.33 | 28,635 | 10.35 | |||||||||||||||
| $11.83 to $18.60 | 65,616 | 6.20 | 16.58 | �� | 30,836 | 14.84 | ||||||||||||||
| $18.67 to $20.90 | 70,100 | 8.16 | 19.48 | 18,971 | 19.71 | |||||||||||||||
| $21.00 to $22.00 | 29,120 | 8.16 | 21.28 | 5,920 | 21.29 | |||||||||||||||
| 281,594 | 167,455 | |||||||||||||||||||
67
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Stock Based Compensation (Continued)
Stock appreciation rights:
Additionally, the
The 1997 Stock Incentive Plan allowsand 2004 Stock Incentive Plan allow the granting of stock appreciation rights (SARs). SARs are rights entitling the grantee to receive cash having aequal to the fair market value equal toof the appreciation in the market value of a stated number of shares from the date of grant. Like options, the number and exercise price of SARs granted is determined by the Committee. The SARs vest 20% per year, and the term of the SARs may not exceed 10 years from the date of the grant. As of December 31, 20032006, 2005, and 2002 and June 30, 2002 and
20012004 there were 90,350, 90,450, 90,850,94,875, 104,775, and 90,850111,375 SARs, respectively, outstanding, with 61,540, 48,820, 48,820,94,875, 93,435, and 28,200,84,810, respectively, exercisable. During the year ended December 31, 2003, six months ended
December 31, 2002, and the years ended June 20, 20022006, 2005, and 20012004 the Company expensed $915,224, $120,474, $187,360recorded (income)/expense of ($114,226), ($137,026) and $(36,825),$297,441, respectively, related to the SARs. As of December 31, 20032006 and 20022005 the liability related to the SARs totals $1,223,058$825,752 and $307,834,$1,035,935, respectively.
50
A further summary of SARs is presented below:
| December 31, 2006 | Liability Recorded for SARs | |||||||||||||||
| SARs | SARs | December 31, | ||||||||||||||
| Grant Date Price | Outstanding | Exercisable | 2006 | 2005 | ||||||||||||
| $6.90 | 30,900 | 30,900 | $ | 360,912 | $ | 412,800 | ||||||||||
| $7.00 | 10,800 | 10,800 | 124,740 | 160,020 | ||||||||||||
| $9.11 | 6,750 | 6,750 | 58,928 | 134,980 | ||||||||||||
| $10.75 | 15,825 | 15,825 | 131,348 | 148,346 | ||||||||||||
| $11.83 | 4,425 | 4,425 | 30,754 | 34,810 | ||||||||||||
| $12.17 | 750 | 750 | 4,912 | 5,650 | ||||||||||||
| $14.22 | 25,425 | 25,425 | 114,158 | 139,329 | ||||||||||||
| 94,875 | 94,875 | $ | 825,752 | $ | 1,035,935 | |||||||||||
Stock purchase plan:
The Company'sCompany’s Board of Directors and its stockholders adopted in October 2002 the QCR Holdings, Inc. Employee Stock Purchase Plan (the "Purchase Plan"“Purchase Plan”). As of January 1, 20032006 there were 100,000117,669 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.investment date. The investment date, as established by the Board of Directors of the Company, is the date common stock is purchased after the end of each calendar quarter during an offering period. The maximum dollar amount any one participant can elect to contribute in an offering period is $5,000. Additionally, the maximum percentage that any one participant can elect to contribute is 5% of his or her compensation. During the year ended December 31, 2003, 8,6732006, 15,987 shares were granted and 6,85214,552 purchased. Shares granted during the year ended December 31, 20032006 had a weighted average fair value of $2.77$2.44 per share.
68
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 15.14. Regulatory Capital Requirements and Restrictions on Dividends
The Company (on a consolidated basis) and the Bankssubsidiary 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 Banks'subsidiary banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bankssubsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bankssubsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). ManagementExcept as noted in (A) in the following table, management believes, as of December 31, 20032006 and 2002,2005, that the Company and the Bankssubsidiary banks met all capital adequacy requirements to which they are subject.
51
As of December 31, 2003,2006, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bankssubsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Banks'subsidiary banks’ categories. The Company and the Banks'subsidiary banks’ actual capital amounts and ratios as of December 31, 20032006 and 20022005 are also presented in the table.
table (dollars in thousands).
