U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004.
Commission file number: 0-22208
QCR HOLDINGS, INC.
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(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.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
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Common stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ x ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on The
Nasdaq SmallCap Market on June 30, 2004, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$70,193,000.
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 2005.
1
Part I
Item 1. Business
General. QCR Holdings, Inc. (the "Company") is a multi-bank holding company
headquartered in Moline, Illinois that was formed in February 1993 under the
laws of the state of Delaware. The Company serves the Quad City, Cedar Rapids,
and Rockford communities via its three wholly owned banking subsidiaries, which
provide full-service commercial and consumer banking and trust and asset
management services:
o Quad City Bank and Trust Company, ("Quad City Bank & Trust") which is based
in Bettendorf, Iowa and commenced operations in 1994,
o Cedar Rapids Bank and Trust Company, ("Cedar Rapids Bank & Trust") which is
based in Cedar Rapids, Iowa and commenced operations in 2001, and
o Rockford Bank and Trust Company, (Rockford Bank & Trust") which is based in
Rockford, Illinois and commenced operations in 2005.
The Company also engages in merchant credit card processing through its wholly
owned subsidiary, Quad City Bancard, Inc., based in Moline, Illinois.
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. Late in the
first quarter of 2005, Quad City Bank & Trust plans to open its fifth
full-service banking facility in the Five Points area of west Davenport.
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. 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 and adjacent communities
through its office located in downtown Cedar Rapids, Iowa. In early summer 2005,
Cedar Rapids Bank & Trust is scheduled to open at its first branch location in
northern Cedar Rapids, and in mid 2005 it plans to relocate its headquarters to
a new facility in downtown Cedar Rapids.
On January 3, 2005, Rockford Bank & Trust opened as the Company's third bank
charter. 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 Federal Deposit Insurance Corporation. It provides full-service
commercial and consumer banking to Rockford and adjacent communities through its
office located in downtown Rockford.
Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a
Delaware corporation that provides merchant and cardholder credit card
processing services. This operation had previously been a division of Quad City
Bank & Trust since July 1994. On October 22, 2002, 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 merchants and cardholders of the Company's subsidiary
banks and agent banks.
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 and callable on
June 30, 2004. Trust I was liquidated on June 30, 2004 in conjunction with the
Company's early redemption of its junior subordinated debentures.
In February 2004, the Company issued $12,000,000 of fixed/floating rate trust
preferred securities (fixed at a rate of 6.93% for 7 years and floating rate for
23 years) and $8,000,000 of floating rate trust preferred securities through two
newly formed subsidiaries, QCR Holdings Statutory Trust II ("Trust II") and QCR
Holdings Statutory Trust III ("Trust III"), respectively. Trust II and Trust III
are each 100% owned non-consolidated subsidiaries of the Company. Trust II and
Trust III each used the proceeds from the sale of the trust preferred
securities, along with the funds from their equity, to purchase junior
subordinated debentures of the Company in the amounts of $8,248,000 and
$12,372,000, respectively.
2
The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust,
Rockford Bank & Trust and Bancard, and 100% of the common securities of Trust II
and Trust III. In addition to such ownership, the Company invests its capital in
stocks of financial institutions and mutual funds, as well as participates in
loans with the subsidiary banks. In addition, to its wholly-owned subsidiaries,
the Company has an aggregate investment of $319 thousand in three associated
companies, Nobel Electronic Transfer, LLC, Nobel Real Estate Investors, LLC, and
Velie Plantation Holding Company, LLC.
The Company and its subsidiaries collectively employed 261 individuals at
December 31, 2004. No one customer accounts for more than 10% of revenues, loans
or deposits. In August 2002, the Company's board of directors elected to change
the Company's fiscal year end from June 30 to December 31. Due to this change,
the Company filed a Form 10-K for the transition period from July 1, 2002 to
December 31, 2002 and now holds its annual meetings in May of each year instead
of October. The 2005 annual meeting will be held on May 4, 2005. The Company's
subsidiaries have also changed their fiscal years, aligning their financial
reporting with that of the Company. Throughout this document, references to
fiscal 2004 are for the year ended December 31, 2004, and references to fiscal
2003 are for the year ended December 31, 2003. References to the transition
period are for the six months ended December 31, 2002. References to fiscal 2002
are for the year ended June 30, 2002. In most instances, results are shown for
the fiscal years ended December 31, 2004 and December 31, 2003, along with the
six-month transition period and the previous fiscal year ended June 30, 2002.
Competition. The Company currently operates in the highly competitive Quad City,
Cedar Rapids, and Rockford markets. Competitors include not only other
commercial banks, credit unions, thrift institutions, and mutual funds, but
also, insurance companies, finance companies, brokerage firms, investment
banking companies, and a variety of other financial services and advisory
companies. Many of these competitors are not subject to the same regulatory
restrictions as the Company. Many of these unregulated competitors compete
across geographic boundaries and provide customers increasing access to
meaningful alternatives to banking services. Additionally, the Company competes
in markets with a number of much larger financial institutions with
substantially greater resources and larger lending limits. These competitive
trends are likely to continue and may increase as a result of the continuing
reduction on restrictions on the interstate operations of financial
institutions. Under the Gramm-Leach-Bliley Act of 1999, effective in March of
2000, securities firms and insurance companies that elect to become financial
holding companies may acquire banks and other financial institutions. The
financial services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") is the primary regulator of the Company and its subsidiaries. In
addition, Quad City Bank & Trust and Cedar Rapids Bank & Trust are regulated by
the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal
Deposit Insurance Corporation (the "FDIC"). Rockford Bank & Trust is regulated
by the State of Illinois Department of Financial and Professional Regulation
("the Illinois DFPR") and the FDIC.
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.
Lending. The Company and its subsidiaries provide a broad range of commercial
and retail lending and investment services to corporations, partnerships,
individuals and government agencies. The subsidiary banks actively market their
services to qualified lending customers. Lending officers actively solicit the
business of new borrowers entering their market areas as well as long-standing
members of the local business community. The subsidiary banks have established
lending policies which include a number of underwriting factors to be considered
in making a loan, including location, loan-to-value ratio, cash flow, interest
rate and the credit history of the borrower.
Quad City Bank & Trust's current legal lending limit is approximately $8.2
million. As of December 31, 2004, commercial loans made up approximately 79% of
the loan portfolio, while residential mortgages comprised approximately 11% and
consumer loans comprised approximately 10%.
3
Cedar Rapids Bank & Trust's current corporate lending limit is approximately
$3.1 million. As of December 31, 2004, commercial loans made up approximately
92% of the loan portfolio, while residential mortgages comprised approximately
3% and consumer loans comprised approximately 5%.
Rockford Bank & Trust's current corporate lending limit is approximately $1.5
million. As of January 31, 2005, commercial loans made up approximately 79% of
the loan portfolio, while consumer loans comprised approximately 21%.
As part of the loan monitoring activity at the three 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 the subsidiary banks. Management has attempted to identify problem loans at
an early stage and to aggressively seek a resolution of these situations.
As noted above, the subsidiary banks are active commercial lenders. The areas of
emphasis include loans to wholesalers, manufacturers, building contractors,
developers, business services companies and retailers. The banks provide a wide
range of business loans, including lines of credit for working capital and
operational purposes and term loans for the acquisition of facilities, equipment
and other purposes. Collateral for these loans generally includes accounts
receivable, inventory, equipment and real estate. In addition, the subsidiary
banks often take personal guarantees to help assure repayment. Loans may be made
on an unsecured basis if warranted by the overall financial condition of the
borrower. Terms of commercial business loans generally range from one to five
years. A significant portion of the subsidiary banks' commercial business loans
has floating interest rates or reprice within one year. 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 continues to be a focal point for the banks. The
subsidiary banks' real estate loan portfolios, net of loans held for sale, were
approximately $56.0 million at December 31, 2004. The subsidiary banks currently
have ten mortgage originators.
The subsidiary banks sell the majority of their real estate loans in the
secondary market. They typically sell most of the fixed rate loans that they
originate. During the year ended December 31, 2004, the subsidiary banks
originated $124.6 million of real estate loans and sold $83.5 million, or 67%,
of these loans. During the year ended December 31, 2003, the subsidiary banks
originated $268.8 million of real estate loans and sold $241.6 million, or 90%,
of these loans. 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. 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.
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, relating to the business of the
Company. Consistent with the information presented in Form 10-K, results are
presented for the fiscal years ended December 31, 2004 and December 31, 2003,
along with the six-month transition period ended December 31, 2002, and the
previous three fiscal years 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.
The Company maintains Internet sites for itself and its three banking
subsidiaries and the Company makes available free of charge through these sites
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act after it electronically files such material with, or
furnishes it to, the Securities and Exchange Commission. The sites are
www.qcrh.com, www.qcbt.com, www.crbt.com, and www.rfrdbank.com.
4
Item 2. Property
The original office of Quad City Bank & Trust is in a 6,700 square foot
facility, which was completed in January 1994. In March 1994, Quad City Bank &
Trust acquired that facility, which is located at 2118 Middle Road in
Bettendorf, Iowa.
Construction of a second full service banking facility was completed in July
1996 to provide for the convenience of customers and to expand the market
territory. Quad City Bank & Trust also owns that facility which is located at
4500 Brady Street in Davenport, Iowa. The two-story building is in two segments
that are separated by an atrium. Originally, Quad City Bank & Trust owned the
south half of the building, while the north half was owned by the developer.
Quad City Bank & Trust acquired the northern segment of this facility in August
2003. Each segment has two floors that are 6,000 square feet. In addition, the
southern segment has a 6,000 square foot basement level. In the southern
segment, Quad City Bank & Trust occupies the first floor and utilizes the
basement, which underwent remodeling during 2004, for operational functions,
training and storage. At December 31, 2003, approximately 1,500 square feet on
the second floor of the southern segment were leased to a professional services
firm, and approximately 4,500 square feet were occupied by various operational
and administrative functions, which prior to January 2003 had been located in an
adjacent office building. Renovations were completed during 2004 on both floors
of the northern segment of the building, which is now utilized by additional
operational and administrative functions of Quad City Bank & Trust and the
Company.
Renovation of a third full service banking facility was completed in February
1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near
the intersection of 7th Street and John Deere Road in Moline, Illinois near the
Rock Island/Moline border. The building is owned by a third party limited
liability company, in which the Company has a 20% interest. Quad City Bank &
Trust and Bancard are the building's major tenants. Quad City Bank & Trust
occupies the main floor of the structure and a portion of the lower level.
Bancard relocated its operations to the lower level of the 30,000 square foot
building in late 1997. The Company relocated its corporate headquarters to the
building in February 1998 and occupies approximately 2,000 square feet on the
second floor.
Construction of a fourth full service banking facility was completed in October
2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City Bank & Trust leases
approximately 6,000 square feet on the first floor and 2,200 square feet on the
lower level of the 24,000 square foot facility. The office opened in October
2000. The Company previously announced plans 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. Construction of the new facility is nearly
complete, and opening is scheduled for late in the first quarter of 2005.
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. Cedar Rapids
Bank & Trust leases approximately 8,200 square feet in the GreatAmerica
Building, 625 First Street, S.E. in Cedar Rapids, which currently serves as its
only office.
In February 2004, Cedar Rapids Bank & Trust announced plans to build a four
floor building in downtown Cedar Rapids. The bank's main office will be
relocated to this site when construction is completed, which is anticipated to
be in mid 2005. Cedar Rapids Bank & Trust will own the lower three floors of the
facility, and an unrelated third party will own the fourth floor in a
condominium arrangement with the bank. Cedar Rapids Bank & Trust is also
constructing a branch office in northern Cedar Rapids on Council Street, which
is anticipated to open in early summer 2005.
Plans were announced by the Company in June 2004, to expand its banking
operations to the Rockford, Illinois market. Initially, from September through
December 2004, the Rockford operation functioned as a branch of Quad City Bank &
Trust while waiting for regulatory approvals for a new state bank charter in
Illinois. On January 3, 2005, the Rockford branch operation was converted into
the Company's third charter and began operations as Rockford Bank and Trust
Company. Rockford Bank & Trust leases approximately 7,800 square feet in the
newly restored Morrissey Building at 127 North Wyman Street in downtown
Rockford, which currently serves as its only office.
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.
5
The subsidiary banks 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. They each 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, 2004.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock, par value $1.00 per share, of the Company is traded on The
Nasdaq SmallCap Market under the symbol "QCRH". The stock began trading on
October 6, 1993. As of December 31, 2004, there were 4,496,730 shares of common
stock outstanding held by approximately 2,000 holders of record. The following
table sets forth the high and low sales prices of the common stock, as reported
by The Nasdaq SmallCap Market, for the periods indicated. Price per share data
has been retroactively adjusted to effect a 3-for-2 common stock split, which
occurred on May 28, 2004, as if it had occurred on July 1,1999.
High Low High Low High Low
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First quarter ............. $22.000 $18.667 $12.100 $11.220 $10.333 $ 9.080
Second quarter ............ 19.667 17.400 13.333 11.633 11.333 9.707
Third quarter ............. 19.940 17.550 16.667 13.207 NA NA
Fourth quarter ............ 21.990 18.000 19.387 15.000 NA NA
On April 22, 2004, the board of directors declared a cash dividend of $0.04
payable on July 2, 2004, to stockholders of record on June 18, 2004. On October
29, 2004, the board of directors declared a cash dividend of $0.04 per share
payable on January 7, 2005, to stockholders of record on December 24, 2004. In
the future, it is the Company's intention to continue to consider the payment of
dividends on a semi-annual basis. The Company anticipates an ongoing need to
retain much of its operating income to help provide the capital for continued
growth, but believes that operating results have reached a level that can
sustain dividends to stockholders as well. The Company has issued junior
subordinated debentures in two private placements. Under the terms of the
debentures, the Company may be prohibited, under certain circumstances, from
paying dividends on shares of its common stock. None of these circumstances
currently exist.
On April 22, 2004, the Company's board of directors declared a 3-for-2 common
stock split effected in the form of a fifty percent stock dividend, which was
paid on May 28, 2004 to stockholders of record on May 10, 2004. All share and
per share data throughout this document and accompanying schedules has been
retroactively adjusted to reflect the 3-for-2 split, as if it occurred on July
1, 1999.
Under applicable state laws, the banks are restricted as to the maximum amount
of dividends that they may pay on their common stock. Both Iowa law and Illinois
law provide that state-chartered banks in those states may not pay dividends in
excess of their undivided profits. Before declaring its first dividend, Rockford
Bank & Trust, as a de novo institution, is required by Illinois law to carry at
least one-tenth of its net profits since the issuance of its charter to its
surplus until its surplus is equal to its capital.
6
The Federal Reserve Act also imposes limitations on the amount of dividends that
may be paid by state member banks, such as the banks. Generally, a member bank
may pay dividends out of its undivided profits, in such amounts and at such
times as the bank's board of directors deems prudent. Without prior Federal
Reserve approval, however, a state member bank may not pay dividends in any
calendar year that, in the aggregate, exceed the bank's calendar year-to-date
net income plus the bank's retained net income for the two preceding calendar
years. The Federal Reserve's approval for Rockford Bank & Trust to become a
member bank is conditioned upon Rockford Bank & Trust's commitment that without
prior Federal Reserve approval, it will not pay dividends until after it has
been in operation for three years and has received two consecutive satisfactory
composite CAMELS ratings. Notwithstanding the availability of funds for
dividends, however, the banks' regulators may prohibit the payment of any
dividends by the banks if they determine that such payment would constitute an
unsafe or unsound practice. The Company's ability to pay dividends to its
shareholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding companies. The
payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized.
There were no repurchases of the Company's own stock during the fourth quarter
of 2004.
Item 6. Selected Financial Data
The following "Selected Consolidated Financial Data" of the Company is derived
in part from, and should be read in conjunction with, our consolidated financial
statements and the accompanying notes thereto. See Item 8 "Financial Statements
and Supplementary Data." Results for past periods are not necessarily indicative
of results to be expected for any future period.
Years Ended June 30,
---------------------------------
Six Months
Year Ended Year Ended Ended
December December December
31, 2004 31, 2003 31, 2002 2002 2001 2000
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Statement of Income Data:
Interest income ................. $ 38,017 $ 33,378 $ 16,120 $ 28,520 $ 28,544 $ 24,079
Interest expense ................ 13,325 11,950 6,484 12,870 16,612 13,289
Net interest income ............. 24,692 21,428 9,636 15,650 11,932 10,790
Provision for loan losses ....... 1,372 3,405 2,184 2,265 889 1,052
Noninterest income .............. 8,682 11,168 8,840 7,915 6,313 6,154
Noninterest expenses ............ 24,281 21,035 11,413 17,023 13,800 11,467
Pre-tax net income .............. 7,721 8,156 4,879 4,277 3,556 4,425
Income tax expense .............. 2,504 2,695 1,683 1,315 1,160 1,680
Net income ...................... 5,217 5,461 3,196 2,962 2,396 2,745
Per Common Share Data:
Net income-basic ................ $ 1.23 $ 1.31 $ 0.77 $ 0.74 $ 0.71 $ 0.79
Net income-diluted .............. 1.20 1.28 0.76 0.72 0.69 0.77
Cash dividends declared ......... 0.08 0.07 0.03 -- -- --
Dividend payout ratio ........... 6.50% 5.34% 3.90% --% --% --%
Balance Sheet:
Total assets .................... $870,084 $710,040 $604,600 $518,828 $400,948 $367,622
Securities ...................... 149,561 128,843 81,654 76,231 56,710 56,129
Loans ........................... 648,351 522,471 449,736 390,594 287,865 241,853
Allowance for estimated losses on
loans ........................... 9,262 8,643 6,879 6,111 4,248 3,617
Deposits ........................ 588,016 511,652 434,748 376,317 302,155 288,067
Stockholders' equity:
Common ........................ 50,774 41,823 36,587 32,578 23,817 20,071
Key Ratios:
Return on average assets ........ 0.65% 0.83% 1.13% 0.64% 0.62% 0.82%
Return on average
common equity ................... 11.89 13.93 18.41 10.07 10.95 14.17
Net interest margin (TEY) ....... 3.41 3.55 3.68 3.74 3.38 3.56
Efficiency ratio (1) ............ 72.75 64.53 61.71 72.20 75.64 67.68
Nonperforming assets to
total assets .................... 1.23 0.70 0.83 0.44 0.44 0.20
Allowance for estimated losses on
loans to total loans ............ 1.43 1.65 1.53 1.56 1.48 1.50
Net charge-offs to
average loans ................... 0.13 0.34 0.34 0.12 0.10 0.16
Average stockholders' equity to
average assets .................. 5.49 5.94 6.12 6.38 5.69 5.77
Earnings to fixed charges
Excluding interest on deposits 2.11 x 2.51 x 2.90 x 1.95 x 1.90 x 2.29 x
Including interest on deposits . 1.56 1.66 1.73 1.32 1.21 1.33
7
<FN>
(1) Noninterest expense: divided by the sum of net interest income before
provision for loan losses and noninterest income.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides additional information regarding our
operations for the twelve months ended December 31, 2004, 2003 and 2002 and the
six months ended December 31, 2002 and 2001, and financial condition at December
31, 2004, December 31, 2003, and December 31, 2002. In 2002, the Company changed
its fiscal year end from June 30 to December 31. Due to this change, the Company
filed for the transition period from July 1, 2002 to December 31, 2002.
Throughout this document, reference to fiscal 2004, fiscal 2003, the transition
period, and fiscal 2002 are for the years ended December 31, 2004 and 2003, the
six months ended December 31, 2002, and the year ended June 30, 2002. This
discussion should be read in conjunction with "Selected Consolidated Financial
Data" and our consolidated financial statements and the accompanying notes
thereto included or incorporated by reference elsewhere in this document.
Overview
The Company was formed in February 1993 for the purpose of organizing Quad City
Bank & Trust and has grown to $870.1 million in consolidated assets as of
December 31, 2004. Management expects continued opportunities for growth through
our three bank charters, although the rate of growth may not be maintained at
that experienced to date.
The Company reported earnings of $5.2 million or $1.23 basic earnings per share
for fiscal 2004 as compared to $5.5 million or $1.31 basic earnings per share
for fiscal 2003, $4.8 million or $1.17 basic earnings per share for the twelve
months ended December 31, 2002, $3.2 million or $0.77 basic earnings per share
for the six-month transition period ended December 31, 2002, and $3.0 million or
$0.74 basic earnings per share for fiscal 2002. Earnings for 2003 were
positively impacted by the Company's continued merchant credit card processing
through September 2003 for an ISO portfolio, which had been sold in October
2002. This ISO processing contributed $864 thousand, or $0.20 in diluted
earnings per share, to the Company's net income during 2003. Also, in February
2004, the Company issued $8.0 million in floating rate and $12.0 million in
fixed/floating rate trust preferred securities. In connection with this
issuance, the Company redeemed, on June 30, 2004, $12.0 million of trust
preferred securities originally issued in 1999. Prior to this redemption, the
Company had expensed $747 thousand of unamortized issuance costs associated with
the 1999 trust preferred securities in March 2004. The write-off of these costs,
combined with the additional interest costs of supporting both the original and
the new securities from February through June, resulted in an after-tax
reduction to net income during 2004 of $729 thousand, or $0.17 in diluted
earnings per share.
Excluding the one-time write-off of these unamortized issuance costs and the
additional interest costs incurred for approximately four months, net income for
2004 would have been $5.9 million, or diluted earnings per share of $1.37, a 9%
improvement over earnings for 2003. Although excluding the impact of this event
is a non-GAAP measure, management believes that it is important to provide such
information due to the non-recurring nature of this expense and to more
accurately compare the results of the periods presented.
When compared to the same period in 2003, the fiscal year ended December 31,
2004 reflected significant growth in both net interest income and earnings on
cash surrender value of life insurance for the Company. For fiscal 2004, net
interest income and earnings on cash surrender value of life insurance improved
by 15% and 203%, respectively, for a combined increase of $3.7 million when
compared to the twelve months ended December 31, 2003. A decrease in the
provision for loan losses of $2.0 million from fiscal 2003 to fiscal 2004 also
contributed positively to net income. The successful resolution of several large
credits in Quad City Bank & Trust's loan portfolio, through foreclosure, payoff,
or restructuring, resulted in reductions to both provision expense and the level
of allowance for loan losses. Trust department fees and investment advisory and
management fees also contributed an additional $457 thousand, in aggregate, to
the Company's noninterest income. Partially offsetting these revenue
contributions for the Company was an increase in noninterest expense of $3.4
million. The primary contributors to the increase in noninterest expense were
salaries and employee benefits, which increased $1.1 million from the same
period in 2003 and the $747 thousand loss on the redemption of junior
subordinated debentures. Also during fiscal 2004, the Company incurred $558
thousand of pretax costs associated with the start-up of the new banking
operation in Rockford, Illinois.
8
The Company's results of operations are dependent primarily on net interest
income, which is the difference between interest income, principally from loans
and investment securities, and interest expense, principally on customer
deposits and borrowings. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar level of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities. The Company's
average tax equivalent yield on interest earning assets decreased 0.28% for
fiscal 2004 as compared to 2003. With the same comparison, the average cost of
interest-bearing liabilities decreased 0.26%, which resulted in a 0.02% decrease
in the net interest spread of 3.15% at December 31, 2003 compared to 3.13% at
December 31, 2004. The relative stability in the net interest spread from year
to year did not carry over to the net interest margin. For fiscal 2004, net
interest margin was 3.41% compared to 3.55% for 2003. Management continues to
closely monitor and manage net interest margin. From a profitability standpoint,
an important challenge for the subsidiary banks is the maintenance of their net
interest margins. Management continually addresses this issue with the use of
alternative funding sources and pricing strategies.
The Company's operating results are also affected by sources of noninterest
income, including merchant credit card fees, trust fees, deposit service charge
fees, gains from the sales of residential real estate loans and other income.
Operating expenses of the Company include employee compensation and benefits,
occupancy and equipment expense and other administrative expenses. The Company's
operating results are also affected by economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. The majority of the subsidiary banks' loan portfolios
are invested in commercial loans. Deposits from commercial customers represent a
significant funding source as well.
The Company has continued to add facilities and employees to accommodate both
our historical growth and anticipated future growth. As such, overhead expenses
have had a significant impact on earnings. This trend is likely to continue as
our three 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.
9
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 $0.31
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 Merchant Services, Inc.
Bancard has continued 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. Despite this decline in processing volumes and fees and the
resulting reduction in operating results from prior quarters, Bancard has
remained 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 currently the Company has ten loan originators on staff. Our
banks 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, 2004, the subsidiary banks originated $124.6 million of real
estate loans and sold $83.5 million, or 67%, of these loans resulting in gains
of $1.1 million. During the twelve months ended December 31, 2003, the
subsidiary banks originated $268.8 million of real estate loans and sold $241.6
million, or 90%, of these loans 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. The depressed interest rates throughout
calendar 2002 and most of calendar 2003 brought significant increases in the
subsidiary banks' mortgage origination volumes during those periods. The rising
rate environment experienced in 2004 resulted in an abrupt decline in mortgage
loan originations.
Trust department income continues to be a significant contributor to noninterest
income. Trust department fees contributed $2.5 million in revenues during fiscal
2004. During fiscal 2003, trust department fees totaled $2.2 million. In the six
months ended December 31, 2002, trust department fees contributed $1.0 million
in revenues. Trust department fees were $2.2 million in fiscal 2002. 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, 2004 increased to $778.4 million, resulting
primarily from the development of existing relationships and the addition of new
trust relationships. At December 31, 2003, assets under administration were
$673.5 million, which was an increase of $30.8 million from December 31, 2002,
when assets totaled $642.7 million.
The Company's initial public offering during the fourth calendar quarter of 1993
raised approximately $14 million. In order to provide additional capital to
support the growth of Quad City Bank & Trust, the Company formed a statutory
business trust in June 1999, which issued $12 million of capital securities to
the public for cash. These securities were redeemed at their earliest call date
on June 30, 2004. 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/floating rate capital securities. The
Company used the net proceeds for general corporate purposes, including the
redemption, in June 2004, of the $12.0 million of capital securities issued in
1999. In conjunction with the formation of Rockford Bank & Trust, the Company
sold approximately $4.9 million of its common stock through a private placement
offering in December 2004, primarily to investors in the Rockford area.
10
Critical Accounting Policy
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, governmental guarantees,
payment status, changes in nonperforming loans, and other factors. Quantitative
factors also incorporate known information about individual loans, including
borrowers' sensitivity to interest rate movements. Qualitative factors include
the general economic environment in the Company's markets, including economic
conditions throughout the Midwest and in particular, the state of certain
industries. Size and complexity of individual credits in relation to loan
structure, existing loan policies and pace of portfolio growth are other
qualitative factors that are considered in the methodology. As the Company adds
new products and increases the complexity of its loan portfolio, it enhances its
methodology accordingly. Management may report a materially different amount for
the provision for loan losses in the statement of operations to change the
allowance for loan losses if its assessment of the above factors were different.
This discussion and analysis should be read in conjunction with the Company's
financial statements and the accompanying notes presented elsewhere herein, as
well as the portion of this Management's Discussion and Analysis section
entitled "Financial Condition - Allowance for Loan Losses." Although management
believes the levels of the allowance as of December 31, 2002, 2003, and 2004
were adequate to absorb losses inherent in the loan 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 2004 compared with fiscal 2003
Overview. Net income for the twelve months ended December 31, 2004 was $5.2
million as compared to net income of $5.5 million for the twelve-month period
ended December 31, 2003 for a decrease of $244 thousand or 4%. Basic earnings
per share for fiscal 2004 were $1.23 as compared to $1.31 for 2003. The decrease
in net income was comprised of an increase in net interest income after
provision for loan losses of $5.3 million in combination with a decrease in
federal and state income taxes of $191 thousand, totally offset by a decrease in
noninterest income of $2.5 million, and an increase in noninterest expenses of
$3.2 million. Several specific factors contributed to the decline in net income
from fiscal 2003 to fiscal 2004. Primary factors included a $2.5 million, or
69%, decrease in gains on sale of loans, a $1.1 million, or 8%, increase in
salaries and employee benefits, a decrease in merchant credit card fees of 36%,
or $786 thousand, and the loss on redemption of junior subordinated debentures
of $747 thousand.
Interest income. Interest income grew from $33.4 million for fiscal 2003 to
$38.0 million for fiscal 2004. The 14% increase in interest income was
attributable to greater average outstanding balances in interest-earning assets,
principally loans receivable, partially offset by a decrease in interest rates.
The average yield on interest earning assets for the twelve months ended
December 31, 2004 was 5.22% as compared to 5.50% for the twelve-month period
ended December 31, 2003.
Interest expense. Interest expense increased by $1.4 million, from $11.9 million
for fiscal 2003 to $13.3 million for fiscal 2004. The 12% increase in interest
expense was primarily attributable to greater average outstanding balances in
interest-bearing liabilities, which was partially offset by a reduction in
interest rates. The average cost on interest bearing liabilities was 2.09% for
the twelve months ended December 31, 2004 as compared to 2.35% for the like
period in 2003.
11
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.43% of total gross loans at
December 31, 2004, as compared to approximately 1.65% at December 31, 2003,
1.53% at December 31, 2002, and 1.56% at June 30, 2002. The provision for loan
losses declined significantly to $1.4 million for fiscal 2004, as compared to
$3.4 million for fiscal 2003. During both periods, management made monthly
provisions for loan losses based upon a number of factors, principally the
increase in loans and a detailed analysis of the loan portfolio. During fiscal
2004, the successful resolution of several large credits in Quad City Bank &
Trust's loan portfolio, through foreclosure, payoff, or restructuring, resulted
in reductions to both provision expense and the level of allowance for loan
losses. During fiscal 2004, the net growth in the loan portfolio actually
generated provision expense of $1.8 million, however 24%, or $426 thousand, was
offset by adjustments to the allowance for estimated losses on loans based on
the write-offs, payoffs, or restructures of several large credits within the
portfolio. During 2004, there were transfers totaling $1.9 million of loans to
other real estate owned. For fiscal 2004, commercial loans had total charge-offs
of $624 thousand, of which $419 thousand resulted from two customer
relationships at Quad City Bank & Trust, and there were $137 thousand of
commercial recoveries. Consumer loan charge-offs and recoveries totaled $292
thousand and $75 thousand, respectively, for the twelve months ended December
31, 2004. For fiscal 2004, credit cards accounted for $93 thousand of the
consumer loan charge-offs. Real estate loans had $49 thousand of charge-offs and
no recovery activity during fiscal 2004. The ability to grow profitably is, in
part, dependent upon the ability to maintain asset quality. The Company
continually focuses its efforts at the subsidiary banks to attempt to improve
the overall quality of the Company's loan portfolio.
Noninterest income. Noninterest income decreased by $2.5 million from $11.2
million for the twelve months ended December 31, 2003 to $8.7 million for fiscal
2004. Noninterest income for both periods, along with other miscellaneous fees,
consisted primarily of income from the merchant credit card operation, fees from
the trust department, depository service fees, and gains on the sale of
residential real estate mortgage loans. Making significant improvements from
year to year in the noninterest income category were increases in earnings on
cash surrender value of life insurance and trust department fees.
Merchant credit card fees, net of processing costs for fiscal 2004 decreased by
36% to $1.4 million from $2.2 million for fiscal 2003. In October 2002, the
Company sold Bancard's ISO related merchant credit card operations to iPayment,
Inc., and Bancard's core business focus was shifted to processing for its agent
banks, cardholders, and local merchants. Through September 2003, Bancard
continued to process ISO related transactions for iPayment, Inc. for a fixed
monthly service fee, which increased as the temporary processing period was
extended. For fiscal 2003, net fixed monthly service fees collected from
iPayment totaled $991 thousand, and Bancard's core merchant credit card fees,
net of processing costs were $1.3 million. In September 2003, the transfer of
the ISO related Visa/Mastercard processing activity to iPayment, Inc. was
completed and significantly reduced Bancard's exposure to risk of credit card
loss that the ISO activity carried with it. Bancard had established and carried
ISO-specific reserves, which provided coverage for this exposure. In March 2004,
the Company recognized a recovery of $144 thousand from a reduction in these
ISO-specific reserves. In September 2004, the Company also recognized a recovery
of $133 thousand from the elimination of the remaining balance in the
ISO-specific reserves. Less these recoveries and an additional $50 thousand of
service fees collected from iPayment, Bancard's core merchant credit card fees,
net of processing costs were $1.1 million for fiscal 2004, or a decrease of 15%
from the previous year. The $195 thousand decrease in core merchant credit card
fees, net of processing costs from year to year was primarily due to provisions
for merchant chargeback losses of $226 thousand made during fiscal 2004, which
were the result of two merchant situations involving fraudulent activity.
In fiscal 2004, trust department fees grew to $2.5 million from $2.2 million in
fiscal 2003. The $288 thousand, or 13%, increase from year to year was primarily
a reflection of continued development of existing trust relationships and the
addition of new trust customers, as well as an improvement in the market values
of securities held in trust accounts, when compared to one year ago. Each of
these factors had a resulting impact in the calculation and realization of trust
fees. Total trust assets under management were $778.4 million at December 31,
2004 compared to $673.5 million at December 31, 2003.
Deposit service fees increased $127 thousand, or 8%, to $1.6 million from $1.5
million for fiscal 2004 and for fiscal 2003, respectively. This increase was
primarily a result of the growth in service fees collected on the noninterest
bearing demand deposit accounts of downstream correspondent banks of Quad City
Bank & Trust, in combination with the growth in service fees collected on demand
accounts at Cedar Rapids Bank & Trust. Service charges and NSF (non-sufficient
funds or overdraft) charges related to demand deposit accounts were the main
components of deposit service fees.
12
Gains on sales of loans, net, were $1.1 million for fiscal 2004, which reflected
a decrease of 69%, or $2.6 million, from $3.7 million for fiscal 2003. The
decrease resulted from the steep decline in mortgage refinances, which was
experienced throughout 2004, and its effect on the subsequent sale of the
majority of residential mortgages into the secondary market. Management
anticipates that the level of gains on sales of loans, net, will continue to be
reduced significantly from those experienced throughout much of 2003.
During fiscal 2004, earnings on the cash surrender value of life insurance grew
$421 thousand, or 203%, to $628 thousand from $207 thousand for fiscal 2003.
During the first quarter of 2004, the Company made significant investments in
bank-owned life insurance (BOLI) on key executives at the two existing
subsidiary banks. Quad City Bank & Trust purchased $8.6 million of BOLI, and
Cedar Rapids Bank & Trust made a purchase of $3.6 million of BOLI.
Investment advisory and management fees increased $169 thousand from $341
thousand for fiscal 2003 to $510 thousand for fiscal 2004. The 50% increase from
year to year was due to the increased volume of investment services provided by
representatives of LPL Financial Services at the subsidiary banks, primarily at
Cedar Rapids Bank & Trust.
For the twelve months ended December 31, 2004, other noninterest income
decreased $142 thousand, or 14%, to $$867 thousand from $1.0 million for the
same period in 2003. The decrease, in 2004, was primarily due to a combination
of decreased income from non-consolidated subsidiaries of the Company and from a
gain realized during 2003 on the sale of foreclosed property at Quad City Bank &
Trust.
Noninterest expenses. For both fiscal 2004 and fiscal 2003, the main components
of noninterest expenses were primarily salaries and benefits, occupancy and
equipment expenses, and professional and data processing fees. Noninterest
expenses for fiscal 2004 were $24.3 million as compared to $21.0 million for
fiscal 2003 for an increase of $3.2 million, or 15%.
The following table sets forth the various categories of noninterest expenses
for fiscal years 2004 and 2003.
Twelve Months Ended December 31,
------------------------------------------
2004 2003 % Change
------------------------------------------
Salaries and employee benefits ........................................... $13,773,439 $12,710,505 8%
Professional and data processing fees .................................... 2,199,984 1,962,243 12%
Advertising and marketing ................................................ 1,014,664 786,054 29%
Occupancy and equipment expense .......................................... 3,263,540 2,640,602 24%
Stationery and supplies .................................................. 543,904 460,421 18%
Postage and telephone .................................................... 684,964 632,354 8%
Bank service charges ..................................................... 570,374 454,367 26%
Insurance ................................................................ 420,080 444,947 -6%
Loss on redemption of junior subordinated debentures ..................... 747,490 NA
-------------------------
Other .................................................................... 1,062,412 943,759 13%
-------------------------
Total noninterest expenses ................................. $24,280,851 $21,035,252 15%
=========================
For fiscal 2004, total salaries and benefits, the largest component of
noninterest expenses, increased to $13.8 million or $1.1 million over the $12.7
million for fiscal 2003. The 8% increase was primarily due to the Company's
increase in employees from 213 full time equivalents to 243 from year-to-year,
in combination with decreased expenses for both real estate loan officer
commissions and for tax benefit rights and stock appreciation rights. The growth
in personnel during 2004 mirrored a combination of Quad City Bank & Trust's
expansion into the Rockford market and the strong growth occurring at Cedar
Rapids Bank & Trust. 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. Occupancy and equipment expense increased $623
thousand, or 24%. The increase was a proportionate reflection of the additional
furniture, fixtures and equipment and leasehold improvements at the subsidiary
banks. Professional and data processing fees increased $238 thousand, or 12%,
when comparing fiscal 2004 to fiscal 2003. The increase was primarily
attributable to a combination of additional legal, director, and other
professional fees incurred by the subsidiary banks and by the parent company.
Advertising and marketing expense grew $229 thousand from $786 thousand to $1.0
million, respectively. The 29% increase was a result of the growth at the
subsidiary banks along with special events and marketing materials showcasing
the ten year anniversary of Quad City Bank & Trust, which occurred in the first
quarter of 2004. Bank service charges increased $116 thousand, stationary and
supplies expense grew $83 thousand, and postage and phone expense increased $53
thousand. All of these increases were proportionate reflections of the Company's
growth during the year.
13
Income tax expense. The provision for income taxes was $2.5 million for fiscal
2004 compared to $2.7 million for fiscal 2003, a decrease of $191 thousand or
7%. The decrease was primarily attributable to decreased income before income
taxes of $435 thousand or 5% for fiscal 2004, in combination with a slight
decrease in the Company's effective tax rate for 2004 to 32.4% from 33.0% for
2003.
Fiscal 2003 compared with the twelve months ended December 31, 2002
Overview. Net income for the twelve months ended December 31, 2003 was $5.5
million as compared to net income of $4.8 million for the twelve-month period
ended December 31, 2002 for an increase of $640 thousand or 13%. Basic earnings
per share for fiscal 2003 were $1.31 as compared to $1.17 for the comparable
period in 2002. The increase in net income was comprised of an increase in net
interest income after provision for loan losses of $3.4 million, partially
offset by 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. Several specific factors contributed to the improvement in net income
from 2002 to 2003 for the twelve-month periods. Primary factors included a 19%
improvement in net interest income prompted by increased volume, and a 40%
increase in gains on sales of real estate loans.
In October 2002, the Company sold its ISO-related merchant credit card portfolio
to iPayment, Inc., however Bancard continued to process the portfolio's
transactions through September 2003. The Company's earnings for fiscal 2003 were
positively impacted by the continued processing of these ISO volumes. This
continued ISO processing resulted in additional net income in fiscal 2003 of
$864 thousand or $0.20 in diluted earnings per share. The sale in October 2002
resulted in a gain of $1.3 million, after income tax and related expenses, or
$0.31 in diluted earnings per share. 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 $0.83, and net income for the twelve months ended December 31, 2003
would have been $4.6 million, or diluted earnings per share of $1.07. 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.
Interest income. Interest income grew from $30.8 million for the twelve months
ended December 31, 2002 to $33.4 million for fiscal 2003. The increase in
interest income was attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable, partially offset by a
decrease in interest rates. The average yield on interest earning assets for the
twelve months ended December 31, 2003 was 5.50% as compared to 6.30% for the
twelve-month period ended December 31, 2002.
Interest expense. Interest expense decreased by $770 thousand, from $12.7
million for the twelve months ended December 31, 2002 to $11.9 million for
fiscal 2003. The 6% decrease in interest expense was primarily attributable to a
reduction in interest rates, which was almost entirely offset by greater average
outstanding balances in interest-bearing liabilities. The average cost on
interest bearing liabilities was 2.35% for the twelve months ended December 31,
2003 as compared to 3.09% for the like period in 2002.
14
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 1.65% of total gross loans at
December 31, 2003, as compared to approximately 1.53% at December 31, 2002,
1.56% at June 30, 2002 and 1.48% at June 30, 2001. The provision for loan losses
remained stable at $3.4 million for fiscal 2003, as it had been for the twelve
months ended December 31, 2002. During both periods, management made monthly
provisions for loan losses based upon a number of factors, principally the
increase in loans and a detailed analysis of the loan portfolio. During fiscal
2003, the $3.4 million provision to the allowance for loan losses was attributed
35%, or $1.2 million, to net growth in the loan portfolio, and 65%, or $2.2
million, to downgrades and write-offs within the portfolio. For the twelve
months ended December 31, 2003, commercial loans had total charge-offs of $1.8
million, which resulted primarily from a single customer relationship at Quad
City Bank & Trust, and there were $192 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. Consumer loan charge-offs and
recoveries totaled $298 thousand and $242 thousand, respectively, for the twelve
months ended December 31, 2003. Real estate loans had no charge-off or recovery
activity during fiscal 2003. The ability to grow profitably is, in part,
dependent upon the ability to maintain asset quality. The Company is focusing
efforts at its subsidiary banks in an attempt to improve the overall quality of
the Company's loan portfolio.
Noninterest income. Noninterest income decreased by $1.5 million from $12.7
million for the twelve months ended December 31, 2002 to $11.2 million for
fiscal 2003. In the twelve months ended December 31, 2002, the largest component
of 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.
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.
15
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 as compared
to $20.2 million for the same period in 2002 for an increase of $845 thousand or
4%.
The following table sets forth the various categories of noninterest expenses
for the twelve months ended December 31, 2003 and 2002.
Twelve Months Ended December 31,
----------------------------------------
2003 2002 % Change
----------------------------------------
Salaries and employee benefits ........................................... $12,710,505 $11,379,110 12%
Compensation and other expenses related to sale of
merchant credit card portfolio ......................................... -- 1,413,734 -100%
Professional and data processing fees .................................... 1,962,243 1,498,819 31%
Advertising and marketing ................................................ 786,054 658,452 19%
Occupancy and equipment expense .......................................... 2,640,602 2,517,047 5%
Stationery and supplies .................................................. 460,421 469,458 -2%
Postage and telephone .................................................... 632,354 548,328 15%
Bank service charges ..................................................... 454,367 391,886 16%
Insurance ................................................................ 444,947 356,529 25%
Other .................................................................... 943,759 957,202 -1%
-------------------------
Total noninterest expenses ....................................... $21,035,252 $20,190,565 4%
=========================
16
For the fiscal year ended December 31, 2003, total salaries and benefits
increased to $12.7 million or $1.3 million over the $11.4 million for the
comparable period in 2002. Stock appreciation rights (SAR) expense was $915
thousand for the year, as the Company's stock price grew from $16.90 to $28.00
during 2003. Also contributing to the increase in salaries and benefits were
increased incentive compensation to real estate loan officers and processors
proportionate to the increased volumes of gains on sales of loans, and the
addition of employees at both subsidiary banks. Compensation and other expenses
related to the sale of the ISO-related merchant credit card portfolio of $1.4
million accounted for 7% of the $20.2 million total in noninterest expenses for
the twelve months ended December 31, 2002. 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. Occupancy and
equipment expense increased $124 thousand, or 5%, for the period. The increase
was due primarily to increased levels of rent, property taxes, utilities,
depreciation, maintenance, and other occupancy expenses, in conjunction with $46
thousand in losses on disposals of assets. Professional and data processing fees
increased $463 thousand, or 31%, when comparing fiscal 2003 to the comparable
period in 2002. The increase was primarily attributable to a combination of
additional data processing fees incurred by the subsidiary banks and other
professional fees incurred by the parent company. When comparing fiscal 2003 to
the comparable period in 2002, advertising and marketing expense grew $128
thousand, insurance expense increased $88 thousand, postage and phone expense
grew $84 thousand, and bank service charges increased $62 thousand. These
increases were all proportionate reflections of the Company's growth during the
year.
Income tax expense. The provision for income taxes was $2.7 million for the
fiscal year ended December 31, 2003 compared to $2.4 million for the comparable
period in 2002, an increase of $327 thousand or 14%. The increase was primarily
attributable to increased income before income taxes of $967 thousand or 13% for
the twelve-month period ended December 31, 2003, in combination with a slight
increase in the Company's effective tax rate for the 2003 period to 33.0% from
32.9% for the same period in 2002.
Six months ended December 31, 2002 compared with six months ended December 31,
2001
Overview. Net income for the six months ended December 31, 2002 was $3.2 million
as compared to net income of $1.3 million for the six-month period ended
December 31, 2001 for an increase of $1.9 million or 139%. Basic earnings per
share for the six-month period ended December 31, 2002 were $0.77 as compared to
$0.34 for the comparable period in 2001. The increase in net income was
comprised of an increase in net interest income after provision for loan losses
of $1.3 million and an increase in noninterest income of $4.8 million, partially
offset by increases in noninterest expenses of $3.2 million and an increase in
federal and state income taxes of $1.1 million. Several specific factors
contributed to the improvement in net income from 2001 to 2002 for the six-month
periods. Primary factors included the $3.5 million gain on sale of the merchant
credit card portfolio, a 34% improvement in net interest income prompted by
increased volume, and a 51% increase in gains on sales of real estate loans.
Interest income. Interest income grew from $13.8 million for the six months
ended December 31, 2001 to $16.1 million for the comparable period in 2002. The
increase in interest income was attributable to greater average outstanding
balances in interest-earning assets, principally loans receivable, partially
offset by a decrease in interest rates. The average yield on interest earning
assets for the six months ended December 31, 2002 was 6.13% as compared to 7.05%
for the six-month period ended December 31, 2001.
Interest expense. Interest expense decreased by $150 thousand, from $6.6 million
for the six months ended December 31, 2001 to $6.5 million for the same period
in 2002. The 2% decrease in interest expense was primarily attributable to a
reduction in interest rates almost entirely offset by greater average
outstanding balances in interest-bearing liabilities. The average cost on
interest bearing liabilities was 2.90% for the six months ended December 31,
2002 as compared to 3.89% for the like period in 2001.
17
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.53% of total gross loans at
December 31, 2002, as compared to approximately 1.56% at June 30, 2002 and 1.43%
at December 31, 2001. The provision for loan losses increased by $1.2 million,
from $1.0 million for the six months ended December 31, 2001 to $2.2 million for
the six-month period ended December 31, 2002. During the period, management made
monthly provisions for loan losses based upon a number of factors, principally
the increase in loans and a detailed analysis of the loan portfolio. During the
six months ended December 31, 2002, $786 thousand, or 36%, of the provision for
loan losses resulted from the deterioration of a single, significant loan
relationship at Quad City Bank and Trust. For the six-month period ended
December 31, 2002, 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. Consumer loan charge-offs and recoveries totaled $105 thousand and
$37 thousand, respectively, for the six months ended December 31, 2002. Real
estate loans had no charge-off or recovery activity during this period in 2002.
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 for 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 that the
subsidiary banks will continue to maintain this level of activity in 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 all of the merchant credit card
processing relationships owned by Allied.
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%.
18
The following table sets forth the various categories of noninterest expenses
for the six months ended December 31, 2002 and 2001.