| To Be Well | ||||||||||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||
| As of December 31, 2006: | ||||||||||||||||||||||||||||||||
| Company: | ||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | 114,784 | 10.46 | % | $ | 87,827 | > | 8.0 | % | N/A | N/A | |||||||||||||||||||||
| Tier 1 risk-based capital | 90,176 | 8.21 | % | 43,914 | > | 4.0 | N/A | N/A | ||||||||||||||||||||||||
| Leverage ratio | 90,176 | 7.21 | % | 50,031 | > | 4.0 | N/A | N/A | ||||||||||||||||||||||||
| Quad City Bank & Trust: | ||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | 74,221 | 10.50 | % | $ | 56,568 | > | 8.0 | % | $ | 70,710 | > | 10.00 | % | ||||||||||||||||||
| Tier 1 risk-based capital | 67,749 | 9.58 | % | 28,284 | > | 4.0 | 42,426 | > | 6.00 | % | ||||||||||||||||||||||
| Leverage ratio | 67,749 | 8.22 | % | 32,971 | > | 4.0 | 41,214 | > | 5.00 | % | ||||||||||||||||||||||
| Cedar Rapids Bank & Trust: | ||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | 28,331 | 10.25 | % | $ | 22,109 | > | 8.0 | % | $ | 27,637 | > | 10.00 | % | ||||||||||||||||||
| Tier 1 risk-based capital | 25,104 | 9.08 | % | 11,055 | > | 4.0 | 16,582 | > | 6.00 | % | ||||||||||||||||||||||
| Leverage ratio | 25,104 | 7.66 | % | 13,107 | > | 4.0 | 16,384 | > | 5.00 | % | ||||||||||||||||||||||
| Rockford Bank & Trust (A): | ||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | 10,264 | 10.53 | % | $ | 7,801 | > | 8.0 | % | $ | 9,751 | > | 10.00 | % | ||||||||||||||||||
| Tier 1 risk-based capital | 9,352 | 9.59 | % | 3,901 | > | 4.0 | 5,851 | > | 6.00 | % | ||||||||||||||||||||||
| Leverage ratio | 9,352 | 8.70 | % | 4,298 | > | 4.0 | 5,373 | > | 5.00 | % | ||||||||||||||||||||||
69
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Regulatory Capital Requirements and Restrictions on Dividends (Continued)
| To Be Well | ||||||||||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||
| As of December 31, 2005: | ||||||||||||||||||||||||||||||||
| Company: | ||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | 86,515 | 10.14 | % | $ | 68,252 | > | 8.0 | % | N/A | N/A | |||||||||||||||||||||
| Tier 1 risk-based capital | 69,081 | 8.10 | % | 34,126 | > | 4.0 | N/A | N/A | ||||||||||||||||||||||||
| Leverage ratio | 69,081 | 6.84 | % | 40,373 | > | 4.0 | N/A | N/A | ||||||||||||||||||||||||
| Quad City Bank & Trust: | ||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | 60,670 | 10.22 | % | $ | 47,480 | > | 8.0 | % | $ | 59,350 | > | 10.0 | % | ||||||||||||||||||
| Tier 1 risk-based capital | 54,609 | 9.20 | % | 23,740 | > | 4.0 | 35,610 | > | 6.0 | |||||||||||||||||||||||
| Leverage ratio | 54,609 | 7.84 | % | 27,876 | > | 4.0 | 34,845 | > | 5.0 | |||||||||||||||||||||||
| Cedar Rapids Bank & Trust: | ||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | 23,476 | 10.26 | % | $ | 18,313 | > | 8.0 | % | $ | 22,891 | > | 10.0 | % | ||||||||||||||||||
| Tier 1 risk-based capital | 20,869 | 9.12 | % | 9,156 | > | 4.0 | 13,735 | > | 6.0 | |||||||||||||||||||||||
| Leverage ratio | 20,869 | 7.46 | % | 11,186 | > | 4.0 | 13,983 | > | 5.0 | |||||||||||||||||||||||
| Rockford Bank & Trust (A): | ||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | 9,019 | 29.77 | % | $ | 2,424 | > | 8.0 | % | $ | 3,030 | > | 10.0 | % | ||||||||||||||||||
| Tier 1 risk-based capital | 8,757 | 28.90 | % | 1,212 | > | 4.0 | 1,818 | > | 6.0 | |||||||||||||||||||||||
| Leverage ratio | 8,757 | 24.16 | % | 1,450 | > | 4.0 | 1,813 | > | 5.0 | |||||||||||||||||||||||
| (A) | As |
The Company’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve Bank policy provides that aapplicable to bank holding company should not pay
dividends unless (i)companies. As a Delaware corporation, the dividends can be fully funded outCompany is subject to the limitations of net income from
the company's net earnings over the prior year and (ii) the prospective rate of
earnings retention appears consistent with the company's (and its subsidiaries')
capital needs, asset quality, and overall financial condition.
In addition, the Delaware General Corporation Law restricts(the “DGCL”), which allow the Company from
payingto pay dividends exceptonly out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or inif the case there shall beCompany has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
70
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Regulatory Capital Requirements and Restrictions on Dividends (Continued)
Under applicable Iowa Bankingand Illinois law, the subsidiary banks may not pay dividends in excess of their undivided profits. Before declaring its first dividend, an Illinois bank, as a de novo institution, is required by Illinois law to carry at least one-tenth of its net profits since the issuance of its charter to its surplus until its surplus is equal to its capital. The Federal Reserve Act providesalso imposes limitations on the amount of dividends that an Iowamay be paid by state member banks. Generally, a member bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank’s board of directors deems prudent. Without prior Federal Reserve approval, however, a state member bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’s calendar year-to-date net income plus the bank’s retained net income for the two preceding calendar years. The Federal Reserve’s approval for an amount greater thanIllinois bank to become a member bank is conditioned upon the bank’s commitment that without prior Federal Reserve approval, it will not pay dividends until after it has been in operation for three years and has received two consecutive satisfactory composite CAMELS ratings.
The payment of dividends by any financial institution or its undivided profits. In addition,holding company is affected by the Banks, as membersrequirement 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 System, will be prohibited from payingmay prohibit the payment of any dividends toby the extent such dividends declared in any calendar year exceed the total of its net
profits of that year combined with its retained net profits of the preceding two
years, or are otherwise determined to be an "unsafe and unsound practice" byBanks if the Federal Reserve Board.
52
determines such payment would constitute an unsafe or unsound practice.
Note 16.15. Earnings Per Common Share
The following information was used in the computation of basic and diluted earnings per common share for the yearyears ended December 31, 2003, six months ended
December 31, 2002,2006, 2005, and the years ended June 30, 2002 and 2001:
2004:
| 2006 | 2005 | 2004 | ||||||||||
| Net income | $ | 2,802,205 | $ | 4,810,015 | $ | 5,216,672 | ||||||
| Less preferred stock dividends | 164,373 | — | — | |||||||||
| Net income available to common stockholders | $ | 2,637,832 | $ | 4,810,015 | $ | 5,216,672 | ||||||
| Weighted average common shares outstanding | 4,609,626 | 4,518,162 | 4,234,345 | |||||||||
| Weighted average common shares issuable upon exercise of stock options and under the Employee Stock Purchase Plan* | 43,603 | 98,394 | 110,420 | |||||||||
| Weighted average common and common equivalent shares outstanding | 4,653,229 | 4,616,556 | 4,344,765 | |||||||||
| * | Excludes anti-dilutive shares of 138,814, 49,950 and 19,350 at December 31, |
71
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 17.16. Commitments and Contingencies
In the normal course of business, the Bankssubsidiary 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 Bankssubsidiary banks evaluate each customer'scustomer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bankssubsidiary banks upon extension of credit, is based upon management'smanagement’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 Bankssubsidiary 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 Bankssubsidiary 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 Bankssubsidiary banks would be required to fund the commitments. The maximum potential amount of future payments the Bankssubsidiary banks could be required to make is represented by the contractual amount. If the commitment is funded, the Bankssubsidiary banks would be entitled to seek recovery from the customer. At December 31, 20032006 and 20022005 no amounts have been recorded as liabilities for the Banks'subsidiary banks’ potential obligations under these guarantees.