Six Months Ended December 31,
------------------------------------------
2002 2001 % Change
------------------------------------------
Salaries and employee benefits ........................................... $ 6,075,885 $ 4,774,358 27%
Compensation and other expenses related to sale of ....................... 1,413,734 NA
merchant credit card portfolio ......................................... --
Professional and data processing fees .................................... 872,750 784,701 11%
Advertising and marketing ................................................ 341,093 286,643 19%
Occupancy and equipment expense .......................................... 1,322,826 1,137,585 16%
Stationery and supplies .................................................. 229,066 235,766 -3%
Postage and telephone .................................................... 291,737 229,462 27%
Bank service charges ..................................................... 211,873 177,535 19%
Insurance ................................................................ 186,308 193,458 -4%
Other .................................................................... 467,779 425,406 10%
-------------------------
Total noninterest expenses ....................................... $11,413,051 $ 8,244,914 38%
=========================
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 loan 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.
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.
Financial Condition
Total assets of the Company increased by $160.0 million or 23% to $870.1 million
at December 31, 2004 from $710.0 million at December 31, 2003. Total assets of
the Company increased by $105.4 million or 17% to $710.0 million at December 31,
2003 from $604.6 million 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.
Cash and Cash Equivalent Assets. Cash and due from banks decreased by $3.0
million or 13% to $21.4 million at December 31, 2004 from $24.4 million at
December 31, 2003. Cash and due from banks 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 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.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
decreased by $1.1 million to $2.9 million at December 31, 2004 from $4.0 million
at December 31, 2003. Federal funds sold decreased by $10.4 million to $4.0
million at December 31, 2003 from $14.4 million at December 31, 2002.
Fluctuations are attributed to a combination of lower demands for Federal Funds
by Quad City Bank & Trust's downstream correspondent banks and to varying levels
of liquidity at the Company's subsidiary banks.
19
Interest-bearing deposits at financial institutions decreased by $6.5 million or
63% to $3.9 million at December 31, 2004 from $10.4 million at December 31,
2003. Included in interest-bearing deposits at financial institutions are demand
accounts, money market accounts, and certificates of deposit. The decrease was
the result of decreases in money market accounts of $3.4 million and maturities
of certificates of deposit totaling $3.1 million. Interest-bearing deposits at
financial institutions decreased by $4.2 million or 29% to $10.4 million at
December 31, 2003 from $14.6 million at December 31, 2002. During fiscal 2003,
the certificate of deposit portfolio had 35 maturities totaling $3.4 million and
30 purchases totaling $2.8 million. As a result of the interest rate
environments and strong loan demand, during 2004 and 2003, the subsidiary banks
reduced their deposits in other banks in the form of certificates of deposit and
increased their utilization of Federal funds sold for any excess liquidity.
Investments. Securities increased by $20.7 million or 16% to $149.6 million at
December 31, 2004 from $128.8 million at December 31, 2003. The net increase was
the result of a number of transactions in the securities portfolio. The Company
purchased additional securities, classified as available for sale, in the amount
of $86.7 million. This increase was partially offset by paydowns of $1.8 million
that were received on mortgage-backed securities, proceeds from calls and
maturities of $53.0 million, proceeds from sales of $8.4 million, net losses of
$45 thousand, the amortization of premiums, net of the accretion of discounts,
of $983 thousand, and a decrease in unrealized gains on securities available for
sale, before applicable income tax of $1.8 million.
Securities increased by $47.1 million or 58% to $128.8 million at December 31,
2003 from $81.7 million at December 31, 2002. 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 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 a decrease in unrealized gains on securities
available for sale, before applicable income tax of $549 thousand.
Certain investment securities at Quad City Bank & Trust were purchased with the
intent to hold the securities until they mature. These held to maturity
securities, comprised of municipal securities and other bonds were recorded at
amortized cost at December 31, 2004, 2003, and 2002. The balance at December 31,
2004 was $100 thousand, which was a decrease of $300 thousand from the balance
of $400 thousand at December 31, 2003. The balance at December 31, 2003 of $400
thousand was a decrease of $25 thousand from the balance of $425 thousand at
December 31, 2002. Market values at December 31, 2004, 2003, and 2002 were $108
thousand, $417 thousand, and $451 thousand, respectively.
All of the Company's and Cedar Rapids Bank & Trust's securities, and a majority
of Quad City Bank & Trust's securities are placed in the available for sale
category as the securities may be liquidated to provide cash for operating,
investing or financing purposes. These securities were reported at fair value
and increased by $21.0 million, or 16%, to $149.5 million at December 31, 2004,
from $128.4 million at December 31, 2003. These securities were reported at fair
value and increased by $47.2 million, or 58%, to $128.4 million at December 31,
2003, from $81.2 million at December 31, 2002. The amortized cost of such
securities at December 31, 2004, 2003, and 2002 was $148.4, $125.6 million, and
$77.8 million, respectively.
As of December 31, 2004 there existed no security in the investment portfolio
(other than U.S. Government and U.S. Government agency securities) that exceeded
10% of stockholders' equity at that date.
Loans. Total gross loans receivable increased by $125.9 million or 24% to $648.4
million at December 31, 2004 from $522.5 million at December 31, 2003. The
increase was the result of the origination or purchase of $568.7 million of
commercial business, consumer and real estate loans, less loans transferred to
other real estate owned (OREO) of $1.9 million, loan charge-offs, net of
recoveries, of $753 thousand and loan repayments or sales of loans of $440.2
million. During fiscal 2004, Quad City Bank & Trust contributed $347.8 million,
or 61%, and Cedar Rapids Bank & Trust contributed $220.9 million, or 39% of the
Company's loan originations or purchases. During 2004, the Company established
new customer relationships in Wisconsin, and at December 31, 2004, held gross
loans of $11.6 million from these relationships. The Company expects that it
will eventually sell these loans to a Wisconsin bank. 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, 2004, Quad City Bank & Trust's legal
lending limit was approximately $8.2 million and Cedar Rapids Bank & Trust's
legal lending limit was approximately $3.1 million.
20
Total gross loans receivable increased by $72.8 million or 16% to $522.5 million
at December 31, 2003 from $449.7 million at December 31, 2002. The increase was
the result of the origination or purchase of $691.1 million of commercial
business, consumer and real estate loans, less loan charge-offs, net of
recoveries, of $1.6 million and loan repayments or sales of loans of $616.7
million. During fiscal 2003, Quad City Bank & Trust contributed $536.3 million,
or 78%, and Cedar Rapids Bank & Trust contributed $154.8 million, or 22% of the
Company's loan 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, Quad City Bank & Trust's legal lending limit was
approximately $7.2 million and Cedar Rapids Bank & Trust's legal lending limit
was approximately $2.5 million.
Allowance for Loan Losses. The allowance for estimated losses on loans was $9.3
million at December 31, 2004 compared to $8.6 million at December 31, 2003, for
an increase of $619 thousand, or 7%. The allowance for estimated losses on loans
was $8.6 million at December 31, 2003 compared to $6.9 million at December 31,
2002, for an increase of $1.7 million or 26%. During fiscal 2004, the resolution
of several large credits in Quad City Bank & Trust's loan portfolio, through
foreclosure, payoff, or restructuring, resulted in reductions to the level of
allowance for loan losses. A secondary result of this activity was the
distortion in the growth percentage of the allowance for loan losses of 7% when
compared to the growth percentage of the loan portfolio of 24%. The adequacy of
the allowance for estimated losses on loans was determined by management based
on factors that included the overall composition of the loan portfolio, types of
loans, past loss experience, loan delinquencies, potential substandard and
doubtful credits, economic conditions and other factors that, in management's
judgment, deserved evaluation in estimating loan losses. To ensure that an
adequate allowance was maintained, provisions were made based on the increase in
loans and a detailed analysis of the loan portfolio. The loan portfolio was
reviewed and analyzed monthly utilizing the percentage allocation method with
specific detailed reviews completed on all credits risk-rated less than "fair
quality" and carrying aggregate exposure in excess of $250 thousand. The
adequacy of the allowance for estimated losses on loans 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, 2004, 2003 and 2002, were $753
thousand, $1.6 million and $1.5 million, respectively. One measure of the
adequacy of the allowance for estimated losses on loans is the ratio of the
allowance to the total loan portfolio. Provisions were made monthly to ensure
that an adequate level was maintained. The allowance for estimated losses on
loans as a percentage of total gross loans was 1.43% at December 31, 2004, 1.65%
at December 31, 2003, and 1.53% at December 31, 2002.
Although management believes that the allowance for estimated losses on loans at
December 31, 2004 was at a level adequate to absorb losses on existing loans,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional provisions for loan
losses in the future. Asset quality is a priority for the Company and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality. The Company is focusing efforts at its
subsidiary banks in an attempt to improve the overall quality of the Company's
loan 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. Future events could still 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,
and require further increases in the provision.
Nonperforming Assets. The policy of the Company is to place a loan on nonaccrual
status if: (a) payment in full of interest or principal is not expected or (b)
principal or interest has been in default for a period of 90 days or more unless
the obligation is both in the process of collection and well secured. Well
secured is defined as collateral with sufficient market value to repay principal
and all accrued interest. A debt is in the process of collection if collection
of the debt is proceeding in due course either through legal action, including
judgment enforcement procedures, or in appropriate circumstances, through
collection efforts not involving legal action which are reasonably expected to
result in repayment of the debt or in its restoration to current status.
Nonaccrual loans were $7.6 million at December 31, 2004 compared to $4.2 million
at December 31, 2003, for an increase of $3.4 million or 81%. The increase in
nonaccrual loans was comprised of increases in commercial loans of $2.8 million,
real estate loans of $359 thousand, and consumer loans of $221 thousand.
Nonaccrual commercial loans totaled $6.6 million of which $6.4 million was due
to four large lending relationships at Quad City Bank & Trust. Nonaccrual loans
at December 31, 2004 represented 1.2% of the Company's held for investment loan
portfolio. All of the Company's nonperforming loans were located in the loan
portfolio at Quad City Bank & Trust. The loans in the Cedar Rapids Bank & Trust
loan portfolio have been made since its inception in 2001, and none of the loans
at December 31, 2004 were categorized as nonperforming loans. As the loan
portfolio at Cedar Rapids Bank & Trust matures, it is likely that there will be
nonperformers within the portfolio.
21
Nonaccrual loans were $4.2 million at December 31, 2003 compared to $4.6 million
at December 31, 2002, for a decrease of $404 thousand or 9%. The decrease in
nonaccrual loans was comprised of decreases in commercial loans of $302 thousand
and real estate loans of $139 thousand, partially offset by an increase in
consumer loans of $36 thousand. The decrease in nonaccrual commercial loans 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 commercial lending relationship at Quad City Bank & Trust with an
outstanding balance at December 31, 2003 of $702 thousand. Nonaccrual loans at
December 31, 2003 represented less than one percent of the Company's loan
portfolio. All of the Company's nonperforming assets at December 31, 2003 were
located in the loan portfolio at Quad City Bank & Trust. As of December 31,
2004, 2003, and 2002, past due loans of 30 days or more amounted to $10.2
million, $6.9 million, and $9.6 million, respectively. Past due loans as a
percentage of gross loans receivable were 1.6 % at December 31, 2004, 1.3% at
December 31, 2003, and 2.1% at December 31, 2002.
During fiscal 2004, the Company transferred $1.9 million from the loan portfolio
into other real estate owned. At December 31, 2004, $1.4 million was held at
Quad City Bank & Trust and $506 thousand was held at Cedar Rapids Bank & Trust.
At both December 31, 2003 and 2002, the Company held no assets in other real
estate owned.
Other Assets. Premises and equipment increased by $6.1 million or 50% to $18.1
million at December 31, 2004 from $12.0 million at December 31, 2003. This
increase resulted primarily from a combination of construction costs of $1.9
million for Quad City Bank & Trust's fifth facility, $2.6 million for Cedar
Rapids Bank & Trust's new main facility, and $664 thousand for Cedar Rapids Bank
& Trust's first branch facility. Additionally, there were Company purchases of
additional furniture, fixtures and equipment offset by depreciation expense.
Premises and equipment increased by $2.8 million or 30% to $12.0 million at
December 31, 2003 from $9.2 million at December 31, 2002. This increase resulted
primarily from Quad City Bank & Trust's purchases of the northern segment of its
Brady Street facility and the land for its fifth location, in combination with
Company purchases of additional furniture, fixtures and equipment offset by
depreciation expense. Additional information regarding the composition of this
account and related accumulated depreciation is described in Note 5 to the
consolidated financial statements.
Accrued interest receivable on loans, securities, and interest-bearing deposits
at financial institutions increased by $427 thousand, or 13%, to $4.1 million at
December 31, 2004 from $3.6 million at December 31, 2003. Accrued interest
receivable on loans, securities, and interest-bearing deposits at financial
institutions increased by $425 thousand, or 13%, to $3.6 million at December 31,
2003 from $3.2 million at December 31, 2002. Increases were primarily due to
greater average outstanding balances in interest-bearing assets.
Bank-owned life insurance (BOLI) increased by $12.8 million from $3.1 million at
December 31, 2003 to $15.9 million at December 31, 2004. BOLI increased by $257
thousand from $2.8 million at December 31, 2002 to $3.1 million at December 31,
2003. Banks may generally buy BOLI as a financing or cost recovery vehicle for
pre-and post-retirement employee benefits. During fiscal 2004, the subsidiary
banks purchased $8.0 million of insurance to finance the expenses associated
with the establishment of supplemental retirement benefits plans (SERPs) for the
executive officers. Additionally in fiscal 2004, the subsidiary banks purchased
life insurance totaling $4.2 million on the lives of a number of senior
management personnel for the purpose of funding the expenses of new deferred
compensation arrangements for senior officers. Benefit expense associated with
the supplemental retirement benefits and deferred compensation arrangements was
$134 thousand and $129 thousand, respectively, for fiscal 2004. These purchases
during the first quarter, combined with the existing bank-owned life insurance,
resulted in each subsidiary bank holding investments in bank-owned life
insurance 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.
Earnings on BOLI totaled $628 thousand for fiscal 2004.
Other assets increased by $5.5 million or 56% to $15.2 million at December 31,
2004 from $9.7 million at December 31, 2003. The three largest components of
other assets at December 31, 2004 were $5.9 million in Federal Reserve Bank and
Federal Home Loan Bank stocks, $2.8 million in deferred tax assets and $2.0
million in various prepaid expenses. Other assets decreased by $1.3 million to
$9.7 million at December 31, 2003 from $11.0 million at December 31, 2002. The
two largest components of other assets at December 31, 2003 were $5.5 million in
Federal Reserve Bank and Federal Home Loan Bank stocks and $752 thousand in
prepaid trust preferred offering expense. At both December 31, 2004 and 2003,
other assets also included accrued trust department fees, other miscellaneous
receivables, and the net equity in unconsolidated subsidiaries.
22
Deposits. Deposits increased by $76.4 million or 15% to $588.0 million at
December 31, 2004 from $511.7 million at December 31, 2003. The increase
resulted from a $21.1 million net decrease in non-interest bearing, NOW, money
market and savings accounts offset by a $97.5 million net increase in
interest-bearing certificates of deposit. As anticipated for several quarters,
the merchant credit card processing for the independent sales organization
("ISO") portfolio, which was sold to iPayment, Inc. in October 2001, was
transferred to another processor on February 1, 2004. Funds related to this
transfer accounted for $16.5 million of the decrease in non-interest bearing
deposits from December 31, 2003 to December 31, 2004. The subsidiary banks also
issued brokered certificates of deposit totaling $28.8 million during fiscal
2004. During 2004, the Company established new customer relationships in
Wisconsin, and at December 31, 2004, held total deposits of $2.9 million for
these customers. The Company expects that it will eventually transfer these
deposits to a Wisconsin bank. Deposits increased by $77.0 million or 18% to
$511.7 million at December 31, 2003 from $434.7 million at December 31, 2002.
The increase resulted from a $75.0 million net increase in noninterest bearing,
NOW, money market and other savings accounts and a $2.0 million net increase in
certificates of deposit.
Short-term Borrowings. Short-term borrowings increased by $53.2 million or 103%
from $51.6 million as of December 31, 2003 to $104.8 million as of December 31,
2004. Short-term borrowings increased by $18.7 million or 57% from $32.9 million
as of December 31, 2002 to $51.6 million as of December 31, 2003. The subsidiary
banks offer short-term repurchase agreements to some of their major customers.
Also, on occasion, the subsidiary banks purchase Federal funds for short-term
funding needs from the Federal Reserve Bank, or from their correspondent banks.
As a result of the significant growth in assets during fiscal 2004, primarily
the loan portfolio and securities available for sale, and the smaller increase
in deposits, the subsidiary banks utilized additional short-term borrowings.
Short-term borrowings were comprised of customer repurchase agreements of $47.6
million, $34.7 million, and $32.9 million at December 31, 2004, 2003, and 2002,
respectively, as well as federal funds purchased from correspondent banks of
$57.2 million at December 31, 2004, $16.9 million at December 31, 2003, and none
at December 31, 2002.
FHLB Advances and Other Borrowings. FHLB advances increased $15.8 million or 21%
from $76.2 million as of December 31, 2003 to $92.0 million as of December 31,
2004. FHLB advances increased $1.2 million or 2% from $75.0 million as of
December 31, 2002 to $76.2 million as of December 31, 2003. As of December 31,
2004, the subsidiary banks held $5.6 million of FHLB stock in aggregate. As a
result of their memberships in the FHLB of Des Moines, 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 & Trust utilized
FHLB advances for loan matching as a hedge against the possibility of rising
interest rates or when these advances provided a less costly source of funds
than customer deposits.
Other borrowings decreased to $6.0 million at December 31, 2004 for a decrease
of $4.0 million, or 40%, from December 31, 2003. Other borrowings increased to
$10.0 million at December 31, 2003 for an increase of $5.0 million, or 100%,
from December 31, 2002. Other borrowings were $5.0 million at December 31, 2002.
In September 2001, the Company had drawn a $5.0 million advance on a line of
credit at an upstream correspondent bank as partial funding for the initial
capitalization of Cedar Rapids Bank & Trust. In February and July 2003, the
Company drew additional advances of $2.0 million and $3.0 million, respectively,
as funding to maintain the required level of regulatory capital at Cedar Rapids
Bank & Trust in light of the bank's growth. In February 2004, the Company formed
two trusts, which, in a private transaction, issued $8.0 million of floating
rate trust preferred securities and $12.0 million of fixed/floating rate trust
preferred securities. Partial proceeds from this transaction were used to pay
off the $10.0 million credit note balance existing on that date. In June 2004,
the Company drew an advance of $7.0 million as partial funding for the
redemption of the $12.0 million in trust preferred securities, which had been
issued in 1999. In December 2004, the Company made a payment to reduce the
balance by $1.0 million.
Junior subordinated debentures increased $8.6 million, or 72%, from $12.0
million at December 31, 2003 to $20.6 million at December 31, 2004. In June
1999, the Company issued 1,200,000 shares of trust preferred securities through
a newly formed subsidiary, Trust I. These securities were $12.0 million at
December 31, 2003 and 2002. The Company redeemed these securities on June 30,
2004. In February 2004, the Company formed two new subsidiaries and issued, in a
private transaction, $12.0 million of fixed/floating rate trust preferred
securities and $8.0 million of floating rate trust preferred securities of Trust
II and Trust III, respectively. Trust II and Trust III used the proceeds from
the sale of the trust preferred securities, along with the funds from their
equity, to purchase junior subordinated debentures of the Company in the amounts
of $8.2 million and $12.4 million, respectively.
23
Other liabilities increased by $1.2 million or 17% to $7.9 million as of
December 31, 2004 from $6.7 million as of December 31, 2003. The increase was
primarily due to the increased balances in SERP and deferred compensation
liabilities at the subsidiary banks. Other liabilities decreased by $1.7 million
or 20% to $6.7 million as of December 31, 2003 from $8.4 million as of December
31, 2002. The decrease was primarily the result of the payment during 2003 of
income taxes and a large portion of the accrued severance compensation related
to Bancard's sale of its ISO related merchant credit card operations in October
2002. Other liabilities were comprised of unpaid amounts for various products
and services, and accrued but unpaid interest on deposits. At December 31, 2004,
the largest single component of other liabilities was accrued expenses of $3.4
million. At both December 31, 2003 and 2002, the largest single component of
other liabilities was interest payable at $1.2 million and $1.8 million,
respectively.
Stockholders' Equity. Common stock of $2.9 million as of December 31, 2003
increased by $1.6 million, or 57%, to $4.5 million at December 31, 2004. The
increase was the net result of a private placement offering during the fourth
quarter of 2004, which issued an additional 250,506 common shares, a
three-for-two common stock split, which was paid in the form of a stock dividend
on May 28, 2004, stock issued from the net exercise of stock options, stock
purchased under the employee stock purchase plan, and the retirement of treasury
shares. Common stock of $2.8 million as of December 31, 2002 increased by $41
thousand, or 1%, to $2.9 million at December 31, 2003. The slight increase was
the result of stock issued from the net exercise of stock options and stock
purchased under the employee stock purchase plan.
Additional paid-in capital increased to $20.3 million as of December 31, 2004
from $17.1 million at December 31, 2003. The increase of $3.2 million, or 19%,
resulted primarily from proceeds received in excess of the $1.00 per share par
value for the shares of common stock issued as the result of a private placement
offering, the exercise of stock options and purchases of stock under the
employee stock purchase plan, partially offset by the three-for-two stock split
and the retirement of treasury shares. Additional paid-in capital increased to
$17.1 million as of December 31, 2003 from $16.7 million at December 31, 2002.
The increase of $382 thousand, or 2%, resulted primarily from proceeds received
in excess of the $1.00 per share par value for the 40,929 shares of common stock
issued as the result of the exercise of stock options and purchases of stock
under the employee stock purchase plan.
Retained earnings increased by $4.4 million, or 21%, to $25.3 million at
December 31, 2004 from $20.9 million at December 31, 2003. The increase
reflected net income for the fiscal year reduced by a combination of the $349
thousand in dividends declared during 2004, the retirement of treasury shares,
and the payout of fractional shares in conjunction with the stock split. A cash
dividend of $0.04 was paid in July 2004. On October 29, 2004, the board of
directors declared a cash dividend of $0.04 per share payable on January 7,
2005, to stockholders of record on December 24, 2004. Retained earnings
increased by $5.2 million, or 33%, to $20.9 million at December 31, 2003 from
$15.7 million at December 31, 2002. The increase reflected net income for the
fiscal year reduced by the $307 thousand in dividends declared during fiscal
2003. The Company paid a cash dividend of $0.03 per share in July 2003 and $0.04
per share in January 2004.
Accumulated other comprehensive income was $669 thousand as of December 31, 2004
as compared to $1.8 million as of December 31, 2003. The decrease was
attributable to the decrease during the period in the fair value of the
securities identified as available for sale, primarily as a result of increasing
market interest rates. Accumulated other comprehensive income was $1.8 million
as of December 31, 2003 as compared to $2.1 million as of December 31, 2002. The
decrease in the gains 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 recovery 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 December 31, 2003 and 2002 the Company held in treasury
90,219 shares at a total cost of $855 thousand. The weighted average cost was
$9.47 per share. On April 30, 2004, the treasury shares were retired by the
Company.
Liquidity and Capital Resources
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customers' credit needs. One source of
liquidity is cash and short-term assets, such as interest-bearing deposits in
other banks and federal funds sold, which totaled $28.1 million at December 31,
2004, $38.9 million at December 31, 2003, and $53.9 million at December 31,
2002. 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.
24
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, was $7.4 million for
fiscal 2004 compared to net cash provided by operating activities, primarily
proceeds on the sale of loans, of $30.2 million for fiscal 2003. Net cash
provided by operating activities, comprised predominately of proceeds on the
sale of loans, was $30.2 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
investing activities, consisting principally of loan funding and the purchase of
securities, was $165.1 million for fiscal 2004 and $132.5 million for fiscal
2003, comprised predominately of loan originations and the purchase of
securities. Net cash used in investing activities, consisting principally of
loan funding and the purchase of securities, was $132.5 million for fiscal 2003
and $117.0 million for the comparable period in 2002, comprised predominately of
loan originations. Net cash provided by financing activities, consisting
primarily of deposit growth and proceeds from short-term borrowings, was $154.6
million for fiscal 2004 compared to $101.8 million, comprised predominately of
growth in deposits and proceeds from short-term borrowings for fiscal 2003. 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.
At December 31, 2004, the subsidiary banks had fourteen lines of credit totaling
$99.5 million of which $13.0 million was secured and $86.5 million was
unsecured. At December 31, 2004, Quad City Bank & Trust had drawn $21.1 million
of their available balance of $83.0 million. As of December 31, 2004, the
Company had two unsecured revolving credit notes totaling $15.0 million in
aggregate, replacing a single note of $15.0 million previously held. The Company
had a 364-day revolving note, which matures December 29, 2005, for $10.0 million
and had a balance outstanding of $6.0 million as of December 31, 2004. The
Company also had a 3-year revolving note, which matures December 30, 2007, for
$5.0 million and carried no balance as of December 31, 2004. On January 3, 2005,
the 3-year note was fully drawn as partial funding for the capitalization of
Rockford Bank & Trust. For both notes, interest is payable monthly at the
Federal Funds rate plus 1% per annum, as defined in the credit agreements. As of
December 31, 2004, the interest rate on the 364-day note was 3.23%.
At December 31, 2003, the subsidiary banks had seven unused lines of credit
totaling $41.0 million of which $4.0 million was secured and $37.0 million was
unsecured. 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 the close of fiscal 2003, the Company had a $15.0
million unsecured revolving credit note. The note, which matured July 21, 2004,
was renewed and existed until December 28, 2004, had a balance outstanding of
$10.0 million at December 31, 2003. Interest was payable monthly at the Federal
Funds rate plus one percent per annum, as defined in the credit note agreement.
As of December 31, 2003, the interest rate was 1.97%. At December 31, 2002, the
Company had a secured line of credit for $10.0 million, of which $5.0 million
had been used as partial funding for the capitalization of Cedar Rapids Bank and
Trust.
On February 18, 2004, the Company issued $12.0 million of fixed/floating rate
capital securities and $8.0 million of floating rate capital securities of QCR
Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III
("Trust III"). The securities issued by Trust II and Trust III mature in 30
years. The fixed/floating rate capital securities are callable at par after
seven years, and the floating rate capital securities are callable at par after
five years. The fixed/floating rate capital securities have a fixed rate of
6.93%, payable quarterly, for seven years, at which time they have a variable
rate based on the three-month LIBOR, reset quarterly, and the floating rate
capital securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the rate set at 4.83% at December 31, 2004. Both Trust II and
Trust III used the proceeds from the sale of the trust preferred securities to
purchase junior subordinated debentures of QCR Holdings, Inc. Partial proceeds
from the issuance were used for redemption in June 2004 of the $12.0 million of
9.2% cumulative trust preferred securities issued by Trust I in 1999.
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.
25
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the banks upon extension of credit, is based
upon management's credit evaluation of the counter party. Collateral held varies
but may include accounts receivable, marketable securities, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the subsidiary
banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements and, generally, have terms of one year, or less. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The banks hold collateral, as
described above, supporting those commitments if deemed necessary. In the event
the customer does not perform in accordance with the terms of the agreement with
the third party, the banks would be required to fund the commitments. The
maximum potential amount of future payments the banks could be required to make
is represented by the contractual amount. If the commitment is funded, the banks
would be entitled to seek recovery from the customer. At December 31, 2004 and
2003, no amounts had been recorded as liabilities for the banks' potential
obligations under these guarantees.
As of December 31, 2004 and 2003, commitments to extend credit aggregated $257.6
million and $194.9 million, respectively. As of December 31, 2004 and 2003,
standby letters of credit aggregated $12.7 million and $6.0 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 $3.5 million and $3.8 million as of December
31, 2004 and 2003, 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 has $35.6 million of sold
residential mortgage loans with recourse provisions still in effect at December
31, 2004. 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, 2004 and 2003, six months ended December 31, 2002, or the
year ended June 30, 2002. 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 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 December 31, 2004, Quad City Bank & Trust had funded $11.7 million of
mortgages through the FHLB's MPF Program with an attached credit exposure of
$240 thousand. In conjunction with its participation in this program, Quad City
Bank & Trust has established an allowance for credit losses on these off-balance
sheet exposures of $11 thousand at December 31, 2004.
26
Bancard is subject to the risk of cardholder chargebacks and its merchants being
incapable of refunding the amount charged back. Management attempts to mitigate
such risk by regular monitoring of merchant activity and in appropriate cases,
holding cash reserves deposited by the local merchant. During 2004, Bancard
experienced two situations, as the result of fraudulent activity, in which
merchants experienced multiple, significant cardholder chargebacks over periods
of several months. In each of these cases, the merchant's cash reserves on
deposit were not sufficient to cover the cardholder chargeback volumes, and in
one case, the merchant was incapable of making reimbursement to Bancard. As a
result, Bancard incurred $196 thousand of chargeback loss expense during 2004
absorbing all of the chargeback activity on this merchant and establishing an
allowance for chargeback losses in the anticipation of additional cardholder
chargebacks, which could occur from either of these situations. As an additional
mitigation to cardholder chargeback risk, in August 2004 Bancard began making
monthly provisions to the allowance for chargeback losses in an amount equal to
5 basis points of the month's dollar volume of merchant credit card activity.
Management will continually monitor merchant credit card activity and Bancard's
level of the allowance for chargeback losses.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed by a performance bond in the amount of $1.0 million. As of December
31, 2004, there were no significant pending liabilities.
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, 2004, significant fixed and determinable
contractual obligations to third parties by payment date. Further discussion of
the nature of each obligation is included in the referenced note to the
consolidated financial statements.
Payments Due by Period
(in thousands)
----------------------------------------------------
Description and One Year After 5
Note reference Total Or less 1-3 years 4-5 years Years
- -----------------------------------------------------------------------------------
Deposits without a
stated maturity .......... $294,785 $294,785 $ -- $ -- $ --
Certificates of deposits (6) 293,231 213,068 68,728 11,435
Short-term borrowings (7) .. 104,771 104,771 -- -- --
Federal Home Loan
Bank advances (8) ........ 92,022 7,500 34,610 26,800 23,112
Other borrowings (9) ....... 6,000 6,000 -- -- --
Junior subordinated ........
debentures (10) .......... 20,620 -- -- -- 20,620
Rental commitments (5) ..... 2,934 663 932 516 823
Purchase obligations (17) .. 7,943 7,943 -- -- --
Operating contracts (17) ... 2,341 1,335 979 11 16
----------------------------------------------------
Total contractual
cash obligations ... $824,647 $636,065 $105,249 $ 33,762 $ 44,571
====================================================
Purchase obligations represent obligations under agreements to purchase goods or
services that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. The purchase obligation amounts presented primarily
relate to certain contractual payments for capital expenditures of facilities
expansion. The Company's operating contract obligations represent short and
long-term lease payments for data processing equipment and services, software,
and other equipment and professional services.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Impact of New Accounting Standards
27
On September 30, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") Issue No. 03-1-1
delaying the effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments",
which provides guidance for determining the meaning of "other-than-temporarily
impaired" and its application to certain debt and equity securities within the
scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", and investments accounted for under the cost method. The guidance
requires that investments which have declined in value due to credit concerns or
solely due to changes in interest rates must be recorded as
other-than-temporarily impaired unless the Company can assert and demonstrate
its intention to hold the security for a period of time sufficient to allow for
a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. The delay of the effective date of EITF 03-1 will be superceded
concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP
Issue 03-1-a is intended to provide implementation guidance with respect to all
securities analyzed for impairment under paragraphs 10-20 of EITF 03-1.
Management continues to closely monitor and evaluate how the provisions of EITF
03-1 and proposed FSP Issue 03-1-a will affect the Company.
In December 2004, FASB published Statement No. 123 (revised 2004), Share-Based
Payment ("FAS 123(R)") FAS 123(R) requires that the compensation cost relating
to share-based payment transactions, including grants of employee stock options
and shares under employee stock purchase plans, be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement. The
Statement is effective at the beginning of the Company's third quarter in 2005.
As of the effective date, the Company will have the option of applying the
Statement using a modified prospective application or a modified retrospective
application. Under the prospective method compensation cost would be recognized
for (1) all awards granted after the required effective date and for awards
modified, cancelled, or repurchased after that date and (2) the portion of prior
awards for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated for pro forma disclosures under
SFAS 123. Under the retrospective application method compensation cost would be
recognized as in (1) above and (2) for prior periods would be restated
consistent with the pro forma disclosures required for those periods by SFAS
123. The Company has not yet made a decision on which method of application it
will elect.
The impact of this Statement on the Company after the effective date and beyond
will depend upon various factors, among them being the future compensation
strategy. The SFAS 123 pro forma compensation costs presented in the footnotes
to the financial statements have been calculated using a Black-Scholes
option-pricing model and may not be indicative of amounts, which should be
expected in future periods.
FORWARD LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "bode," "predict,"
"suggest," "project," "appear," "plan," "intend," "estimate," "may," "will,"
"would," "could," "should," "likely" or other similar expressions. Additionally,
all statements in this document, including forward-looking statements, speak
only as of the date they are made, and the Company undertakes no obligation to
update any statement in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries 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.
28
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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and
indirect market risk. Direct market risk exists from changes in interest rates.
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Each subsidiary bank has an
asset/liability management committee of the board of directors that meets
quarterly to review the bank's interest rate risk position and profitability,
and to make or recommend adjustments for consideration by the full board of each
bank . Management also reviews Quad City Bank & Trust and Cedar Rapids Bank &
Trust's securities portfolios, formulates investment strategies, and oversees
the timing and implementation of transactions to assure attainment of the
board's objectives in the most effective manner. Notwithstanding the Company's
interest rate risk management activities, the potential for changing interest
rates is an uncertainty that can have an adverse effect on net income.
29
In adjusting the Company's asset/liability position, the board and management
attempt to manage the Company's interest rate risk while maintaining or
enhancing net interest margins. At times, depending on the level of general
interest rates, the relationship between long-term and short-term interest
rates, market conditions and competitive factors, the board and management may
decide to increase the Company's interest rate risk position somewhat in order
to increase its net interest margin. The Company's results of operations and net
portfolio values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long-term and short-term interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk
summary, which is a detailed and dynamic simulation model used to quantify the
estimated exposure of net interest income to sustained interest rate changes.
This simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all interest sensitive
assets and liabilities reflected on the Company's consolidated balance sheet.
This sensitivity analysis demonstrates net interest income exposure over a one
year horizon, assuming no balance sheet growth and a 200 basis point upward and
a 100 basis point downward shift in interest rates, where interest-bearing
assets and liabilities reprice at their earliest possible repricing date. The
model assumes a parallel and pro rata shift in interest rates over a
twelve-month period. Application of the simulation model analysis at December
31, 2004 demonstrated a 1.47% decrease in interest income with a 200 basis point
increase in interest rates, and a 1.20% decrease in interest income with a 100
basis point decrease in interest rates. Both simulations are within the
board-established policy limits of a 10% decline in value.
Interest rate risk is the most significant market risk affecting the Company.
For that reason, the Company engages the assistance of a national consulting
firm and their risk management system to monitor and control the Company's
interest rate risk exposure. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities.
30
Item 8. Financial Statements
QCR Holdings, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 32
Financial Statements
Consolidated balance sheets as of December 31, 2004 and 2003 33
Consolidated statements of income for the years ended December 31,
2004 and 2003, six months ended December 31, 2002 and the year
ended June 30, 2002 34
Consolidated statements of changes in stockholders' equity for
the years ended December 31, 2004 and 2003, six months ended
December 31, 2002 and the year ended June 30, 2002 35-36
Consolidated statements of cash flows for the years ended
December 31, 2004 and 2003, six months ended December 31, 2002
and the year ended June 30, 2002 37-38
Notes to consolidated financial statements 39-64
31
McGladrey & Pullen
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
QCR Holdings, Inc.
Moline, Illinois
We have audited the accompanying consolidated balance sheets of QCR Holdings,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended December 31, 2004 and 2003, six months ended December
31, 2002, and the year ended June 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QCR Holdings, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the years ended December 31, 2004 and 2003,
six months ended December 31, 2002, and the year ended June 30, 2002, in
conformity with U.S. generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 24, 2005
McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation
of separate and independent legal entities.
32
QCR Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
December 31, 2004 and 2003
Assets 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Cash and due from banks .......................................................... $ 21,372,342 $ 24,427,573
Federal funds sold ............................................................... 2,890,000 4,030,000
Interest-bearing deposits at financial institutions .............................. 3,857,563 10,426,092
Securities held to maturity, at amortized cost (fair value
2004 $108,254; 2003 $416,751) (Note 3) ......................................... 100,000 400,116
Securities available for sale, at fair value (Note 3) ............................ 149,460,886 128,442,926
---------------------------
149,560,886 128,843,042
---------------------------
Loans receivable, held for sale (Note 4) ......................................... 3,498,809 3,790,031
Loans receivable, held for investment (Note 4) ................................... 644,852,018 518,681,380
Less allowance for estimated losses on loans (Note 4) .......................... 9,261,991 8,643,012
---------------------------
639,088,836 513,828,399
---------------------------
Premises and equipment, net (Note 5) ............................................. 18,100,590 12,028,532
Accrued interest receivable ...................................................... 4,072,762 3,646,108
Bank-owned life insurance ........................................................ 15,935,000 3,085,797
Other assets ..................................................................... 15,205,568 9,724,012
---------------------------
Total assets ............................................................. $870,083,547 $710,039,555
===========================
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing .......................................................... $109,361,817 $130,962,916
Interest-bearing ............................................................. 478,653,866 380,688,947
---------------------------
Total deposits (Note 6) .................................................. 588,015,683 511,651,863
Short-term borrowings (Note 7) ................................................... 104,771,178 51,609,801
Federal Home Loan Bank advances (Note 8) ......................................... 92,021,877 76,232,348
Other borrowings (Note 9) ........................................................ 6,000,000 10,000,000
Junior subordinated debentures (Notes 1 and 10) .................................. 20,620,000 12,000,000
Other liabilities ................................................................ 7,881,009 6,722,808
---------------------------
Total liabilities ........................................................ 819,309,747 668,216,820
---------------------------
Commitments and Contingencies (Note 17)
Stockholders' Equity (Note 15):
Preferred stock, stated value of $1 per share; shares
authorized 250,000; shares issued none ....................................... -- --
Common stock, $1 par value;
shares authorized 2004 - 10,000,000; 2003 - 5,000,000; 2004 - 4,496,730 shares
issued and outstanding; 2003 - 4,295,985 shares issued and 4,205,766 shares
outstanding .................................................................. 4,496,730 2,863,990
Additional paid-in capital ..................................................... 20,329,033 17,143,868
Retained earnings .............................................................. 25,278,666 20,866,749
Accumulated other comprehensive income ......................................... 669,371 1,802,664
---------------------------
50,773,800 42,677,271
Less cost of common shares acquired for the treasury
2004 - none; 2003 - 90,219 ..................................................... -- 854,536
---------------------------
Total stockholders' equity ............................................... 50,773,800 41,822,735
---------------------------
Total liabilities and stockholders' equity ............................... $870,083,547 $710,039,555
===========================
See Notes to Consolidated Financial Statements.
33
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Income
Six Months
Year Ended December 31, Ended Year Ended
---------------------------- December 31, June 30,
2004 2003 2002 2002
- -------------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans, including fees ................................... $ 33,111,498 $ 28,984,000 $ 13,747,643 $ 23,718,322
Securities:
Taxable ............................................... 4,067,826 3,248,115 1,702,046 3,166,323
Nontaxable ............................................ 571,405 493,162 235,155 429,138
Interest-bearing deposits at financial institutions ..... 224,293 432,119 361,218 948,098
Federal funds sold ...................................... 41,818 220,865 73,611 258,256
-----------------------------------------------------------
Total interest and dividend income ................ 38,016,840 33,378,261 16,119,673 28,520,137
-----------------------------------------------------------
Interest expense:
Deposits ................................................ 6,852,108 7,005,306 4,151,446 8,894,578
Short-term borrowings ................................... 1,208,494 326,916 225,093 592,382
Federal Home Loan Bank advances ......................... 3,464,122 3,255,416 1,440,326 2,048,273
Other borrowings ........................................ 159,165 228,433 99,645 201,415
Junior subordinated debentures .......................... 1,640,879 1,133,506 566,753 1,133,506
-----------------------------------------------------------
Total interest expense ............................ 13,324,768 11,949,577 6,483,263 12,870,154
-----------------------------------------------------------
Net interest income ............................... 24,692,072 21,428,684 9,636,410 15,649,983
Provision for loan losses (Note 4) ........................ 1,372,208 3,405,427 2,183,745 2,264,965
-----------------------------------------------------------
Net interest income after provision for loan losses 23,319,864 18,023,257 7,452,665 13,385,018
-----------------------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ...... 1,409,237 2,194,974 1,292,213 2,097,209
Trust department fees ................................... 2,530,907 2,242,747 1,045,046 2,161,677
Deposit service fees .................................... 1,631,713 1,505,200 596,999 994,630
Gains on sales of loans, net ............................ 1,149,791 3,667,513 1,864,813 1,991,437
Securities gains (losses), net .......................... (45,428) 5 61,514 6,433
Gain on sale of merchant credit card portfolio (Note 11) -- -- 3,460,137 --
Earnings on cash surrender value of life insurance ...... 627,796 206,893 (2,488) 129,658
Investment advisory and management fees ................. 509,988 340,812 118,039 247,905
Other ................................................... 867,437 1,009,465 403,448 285,710
-----------------------------------------------------------
Total noninterest income .......................... 8,681,441 11,167,609 8,839,721 7,914,659
-----------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits .......................... 13,773,439 12,710,505 6,075,885 10,077,583
Compensation and other expenses related to sale of
merchant credit card portfolio (Note 11) .............. -- -- 1,413,734 --
Professional and data processing fees ................... 2,199,984 1,962,243 872,750 1,410,770
Advertising and marketing ............................... 1,014,664 786,054 341,093 604,002
Occupancy and equipment expense ......................... 3,263,540 2,640,602 1,322,826 2,331,806
Stationery and supplies ................................. 543,904 460,421 229,066 476,158
Postage and telephone ................................... 684,964 632,354 291,737 486,053
Bank service charges .................................... 570,374 454,367 211,873 357,550
Insurance ............................................... 420,080 444,947 186,308 351,873
Loss on redemption of junior subordinated debentures .... 747,490 -- -- --
Other ................................................... 1,062,412 943,759 467,779 926,633
-----------------------------------------------------------
Total noninterest expenses ........................ 24,280,851 21,035,252 11,413,051 17,022,428
-----------------------------------------------------------
Income before income taxes ........................ 7,720,454 8,155,614 4,879,335 4,277,249
Federal and state income taxes (Note 12) .................. 2,503,782 2,694,687 1,682,791 1,314,796
-----------------------------------------------------------
Net income ........................................ $ 5,216,672 $ 5,460,927 $ 3,196,544 $ 2,962,453
===========================================================
Earnings per common share (Note 16):
Basic ................................................... $ 1.23 $ 1.31 $ 0.77 $ 0.74
Diluted ................................................. $ 1.20 $ 1.28 $ 0.76 $ 0.72
Weighted average common shares outstanding .............. 4,234,345 4,173,063 4,129,109 4,028,994
Weighted average common and common equivalent
shares outstanding .................................... 4,344,765 4,282,583 4,229,124 4,115,708
Cash dividends declared per common share ................ $ 0.08 $ 0.07 $ 0.03 $ --
See Notes to Consolidated Financial Statements.
34
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2004 and 2003, Six Months Ended
December 31, 2002 and Year Ended June 30, 2002
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 ......................... $2,325,566 $12,148,759 $ 9,691,749 $ 505,922 $(854,536) $23,817,460
Comprehensive income:
Net income ................................. -- -- 2,962,453 -- -- 2,962,453
Other comprehensive income, net of tax
(Note 2) ................................. -- -- -- 777,817 -- 777,817
-----------
Comprehensive income ................... 3,740,270
-----------
Proceeds from issuance of 35,063 shares of
common stock as a result of stock options
exercised (Note 14) ........................ 35,063 121,919 -- -- -- 156,982
Exchange of 22,158 shares of common
stock in connection with options exercised . (22,158) (163,905) -- -- -- (186,063)
Proceeds from issuance of 713,136 shares
of common stock ............................ 713,136 4,275,486 -- -- -- 4,988,622
Tax benefit of nonqualified stock options
exercised .................................. -- 60,332 -- -- -- 60,332
----------------------------------------------------------------------------------
Balance, June 30, 2002 ......................... 3,051,607 16,442,591 12,654,202 1,283,739 (854,536) 32,577,603
Comprehensive income:
Net income .................................. -- -- 3,196,544 -- -- 3,196,544
Other comprehensive income, net of tax
(Note 2) .................................. -- -- -- 860,315 -- 860,315
------------
Comprehensive income ................... 4,056,859
------------
Cash dividends declared, $0.03 per share ..... -- -- (138,146) -- -- (138,146)
Proceeds from issuance of 36,405 shares of
common stock as a result of stock options
exercised (Note 14) ........................ 36,405 128,269 -- -- -- 164,674
Exchange of 16,203 shares of common stock
in connection with options exercised ....... (16,203) (146,107) -- -- -- (162,310)
Tax benefit of nonqualified stock options
exercised .................................. -- 87,922 -- -- -- 87,922
----------------------------------------------------------------------------------
Balance, December 31, 2002 ..................... 3,071,809 16,512,675 15,712,600 2,144,054 (854,536) 36,586,602
Comprehensive income:
Net income ................................. -- -- 5,460,927 -- -- 5,460,927
Other comprehensive income, net of tax
(Note 2) ................................. -- -- -- (341,390) -- (341,390)
------------
Comprehensive income ................... 5,119,537
------------
Cash dividends declared, $0.07 per share ..... -- -- (306,778) -- -- (306,778)
Proceeds from issuance of 10,278 shares of
common stock as a result of stock purchased
under the Employee Stock Purchase Plan
(Note 14) .................................. 10,278 101,209 -- -- -- 111,487
Proceeds from issuance of 75,537 shares of
common stock as a result of stock options
exercised (Note 14) ........................ 75,537 300,941 -- -- -- 376,478
Exchange of 24,872 shares of common stock in
connection with options exercised .......... (24,872) (314,590) -- -- -- (339,462)
Tax benefit of nonqualified stock options
exercised .................................. -- 274,871 -- -- -- 274,871
----------------------------------------------------------------------------------
Balance, December 31, 2003 ..................... 3,132,752 16,875,106 20,866,749 1,802,664 (854,536) 41,822,735
Comprehensive income:
Net income ................................. -- -- 5,216,672 -- -- 5,216,672
Other comprehensive income, net of tax
(Note 2) ................................ -- -- -- (1,133,293) -- (1,133,293)
-----------
Comprehensive income .................. 4,083,379
-----------
(Continued)
35
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Years Ended December 31, 2004 and 2003, Six Months Ended
December 31, 2002 and Year Ended June 30, 2002
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
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 ........ 1,401,781 (1,401,781) (2,549) -- -- (2,549)
Proceeds from issuance of 250,506 shares of
common stock .............................. 250,506 4,537,713 -- -- -- 4,788,219
Cash dividends declared, $0.08 per share .... -- -- (348,844) -- -- (348,844)
Proceeds from issuance of 9,057 shares of
common stock as a result of stock purchased
under the Employee Stock Purchase Plan
(Note 14) ................................. 9,057 127,653 -- -- -- 136,710
Proceeds from issuance of 38,604 shares of
common stock as a result of stock options
exercised (Note 14) ....................... 38,604 206,636 -- -- -- 245,240
Exchange of 7,062 shares of common stock in
connection with options exercised ......... (7,062) (134,276) -- -- -- (141,338)
Tax benefit of nonqualified stock options
exercised ................................. -- 190,248 -- -- -- 190,248
---------------------------------------------------------------------- ------------
Balance, December 31, 2004 .................... $4,765,492 $20,060,271 $25,278,666 $ 669,371 $ -- $50,773,800
===================================================================================
See Notes to Consolidated Financial Statements.