As of December 31, 20032006 and 2002,2005, commitments to extend credit aggregated $194,915,000$459,311,000 and $165,163,000,$385,779,000, respectively. As of December 31, 20032006 and 2002,2005, standby letters of credit aggregated $5,994,000$18,629,000 and $4,914,000,$15,242,000, 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 $3,790,031$6,186,632 and $23,691,004$2,632,400 as of December 31, 20032006 and 2002,2005, 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 $39,666,000 and $43,439,000 of sold residential mortgage loans with recourse provisions still in effect at December 31, 2006 and 2005, respectively. The subsidiary banks did not repurchase any loans from secondary market investors under the terms of loans sales agreements during the years ended December 31, 2006, 2005, and 2004. 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.
72
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 16. Commitments and Contingencies (Continued)
During fiscal 2004, Quad City Bank & Trust joined the Federal Home Loan Bank’s (FHLB) Mortgage Partnership Finance (MPF) Program, which offers a “risk-sharing” alternative to selling residential mortgage loans to investors in the secondary market. Lenders funding mortgages through the MPF Program manage the credit risk of the loans they originate. The loans are funded by the FHLB and held within their portfolio, thereby managing the liquidity, interest rate, and prepayment risks of the loans. Lenders participating in the MPF Program receive monthly credit enhancement fees for managing the credit risk of the loans they originate. Any credit losses incurred on those loans will be absorbed first by private mortgage insurance, second by an allowance established by the FHLB, and third by withholding monthly credit enhancements due to the participating lender. At both December 31, 2006 and 2005, Quad City Bank & Trust had funded $13,800,000 of mortgages through the FHLB’s MPF Program with an attached credit exposure of $279,000.
Bancard is subject to the risk of cardholder chargebacks and its local merchants being incapable of refunding the amount charged back. Management attempts to mitigate such risk by regular monitoring of merchant activity and in appropriate cases, holding cash reserves deposited by the local merchant. Throughout 2006 monthly provisions were made to the allowance for chargeback losses based on the dollar volumes of merchant credit card and related chargeback activity. For the year ended December 31, 2006, monthly provisions were made totaling $4,000. At December 31, 2006 and 2005, Bancard had a merchant chargeback reserve of $81,000 and $77,000, respectively. Management will continually monitor merchant credit card volumes, related chargeback activity, and Bancard’s level of the allowance for chargeback losses.
The Company also has a limited guarantee to MasterCard International, Incorporated, which is backed up by a performance bond in the amount$750,000 letter of $1,000,000.credit from The Northern Trust Company. As of December 31, 20032005 and 2006, there were no significant pending liabilities.
53
Aside from cash on-hand and in-vault, the majority of the Company'sCompany’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 $20,809,486approximately $7,000,000 and $25,256,262$9,800,000 as of December 31, 20032006 and 2002,2005, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks.
A significant portion of residential mortgage loans sold to investors in the
secondary market are sold
In an arrangement with recourse. Specifically, certain loan sales
agreements provide that if the borrower becomes delinquent a number of payments
or a number of days, within six months to one year of the sale, the Banks must
repurchase the loan from the subject investor. The Banks did not repurchase any
loans from secondary market investors under the terms of these loan sales
agreements during the year ended December 31, 2003, six months ended December
31, 2002, or the years ended June 30, 2002 or 2001. In the opinion of
management, the risk of recourse to the Banks is not significantGoldman, Sachs and accordingly, no liability has been established related to such.
The Company has various financial obligations, including contractual obligations
and commitments, which may require future cash payments. The Company has
purchase obligations which represent obligations under agreements to purchase
goods or services that are enforceable and legally binding on the Company and
that specify all significant terms. At December 31, 2003, the Company's purchase
obligations were primarily related to certain contractual payments for capital
expenditures of data processing technology and facilities expansion. The Company
has operating lease obligations which represent short and long-term lease
payments for data processing equipment and services, software, and other
equipment and professional services. The following table presents, as of
December 31, 2003, significant fixed and determinable contractual obligations to
these third parties by payment date.
Purchase Operating
Obligation Lease
------------------------------
Year ending December 31:
2004 $ 1,082,897 $ 1,029,476
2005 -- 1,036,011
2006 -- 946,579
2007 -- 18,900
2008 -- 3,525
Thereafter -- 19,340
-----------------------------
$ 1,082,897 $ 3,053,831
=============================
Plans were announced in October 2003 for Quad City Bank & Trust to add a fifth
full service banking facility. The facility is to be located in the Five Points
area of west Davenport, Iowa. Demolition of existing structures on the site has
been completed, and construction of the new facility is scheduled for completion
in late 2004 or early 2005. Total costs for the project are anticipated to be
approximately $1,700,000 with $519,000 incurred as of December 31, 2003.
In February 2004,(Goldman Sachs), Cedar Rapids Bank & Trust announced plansoffers a cash management program for select customers. Using this cash management tool, the customer’s demand deposit account performs like an investment account. Based on a predetermined minimum balance, which must be maintained in the account, excess funds are automatically swept daily to buildan institutional money market fund distributed by Goldman Sachs. As with a four
floor building in downtown Cedar Rapids. The Bank's main office will be
relocatedtraditional demand deposit account, customers retain complete check-writing and withdrawal privileges. If the demand deposit account balance drops below the predetermined threshold, funds are automatically swept back from the money market fund at Goldman Sachs to this site when construction is completed, which is anticipated to
be early in 2005.the account at Cedar Rapids Bank & Trust will ownto maintain the lower three floors ofrequired minimum balance. Balances swept into the facility,money market funds are not bank deposits, are not insured by any U.S. government agency, and an unrelated third party will own the fourth floor in a
condominium arrangement with the Bank. Costs for this facility are projecteddo not require cash reserves to be $5,000,000 with $141,000 incurred atset against the balances. At December 31, 2003. The Bank is also
considering2006 and December 31, 2005, the constructionCompany had $23,482,000 and $36,052,000, respectively, of a branch officecustomer funds invested in late 2004.
54
this cash management program.
73
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 18.17. Quarterly Results of Operations (Unaudited)
| Year Ended December 31, 2006 | ||||||||||||||||
| March | June | September | December | |||||||||||||
| 2006 | 2006 | 2006 | 2006 | |||||||||||||
| Total interest income | $ | 14,868,849 | $ | 16,222,226 | $ | 18,373,203 | $ | 19,338,748 | ||||||||
| Total interest expense | 7,752,028 | 8,970,128 | 10,689,212 | 11,495,966 | ||||||||||||
Net interest income | 7,116,821 | 7,252,098 | 7,683,991 | 7,842,782 | ||||||||||||
| Provision for loan losses (gains) | 543,844 | 351,736 | 728,678 | 1,659,984 | (A) | |||||||||||
| Noninterest income | 2,796,049 | 3,596,766 | 2,742,322 | 2,847,968 | ||||||||||||
| Noninterest expenses | 8,193,513 | 8,682,140 | 9,007,578 | 8,785,753 | ||||||||||||
| Minority interest in income of consolidated subsidiaries | 53,384 | 47,757 | 45,410 | 118,973 | ||||||||||||
Net income before income taxes | 1,122,129 | 1,767,231 | 644,647 | 126,040 | ||||||||||||
| Federal and state income taxes | 288,958 | 563,750 | 125,094 | (119,960 | ) | |||||||||||
Net income | $ | 833,171 | $ | 1,203,481 | $ | 519,553 | $ | 246,000 | ||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | 0.18 | $ | 0.26 | $ | 0.11 | $ | 0.02 | ||||||||
| Diluted | 0.18 | 0.26 | 0.11 | 0.02 | ||||||||||||
| (A) | Fourth quarter net income |
| Year Ended December 31, 2005 | ||||||||||||||||
| March | June | September | December | |||||||||||||
| 2005 | 2005 | 2005 | 2005 | |||||||||||||
| Total interest income | $ | 10,679,989 | $ | 11,538,870 | $ | 12,502,512 | $ | 13,966,897 | ||||||||
| Total interest expense | 4,191,650 | 4,781,874 | 5,642,350 | 6,664,911 | ||||||||||||
Net interest income | 6,488,339 | 6,756,996 | 6,860,162 | 7,301,986 | ||||||||||||
| Provision for loan losses (gains) | 301,206 | (147,418 | ) | 382,752 | 340,544 | |||||||||||
| Noninterest income | 2,516,475 | 2,434,878 | 2,508,535 | 2,612,615 | ||||||||||||
| Noninterest expenses | 6,752,705 | 7,443,341 | 7,589,747 | 7,647,355 | ||||||||||||
| Minority interest in income of consolidated subsidiary | — | — | 20,651 | 56,887 | ||||||||||||
Net income before income taxes | 1,950,903 | 1,895,951 | 1,375,547 | 1,869,815 | ||||||||||||
| Federal and state income taxes | 627,153 | 633,428 | 419,968 | 601,652 | ||||||||||||
Net income | $ | 1,323,750 | $ | 1,262,523 | $ | 955,579 | $ | 1,268,163 | ||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | 0.29 | $ | 0.28 | $ | 0.21 | $ | 0.28 | ||||||||
| Diluted | 0.29 | 0.27 | 0.21 | 0.27 | ||||||||||||
74
QCR Holdings, Inc.