36
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Six Months
Year Ended December 31, Ended Year Ended
------------------------------ December 31, June 30,
2004 2003 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .............................................. $ 5,216,672 $ 5,460,927 $ 3,196,544 $ 2,962,453
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation .......................................... 1,475,453 1,072,943 497,460 923,747
Provision for loan losses ............................. 1,372,208 3,405,427 2,183,745 2,264,965
Deferred income taxes ................................. (185,676) (674,681) (403,312) (634,045)
Amortization of offering costs on junior subordinated
debentures .......................................... 17,933 29,506 14,753 29,506
Loss on redemption of junior subordinated debentures .. 747,490 -- -- --
Amortization of premiums on securities, net ........... 983,256 788,263 148,782 162,642
Investment securities losses (gains), net ............. 45,428 (5) (61,514) (6,433)
Loans originated for sale ............................. (83,176,326) (245,414,955) (136,646,900) (146,973,634)
Proceeds on sales of loans ............................ 84,617,339 268,983,441 123,319,054 146,290,546
Net gains on sales of loans ........................... (1,149,791) (3,667,513) (1,864,813) (1,991,437)
Net losses on sales of premises and equipment ......... 1,048 50,446 -- --
Gain on sale of merchant credit card portfolio ........ -- -- (3,460,137) --
Tax benefit of nonqualified stock options exercised ... 190,248 274,871 87,922 60,332
Increase in accrued interest receivable ............... (426,654) (424,862) (95,254) (262,814)
(Increase) decrease in other assets ................... (3,461,144) 2,075,198 (2,193,369) (283,790)
Increase (decrease) in other liabilities .............. 1,146,173 (1,722,249) 2,386,668 970,602
----------------------------------------------------------------
Net cash provided by (used in) operating activities 7,413,657 30,236,757 (12,890,371) 3,512,640
----------------------------------------------------------------
Cash Flows from Investing Activities:
Net decrease (increase) in federal funds sold ........... 1,140,000 10,365,000 (13,635,000) 7,015,000
Net decrease (increase) in interest-bearing deposits at
financial institutions ................................ 6,568,529 4,159,703 501,664 (1,568,962)
Activity in securities portfolio:
Purchases ............................................. (86,743,594) (91,746,856) (14,778,519) (30,034,923)
Calls and maturities .................................. 53,006,001 39,195,000 7,335,000 9,702,500
Paydowns .............................................. 1,754,343 4,025,159 1,166,490 1,789,042
Sales of securities available for sale ................ 8,428,590 -- 2,141,382 101,285
Activity in bank-owned life insurance:
Purchases ............................................. (12,221,428) (66,312) (195,000) (401,087)
Increase in cash value ................................ (627,775) (190,873) (9,388) (115,888)
Proceeds from sale of merchant credit card portfolio .... -- -- 3,500,000 --
Net loans originated and held for investment ............ (128,849,187) (94,278,016) (45,365,509) (100,456,216)
Purchase of premises and equipment ...................... (7,611,586) (4,152,033) (515,241) (1,471,625)
Proceeds from sales of premises and equipment ........... 63,027 224,654 -- --
----------------------------------------------------------------
Net cash used in investing activities ............. $(165,093,080) $(132,464,574) $ (59,854,121) $(115,440,874)
----------------------------------------------------------------
(Continued)
37
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Six Months
Year Ended December 31, Ended Year Ended
----------------------------- December 31, June 30,
2004 2003 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ........................... $ 76,363,820 $ 76,904,240 $ 58,430,314 $ 74,162,085
Net increase (decrease) in short-term borrowings ........... 53,161,377 18,747,355 (1,766,263) 6,286,167
Activity in Federal Home Loan Bank advances:
Advances ................................................. 35,500,000 12,550,000 29,000,000 25,000,000
Payments ................................................. (19,710,471) (11,305,972) (6,426,003) (2,298,436)
Net (decrease) increase in other borrowings ................ (4,000,000) 5,000,000 -- 5,000,000
Proceeds from issuance of junior subordinated debentures ... 20,620,000 -- -- --
Redemption of junior subordinated debentures ............... (12,000,000) -- -- --
Payment of cash dividends .................................. (336,816) (277,086) -- --
Payment of fractional shares on 3:2 stock split ............ (2,549) -- -- --
Proceeds from issuance of common stock, net ................ 5,028,831 148,503 2,364 4,959,541
----------------------------------------------------------------
Net cash provided by financing activities ............ 154,624,192 101,767,040 79,240,412 113,109,357
----------------------------------------------------------------
Net increase (decrease) in cash and due from banks ... (3,055,231) (460,777) 6,495,920 1,181,123
Cash and due from banks:
Beginning .................................................. 24,427,573 24,888,350 18,392,430 17,211,307
----------------------------------------------------------------
Ending ..................................................... $ 21,372,342 $ 24,427,573 $ 24,888,350 $ 18,392,430
================================================================
Supplemental Disclosures of Cash Flow Information,
cash payments for:
Interest ................................................... $ 13,024,698 $ 12,516,692 $ 6,537,656 $ 13,405,861
Income and franchise taxes ................................. 2,566,493 4,904,697 1,112,741 1,363,292
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
(losses) gains on securities available for sale, net ..... (1,133,293) (341,390) 860,315 777,817
Exchange of shares of common stock in connection
with options exercised ................................... (141,433) (339,462) (162,310) (186,063)
Transfers of loans to other real estate owned .............. 1,925,320 -- -- --
See Notes to Consolidated Financial Statements.
38
QCR Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
QCR Holdings, Inc. (the Company) is a bank holding company providing bank and
bank related services through its subsidiaries, Quad City Bank and Trust Company
(Quad City Bank & Trust), Cedar Rapids Bank and Trust Company (Cedar Rapids Bank
& Trust), Quad City Bancard, Inc. (Bancard), QCR Holdings Statutory Trust II
(Trust II), and QCR Holdings Statutory Trust III (Trust III). Quad City Bank &
Trust is a commercial bank that serves the Quad Cities and adjacent communities.
During 2004, Quad City Bank & Trust also served Rockford, Illinois and adjacent
communities through a temporary branch facility. Effective January 3, 2005, the
Company's third bank charter began serving this market (see Note 22). Cedar
Rapids Bank & Trust is a commercial bank that serves Cedar Rapids and adjacent
communities. Both subsidiary banks are chartered and regulated by the state of
Iowa, 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 conduct the Company's credit card
operation and is regulated by the Federal Reserve System. In February 2004,
Trust II and Trust III were formed for the purpose of issuing $12,000,000 of
fixed/floating rate trust preferred securities and $8,000,000 of floating rate
trust preferred securities, respectively. QCR Holdings Capital Trust I was
capitalized in June 1999 for the purpose of issuing $12,000,000 of 9.2%
cumulative trust preferred securities and was liquidated on June 30, 2004 with
the Company's redemption of its junior subordinated debentures.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The allowance for estimated losses on loans is inherently subjective as it
requires material estimates that are susceptible to significant change. The fair
value disclosure of financial instruments is an estimate that can be computed
within a range.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and all wholly-owned subsidiaries, except
Trust I, Trust II, and Trust III, which do not meet the criteria for
consolidation. All material intercompany accounts and transactions have been
eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and due
from banks include cash on hand and non-interest bearing amounts due from banks.
Cash flows from federal funds sold, interest bearing deposits at financial
institutions, loans, deposits, and short-term borrowings are treated as net
increases or decreases.
Cash and due from banks: The subsidiary banks are required by federal banking
regulations to maintain certain cash and due from bank reserves. The reserve
requirement was approximately $9,700,000 and $12,216,000 as of December 31, 2004
and 2003, respectively.
Investment securities: Investment securities held to maturity are those debt
securities that the Company has the ability and intent to hold until maturity
regardless of changes in market conditions, liquidity needs, or changes in
general economic conditions. Such securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. If the ability or intent to
hold to maturity is not present for certain specified securities, such
securities are considered available for sale as the Company intends to hold them
for an indefinite period of time but not necessarily to maturity. Any decision
to sell a security classified as available for sale would be based on various
factors, including movements in interest rates, changes in the maturity mix of
the Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other factors. Securities available for sale are carried at
fair value. Unrealized gains or losses are reported as increases or decreases in
accumulated other comprehensive income. Realized gains or losses, determined on
the basis of the cost of specific securities sold, are included in earnings.
39
Loans and allowance for estimated losses on loans: Loans are stated at the
amount of unpaid principal, reduced by an allowance for estimated losses on
loans. Interest is credited to earnings as earned based on the principal amount
outstanding. The allowance for estimated losses on loans is maintained at the
level considered adequate by management of the Company and the subsidiary banks
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 consider the
overall composition of the loan portfolio, types of loans, past loss experience,
loan delinquencies, potential substandard and doubtful credits, economic
conditions, and other factors that in management's judgment deserve evaluation.
Loans are considered impaired when, based on current information and events, it
is probable the Company and the bank involved will not be able to collect all
amounts due. The portion of the allowance for loan losses applicable to an
impaired loan is computed based on the present value of the estimated future
cash flows of interest and principal discounted at the loan's effective interest
rate or on the fair value of the collateral for collateral dependent loans. The
entire change in present value of expected cash flows of impaired loans 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 subsidiary banks recognize
interest income on impaired loans 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: In the ordinary course of business, the
Company has entered into commitments to extend credit and standby letters of
credit. Such financial instruments are recorded when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for
as sales only when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when: (1) the assets have been
isolated from the Company, (2) the transferee obtains the right to pledge or
exchange the assets it received, and no condition both constrains the transferee
from taking advantage of its right to pledge or exchange and provides more than
a modest benefit to the transferor, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity or the ability to unilaterally cause the holder to
return specific assets.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method over the estimated useful lives.
Foreclosed assets: Assets acquired through, or in lieu of, loan foreclosures,
which are included in other assets on the consolidated balance sheets are held
for sale and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less costs to sell.
40
Stock-based compensation plans: At December 31, 2004, the Company has three
stock-based employee compensation plans, which are described more fully in Note
14. The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), to
stock-based employee compensation.
Six Months
Year Ended December 31, Ended Year Ended
------------------------------ December 31, June 30,
2004 2003 2002 2002
----------------------------------------------------------------
Net income, as reported ............... $ 5,216,672 $ 5,460,927 $ 3,196,544 $ 2,962,453
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects .. (132,297) (96,447) (39,503) (90,182)
----------------------------------------------------------------
Net income .................... $ 5,084,375 $ 5,364,480 $ 3,157,041 $ 2,872,271
================================================================
Earnings per share:
Basic:
As reported ....................... $ 1.23 $ 1.31 $ 0.77 $ 0.74
Pro forma ......................... 1.20 1.29 0.77 0.71
Diluted:
As reported ....................... 1.20 1.28 0.76 0.72
Pro forma ......................... 1.18 1.26 0.75 0.70
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions for grants during the years ended
December 31, 2004 and 2003, six months ended December 31, 2002, and the year
ended June 30, 2002: dividend rate of 0.38% to 0.58% for the years ended
December 31, 2004 and 2003, 0.59% for the six months ended December 31, 2002,
and 0% for the year ended June 30, 2002; risk-free interest rates based upon
current rates at the date of grant (3.68% to 5.68% for stock options and 0.82%
to 1.59% 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 23.54% to 27.18%.
In December 2004, FASB published Statement No. 123 (revised 2004), Share-Based
Payment ("FAS 123(R)") FAS 123(R) requires that the compensation cost relating
to share-based payment transactions, including grants of employee stock options
and shares under employee stock purchase plans, be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement. The
Statement is effective at the beginning of the Company's third quarter in 2005.
As of the effective date, the Company will have the option of applying the
Statement using a modified prospective application or a modified retrospective
application. Under the prospective method compensation cost would be recognized
for (1) all awards granted after the required effective date and for awards
modified, cancelled, or repurchased after that date and (2) the portion of prior
awards for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated for pro forma disclosures under
SFAS 123. Under the retrospective application method compensation cost would be
recognized as in (1) above and (2) for prior periods would be restated
consistent with the pro forma disclosures required for those periods by SFAS
123. The Company has not yet made a decision on which method of application it
will elect.
The impact of this Statement on the Company after the effective date and beyond
will depend upon various factors, among them being the future compensation
strategy. The SFAS 123 pro forma compensation costs presented above have been
calculated using a Black-Scholes option-pricing model and may not be indicative
of amounts which should be expected in future periods.
Income taxes: The 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.
41
Deferred income taxes are provided under the liability method whereby deferred
tax assets are recognized for deductible temporary differences and net operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
Trust assets: Trust assets held by Quad City Bank & Trust and Cedar Rapids Bank
& Trust in a fiduciary, agency, or custodial capacity for their customers, other
than cash on deposit at the subsidiary banks, are not included in the
accompanying consolidated financial statements since such items are not assets
of the subsidiary banks.
Earnings per common share: Basic earnings per share is computed by dividing net
income by the weighted average number of common stock shares outstanding for the
respective period. Diluted earnings per share is computed by dividing net income
by the weighted average number of common stock and common stock equivalents
outstanding for the respective period.
Common stock split: On May 28, 2004, the Company issued additional shares
necessary to effect a 3 for 2 common stock split which was in the form of a 50%
stock dividend. All share and per share data has been retroactively adjusted to
reflect the split.
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 and fiscal 2002 throughout these
consolidated financial statements are for the six months ended December 31, 2002
and the year ended June 30, 2002, respectively.
In connection with the Company's change in fiscal year, presented below is the
financial data for comparable twelve month and six month periods:
Twelve Months Ended Six Months Ended
December 31, December 31,
---------------------------------------- -------------------------
(Unaudited) (Unaudited)
2004 2003 2002 2002 2001
-------------------------------------------------------------------
Total interest income ........ $38,016,840 $33,378,261 $30,794,010 $16,119,673 $13,845,800
Total interest expense ....... 13,324,768 11,949,577 12,719,892 6,483,263 6,633,525
-------------------------------------------------------------------
Net interest income .. 24,692,072 21,428,684 18,074,118 9,636,410 7,212,275
Provision for loan losses .... 1,372,208 3,405,427 3,408,845 2,183,745 1,039,865
Noninterest income ........... 8,681,441 11,167,609 12,714,140 8,839,721 4,040,240
Noninterest expenses ......... 24,280,851 21,035,252 20,190,565 11,413,051 8,244,914
-------------------------------------------------------------------
Net income before
income taxes ......... 7,720,454 8,155,614 7,188,848 4,879,335 1,967,736
Federal and state income taxes 2,503,782 2,694,687 2,367,461 1,682,791 630,126
-------------------------------------------------------------------
Net income ........... $ 5,216,672 $ 5,460,927 $ 4,821,387 $ 3,196,544 $ 1,337,610
===================================================================
Earnings per common share:*
Basic ...................... $ 1.23 $ 1.31 $ 1.17 $ 0.77 $ 0.34
Diluted .................... 1.20 1.28 1.14 0.76 0.33
Reclassification: Certain amounts in the prior year financial statements have
been reclassified, with no effect on net income or stockholders' equity, to
conform with the current period presentation.
Note 2. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income,
which for the Company is comprised entirely of unrealized gains and losses on
securities available for sale.
42
Other comprehensive income (loss) for the years ended December 31, 2004 and
2003, six months ended December 31, 2002, and the year ended June 30, 2002 is
comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------
Year ended December 31, 2004:
Unrealized gains (losses) on securities available for sale:
Unrealized holding (losses) arising during the period ................ $(1,853,560) $ (691,794) $(1,161,766)
Less reclassification adjustment for (losses)
included in net income ............................................. (45,428) (16,955) (28,473)
-----------------------------------------
Other comprehensive (loss) ....................................... $(1,808,132) $ (674,839) $(1,133,293)
=========================================
Year ended December 31, 2003:
Unrealized gains (losses) on securities available for sale:
Unrealized holding (losses) arising during the period ................ $ (549,473) $ (208,086) $ (341,387)
Less reclassification adjustment for gains
included in net income ............................................. 5 2 3
-----------------------------------------
Other comprehensive (loss) ....................................... $ (549,478) $ (208,088) $ (341,390)
=========================================
Six months ended December 31, 2002:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period ................... $ 1,436,098 $ 537,283 $ 898,815
Less reclassification adjustment for gains
included in net income ............................................. 61,514 23,014 38,500
-----------------------------------------
Other comprehensive income ....................................... $ 1,374,584 $ 514,269 $ 860,315
=========================================
Year ended June 30, 2002:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year ..................... $ 1,241,584 $ 459,716 $ 781,868
Less reclassification adjustment for gains
included in net income ............................................. 6,433 2,382 4,051
-----------------------------------------
Other comprehensive income ....................................... $ 1,235,151 $ 457,334 $ 777,817
=========================================
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of December 31,
2004 and 2003 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------------
December 31, 2004:
Securities held to maturity:
Foreign bonds ............ $ 100,000 $ 8,254 $ -- $ 108,254
===============================================================
Securities available for sale:
U.S. Treasury securities ... $ 100,214 $ -- $ (1,025) $ 99,189
U.S. agency securities ..... 114,648,596 367,536 (392,337) 114,623,795
Mortgage-backed securities . 3,863,733 20,297 (18,636) 3,865,394
Municipal securities ....... 15,922,863 653,714 (131,371) 16,445,206
Corporate securities ....... 6,704,267 230,427 (9,409) 6,925,285
Trust preferred securities . 1,148,988 93,814 -- 1,242,802
Other securities ........... 5,995,056 264,450 (291) 6,259,215
---------------------------------------------------------------
$ 148,383,717 $ 1,630,238 $ (553,069) $ 149,460,886
===============================================================
December 31, 2003:
Securities held to maturity:
Municipal securities ..... $ 250,116 $ 3,856 $ -- $ 253,972
Foreign bonds ............ 150,000 12,779 -- 162,779
---------------------------------------------------------------
$ 400,116 $ 16,635 $ -- $ 416,751
===============================================================
Securities available for sale:
U.S. Treasury securities ... $ 1,001,823 $ 3,028 $ -- $ 1,004,851
U.S. agency securities ..... 86,732,152 1,104,501 (63,574) 87,773,079
Mortgage-backed securities . 5,656,092 67,078 (8,438) 5,714,732
Municipal securities ....... 15,663,699 1,017,795 (884) 16,680,610
Corporate securities ....... 9,466,395 491,943 (3,782) 9,954,556
Trust preferred securities . 1,349,800 105,009 -- 1,454,809
Other securities ........... 5,687,664 173,612 (987) 5,860,289
---------------------------------------------------------------
$ 125,557,625 $ 2,962,966 $ (77,665) $ 128,442,926
===============================================================
43
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, 2004 and 2003, are summarized as follows:
Less than 12 Months 12 Months or More Total
---------------------------- ---------------------------- ----------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------------------------------------------------------------------------------------------
December 31, 2004:
Securities available for sale:
U.S. Treasury securities ... $ 99,189 $ (1,025) $ -- $ -- $ 99,189 $ (1,025)
U.S. agency securities ..... 63,045,833 (387,973) 1,006,851 (4,364) 64,052,684 (392,337)
Mortgage-backed securities . 2,739,543 (18,636) -- -- 2,739,543 (18,636)
Municipal securities ....... 2,900,358 (128,622) 238,914 (2,749) 3,139,272 (131,371)
Corporate securities ....... 1,276,752 (5,915) 256,705 (3,494) 1,533,457 (9,409)
Other securities ........... -- -- 283 (291) 283 (291)
--------------------------------------------------------------------------------------------
$ 70,061,675 $ (542,171) $ 1,502,753 $ (10,898) $ 71,564,428 $ (553,069)
============================================================================================
December 31, 2003:
Securities available for sale:
U.S. agency securities ..... $ 29,629,310 $ (63,574) $ -- $ -- $ 29,629,310 $ (63,574)
Mortgage-backed securities . 2,919,512 (8,438) -- -- 2,919,512 (8,438)
Municipal securities ....... 246,727 (884) -- -- 246,727 (884)
Corporate securities ....... 1,058,945 (3,782) -- -- 1,058,945 (3,782)
Other securities ........... -- -- 24,927 (987) 24,927 (987)
--------------------------------------------------------------------------------------------
$ 33,854,494 $ (76,678) $ 24,927 $ (987) $ 33,879,421 $ (77,665)
============================================================================================
For all of the above investment securities, as of December 31, 2004 and 2003,
the unrealized losses are generally due to changes in interest rates and, as
such, are considered to be temporary, by the Company.
During the year ended December 31, 2004, all sales of securities were from
securities identified as available for sale. There were no sales of securities
during the year ended December 31, 2003. All sales of securities during the six
months ended December 31, 2002 and the year ended June 30, 2002 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:
Six Months
Year Ended December 31, Ended Year Ended
----------------------- December 31, June 30,
2004 2003 2002 2002
------------------------------------------------------
Proceeds from sales of securities ... $8,428,590 $ -- $2,141,382 $ 101,285
Gross gains from sales of securities 26,188 -- 64,026 10,093
Gross losses from sales of securities 71,616 -- 2,512 3,660
The amortized cost and fair value of securities as of December 31, 2004 by
contractual maturity are shown below. Expected maturities of mortgage-backed
securities may differ from contractual maturities because the mortgages
underlying the mortgage-backed securities may be called or prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary. Other securities are excluded from the
maturity categories as there is no fixed maturity date.
Amortized
Cost Fair Value
-----------------------------
Securities held to maturity:
Due after one year through five years ...... $ 50,000 $ 51,871
Due after five years ....................... 50,000 56,383
-----------------------------
$ 100,000 $ 108,254
=============================
Securities available for sale:
Due in one year or less .................... $ 16,675,622 $ 16,746,984
Due after one year through five years ...... 106,373,711 106,729,640
Due after five years ....................... 15,475,595 15,859,653
-----------------------------
138,524,928 139,336,277
Mortgage-backed securities ................. 3,863,733 3,865,394
Other securities ........................... 5,995,056 6,259,215
-----------------------------
$148,383,717 $149,460,886
=============================
44
As of December 31, 2004 and 2003, investment securities with a carrying value of
$117,144,212 and $83,068,190, respectively, were pledged on securities sold
under agreements to repurchase and for other purposes as required or permitted
by law.
Note 4. Loans Receivable
The composition of the loan portfolio as of December 31, 2004 and 2003 is
presented as follows:
2004 2003
------------------------------
Commercial and commercial real estate ................ $ 532,517,321 $ 435,345,514
Real estate loans held for sale - residential mortgage 3,498,809 3,790,031
Real estate - residential mortgage ................... 52,423,387 29,603,777
Real estate - construction ........................... 3,607,525 2,253,675
Installment and other consumer ....................... 55,736,029 50,984,349
------------------------------
647,783,071 521,977,346
Deferred loan origination costs, net ................. 567,756 494,065
Less allowance for estimated losses on loans ......... (9,261,991) (8,643,012)
------------------------------
$ 639,088,836 $ 513,828,399
==============================
Loans on nonaccrual status amounted to $7,607,977 and $4,204,078 as of December
31, 2004 and 2003, respectively. Interest income in the amount of $490,866,
$468,758, $311,519, and $156,478 for the years ended December 31, 2004 and 2003,
six months ended December 31, 2002, and the year ended June 30, 2002,
respectively, would have been earned on the nonaccrual loans had they been
performing in accordance with their original terms. Cash interest collected on
nonaccrual loans was $230,810, $262,819, $69,503, and $122,303 for the years
ended December 31, 2004 and 2003, six months ended December 31, 2002, and the
year ended June 30, 2002, respectively.