andstate income taxes ............. 588,459 1,094,332
----------------------------
Net income ......................... $1,159,305 $2,037,239
============================
Earnings per common share:
Basic .................................... $ 0.42 $ 0.74
Diluted .................................. 0.41 0.72
55
56
Subsidiaries
and
Notes to Consolidated Financial Statements
Note 19.18. Parent Company Only Financial Statements
The following is condensed financial information of QCR Holdings, Inc. (parent company only):
57
58
59
Condensed Balance Sheets
December 31, 2006 and 2005
December 31, 2006 and 2005
| 2006 | 2005 | |||||||
Assets | ||||||||
| Cash and due from banks | $ | 1,200,403 | $ | 842,260 | ||||
| Interest-bearing deposits at financial institutions | 158,919 | 95,727 | ||||||
| Securities available for sale, at fair value | 1,569,541 | 1,593,719 | ||||||
| Investment in bank subsidiaries | 104,410,202 | 86,100,599 | ||||||
| Investment in nonbank subsidiaries | 1,710,251 | 1,376,780 | ||||||
| Other assets | 3,022,677 | 2,070,084 | ||||||
Total assets | $ | 112,071,993 | $ | 92,079,169 | ||||
Liabilities and Stockholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Other borrowings | $ | 3,500,000 | $ | 10,500,000 | ||||
| Junior subordinated debentures | 36,085,000 | 25,775,000 | ||||||
| Other liabilities | 1,604,413 | 1,337,470 | ||||||
Total liabilities | 41,189,413 | 37,612,470 | ||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock | 268 | — | ||||||
| Common stock | 4,560,629 | 4,531,224 | ||||||
| Additional paid-in capital | 34,293,511 | 20,776,254 | ||||||
| Retained earnings | 32,000,213 | 29,726,700 | ||||||
| Accumulated other comprehensive income (loss) | 27,959 | (567,479 | ) | |||||
Total stockholders’ equity | 70,882,580 | 54,466,699 | ||||||
Total liabilities and stockholders’ equity | $ | 112,071,993 | $ | 92,079,169 | ||||
75
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 20.18. Parent Company Only Financial Statements (Continued)
Condensed Statements of Income
Years Ended December 31, 2006, 2005, and 2004
Years Ended December 31, 2006, 2005, and 2004
| 2006 | 2005 | 2004 | ||||||||||
| Total interest income | $ | 126,990 | $ | 48,991 | $ | 114,731 | ||||||
| Securities gains, net | — | 50 | 26,188 | |||||||||
| Equity in net income of bank subsidiaries | 5,521,908 | 6,491,611 | 7,643,815 | |||||||||
| Equity in net income of nonbank subsidiaries | 369,964 | 405,220 | 259,660 | |||||||||
| Other | 244,503 | 386,382 | 212,814 | |||||||||
Total income | 6,263,365 | 7,332,254 | 8,257,208 | |||||||||
| Interest expense | 3,038,143 | 1,988,963 | 2,547,534 | |||||||||
| Salaries and employee benefits | 1,264,543 | 778,402 | 1,135,333 | |||||||||
| Professional and data processing fees | 388,136 | 508,237 | 361,063 | |||||||||
| Other | 446,057 | 344,280 | 423,347 | |||||||||
Total expenses | 5,136,879 | 3,619,882 | 4,467,277 | |||||||||
Income before income tax benefit | 1,126,486 | 3,712,372 | 3,789,931 | |||||||||
| Income tax benefit | 1,675,719 | 1,097,643 | 1,426,741 | |||||||||
Net income | $ | 2,802,205 | $ | 4,810,015 | $ | 5,216,672 | ||||||
76
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 18. Parent Company Only Financial Statements (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2006, 2005, and 2004
Years Ended December 31, 2006, 2005, and 2004
| 2006 | 2005 | 2004 | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net income | $ | 2,802,205 | $ | 4,810,015 | $ | 5,216,672 | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||
| Distributions in excess of (less than) earnings of: | ||||||||||||
| Bank subsidiaries | (3,621,909 | ) | (6,491,611 | ) | (6,643,815 | ) | ||||||
| Nonbank subsidiaries | (35,841 | ) | 28,893 | 2,662,973 | ||||||||
| Depreciation | 2,500 | 3,877 | 4,507 | |||||||||
| Provision for loan losses | — | 3,269 | — | |||||||||
| Loss on redemption of junior subordinated debentures | — | — | 747,490 | |||||||||
| Investment securities gains, net | — | (50 | ) | (26,188 | ) | |||||||
| Stock-based compensation expense | 285,351 | — | — | |||||||||
| Tax benefit of nonqualified stock options exercised | — | 125,993 | 190,248 | |||||||||
| (Increase) decrease in accrued interest receivable | (103,172 | ) | 26,788 | (28,252 | ) | |||||||
| (Increase) decrease in other assets | (243,954 | ) | 424,737 | (1,103,348 | ) | |||||||
| Increase (decrease) in other liabilities | 101,394 | (176,051 | ) | 523,507 | ||||||||
Net cash (used in) provided by operating activities | (813,426 | ) | (1,244,140 | ) | 1,543,794 | |||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Net (increase) decrease in interest-bearing deposits at financial institutions | (63,192 | ) | 319,712 | (281,648 | ) | |||||||
| Purchase of securities available for sale | (13,675 | ) | (167,736 | ) | (307,392 | ) | ||||||
| Proceeds from calls and maturities of securities | 50,000 | 298,988 | 227,001 | |||||||||
| Capital infusion, bank subsidiaries | (14,100,000 | ) | (14,000,000 | ) | (4,000,000 | ) | ||||||
| Capital infusion, nonbank subsidiaries | (910,000 | ) | (155,000 | ) | (620,000 | ) | ||||||
| Net loans (originated) repaid | — | 22,084 | — | |||||||||
| Purchase of premises and equipment | — | (7,500 | ) | — | ||||||||
Net cash used in investing activities | (15,036,867 | ) | (13,689,452 | ) | (4,982,039 | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Net (decrease) increase in other borrowings | (7,000,000 | ) | 4,500,000 | (4,000,000 | ) | |||||||
| Proceeds from issuance of junior subordinated debentures | 10,310,000 | 5,155,000 | 20,620,000 | |||||||||
| Tax benefit of nonqualified stock options exercised | 37,795 | — | — | |||||||||
| Redemption of junior subordinated debentures | — | — | (12,000,000 | ) | ||||||||
| Payment of cash dividends | (363,143 | ) | (360,598 | ) | (336,816 | ) | ||||||
| Payment from fractional shares on 3:2 stock split | — | — | (2,549 | ) | ||||||||
| Proceeds from issuance of preferred stock, net | 12,884,414 | — | — | |||||||||
| Proceeds from issuance of common stock, net | 339,370 | 355,722 | 5,028,831 | |||||||||
Net cash provided by financing activities | 16,208,436 | 9,650,124 | 9,309,466 | |||||||||
Net increase (decrease) in cash and due from banks | 358,143 | (5,283,468 | ) | 5,871,221 | ||||||||
| Cash and due from banks: | ||||||||||||
| Beginning | 842,260 | 6,125,728 | 254,507 | |||||||||
| Ending | $ | 1,200,403 | $ | 842,260 | $ | 6,125,728 | ||||||
77
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 19. Fair Value of Financial Instruments
FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments,requires disclosures of fair value information about financial instruments for which it is practicable to estimate that value. When quoted market prices are not available, fair values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the discounted rates and estimates of future cash flows. In this regard, fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement. Some financial instruments and all nonfinancial instruments are excluded from the disclosures. The aggregate fair value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of their financial instruments.