Changes in the allowance for estimated losses on loans for the years ended
December 31, 2004 and 2003, six months ended December 31, 2002, and the year
ended June 30, 2002 are presented as follows:
Six Months
Year Ended December 31, Ended Year Ended
-------------------------- December 31, June 30,
2004 2003 2002 2002
--------------------------------------------------------
Balance, beginning ......................... $ 8,643,012 $ 6,878,953 $ 6,111,454 $ 4,248,182
Provisions charged to expense ............ 1,372,208 3,405,427 2,183,745 2,264,965
Loans charged off ........................ (964,708) (2,075,406) (1,454,192) (641,156)
Recoveries on loans previously charged off 211,479 434,038 37,946 239,463
--------------------------------------------------------
Balance, ending ............................ $ 9,261,991 $ 8,643,012 $ 6,878,953 $ 6,111,454
========================================================
Loans considered to be impaired as of December 31, 2004 and 2003 are as follows:
2004 2003
----------------------
Impaired loans for which an allowance has been provided $ 92,653 $3,355,017
======================
Allowance provided for impaired loans, included in
the allowance for loan losses ....................... $ 90,153 $ 539,105
======================
Impaired loans for which no allowance has been provided $ 96,944 $ 932,064
======================
Impaired loans for which no allowance has been provided have adequate
collateral, based on management's current estimates.
The average recorded investment in impaired loans during the years ended
December 31, 2004 and 2003, six months ended December 31, 2002, and the year
ended June 30, 2002 was $3,485,989, $5,213,072, $5,795,054, and $1,157,939,
respectively. Interest income on impaired loans of $56,532, $205,366, $123,882,
and $42,414 was recognized for cash payments received for the years ended
December 31, 2004 and 2003, six months ended December 31, 2002, and the year
ended June 30, 2002, respectively.
Loans past due 90 days or more and still accruing interest totaled $1,132,574
and $755,757 as of December 31, 2004 and 2003, respectively.
45
Loans are made in the normal course of business to directors, officers, and
their related interests. The terms of these loans, including interest rates and
collateral, are similar to those prevailing for comparable transactions with
other persons. An analysis of the changes in the aggregate amount of these loans
during the years ended December 31, 2004 and 2003 and six months ended December
31, 2002 was as follows:
Six Months
Year Ended December 31, Ended
---------------------------- December 31,
2004 2003 2002
--------------------------------------------
Balance, beginning .............................. $ 23,925,005 $ 23,267,366 $ 22,806,789
Net (decrease) due to change in related parties -- (359) --
Advances ...................................... 6,414,002 10,589,823 1,876,950
Repayments .................................... (12,805,461) (9,931,825) (1,416,373)
--------------------------------------------
Balance, ending ................................. $ 17,533,546 $ 23,925,005 $ 23,267,366
============================================
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of December
31, 2004 and 2003:
2004 2003
-----------------------------
Land ....................................... $ 2,945,414 $ 1,639,080
Buildings .................................. 12,052,192 7,711,335
Furniture and equipment .................... 9,566,067 8,023,725
-----------------------------
24,563,673 17,374,140
Less accumulated depreciation .............. 6,463,083 5,345,608
-----------------------------
$18,100,590 $12,028,532
=============================
Certain facilities are leased under operating leases. Rental expense was
$866,581, $837,271, $430,576, and $795,768 for the years ended December 31, 2004
and 2003, six months ended December 31, 2002, and the year ended June 30, 2002,
respectively.
Future minimum rental commitments under noncancelable leases are as follows as
of December 31, 2004:
Year ending December 31:
2005 $ 663,099
2006 626,632
2007 305,265
2008 256,851
2009 259,083
Thereafter 823,087
-----------
$ 2,934,017
===========
Note 6. Deposits
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000, was $165,685,917 and $73,799,534 as of December 31,
2004 and 2003, respectively.
As of December 31, 2004, the scheduled maturities of certificates of deposit
were as follows:
Year ending December 31:
2005 $ 213,068,383
2006 54,583,227
2007 14,144,310
2008 1,821,993
2009 9,613,388
-------------
$ 293,231,301
=============
46
Note 7. Short-Term Borrowings
Short-term borrowings as of December 31, 2004 and 2003 are summarized as
follows:
2004 2003
---------------------------
Overnight repurchase agreements with customers ... $ 47,551,178 $ 34,699,801
Federal funds purchased .......................... 57,220,000 16,910,000
---------------------------
$104,771,178 $ 51,609,801
===========================
Information concerning repurchase agreements is summarized as follows as of
December 31, 2004 and 2003:
2004 2003
--------------------------
Average daily balance during the period ................. $43,148,089 $36,270,809
Average daily interest rate during the period ........... 0.88% 0.82%
Maximum month-end balance during the period ............. $48,354,535 $38,341,650
Weighted average rate as of end of period ............... 0.75% 0.82%
Securities underlying the agreements as of end of period:
Carrying value ........................................ $86,843,644 $72,393,780
Fair value ............................................ 86,843,644 72,393,780
The securities underlying the agreements as of December 31, 2004 and 2003 were
under the Company's control in safekeeping at third-party financial
institutions.
Information concerning federal funds purchased is summarized as follows as of
December 31, 2004 and 2003:
2004 2003
--------------------------
Average daily balance during the period ........... $65,298,766 $ 3,461,176
Average daily interest rate during the period ..... 1.76% 1.20%
Maximum month-end balance during the period ....... $95,775,000 $16,910,000
Weighted average rate as of end of period ......... 1.57% 1.09%
Note 8. Federal Home Loan Bank Advances
The subsidiary banks are members of the Federal Home Loan Bank of Des Moines
(FHLB). As of December 31, 2004 and 2003, the subsidiary banks held $5,586,800
and $4,251,000, respectively, of FHLB stock. Maturity and interest rate
information on advances from the FHLB as of December 31, 2004 and 2003 is as
follows:
December 31, 2004
-----------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
-----------------------------
Maturity:
Year ending December 31:
2005 $ 7,500,000 2.61%
2006 18,410,000 2.96
2007 16,200,000 3.58
2008 15,100,000 3.60
2009 11,700,000 3.95
Thereafter 23,111,877 4.65
------------
Total FHLB advances $ 92,021,877 3.69
============
47
Of the advances maturing after December 31, 2004, $19,000,000 have options which
allow the subsidiary banks the right, but not the obligation, to "put" the
advances back to the FHLB.
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
============
Advances are collateralized by securities, with a carrying value of $6,112,175
and $3,196,119 as of December 31, 2004 and 2003, respectively. Advances as of
December 31, 2004 and 2003 are also collateralized by 1-to-4 unit residential,
home equity 2nd mortgages, commercial real estate, home equity lines of credit,
and business loans equal to 135%, 175%, 175%, 200%, and 250%, respectively, of
total outstanding notes. At December 31, 2004, the aggregate total of loans
pledged was $225,052,582.
Note 9. Other Borrowings
As of December 31, 2004, the Company had two unsecured revolving credit notes
totaling $15,000,000 in aggregate, replacing a single note for $15,000,000
previously held. The Company had a 364-day revolving note, which matures
December 29, 2005, for $10,000,000 and with a balance outstanding of $6,000,000
as of December 31, 2004. The Company also had a 3-year revolving note, which
matures December 30, 2007, for $5,000,000 and carried no balance as of December
31, 2004. On January 3, 2005, the 3-year note was fully drawn as partial funding
for the capitalization of Rockford Bank and Trust Company (Rockford Bank &
Trust) (see Note 22). For both notes, interest is payable monthly at the Federal
Funds rate plus 1% per annum, as defined in the credit note agreements. As of
December 31, 2004, the interest rate on the 364-day note was 3.23%.
The revolving credit note agreements contain certain covenants that place
restrictions on additional debt and stipulate minimum capital and various
operating ratios.
As of December 31, 2003, the Company had a $15,000,000 unsecured revolving
credit note. The note, which matured July 21, 2004 and had been renewed and
existed until December 28, 2004, had a balance outstanding of $10,000,000 as of
December 31, 2003. Interest was payable monthly at the Federal Funds rate plus
1% per annum, as defined in the credit note agreement. As of December 31, 2003,
the interest rate was 1.97%.
Unused lines of credit of the subsidiary banks as of December 31, 2004 and 2003
are summarized as follows:
2004 2003
-------------------------
Secured ......................................... $13,000,000 $ 4,000,000
Unsecured ....................................... 86,500,000 37,000,000
-------------------------
$99,500,000 $41,000,000
=========================
Note 10. Junior Subordinated Debentures
In June 1999, the Company issued 1,200,000 shares of 9.2% cumulative trust
preferred securities through a newly formed subsidiary, QCR Holdings Capital
Trust I (Trust I), which used the proceeds from the sale of the trust preferred
securities to purchase $12,000,000 of junior subordinated debentures of the
Company. Trust I was a 100% owned non-consolidated subsidiary of the Company.
The debentures bore the same interest rate and terms as the preferred
securities. Distributions on the securities were paid quarterly. The capital
securities had a maturity date of June 30, 2029 with a call date not earlier
than June 30, 2004. At December 31, 2003, these trust preferred securities were
$12,000,000.
48
In February 2004, the Company issued $12,000,000 of fixed/floating rate trust
preferred securities (fixed at a rate of 6.93% for 7 years and floating rate for
23 years) and $8,000,000 of floating rate trust preferred securities through two
newly formed subsidiaries, Trust II and Trust III, respectively. Trust II and
Trust III are each 100% owned non-consolidated subsidiaries of the Company.
Trust II and Trust III each used the proceeds from the sale of the trust
preferred securities, along with the funds from their equity, to purchase junior
subordinated debentures of the Company in the amounts of $12,372,000 and
$8,248,000, respectively. The debentures bear the same 30-year terms, interest
rates, and quarterly distribution schedules as the preferred securities. The
Company incurred issuance costs of $410,000, which are being amortized over the
lives of the securities. At December 31, 2004, these trust preferred securities
are $20,000,000 in aggregate, and the $8,000,000 in floating rate securities
carry an interest rate of 4.825%.
On June 30, 2004, the Company redeemed the $12,000,000 of 9.2% cumulative trust
preferred securities issued by Trust I in 1999. As a result of the redemption,
the Company recognized a loss of $747,490. The loss resulted from the one-time
write-off of unamortized costs related to the original issuance of the
securities in 1999.
The current debentures were included on the balance sheet as liabilities;
however, for regulatory purposes, approximately $16,702,000 and $12,000,000 were
allowed in the calculation of Tier I capital at December 31, 2004 and 2003,
respectively, with the remainder allowed as Tier II capital. The required
deconsolidation of trust preferred subsidiaries, such as Trust II and Trust III,
under FIN 46R, calls into question the permissibility of including these
securities in regulatory capital in the future. In February 2004, the Federal
Reserve provided confirmation to the Company for their treatment of the new
issuances as Tier 1 capital for regulatory capital purposes, subject to current
established limitations.
Note 11. Sale of Merchant Credit Card Portfolio
On October 22, 2002, the Company announced Bancard's sale of its ISO-related
merchant credit card operations 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
$0.31 per share. Also included in the sale were all of the merchant credit card
processing relationships owned by Allied Merchant Services, Inc., which was a
wholly-owned subsidiary of Bancard that was liquidated in December 2003. Bancard
continues to provide credit card processing for its local merchants and
cardholders of the subsidiary banks and agent banks. As anticipated, the
Company's termination of ISO-related merchant credit card processing has reduced
Bancard's earnings. However, the Company believes that Bancard will continue to
be profitable with its narrowed business focus of continuing to provide credit
card processing for merchants and cardholders of the Company's subsidiary banks
and agent banks.
Note 12. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components
for the years ended December 31, 2004 and 2003, six months ended December 31,
2002, and the year ended June 30, 2002:
Six Months
Year Ended December 31, Ended Year Ended
--------------------------- December 31, June 30,
2004 2003 2002 2002
-----------------------------------------------------------
Current ........ $ 2,689,458 $ 3,369,368 $ 2,086,103 $ 1,948,841
Deferred ....... (185,676) (674,681) (403,312) (634,045)
-----------------------------------------------------------
$ 2,503,782 $ 2,694,687 $ 1,682,791 $ 1,314,796
===========================================================
49
A reconciliation of the expected federal income tax expense to the income tax
expense included in the consolidated statements of income was as follows for the
years ended December 31, 2004 and 2003, six months ended December 31, 2002, and
the year ended June 30, 2002:
Year Ended Year Ended Six Months Ended Year Ended
December 31, December 31, December 31, June 30,
----------------------- ----------------------- ----------------------- -----------------------
2004 2003 2002 2002
----------------------- ----------------------- ----------------------- -----------------------
% of % of % of % of
Pretax Pretax Pretax Pretax
Amount Income Amount Income Amount Income Amount Income
--------------------------------------------------------------------------------------------------
Computed "expected"
tax expense ......... $ 2,702,159 35.0% $ 2,854,465 35.0% $ 1,707,767 35.0% $ 1,497,037 35.0%
Effect of graduated
tax rates interest .. (77,205) (1.0) (81,556) (1.0) (48,793) (1.0) (42,772) (1.0)
Tax exempt income, net (220,560) (2.9) (212,105) (2.6) (105,270) (2.2) (196,870) (4.6)
Bank-owned life
insurance ........... (212,060) (2.7) (62,390) (0.8) 846 0.1 (44,084) (1.0)
State income taxes, net
of federal benefit .. 303,735 3.9 226,446 2.8 161,761 3.3 166,812 3.9
Other ................. 7,713 0.1 (30,173) (0.4) (33,520) (0.7) (65,327) (1.6)
--------------------------------------------------------------------------------------------------
$ 2,503,782 32.4% $ 2,694,687 33.0% $ 1,682,791 34.5% $ 1,314,796 30.7%
==================================================================================================
The net deferred tax assets included with other assets on the consolidated
balance sheets consisted of the following as of December 31, 2004 and 2003:
2004 2003
-----------------------
Deferred tax assets:
Compensation ........................................ $1,291,563 $1,058,111
Loan and credit card losses ......................... 3,309,991 3,038,140
Other ............................................... 116,997 70,609
-----------------------
4,718,551 4,166,860
-----------------------
Deferred tax liabilities:
Net unrealized gains on securities available for sale 407,798 1,082,637
Premises and equipment .............................. 1,052,783 736,021
Investment accretion ................................ 37,260 36,226
Deferred loan origination fees, net ................. 223,339 198,945
Other ............................................... 117,083 93,258
-----------------------
1,838,263 2,147,087
-----------------------
Net deferred tax asset ........................ $2,880,288 $2,019,773
=======================
The change in deferred income taxes was reflected in the consolidated financial
statements as follows for the years ended December 31, 2004 and 2003, six months
ended December 31, 2002, and the year ended June 30, 2002:
Six Months
Year Ended December 31, Ended Year Ended
----------------------- December 31, June 30,
2004 2003 2002 2002
--------------------------------------------------
Provision for income taxes ............ $(185,676) $(674,681) $(403,312) $(634,045)
Statement of stockholders' equity-
accumulated other comprehensive
income, unrealized gains (losses)
on securities available for sale, net (674,839) (208,088) 514,269 457,334
-------------------------------------------------
$(860,515) $(882,769) $ 110,957 $(176,711)
=================================================
50
Note 13. Employee Benefit Plans
The Company has a profit sharing plan which includes a provision designed to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended,
to allow for participant contributions. All employees are eligible to
participate in the plan. The Company matches 100% of the first 3% of employee
contributions, and 50% of the next 3% of employee contributions, up to a maximum
amount of 4.5% of an employee's compensation. Additionally, at its discretion,
the Company may make additional contributions to the plan which are allocated to
the accounts of participants in the plan based on relative compensation. Company
contributions for the years ended December 31, 2004 and 2003, six months ended
December 31, 2002, and the year ended June 30, 2002 were as follows:
Six Months
Year Ended December 31, Ended Year Ended
----------------------- December 31, June 30,
2004 2003 2002 2002
------------------------------------------------
Matching contribution .......... $415,582 $377,854 $179,930 $318,457
Discretionary contribution ..... 89,000 90,000 60,500 49,000
-----------------------------------------------
$504,582 $467,854 $240,430 $367,457
===============================================
During the year ended December 31, 2004, the Company also began offering
nonqualified supplemental executive retirement plans (SERPs). The SERPs allow
certain executives to accumulate retirement benefits beyond those provided by
the qualified plans. The Company's contributions for the year ended December 31,
2004 were $134,000. As of December 31, 2004, the aggregate liability relating to
the SERPs totals $134,000.
The Company has entered into deferred compensation agreements with certain
executive officers. Under the provisions of the agreements the officers may
defer compensation and the Company matches the deferral up to certain maximums.
The Company's matching contribution differs by officer and is a maximum of
between $7,000 and $20,000 annually. Interest on the deferred amounts is earned
at The Wall Street Journal's prime rate subject to a minimum of 4% and a maximum
of 12% with such limits differing by officer. Upon retirement, the officer will
receive the deferral balance in 180 equal monthly installments. During the years
ended December 31, 2004 and 2003, six months ended December 31, 2002, and the
year ended June 30, 2002 the Company expensed $107,420, $86,275, $41,041, and
$67,273, respectively, related to the agreements. As of December 31, 2004 and
2003 the liability related to the agreements totals $627,160 and $459,240,
respectively.
The Company has also entered into deferred compensation agreements with certain
management officers. Under the provisions of the agreements the officers may
defer compensation and the Company matches the deferral up to certain maximums.
The Company's matching contribution differs by officer and is a maximum of
either 5% or 6% of officer's compensation. Interest on the deferred amounts is
earned at The Wall Street Journal's prime rate plus one percentage point, and
has a minimum of 4% and shall not exceed 8%. Upon retirement, the officer will
receive the deferral balance in 180 equal monthly installments. During the year
ended December 31, 2004 the Company expensed $21,448 related to the agreements.
As of December 31, 2004 the liability related to the agreements totals $62,152.
Note 14. Stock Based Compensation
Stock option and incentive plans:
The Company's Board of Directors and its stockholders adopted in June 1993 the
QCR Holdings, Inc. Stock Option Plan (Stock Option Plan). Up to 225,000 shares
of common stock may be issued to employees and directors of the Company and its
subsidiaries pursuant to the exercise of incentive stock options or nonqualified
stock options granted under the Stock Option Plan. All of the options have been
granted under this plan, and on June 30, 2003, the plan expired. The Company's
Board of Directors adopted in November 1996 the QCR Holdings, Inc. 1997 Stock
Incentive Plan (1997 Stock Incentive Plan). Up to 225,000 shares of common stock
may be issued to employees and directors of the Company and its subsidiaries
pursuant to the exercise of nonqualified stock options and restricted stock
granted under the 1997 Stock Incentive Plan. As of December 31, 2004, there are
no remaining options available for grant under this plan. The Company's Board of
Directors adopted in January 2004, and the stockholders approved in May 2004,
the QCR Holdings, Inc. 2004 Stock Incentive Plan (2004 Stock Incentive Plan). Up
to 225,000 shares of common stock may be issued to employees and directors of
the Company and its subsidiaries pursuant to the exercise of nonqualified stock
options and restricted stock granted under the 2004 Stock Incentive Plan. As of
December 31, 2004, there are 203,604 remaining options available for grant under
this plan. The Stock Option Plan, the 1997 Stock Incentive Plan, and the 2004
Stock Incentive Plan (stock option plans) are administered by the Executive
Committee appointed by the Board of Directors (Committee).
51
The number and exercise price of options granted under the stock option plans is
determined by the Committee at the time the option is granted. In no event can
the exercise price be less than the value of the common stock at the date of the
grant for incentive stock options. All options have a 10-year life and will vest
and become exercisable from 1-to-5 years after the date of the grant. Only
nonqualified stock options have been issued to date.
In the case of nonqualified stock options, the stock option plans provide for
the granting of "Tax Benefit Rights" to certain participants at the same time as
these participants are awarded nonqualified options. Each Tax Benefit Right
entitles a participant to a cash payment equal to the excess of the fair market
value of a share of common stock on the exercise date over the exercise price of
the related option multiplied by the difference between the rate of tax on
ordinary income over the rate of tax on capital gains (federal and state).
A summary of the stock option plans as of December 31, 2004 and 2003 and June
30, 2002 and 2001 and changes during the six months ended and years ended on
those dates is presented below:
December 31, June 30,
----------------------------------------------------------------- ---------------------
2004 2003 2002 2002
------------------- --------------------- ------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------
Outstanding, beginning 224,800 $ 8.57 300,566 $ 7.56 342,215 $ 7.26 354,717 $ 6.81
Granted ............ 60,100 19.33 7,350 13.47 1,050 9.97 27,581 9.67
Exercised .......... (38,604) 6.35 (75,998) 4.98 (36,405) 4.53 (35,063) 4.48
Forfeited .......... (1,480) 8.99 (7,118) 9.41 (6,294) 9.87 (5,020) 8.67
----------------------------------------------------------------------------------------
Outstanding, ending .. 244,816 11.56 224,800 8.57 300,566 7.56 342,215 7.26
======== ======== ======== ========
Exercisable, ending .. 135,210 145,598 192,621 208,635
Weighted average fair
value per option of
options granted
during the period .. $ 8.29 $ 5.58 $ 4.07 $ 4.62
A further summary of options outstanding as of December 31, 2004 is presented
below:
Options Outstanding
----------------------------------------------- Options Exercisable
Weighted -------------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------
$4.55 to $6.90 32,826 3.98 $ 6.15 25,566 $ 5.94
$7.00 to $7.13 42,650 6.27 7.01 23,750 7.01
$7.45 to $9.39 41,653 3.62 8.88 37,903 8.94
$9.87 to $11.64 37,859 6.75 10.33 20,603 10.43
$11.83 to $18.40 48,578 6.45 15.51 25,888 13.56
$18.67 to $20.90 41,250 9.45 19.77 1,500 19.33
------- -------
244,816 135,210
======= =======
Stock appreciation rights:
Additionally, the 1997 Stock Incentive Plan and 2004 Stock Incentive Plan allow
the granting of stock appreciation rights (SARs). SARs are rights entitling the
grantee to receive cash having a fair market value equal to the appreciation in
the market value of a stated number of shares from the date of grant. Like
options, the number and exercise price of SARs granted is determined by the
Committee. The SARs vest 20% per year, and the term of the SARs may not exceed
10 years from the date of the grant. As of December 31, 2004, 2003, and 2002 and
June 30, 2002 there were 111,375, 135,525, 135,675, and 136,275 SARs,
respectively, outstanding, with 84,810, 92,310, 73,230, and 73,230,
respectively, exercisable. During the years ended December 31, 2004 and 2003,
six months ended December 31, 2002, and the year ended June 20, 2002 the Company
expensed $297,441, $915,224, $120,474, and $187,360, respectively, related to
the SARs. As of December 31, 2004 and 2003 the liability related to the SARs
totals $1,251,908 and $1,223,058, respectively.
52
A further summary of SARs is presented below:
December 31, 2004 Liability Recorded for SARs SAR Expense
-------------------------- --------------------------- For the
December 31, Year Ended
SARs SARs ------------------------- December 31,
Exercise Price Outstanding Exercisable 2004 2003 2004
- ----------------------------------------------------------------------------------------------------------------
$6.90 34,650 20,850 $ 488,565 $ 407,715 $ 80,850
$7.00 13,800 4,800 193,200 262,500 41,082
$9.11 12,750 12,750 151,555 214,950 49,478
$10.75 18,075 14,310 185,269 152,594 44,147
$11.83 5,925 5,925 54,313 55,863 16,414
$12.17 750 750 6,625 4,875 1,750
$13.55 - - - 11,505 4,395
$14.22 25,425 25,425 172,381 113,056 59,325
--------------------------------------------------------------------------
111,375 84,810 $ 1,251,908 $ 1,223,058 $ 297,441
==========================================================================
Stock purchase plan:
The Company's Board of Directors and its stockholders adopted in October 2002
the QCR Holdings, Inc. Employee Stock Purchase Plan (the "Purchase Plan"). As of
January 1, 2004 there were 137,102 shares of common stock available for issuance
under the Purchase Plan. For each six-month offering period, the Board of
Directors will determine how many of the total number of available shares will
be offered. The purchase price is the lesser of 90% of the fair market value at
the date of the grant or the investment date. The investment date, as
established by the Board of Directors of the Company, is the date common stock
is purchased after the end of each calendar quarter during an offering period.
The maximum dollar amount any one participant can elect to contribute in an
offering period is $5,000. Additionally, the maximum percentage that any one
participant can elect to contribute is 5% of his or her compensation. During the
year ended December 31, 2004, 8,917 shares were granted and 6,438 purchased.
Shares granted during the year ended December 31, 2004 had a weighted average
fair value of $2.90 per share.
Note 15. Regulatory Capital Requirements and Restrictions on Dividends
The Company (on a consolidated basis) and the subsidiary banks are subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company and subsidiary
banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the
subsidiary banks must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the subsidiary banks to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined) and of Tier 1
capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2004 and 2003, that the Company and the subsidiary banks met all
capital adequacy requirements to which they are subject.
53
As of December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized the subsidiary banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since the notification that management
believes have changed the subsidiary banks' categories. The Company and the
subsidiary banks' actual capital amounts and ratios as of December 31, 2004 and
2003 are also presented in the table (dollars in thousands).
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------
As of December 31, 2004:
Company:
Total risk-based capital ... $79,299 10.9% $58,066 >= 8.0% N/A N/A
Tier 1 risk-based capital .. 66,807 9.2 29,033 >= 4.0 N/A N/A
Leverage ratio ............. 66,807 7.8 34,209 >= 4.0 N/A N/A
Quad City Bank & Trust:
Total risk-based capital ... $54,772 10.3% $42,513 >= 8.0% $ 53,141 >= 10.0%
Tier 1 risk-based capital .. 48,127 9.1 21,256 >= 4.0 31,885 >= 6.0
Leverage ratio ............. 48,127 7.6 25,476 >= 4.0 31,845 >= 5.0
Cedar Rapids Bank & Trust (A):
Total risk-based capital ... $20,680 10.8% $15,280 >= 8.0% $ 19,100 >= 10.0%
Tier 1 risk-based capital .. 18,292 9.6 7,640 >= 4.0 11,460 >= 6.0
Leverage ratio ............. 18,292 8.2 8,949 >= 4.0 11,186 >= 5.0
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------
As of December 31, 2003:
Company:
Total risk-based capital ... $59,326 10.3% $46,151 >= 8.0% N/A N/A
Tier 1 risk-based capital .. 52,020 9.0 23,076 >= 4.0 N/A N/A
Leverage ratio ............. 52,020 7.4 28,283 >= 4.0 N/A N/A
Quad City Bank & Trust:
Total risk-based capital ... $46,934 10.4% $36,724 >= 8.0% $ 45,343 >= 10.0%
Tier 1 risk-based capital .. 41,252 9.1 18,137 >= 4.0 27,206 >= 6.0
Leverage ratio ............. 41,252 7.4 22,169 >= 4.0 27,711 >= 5.0
Cedar Rapids Bank & Trust (A):
Total risk-based capital ... $16,031 13.3% $ 9,618 >= 8.0% $ 12,022 >= 10.0%
Tier 1 risk-based capital .. 14,524 12.1 4,809 >= 4.0 7,213 >= 6.0
Leverage ratio ............. 14,524 10.1 5,782 >= 4.0 7,227 >= 5.0
<FN>
(A) As a de novo bank, Cedar Rapids Bank & Trust could not, without the prior
consent of the Federal Reserve Bank, pay dividends until after the first
three years of operations and two consecutive satisfactory CAMELS ratings.
In addition, the Bank was required to maintain a tangible Tier I leverage
ratio of at least 9% throughout its first three years of operations. The de
novo period for Cedar Rapids Bank & Trust expired in September 2004.
</FN>
Federal Reserve Bank policy provides that a bank holding company should not pay
dividends unless (i) the dividends can be fully funded out of net income from
the company's net earnings over the prior year and (ii) the prospective rate of
earnings retention appears consistent with the company's (and its subsidiaries')
capital needs, asset quality, and overall financial condition.
In addition, the Delaware General Corporation Law restricts the Company from
paying dividends except out of its surplus, or in the case there shall be no
such surplus, out of its net profits for the fiscal year in which the dividend
is declared and/or the preceding fiscal year.
The Iowa Banking Act provides that an Iowa bank may not pay dividends in an
amount greater than its undivided profits. In addition, the subsidiary banks, as
members of the Federal Reserve System, will be prohibited from paying dividends
to the extent such dividends declared in any calendar year exceed the total of
its net profits of that year combined with its retained net profits of the
preceding two years, or are otherwise determined to be an "unsafe and unsound
practice" by the Federal Reserve Board.
54
Note 16. Earnings Per Common Share
The following information was used in the computation of basic and diluted
earnings per common share for the years ended December 31, 2004 and 2003, six
months ended December 31, 2002, and the year ended June 30, 2002:
Six Months
Year Ended December 31, Ended Year Ended
------------------------ December 31, June 30,
2004 2003 2002 2002
---------------------------------------------------
Net income ....................................... $5,216,672 $5,460,927 $3,196,544 $2,962,453
==================================================
Weighted average common shares outstanding ....... 4,234,345 4,173,063 4,129,109 4,028,994
Weighted average common shares issuable upon
exercise of stock options and under the Employee
Stock Purchase Plan ............................ 110,420 109,520 100,015 86,714
--------------------------------------------------
Weighted average common and common
equivalent shares outstanding .................. 4,344,765 4,282,583 4,229,124 4,115,708
==================================================
Note 17. Commitments and Contingencies
In the normal course of business, the subsidiary banks make various commitments
and incur certain contingent liabilities that are not presented in the
accompanying consolidated financial statements. The commitments and contingent
liabilities include various guarantees, commitments to extend credit, and
standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the subsidiary banks upon extension of credit,
is based upon management's credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, marketable securities,
inventory, property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the subsidiary
banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements and, generally, have terms of one year or less. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The subsidiary banks hold collateral,
as described above, supporting those commitments if deemed necessary. In the
event the customer does not perform in accordance with the terms of the
agreement with the third party, the subsidiary banks would be required to fund
the commitments. The maximum potential amount of future payments the subsidiary
banks could be required to make is represented by the contractual amount. If the
commitment is funded, the subsidiary banks would be entitled to seek recovery
from the customer. At December 31, 2004 and 2003 no amounts have been recorded
as liabilities for the subsidiary banks' potential obligations under these
guarantees.
As of December 31, 2004 and 2003, commitments to extend credit aggregated
$257,569,000 and $194,915,000, respectively. As of December 31, 2004 and 2003,
standby letters of credit aggregated $12,653,000 and $5,994,000, 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 $3,498,809, and $3,790,031 as of December 31,
2004 and 2003, respectively. These amounts are included in loans held for sale
at the respective balance sheet dates.
55
Bancard is subject to the risk of cardholder chargebacks and its merchants being
incapable of refunding the amount charged back. Management attempts to mitigate
such risk by regular monitoring of merchant activity and in appropriate cases,
holding cash reserves deposited by the merchant. During 2004, Bancard
experienced two situations, as the result of fraudulent activity, in which
merchants experienced multiple, significant cardholder chargebacks over periods
of several months. In each of these cases, the merchant's cash reserves on
deposit were not sufficient to cover the cardholder chargeback volumes, and in
one case, the merchant was incapable of making reimbursement to Bancard. As a
result, Bancard incurred $196,000 of chargeback loss expense during 2004
absorbing all of the chargeback activity on this merchant and establishing an
allowance for chargeback losses in the anticipation of additional cardholder
chargebacks, which could occur from either of these fraudulent situations. As an
additional mitigation to cardholder chargeback risk, in August 2004 Bancard
began making monthly provisions to the allowance for chargeback losses in an
amount equal to 5 basis points of the month's dollar volume of merchant credit
card activity. Management will continually monitor merchant credit card activity
and Bancard's level of the allowance for chargeback losses.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed up by a performance bond in the amount of $1,000,000. As of December
31, 2004 there were no significant pending liabilities.
Aside from cash on-hand and in-vault, the majority of the Company's cash is
maintained at upstream correspondent banks. The total amount of cash on deposit,
certificates of deposit, and federal funds sold exceeded federal insured limits
by approximately $10,900,000 and $20,800,000 as of December 31, 2004 and 2003,
respectively. In the opinion of management, no material risk of loss exists due
to the financial condition of the upstream correspondent banks.
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 has $35,587,000 of sold residential
mortgage loans with recourse provisions still in effect at December 31, 2004.
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, 2004 and 2003, six months ended December 31, 2002, or the year
ended June 30, 2002. In the opinion of management, the risk of recourse and the
subsequent requirement of loan repurchase to the subsidiary banks is not
significant, and accordingly no liabilities have been established related to
such.
During fiscal 2004, Quad City Bank & Trust joined the Federal Home Loan Bank's
(FHLB) Mortgage Partnership Finance (MPF) Program, which offers a "risk-sharing"
alternative to selling residential mortgage loans to investors in the secondary
market. Lenders funding mortgages through the MPF Program manage the credit risk
of the loans they originate. The loans are funded by the FHLB and held within
their portfolio, thereby managing the liquidity, interest rate, and prepayment
risks of the loans. Lenders participating in the MPF Program receive monthly
credit enhancement fees for managing the credit risk of the loans they
originate. Any credit losses incurred on those loans will be absorbed first by
private mortgage insurance, second by an allowance established by the FHLB, and
third by withholding monthly credit enhancements due to the participating
lender. At December 31, 2004, Quad City Bank & Trust had funded $11.7 million of
mortgages through the FHLB's MPF Program with an attached credit exposure of
$240 thousand. In conjunction with its participation in this program, Quad City
Bank & Trust has established an allowance for credit losses on these
off-balance-sheet exposures of $11 thousand at December 31, 2004.
56
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, 2004, the Company's purchase
obligations were primarily related to certain contractual payments for capital
expenditures of facilities expansion. The Company has operating contract
obligations which represent short and long-term payments for data processing
equipment and services, software, and other equipment and professional services.
The following table presents, as of December 31, 2004, significant fixed and
determinable contractual obligations to these third parties by payment date.
Purchase Operating
Obligations Contracts
-----------------------------
Year ending December 31:
2005 $ 7,943,000 $ 1,334,999
2006 -- 946,300
2007 -- 32,766
2008 -- 7,845
2009 -- 3,640
Thereafter -- 15,700
-----------------------------
$ 7,943,000 $ 2,341,250
=============================
The Company also has operating lease obligations under noncancelable leases for
several of its facilities. See Note 5.
Plans were announced in October 2003 for Quad City Bank & Trust to add a fifth
full service banking facility. The facility is located in the Five Points area
of west Davenport, Iowa. Construction of the new facility is currently in
progress and is scheduled for completion in the first quarter of 2005. Total
costs for the project are anticipated to be approximately $3,800,000 with
$1,948,000 incurred as of December 31, 2004.
In February 2004, Cedar Rapids Bank & Trust announced plans to build a four
floor building in downtown Cedar Rapids. The Bank's main office will be
relocated to this site when construction is completed, which is anticipated to
be mid-year 2005. Cedar Rapids Bank & Trust will own the lower three floors of
the facility, and an unrelated third party will own the fourth floor in a
condominium arrangement with the Bank. Costs for this facility are projected to
be $6,400,000 with $2,578,000 incurred at December 31, 2004. The Bank is also
planning the construction of a branch office during 2005, with an approximate
total cost of $2,300,000, to be located on Council Street in Cedar Rapids. The
Company incurred costs for this project of $664,000 during 2004.
The expansion of the Company to the Rockford, Illinois area was announced in
June 2004. In mid September 2004, Quad City Bank & Trust opened a temporary
branch facility in Rockford. On January 3, 2005, Rockford Bank & Trust began
operations in its permanent facility in downtown Rockford. During 2004,
capitalized costs associated with the establishment of this permanent
full-service banking facility in Rockford were $207,000 (see Note 22).
Note 18. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2004
---------------------------------------------------------
March June September December
2004 2004 2004 2004
---------------------------------------------------------
Total interest income ........... $ 8,678,807 $ 9,225,725 $ 9,799,578 $ 10,312,730
Total interest expense .......... 2,902,869 3,206,913 3,368,355 3,846,631
---------------------------------------------------------
Net interest income ..... 5,775,938 6,018,812 6,431,223 6,466,099
Provision for loan losses (gains) 856,841 467,659 411,385 (363,677)
Noninterest income .............. 2,358,736 2,379,412 2,019,557 1,923,736
Noninterest expenses ............ 6,089,088 5,437,580 5,913,274 6,840,909
---------------------------------------------------------
Net income before
income taxes ............ 1,188,745 2,492,985 2,126,121 1,912,603
Federal and state income taxes .. 352,828 821,773 703,464 625,717
---------------------------------------------------------
Net income .............. $ 835,917 $ 1,671,212 $ 1,422,657 $ 1,286,886
=========================================================
Earnings per common share:
Basic ......................... $ 0.20 $ 0.40 $ 0.33 $ 0.30
Diluted ....................... 0.19 0.39 0.33 0.29
57
Year Ended December 31, 2003
---------------------------------------------------------
March June September December
2003 2003 2003 2003
---------------------------------------------------------
Total interest income ........... $ 7,906,067 $ 8,346,224 $ 8,622,572 $ 8,503,398
Total interest expense .......... 3,057,956 3,227,136 2,889,456 2,775,029
---------------------------------------------------------
Net interest income ..... 4,848,111 5,119,088 5,733,116 5,728,369
Provision for loan losses ....... 1,330,427 358,000 939,000 778,000
Noninterest income .............. 2,488,823 3,248,738 3,259,834 2,170,214
Noninterest expenses ............ 4,783,843 5,399,579 5,356,233 5,495,597
---------------------------------------------------------
Net income before
income taxes ............ 1,222,664 2,610,247 2,697,717 1,624,986
Federal and state income taxes 395,716 883,347 889,569 526,055
---------------------------------------------------------
Net income .............. $ 826,948 $1,726,900 $1,808,148 $ 1,098,931
=========================================================
Earnings per common share:
Basic ......................... $ 0.20 $ 0.41 $ 0.43 $ 0.27
Diluted ....................... 0.19 0.41 0.42 0.26
Six Months Ended
December 31, 2002
----------------------------
September December
2002 2002
----------------------------
Total interest income ...................... $7,875,657 $8,244,016
Total interest expense ..................... 3,188,761 3,294,502
----------------------------
Net interest income ................ 4,686,896 4,949,514
Provision for loan losses .................. 636,800 1,546,945
Noninterest income ......................... 2,469,074 6,370,647
Noninterest expenses ....................... 4,771,406 6,641,645
----------------------------
Net income before
income taxes ....................... 1,747,764 3,131,571
Federal and state income taxes ............. 588,459 1,094,332
----------------------------
Net income ......................... $1,159,305 $2,037,239
============================
Earnings per common share:
Basic .................................... $ 0.28 $ 0.49
Diluted .................................. 0.28 0.48
Year Ended June 30, 2002
-------------------------------------------------
September December March June
2001 2001 2002 2002
-------------------------------------------------
Total interest income ........ $6,950,044 $6,895,756 $7,081,985 $7,592,352
Total interest expense ....... 3,520,220 3,113,305 3,129,885 3,106,744
-------------------------------------------------
Net interest income .. 3,429,824 3,782,451 3,952,100 4,485,608
Provision for loan losses .... 408,490 631,375 497,500 727,600
Noninterest income ........... 1,847,654 2,192,586 1,828,673 2,045,746
Noninterest expenses ......... 3,925,786 4,319,128 4,395,187 4,382,327
-------------------------------------------------
Net income before
income taxes ......... 943,202 1,024,534 888,086 1,421,427
Federal and state income taxes 294,965 335,161 274,003 410,667
-------------------------------------------------
Net income ........... $ 648,237 $ 689,373 $ 614,083 $1,010,760
=================================================
Earnings per common share:
Basic ...................... $ 0.17 $ 0.17 $ 0.15 $ 0.25
Diluted .................... 0.17 0.16 0.15 0.24
58
Note 19. Parent Company Only Financial Statements
The following is condensed financial information of QCR Holdings, Inc. (parent
company only):
Condensed Balance Sheets
December 31, 2004 and 2003
Assets 2004 2003
- ------------------------------------------------------------------------------------
Cash and due from banks .............................. $ 6,125,728 $ 254,507
Interest-bearing deposits at financial institutions .. 415,439 133,791
Securities available for sale, at fair value ......... 1,638,617 1,494,098
Investment in bank subsidiaries ...................... 66,900,880 57,414,541
Investment in nonbank subsidiaries ................... 1,250,673 3,293,646
Net loans receivable ................................. 21,764 21,764
Other assets ......................................... 2,552,837 2,186,991
---------------------------
Total assets ................................. $ 78,905,938 $ 64,799,338
===========================
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------
Liabilities:
Other borrowings ................................... $ 6,000,000 $ 10,000,000
Junior subordinated debentures ..................... 20,620,000 12,000,000
Other liabilities .................................. 1,512,138 976,603
---------------------------
Total liabilities ............................ 28,132,138 22,976,603
---------------------------
Stockholders' Equity:
Common stock ....................................... 4,496,730 2,863,990
Additional paid-in capital ......................... 20,329,033 17,143,868
Retained earnings .................................. 25,278,666 20,866,749
Accumulated other comprehensive income ............. 669,371 1,802,664
Less cost of common shares acquired for the treasury -- (854,536)
---------------------------
Total stockholders' equity ................... 50,773,800 41,822,735
---------------------------
Total liabilities and stockholders' equity ... $ 78,905,938 $ 64,799,338
===========================
59
Condensed Statements of Income
Six Months
Year Ended December 31, Ended Year Ended
----------------------- December 31, June 30,
2004 2003 2002 2002
- ------------------------------------------------------------------------------------------------
Total interest income ...................... $ 114,731 $ 83,894 $ 42,939 $ 102,458
Investment securities gains, net ........... 26,188 5 -- 6,433
Equity in net income of bank subsidiaries .. 7,643,815 6,075,566 2,235,519 4,240,730
Equity in net income of nonbank subsidiaries 259,660 867,217 1,580,932 111,057
Other ...................................... 212,814 303,052 171,822 70,067
-------------------------------------------------
Total income ....................... 8,257,208 7,329,734 4,031,212 4,530,745
-------------------------------------------------
Interest expense ........................... 2,547,534 1,361,939 666,398 1,334,921
Salaries and employee benefits ............. 1,135,333 720,989 239,321 387,203
Professional and data processing fees ...... 361,063 288,217 117,658 145,843
Other ...................................... 423,347 292,914 150,046 495,859
--------------------------------------------------
Total expenses ..................... 4,467,277 2,664,059 1,173,423 2,363,826
--------------------------------------------------
Income before income tax benefit ... 3,789,931 4,665,675 2,857,789 2,166,919
Income tax benefit ......................... 1,426,741 795,252 338,755 795,534
-------------------------------------------------
Net income ......................... $5,216,672 $5,460,927 $3,196,544 $2,962,453
=================================================
60
Condensed Statements of Cash Flows
Six Months
Year Ended December 31, Ended Year Ended
----------------------------- December 31, June 30,
2004 2003 2002 2002
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ............................................. $ 5,216,672 $ 5,460,927 $ 3,196,544 $ 2,962,453
Adjustments to reconcile net income to net cash
provided by operating activities:
Distributions in excess of (less than) earnings of:
Bank subsidiaries .................................. (6,643,815) (5,075,566) (2,235,519) (3,440,730)
Nonbank subsidiaries ............................... 2,662,973 41,775 (9,932) 861,703
Depreciation ......................................... 4,507 4,506 795 252
Provision for loan losses ............................ -- -- (55) (1,835)
Loss on redemption of junior subordinated debentures . 747,490 -- -- --
Investment securities (gains), net ................... (26,188) (5) -- (6,433)
Tax benefit of nonqualified stock options exercised .. 190,248 274,871 87,922 60,332
(Increase) decrease in accrued interest receivable ... (28,252) (6,715) (10,048) 4,016
(Increase) decrease in other assets .................. (1,103,348) (299,820) 187,941 (608,624)
Increase (decrease) in other liabilities ............. 523,507 (47,516) (82,401) 277,024
-----------------------------------------------------------
Net cash provided by operating activities ........ 1,543,794 352,457 1,135,247 108,158
-----------------------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing deposits at
financial institutions ............................... (281,648) 153,118 273,743 (5,263)
Purchase of securities available for sale .............. (307,392) (28,496) (251,411) (18,205)
Proceeds from sale of securities available for sale .... -- -- -- 101,285
Proceeds from calls and maturities of securities ....... 227,001 200,000 -- 107,500
Capital infusion, bank subsidiaries .................... (4,000,000) (5,000,000) (1,000,000) (10,500,000)
Capital infusion, nonbank subsidiaries ................. (620,000) (500,000) -- --
Net loans (originated) repaid .......................... -- (757) -- 125,989
------------------------------------------------------------
Net cash used in investing activities ............ (4,982,039) (5,176,135) (977,668) (10,188,694)
------------------------------------------------------------
Cash Flows from Financing Activities:
Net (decrease) increase in other borrowings ............ (4,000,000) 5,000,000 -- 5,000,000
Proceeds from issuance of junior subordinated debentures 20,620,000 -- -- --
Redemption of junior subordinated debentures ........... (12,000,000) -- -- --
Payment of cash dividends .............................. (336,816) (277,086) -- --
Payment from fractional shares on 3:2 stock split ...... (2,549) -- -- --
Proceeds from issuance of common stock, net ............ 5,028,831 148,503 2,364 4,959,541
------------------------------------------------------------
Net cash provided by financing activities ........ 9,309,466 4,871,417 2,364 9,959,541
------------------------------------------------------------
Net increase (decrease) in cash and due from banks 5,871,221 47,739 159,943 (120,995)
Cash and due from banks:
Beginning .............................................. 254,507 206,768 46,825 167,820
------------------------------------------------------------
Ending ................................................. $ 6,125,728 $ 254,507 $ 206,768 $ 46,825
============================================================
61
Note 20. Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosures of fair value information about financial instruments for
which it is practicable to estimate that value. When quoted market prices are
not available, fair values are based on estimates using present value or other
techniques. Those techniques are significantly affected by the assumptions used,
including the discounted rates and estimates of future cash flows. In this
regard, fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
settlement. Some financial instruments and all nonfinancial instruments are
excluded from the disclosures. The aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of their financial instruments.
Cash and due from banks, federal funds sold, and interest-bearing deposits at
financial institutions: The carrying amounts reported in the balance sheets for
cash and due from banks, federal funds sold, and interest-bearing deposits at
financial institutions equal their fair values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans receivable: The fair values for variable rate loans equal their carrying
values. The fair values for all other types of loans are estimated using
discounted cash flow analysis, using interest rates currently being offered for
loans with similar terms to borrowers with similar credit quality. The fair
value of loans held for sale is based on quoted market prices of similar loans
sold in the secondary market.
Accrued interest receivable and payable: The fair value of accrued interest
receivable and payable is equal to its carrying value.
Deposits: The fair values disclosed for demand deposits equal their carrying
amounts, which represent the amount payable on demand. Fair values for time
deposits are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on time deposits to a schedule of
aggregate expected monthly maturities on time deposits.
Short-term borrowings: The fair value for short-term borrowings is equal to its
carrying value.
Federal Home Loan Bank advances and junior subordinated debentures: The fair
value of these instruments is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Other borrowings: The fair value for variable rate other borrowings is equal to
its carrying value.
Commitments to extend credit: The fair value of these commitments is not
material.