Cash and due from banks, federal funds sold, and interest-bearing deposits at financial institutions:institutions: The carrying amounts reported in the balance sheets for cash and due from banks, federal funds sold, and interest-bearing deposits at financial institutions equal their fair values.
Investment securities:securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans receivable:
Loans/leases receivable: The fair values for variable rate loans equal their carrying values. The fair values for all other types of loansloans/leases are estimated using discounted cash flow analysis,analyses, using interest rates currently being offered for loansloans/leases with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market.
Accrued interest receivable and payable:payable: The fair value of accrued interest receivable and payable is equal to its carrying value.
Deposits:
Deposits: The fair values disclosed for demand deposits equal their carrying amounts, which representsrepresent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits.
Short-term borrowings:borrowings: The fair value for short-term borrowings is equal to its carrying value.
Federal Home Loan Bank advances and junior subordinated debentures:debentures: The fair value of these instruments is estimated using discounted cash flow analysis,analyses, based on the Company'sCompany’s current incremental borrowing rates for similar types of borrowing arrangements.
Other borrowings:borrowings: The fair value for variable rate other borrowings is equal to its carrying value.
Commitments to extend credit:credit: The fair value of these commitments is not material.
78
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 19. Fair Value of Financial Instruments (Continued)
The carrying values and estimated fair values of the Company'sCompany’s financial instruments as of December 31, 20032006 and 20022005 are presented as follows:
60
| 2006 | 2005 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| Value | Fair Value | Value | Fair Value | |||||||||||||
| Cash and due from banks | $ | 42,502,770 | $ | 42,502,770 | $ | 38,956,627 | $ | 38,956,627 | ||||||||
| Federal funds sold | 2,320,000 | 2,320,000 | 4,450,000 | 4,450,000 | ||||||||||||
| Interest-bearing deposits at financial institutions | 2,130,096 | 2,130,096 | 1,270,666 | 1,270,666 | ||||||||||||
| Investment securities: | ||||||||||||||||
| Held to maturity | 350,000 | 357,842 | 150,000 | 154,828 | ||||||||||||
| Available for sale | 194,423,893 | 194,423,893 | 182,214,719 | 182,214,719 | ||||||||||||
| Loans/leases receivable, net | 950,135,242 | 946,862,000 | 747,370,175 | 745,921,173 | ||||||||||||
| Accrued interest receivable | 7,160,298 | 7,160,298 | 4,849,379 | 4,849,379 | ||||||||||||
| Deposits | 875,447,267 | 874,762,000 | 698,503,899 | 696,761,899 | ||||||||||||
| Short-term borrowings | 111,683,951 | 111,683,951 | 107,469,851 | 107,469,851 | ||||||||||||
| Federal Home Loan Bank advances | 151,858,749 | 151,133,000 | 130,000,854 | 128,861,854 | ||||||||||||
| Other borrowings | 3,761,636 | 3,761,636 | 10,764,914 | 10,764,914 | ||||||||||||
| Junior subordinated debentures | 36,085,000 | 37,041,365 | 25,775,000 | 27,653,149 | ||||||||||||
| Accrued interest payable | 4,696,214 | 4,696,214 | 2,410,398 | 2,410,398 | ||||||||||||
Note 21.20. Business Segment Information
The Company’s business segments operate utilizing strong intercompany relationships, primarily with Quad City Bank & Trust. Cedar Rapids Bank & Trust and Rockford Bank & Trust both look to Quad City Bank & Trust as their primary upstream correspondent bank. These relationships produce Federal funds activity, both purchases and sales, which result in intercompany interest income/expense, that is eliminated in segment reporting. At December 31, 2006, the net effect of this elimination to Quad City Bank & Trust’s net income was negative $49,000 for 2006. The reciprocal net effects of this elimination to net income were a positive $42,000 to Cedar Rapids Bank & Trust and a positive $7,000 to Rockford Bank & Trust. At December 31, 2005, the negative net effect of this elimination to Quad City Bank & Trust’s net income was $98,000 for 2005. The reciprocal net effects to net income, at December 31, 2005, were a positive $152,000 to Cedar Rapids Bank & Trust and a negative $54,000 to Rockford Bank & Trust for the year. At December 31, 2004, the negative net effect of this elimination to Quad City Bank & Trust’s net income was $131,000 for 2004. The reciprocal net effect to net income, at December 31, 2004, was a positive $131,000 to Cedar Rapids Bank & Trust for the year. Rockford Bank & Trust began operating as a branch of Quad City Bank & Trust in September 2004.
M2 Lease Funds also utilizes the services of Quad City Bank & Trust to provide the funding for its $52,600,000 lease portfolio. The intercompany interest income/expense, which results from this funding relationship, is eliminated in segment reporting. At December 31, 2006 and 2005 the negative net effect to net income for Quad City Bank & Trust and the positive net effect to net income for M2 Lease Funds were each $1,900,000 and $388,000, respectively for the year. M2 Lease Funds was acquired by Quad City Bank & Trust in August 2005.
Business segment information presented in the “All other” category includes the selected financial information for the parent-only entity and its 56% owned subsidiary, Velie Plantation Holding Company.
79
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 20. Business Segment Information (Continued)
Selected financial information on the Company'sCompany’s business segments, with all inter-company accounts and transactions eliminated, is presented as follows for the yearyears ended December 31, 2003, six months ended December2006, 2005, and 2004:
| 2006 | 2005 | 2004 | ||||||||||
| Commercial banking: | ||||||||||||
| Quad City Bank & Trust: | ||||||||||||
| Revenue | $ | 46,265,441 | $ | 36,732,246 | $ | 32,342,266 | ||||||
| Net income | 2,310,158 | 4,965,565 | 5,914,913 | |||||||||
| Assets | 764,399,817 | 668,896,016 | 634,206,797 | |||||||||
| Depreciation | 1,451,770 | 1,476,476 | 1,245,853 | |||||||||
| Capital expenditures | 716,237 | 1,787,723 | 3,783,114 | |||||||||
| Cedar Rapids Bank & Trust: | ||||||||||||
| Revenue | $ | 20,347,333 | $ | 14,627,423 | $ | 9,809,878 | ||||||
| Net income | 1,676,264 | 1,274,625 | 873,348 | |||||||||
| Assets | 334,414,391 | 288,537,122 | 228,249,176 | |||||||||
| Depreciation | 615,561 | 392,491 | 185,869 | |||||||||
| Capital expenditures | 260,264 | 6,170,123 | 3,582,029 | |||||||||
| Rockford Bank & Trust: | ||||||||||||
| Revenue | $ | 4,858,508 | $ | 1,084,242 | $ | 16,476 | ||||||
| Net (loss) | (2,397,360 | ) | (1,297,322 | ) | (346,490 | ) | ||||||
| Assets | 106,820,534 | 41,206,869 | 1,660,473 | |||||||||
| Depreciation | 192,686 | 97,125 | 10,689 | |||||||||
| Capital expenditures | 4,346,189 | 1,744,149 | 207,239 | |||||||||
| Credit card processing: | ||||||||||||
| Revenue | $ | 2,393,938 | $ | 2,056,474 | $ | 1,612,824 | ||||||
| Net income | 741,483 | 631,954 | 441,117 | |||||||||
| Assets | 535,656 | 575,974 | 889,407 | |||||||||
| Depreciation | 33,331 | 29,359 | 28,535 | |||||||||
| Capital expenditures | 5,228 | 32,533 | 39,204 | |||||||||
| Trust management: | ||||||||||||
| Revenue | $ | 3,049,440 | $ | 2,818,832 | $ | 2,530,907 | ||||||
| Net income | 703,570 | 611,647 | 625,459 | |||||||||
| Assets | N/A | N/A | N/A | |||||||||
| Depreciation | N/A | N/A | N/A | |||||||||
| Capital expenditures | N/A | N/A | N/A | |||||||||
| Leasing services: | ||||||||||||
| Revenue | $ | 3,484,610 | $ | 958,854 | — | |||||||
| Net income | 2,621,724 | 663,084 | — | |||||||||
| Assets | 56,347,859 | 38,585,572 | — | |||||||||
| Depreciation | 40,357 | 9,445 | — | |||||||||
| Capital expenditures | 31,661 | 37,465 | — | |||||||||
| Intangible assets | 3,222,688 | 3,222,688 | — | |||||||||
| All other: | ||||||||||||
| Revenue | $ | 386,861 | $ | 482,700 | $ | 385,930 | ||||||
| Net (loss) | (2,853,634 | ) | (2,039,538 | ) | (2,291,675 | ) | ||||||
| Assets | 9,156,699 | 4,811,975 | 5,077,694 | |||||||||
| Depreciation | 61,469 | 3,877 | 4,507 | |||||||||
| Capital expenditures | 3,974,999 | 7,500 | — | |||||||||
80
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 21. Subsequent Events
In the first quarter of 2007, the Company opened a private placement offering of common stock in connection with the addition of a Wisconsin-chartered bank. The Company is offering up to $3,000,000 of common stock, net of expenses. The total number of shares offered is 182,353 at an offering price of $17.00 per share. The offering terminates on March 31, 2002, and2007.
In October 2006, the years ended June 30, 2002 and 2001:
Note 22. Subsequent EventCompany announced that it had entered into a series of agreements that would result in the addition of a Wisconsin-chartered bank. On February 19, 2004,20, 2007, the Company completed these transactions. Under agreements with Security Bank Shares, Inc., Ridgeland Bancorp, Inc., and Ridgeland’s stockholders, QCR Holdings, Inc. announcedacquired from Ridgeland Bancorp ownership of Farmers State Bank, of Ridgeland, Wisconsin. Concurrently with this acquisition, the issuanceCompany transferred its Wisconsin branch of $8.0 millionRockford Bank & Trust to Farmers State Bank, and Farmers State Bank sold its banking offices in Ridgeland and Dallas, Wisconsin, to Security Bank, New Auburn, Wisconsin, a banking subsidiary of Floating Rate Capital Securities and $12.0 million of Fixed Rate Capital
Securities (together, the "Trust Preferred Securities") of QCR Holdings
Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust
III"), respectively.Security Bank Shares, Inc. The securities represent undivided beneficial interests in
Trust IICompany’s newly acquired Wisconsin bank charter was renamed from Farmer’s State Bank to First Wisconsin Bank and Trust III, which were established by QCR Holdings, Inc. for the
purpose of issuing the Trust Preferred Securities. The Trust Preferred
Securities were sold in a private transaction exemptCompany and was also relocated from registration under the
Securities Act of 1933, as amended (the "Act") and have not been registered
under the Act.
The securities issued by Trust II and Trust III mature in 30 years. The Floating
Rate Capital Securities are callable at par after five years and the Fixed Rate
Capital Securities are callable at par after seven years. The Floating Rate
Capital Securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the initial rate set at 3.97%, and the Fixed Rate Capital
Securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly. Both Trust II and Trust III used the proceeds from the sale of the
Trust Preferred SecuritiesRidgeland to purchase junior subordinated debentures of QCR
Holdings, Inc.Pewaukee, Wisconsin. The Company incurred issuance costs of $410,000, which will be
amortized overprovided the lives of the securities.
The Company intends to use its net proceeds for general corporate purposes,
including the possible redemptionnew charter with $10,000,000 in June 2004 of the $12,000,000 of 9.2%
cumulative Trust Preferred Securities issued by QCR Holdings Capital Trust I in
1999. If redeemed, the Trust Preferred Securities issued in 1999 carry
approximately $750,000 of unamortized issuance costs, which will be expensed as
of June 30, 2004.
capital.
81
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
61
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'sCompany’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended)Act) as of December 31, 2003.2006. Based on that evaluation, the Company'sCompany’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company'sCompany’s disclosure controls and procedures were effective.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, 2006. Management’s assessment is based on the criteria established in theInternal Control — Integrated Frameworkissued 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, 2006. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2006.
McGladrey & Pullen, LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2006 and management’s assessment of the internal control over financial reporting which is included following in this Form 10-K.
82
Report of Independent Registered Public Accounting Firm.
To the Board of Directors
QCR Holdings, Inc.
Moline, Illinois
QCR Holdings, Inc.
Moline, Illinois
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that QCR Holdings, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2006 and 2005, and the related
83
consolidated statements of income, changes in stockholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 15, 2007 expressed an unqualified opinion on those consolidated financial statements.
Davenport, Iowa
March 15, 2007
March 15, 2007
McGladrey & Pullen, LLP is a member firm of RSM – International – an affiliation of separate and independent entities.
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. Control enhancements were made during 2006 as part of the Company’s ongoing efforts to improve internal control over financial reporting. There have been no significant changes into the Company'sCompany’s internal controlscontrol over financial reporting during the period covered by this report that have materially effected, or in other factors that
could significantlyare reasonably likely to affect the Company’s internal controls.
control over financial reporting.
Item 9B. Other Information
None.
Part III
Item 10. Directors, and Executive Officers ofand Corporate Governance
The information required by this item is set forth in the Registrant
2007 Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under the caption "Election
of Directors"“Executive Compensation” in the 2007 Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under the caption "Executive
Compensation" in the Proxy Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is set forth under the caption "Security“Security Ownership of Certain Beneficial Owners"Owners” in the 2007 Proxy Statement, and is incorporated herein by reference, or is presented below.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 20032006 for (i) all compensation plans previously approved by the Company'sCompany’s stockholders and (ii) all compensation plans not previously approved by the Company'sCompany’s stockholders:
(a)
| (a) | the number of securities
84 EQUITY COMPENSATION PLAN INFORMATION
Item 13. Certain Relationships and Related Transactions and Director Independence The information required by this item is set forth under the captions Item 14. Principal The information required by this item is set forth under the caption Part IV Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements These documents are listed in the Index to Consolidated Financial Statements under Item 8. (a) 2. Financial Statement Schedules Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the consolidated financial statements and the accompanying notes thereto. (a) 3. Exhibits The following exhibits are either filed as a part of this Annual Report on Form 10-K or are incorporated herein by reference: 85
86
87
88
89 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.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
90 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.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
91 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 Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for the respective operations of the Company and its subsidiaries and is intended primarily for the protection of the FDIC-insured deposits and depositors of the Banks, rather than shareholders. The following is a summary of the material elements of the regulatory framework that applies to the Company and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. As such, the following is qualified in its entirety by reference to applicable law. Any change in statutes, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries. The Company General.The Company, as the sole shareholder of the Banks (as defined below), 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 Acquisitions, Activities and Change in Control.The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, the Company has Federal law also prohibits any person or company from acquiring Capital Requirements.Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital levels fall below the minimum required levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Dividend Payments.The over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Federal Securities Regulation.The The Banks Quad City Bank and Trust Company (“Quad City Bank & Trust”) and Cedar Rapids Bank and Trust Company (“Cedar Rapids Bank & Trust”) are chartered under Iowa law (collectively, the “Iowa Banks”); Rockford Bank and Trust Company (“Rockford Bank & Trust”) is chartered under Illinois law; and First Wisconsin Bank and Trust Company (“First Wisconsin Bank & Trust”) is chartered under Wisconsin law (collectively, the “Banks”). The 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 Deposit Insurance.As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which For the past several years, FDIC One of the Iowa Banks, Quad City Bank & Trust, and First Wisconsin Bank & Trust are eligible institutions. The other of the two Iowa Banks, Cedar Rapids Bank & Trust, and Rockford Bank & Trust are neither eligible institutions nor successors to eligible institutions and, therefore, will not be entitled to an assessment credit. FICO Assessments.The Financing Corporation Supervisory Assessments. Capital Requirements.Banks are generally required to maintain capital levels in excess of other businesses. The Federal Reserve has established the following minimum capital standards for state-chartered insured member banks, such as the The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, regulations of the Federal Reserve provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Both the Illinois DFPR’s order issuing a charter to Rockford Bank & Trust and the FDIC’s approval of deposit insurance for the bank are conditioned upon it maintaining a Tier 1 capital to assets ratio of not less than 8% for the first three years of operation; and the Federal Reserve’s approval of Rockford Bank & Trust’s application to become a member bank is conditioned upon the bank maintaining a Tier 1 capital to assets ratio of not less than 9% for the first three years of operation. If Rockford Bank & Trust’s Tier 1 capital to assets ratio falls below 9%, it may need to raise additional capital to maintain the required ratio. In addition, the Federal Reserve’s approval of the Company’s acquisition of First Wisconsin Bank & Trust is conditioned upon the bank maintaining a tangible leverage ratio in excess of 9% through the year 2009. Further, federal law and regulations provide various incentives for financial institutions to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a financial institution that is Federal law also provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution. As of December 31, 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. The payment of dividends by any financial institution Insider Transactions.The Banks are subject to certain restrictions imposed by federal law on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans made by the Banks. Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to their respective directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to 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 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 Branching Authority. Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is permitted only in those State Bank Investments and Activities. Federal Reserve System.Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating 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. B-1
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