62
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 2004 and 2003 are presented as follows:
December 31,
---------------------------------------------------------
2004 2003
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------------------------------------------------
Cash and due from banks ........................... $ 21,372,342 $ 21,372,342 $ 24,427,573 $ 24,427,573
Federal funds sold ................................ 2,890,000 2,890,000 4,030,000 4,030,000
Interest-bearing deposits at financial institutions 3,857,563 3,857,563 10,426,092 10,426,092
Investment securities:
Held to maturity ................................ 100,000 108,254 400,116 416,751
Available for sale .............................. 149,460,886 149,460,886 128,442,926 128,442,926
Loans receivable, net ............................. 639,088,836 639,212,836 513,828,399 518,111,399
Accrued interest receivable ....................... 4,072,762 4,072,762 3,646,108 3,646,108
Deposits .......................................... 588,015,683 587,509,683 511,651,863 513,337,863
Short-term borrowings ............................. 104,771,178 104,771,178 51,609,801 51,609,801
Federal Home Loan Bank advances ................... 92,021,877 92,107,877 76,232,348 75,824,348
Other borrowings .................................. 6,000,000 6,000,000 10,000,000 10,000,000
Junior subordinated debentures .................... 20,620,000 21,530,606 12,000,000 12,886,941
Accrued interest payable .......................... 1,536,976 1,536,976 1,236,906 1,236,906
Note 21. Business Segment Information
Selected financial information on the Company's business segments is presented
as follows for the years ended December 31, 2004 and 2003, six months ended
December 31, 2002, and the year ended June 30, 2002:
Six Months
Year Ended December 31, Ended Year Ended
----------------------------- December 31, June 30,
2004 2003 2002 2002
---------------------------------------------------------------
Commercial banking:
Quad City Bank & Trust (excluding
Rockford branch):
Revenue ................................ $ 32,342,266 $ 32,624,650 $ 16,463,635 $ 29,872,982
Net income ............................. 5,914,913 5,148,423 2,130,270 4,316,268
Assets ................................. 634,206,797 555,403,875 506,515,419 450,371,771
Depreciation ........................... 1,245,853 902,175 423,929 811,648
Capital expenditures ................... 3,783,114 3,851,445 231,898 542,282
Cedar Rapids Bank & Trust:
Revenue ................................ 9,809,878 6,920,826 2,396,534 1,961,994
Net income ............................. 873,348 249,866 (237,219) (1,164,730)
Assets ................................. 228,249,176 149,673,720 90,855,077 62,460,116
Depreciation ........................... 185,869 140,606 59,991 76,538
Capital expenditures ................... 3,582,029 292,260 263,016 911,053
Rockford branch of Quad City Bank & Trust:
Revenue ................................ 16,476 -- -- --
Net income ............................. (346,490) -- -- --
Assets ................................. 1,660,473 -- -- --
Depreciation ........................... 10,689 -- -- --
Capital expenditures ................... 207,239 -- -- --
63
Six Months
Year Ended December 31, Ended Year Ended
----------------------- December 31, June 30,
2004 2003 2002 2002
---------------------------------------------------
Credit card processing:
Revenue .............. 1,612,824 2,372,619 4,841,477 2,263,866
Net income ........... 441,117 1,056,399 1,703,340 343,552
Assets ............... 889,407 736,710 3,759,355 3,061,251
Depreciation ......... 28,535 25,656 12,745 35,309
Capital expenditures . 39,204 8,328 9,827 15,270
Trust management:
Revenue .............. 2,530,907 2,242,747 1,045,046 2,161,677
Net income ........... 625,459 490,018 222,117 540,942
Assets ............... N/A N/A N/A N/A
Depreciation ......... N/A N/A N/A N/A
Capital expenditures . N/A N/A N/A N/A
All other:
Revenue .............. 385,930 385,028 212,702 174,277
Net (loss) ........... (2,291,675) (1,483,779) (621,964) (1,073,579)
Assets ............... 5,077,694 4,225,250 3,470,505 2,935,357
Depreciation ......... 4,507 4,506 795 252
Capital expenditures . -- -- 10,500 3,020
Note 22. Subsequent Event
On January 3, 2005, Rockford Bank & Trust was capitalized as the Company's third
bank charter, and a branch facility in Rockford, Illinois, that had been
operating under Quad City Bank & Trust since September 2004, began functioning
under the new charter. Rockford Bank & Trust is an Illinois-chartered commercial
bank insured to the maximum amount permitted by law by the Federal Deposit
Insurance Corporation. It provides full-service commercial and consumer banking
to Rockford and adjacent communities through its office located in downtown
Rockford.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
December 31, 2004. Based on that evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
Item 9B. Other Information
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is set forth under the caption "Election
of Directors" in the Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under the caption "Executive
Compensation" in the Proxy Statement, and is incorporated herein by reference.
64
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners" in the Proxy Statement, and is
incorporated herein by reference, or is presented below.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2004 for
(i) all compensation plans previously approved by the Company's stockholders and
(ii) all compensation plans not previously approved by the Company's
stockholders:
(a) the number of securities to be issued upon the exercise of outstanding
options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options, warrants
and rights; and
(c) other than securities to be issued upon the exercise of such outstanding
options, warrants and rights, the number of securities remaining available
for future issuance under the plans.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Number of securities remaining
Number of securities Weighted-average exercise available for
to be issued upon price of outstanding options, future issuance under
Plan category exercise of warrants and rights equity compensation plans
outstanding options, (b) (excluding securities
warrants and rights reflected in column(a))
(a) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders............... 247,328 $11.61 331,789 (1)
Equity compensation plans
not approved by security holders.. -- -- --
--------------------------------------------------------------------------------------------
Total.................................. 247,328 $11.61 331,789 (1)
============================================================================================
<FN>
(1) Includes 128,185 shares available under the QCR Holdings, Inc. Employee
Stock Purchase Plan. Item 13. Certain Relationships and Related
Transactions
</FN>
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the captions "Security
Ownership of Certain Beneficial Owners" and "Transactions with Management" in
the Proxy Statement, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is set forth under the caption
"IndependentRegistered Public Accounting Firm" in the Proxy statement and is
incorporated herein by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated Financial
Statements under Item 8.
(a) 2. Financial Statement Schedules
Financial statement schedules are omitted, as they are not required or are
not applicable, or the required information is shown in the consolidated
financial statements and the accompanying notes thereto.
65
(a) 3. Exhibits
The following exhibits are either filed as a part of this Annual Report on
Form 10-K or are incorporated herein by reference:
Exhibit Number. Exhibit Description
-----------------------------------------------------------------------
3.1 Certificate of Incorporation of QCR Holdings,
Inc., as amended (exhibit is being filed
herewith).
3.2 Bylaws of QCR Holdings, Inc. (incorporated
herein by reference to Exhibit 3(ii) of
Registrant's Quarterly Report on Form 10Q for
the quarter ended September 30, 2002).
4.1 Specimen Stock Certificate of QCR Holdings,
Inc. (incorporated herein by reference to
Exhibit 4.1 of Registrant's Form SB-2, File
No. 33-67028).
4.2 Registration of Preferred Share Purchase
Rights of QCR Holdings, Inc. (incorporated by
reference to Item 1. of Registrant's form
8-A12G, File No. 000-22208).
10.1 Employment Agreement between QCR Holdings,
Inc., Quad City Bank and Trust Company and
Michael A. Bauer dated January 1, 2004
(incorporated herein by reference to Exhibit
10(i) of Registrant's Annual Report on Form
10K for the year ended December 31, 2003).
10.2 Employment Agreement between QCR Holdings,
Inc., Quad City Bank and Trust Company and
Douglas M. Hultquist dated January 1, 2004
(incorporated herein by reference to Exhibit
10(ii) of Registrant's Annual Report on Form
10K for the year ended December 31, 2003).
10.3 Executive Deferred Compensation Agreement
between Quad City Bank and Trust Company and
Michael A. Bauer dated January 1, 2004
(incorporated herein by reference to Exhibit
10(iii) of Registrant's Annual Report on Form
10K for the year ended December 31, 2003).
10.4 Executive Deferred Compensation Agreement
between Quad City Bank and Trust Company and
Douglas M. Hultquist dated January 1, 2004
(incorporated herein by reference to Exhibit
10(iv) of Registrant's Annual Report on Form
10K for the year ended December 31, 2003).
10.5 Lease Agreement between Quad City Bank and
Trust Company and 56 Utica L.L.C.
(incorporated herein by reference to Exhibit
10.5 of Registrant's Annual Report on Form
10-K for the year ended June 30, 2000).
10.6 Employment Agreement between Quad City Bank
and Trust Company and Larry J. Helling dated
January 1, 2004 (incorporated herein by
reference to Exhibit 10(vi) of Registrant's
Annual Report on Form 10K for the year ended
December 31, 2003).
10.7 First Amendment of Lease Agreement dated
October 2001, between Cedar Rapids Bank and
Trust Company f.k.a. Quad City Bank and Trust
Company, and Ryan Companies (incorporated
herein by reference to Exhibit 10.1 of
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
10.8 Executive Deferred Compensation Agreement for
Todd A. Gipple, Executive Vice President and
Chief Financial Officer of QCR Holdings, Inc.
dated January 1, 2004 (incorporated herein by
reference to Exhibit 10(viii) of Registrant's
Annual Report on Form 10K for the year ended
December 31, 2003).
66
10.9 Executive Deferred Compensation Agreement for
Larry J. Helling, President and Chief
Executive Officer of Cedar Rapids Bank and
Trust Company dated January 1, 2004
(incorporated herein by reference to Exhibit
10(ix) of Registrant's Annual Report on Form
10K for the year ended December 31, 2003).
10.10 Employment Agreement between QCR Holdings,
Inc. and Todd A. Gipple dated January 1, 2004
(incorporated herein by reference to Exhibit
10(xi) of Registrant's Annual Report on Form
10K for the year ended December 31, 2003).
10.11 QCR Holdings, Inc. Employee Stock Purchase
Plan (incorporated herein by reference to
Exhibit 5.1 of Registrant's Form S-8, file
No. 333-101356).
10.12 Dividend Reinvestment Plan of QCR Holdings,
Inc. (incorporated herein by reference to
Exhibit 5.1 of Registrant's Form S-3, File
No. 333-102699).
10.13 Indenture by and between QCR Holdings, Inc. /
QCR Holdings Statutory Trust II and U.S. Bank
National Association, as debenture and
institutional trustee, dated February 18,
2004 (incorporated herein by reference to
Exhibit 10(i) of Registrant's Quarterly
Report on Form 10Q for the quarter ended
March 31, 2004).
10.14 Indenture by and between QCR Holdings, Inc. /
QCR Holdings Statutory Trust III and U.S.
Bank National Association, as debenture and
institutional trustee, dated February 18,
2004 (incorporated herein by reference to
Exhibit 10(ii) of Registrant's Quarterly
Report on Form 10Q for the quarter ended
March 31, 2004).
10.15 Employment Agreement between QCR Holdings,
Inc. and Thomas Budd dated June 2004
(incorporated herein by reference to Exhibit
10(i) of Registrant's Quarterly Report on
Form 10Q for the period ended June 30, 2004).
10.16 Employment Agreement between QCR Holdings,
Inc. and Shawn Way dated June 2004
(incorporated herein by reference to Exhibit
10(ii) of Registrant's Quarterly Report on
Form 10Q for the period ended June 30, 2004).
10.17 Lease Agreement between Quad City Bank and
Trust Company and 127 North Wyman
Development, L.L.C. dated November 3, 2004
(incorporated herein by reference to Exhibit
10(i) of Registrant's Quarterly Report on
Form 10-Q for the period ended September 30,
2004).
10.18 2004 Stock Incentive Plan of QCR Holdings,
Inc. (incorporated herein by reference to
Exhibit B of Registrant's Form Pre 14A, filed
March 5, 2004, File No. 000-22208).
10.19 Director Compensation Schedule of QCR
Holdings, Inc. (incorporated herein by
reference to Registrant's Form 8-K, filed
February 2, 2005, file No. 000-22208).
10.20 Non-Qualified Supplemental Executive
Retirement Agreement between Quad City Bank
and Trust Company and Certain Key Executives
dated February 1, 2004 (exhibit is being
filed herewith).
10.21 Non-Qualified Supplemental Executive
Retirement Agreement between Cedar Rapids
Bank and Trust Company and Certain Key
Executives dated February 1, 2004 (exhibit is
being filed herewith).
67
10.22 Executive Deferred Compensation Agreement
between QCR Holdings, Inc. and Thomas Budd
dated July 15, 2004 (exhibit is being filed
herewith).
10.23 Deferred Income Plan of Quad City Holdings,
Inc. (incorporated herein by reference to
Exhibit 99.1 of Registrant's Form S-8, filed
October 21, 1997, File No. 333-38341).
10.24 Stock Option Plan of Quad City Holdings, Inc.
(incorporated herein by reference to Exhibit
10.1 of Registrant's Form SB-2, File No.
33-67028).
10.25 1997 Stock Incentive Plan of Quad City
Holdings, Inc. (incorporated herein by
reference to Exhibit 10.1 of Registrant's
Form S-8, File No. 333-87229).
12.1 Statement re: Computation of Ratios (exhibit
is being filed herewith).
21.1 Subsidiaries of QCR Holdings, Inc. (exhibit
is being filed herewith).
23.1 Consent of Independent Accountant - McGladrey
and Pullen LLP (exhibit is being filed
herewith).
31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a)/15d-14(a).
31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a)/15d-14(a).
32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QCR HOLDINGS, INC.
Dated: March 18, 2005 By: /s/ Douglas M. Hultquist
-------------------------------------
Douglas M. Hultquist
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- ----------------------------------------------------------------------------------------------
/s/ Michael A. Bauer Chairman of the Board of Directors March 18, 2005
- ----------------------------
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive March 18, 2005
- ----------------------------
Douglas M. Hultquist Officer and Director
/s Patrick S. Baird Director March 18, 2005
- ----------------------------
Patrick Baird
/s/ James J. Brownson Director March 18, 2005
- ----------------------------
James J. Brownson
/s/ Larry J. Helling Director March 18, 2005
- ----------------------------
Larry J. Helling
/s/ Mark C. Kilmer Director March 18, 2005
- ----------------------------
Mark C. Kilmer
/s/ John K. Lawson Director March 18, 2005
- ----------------------------
John K. Lawson
/s/ Ronald G. Peterson Director March 18, 2005
- ----------------------------
Ronald G. Peterson
/s/ Henry Royer Director March 18, 2005
- ----------------------------
Henry Royer
69
Appendix A
SUPERVISION AND REGULATION
General
Financial institutions, their holding companies and their affiliates are
extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Iowa Superintendent of Banking (the
"Superintendent"), the Illinois Department of Financial and Professional
Regulation (the "DFPR"), the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and the Federal Deposit Insurance Corporation (the
"FDIC"). Furthermore, taxation laws administered by the Internal Revenue Service
and state taxing authorities and securities laws administered by the Securities
and Exchange Commission (the "SEC") and state securities authorities have an
impact on the business of the Company. The effect of these statutes, regulations
and regulatory policies may be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and
amounts of investments, reserve requirements, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors of the
Banks, rather than shareholders.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. As such, the
following is qualified in its entirety by reference to applicable law. Any
change in statutes, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiaries.
The Company
General. The Company is a bank holding company and is the sole shareholder of
Quad City Bank and Trust Company, an Iowa chartered state bank, Cedar Rapids
Bank and Trust Company, an Iowa chartered state bank (together the "Iowa Banks")
and Rockford Bank and Trust Company, an Illinois chartered state bank ("Illinois
Bank", and together with the Iowa Banks, the "Banks"). As a bank holding
company, the Company is registered with, and is subject to regulation by, the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). In accordance with Federal Reserve policy, the Company is expected to
act as a source of financial strength to the Banks and to commit resources to
support the Banks in circumstances where the Company might not otherwise do so.
Under the BHCA, the Company is subject to periodic examination by the Federal
Reserve. The Company is also required to file with the Federal Reserve periodic
reports of the Company's operations and such additional information regarding
the Company and its subsidiaries as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank
holding company is to control and manage banks. The BHCA generally requires the
prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank
holding company. Subject to certain conditions (including deposit concentration
limits established by the BHCA), the Federal Reserve may allow a bank holding
company to acquire banks located in any state of the United States. In approving
interstate acquisitions, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may be
held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located
(provided that those limits do not discriminate against out-of-state depository
institutions or their holding companies) and state laws that require that the
target bank have been in existence for a minimum period of time (not to exceed
five years) before being acquired by an out-of-state bank holding company.
70
The BHCA generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
This authority would permit the Company to engage in a variety of
banking-related businesses, including the operation of a thrift, consumer
finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
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 neither applied for nor received
approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed to
exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances at
10% ownership.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels, a bank
holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based
requirement expressed as a percentage of total assets weighted according to
risk; and (ii) a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio
of Tier 1 capital to total assets of 3% for the most highly rated companies,
with a minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain loan servicing rights and purchased
credit card relationships). Total capital consists primarily of Tier 1 capital
plus certain other debt and equity instruments that do not qualify as Tier 1
capital and a portion of the company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels. As of December 31, 2004, the Company had
regulatory capital in excess of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its shareholders
may be affected by both general corporate law considerations and policies of the
Federal Reserve applicable to bank holding companies. As a Delaware corporation,
the Company is subject to the limitations of the Delaware General Corporation
Law (the "DGCL"), which allow the Company to pay dividends only out of its
surplus (as defined and computed in accordance with the provisions of the DGCL)
or if the Company has no such surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Additionally, policies of the Federal Reserve caution that a bank holding
company should not pay cash dividends that exceed its net income or that can
only be funded in ways that weaken the bank holding company's financial health,
such as by borrowing. The Federal Reserve also possesses enforcement powers over
bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
71
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The Banks
The Iowa Banks are chartered under Iowa law and the Illinois Bank is chartered
under Illinois law. The deposit accounts of the Banks are insured by the FDIC's
Bank Insurance Fund ("BIF"). The Banks are members of the Federal Reserve System
("member banks"). As Iowa-chartered, FDIC-insured member banks, the Iowa Banks
are subject to the examination, supervision, reporting and enforcement
requirements of the Superintendent, as the chartering authority for Iowa banks.
As an Illinois-chartered, FDIC-insured member bank, the Illinois Bank is subject
to the examination, supervision, reporting and enforcement requirements of the
DFPR, as the chartering authority for Illinois banks. The Banks are also subject
to the examination, reporting and enforcement requirements of the Federal
Reserve, the primary federal regulator of member banks. In addition, the FDIC,
as administrator of the BIF, has regulatory authority over the Banks.
Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 2004, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2005, BIF assessment rates will continue to range from 0% of deposits
to 0.27% of deposits.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations until the final maturity of such obligations in 2019. These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance. During the year ended December 31, 2004, the FICO assessment rate for
BIF and SAIF members was approximately 0.02% of deposits.
Supervisory Assessments. All Iowa banks are required to pay supervisory
assessments to the Superintendent to fund the operations of the Superintendent
and all Illinois banks are required to pay supervisory assessments to the DFPR
to fund the operations of the DFPR. Assessment amounts are calculated on the
basis of the Banks' total assets. During the year ended December 31, 2004, the
Iowa Banks paid supervisory assessments to the Superintendent totaling $82,134.
Because the Illinois Bank did not commence operations until January 3, 2005, it
paid no assessments to the DFPR during the year ended December 31, 2004.
Capital Requirements. Banks are generally required to maintain capital levels in
excess of other businesses. The Federal Reserve has established the following
minimum capital standards for state-chartered insured member banks, such as the
Banks: (i) a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with a minimum
requirement of at least 4% for all others; and (ii) a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. For purposes of these capital standards, the
components of Tier 1 capital and total capital are the same as those for bank
holding companies discussed above.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, regulations of the
Federal Reserve provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities. Both the DFPR's order issuing a charter to the Illinois Bank and the
FDIC's approval of deposit insurance for the Illinois Bank are conditioned upon
the Illinois Bank maintaining a Tier 1 capital to assets ratio of not less than
8% for the first three years of operation; and the Federal Reserve's approval of
the Illinois Bank's application to become a member bank is conditioned upon the
Illinois Bank maintaining a Tier 1 capital to assets ratio of not less than 9%
for the first three years of operation. If the Illinois Bank's Tier 1 capital to
assets ratio falls below 9%, the Illinois Bank may need to raise additional
capital to maintain the required ratio.
72
Further, federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria that determines a bank holding company's
eligibility to operate as a financial holding company is a requirement that all
of its financial institution subsidiaries be "well-capitalized." Under the
regulations of the Federal Reserve, in order to be "well-capitalized" a
financial institution must maintain a ratio of total capital to total
risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total
risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total
assets of 5% or greater.
Federal law also provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized," in each case
as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include: (i)
requiring the institution to submit a capital restoration plan; (ii) limiting
the institution's asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii)
requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2004: (i) neither of the Iowa Banks was subject to a
directive from the Federal Reserve to increase its capital to an amount in
excess of the minimum regulatory capital requirements; (ii) each of the Iowa
Banks exceeded its minimum regulatory capital requirements under Federal Reserve
capital adequacy guidelines; and (iii) each of the Iowa Banks was
"well-capitalized," as defined by Federal Reserve regulations.
Liability of Commonly Controlled Institutions. Under federal law, institutions
insured by the FDIC may be liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC in connection with the default of commonly
controlled FDIC-insured depository institutions or any assistance provided by
the FDIC to commonly controlled FDIC-insured depository institutions in danger
of default. Because the Company controls each of the Banks, the Banks are
commonly controlled for purposes of these provisions of federal law.
Dividend Payments. The primary source of funds for the Company is dividends from
the Banks. Under applicable Iowa and Illinois law, the Banks may not pay
dividends in excess of their undivided profits. Before declaring its first
dividend, the Illinois Bank, as a de novo institution, is required by Illinois
law to carry at least one-tenth of its net profits since the issuance of its
charter to its surplus until its surplus is equal to its capital. The Federal
Reserve Act also imposes limitations on the amount of dividends that may be paid
by state member banks, such as the Banks. Generally, a member bank may pay
dividends out of its undivided profits, in such amounts and at such times as the
bank's board of directors deems prudent. Without prior Federal Reserve approval,
however, a state member bank may not pay dividends in any calendar year that, in
the aggregate, exceed the bank's calendar year-to-date net income plus the
bank's retained net income for the two preceding calendar years. The Federal
Reserve's approval for the Illinois Bank to become a member bank is conditioned
upon the Illinois Bank's commitment that without prior Federal Reserve approval,
it will not pay dividends until after it has been in operation for three years
and has received two consecutive satisfactory composite CAMELS ratings.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, each of the Iowa
Banks exceeded its minimum capital requirements under applicable guidelines as
of December 31, 2004. As of December 31, 2004, approximately $3.2 million would
have been available to be paid as dividends by the Iowa Banks. Notwithstanding
the availability of funds for dividends, however, the Federal Reserve may
prohibit the payment of any dividends by the Banks if the Federal Reserve
determines such payment would constitute an unsafe or unsound practice.
73
Insider Transactions. The Banks are subject to certain restrictions imposed by
federal law on extensions of credit to the Company, on investments in the stock
or other securities of the Company and the acceptance of the stock or other
securities of the Company as collateral for loans made by the Banks. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to their respective directors and officers, to directors and
officers of the Company and its subsidiaries, to principal shareholders of the
Company and to "related interests" of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the terms upon
which any person who is a director or officer of the Company or one of its
subsidiaries or a principal shareholder of the Company may obtain credit from
banks with which the Banks maintain correspondent relationships.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. The Iowa Banks have the authority under Iowa law to
establish branches anywhere in the State of Iowa, subject to receipt of all
required regulatory approvals. In 1997, the Company formed a de novo Illinois
bank that was merged into the Quad City Bank and Trust Company, resulting in the
Quad City Bank and Trust Company establishing a branch office in Illinois. Under
Illinois law, Quad City Bank and Trust Company may continue to establish offices
in Illinois to the same extent permitted for an Illinois bank (subject to
certain conditions, including certain regulatory notice requirements).
Similarly, the Illinois Bank has the authority under Illinois law to establish
branches anywhere in the State of Illinois, subject to receipt of all required
regulatory approvals.
Federal law permits state and national banks to merge with banks in other states
subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is permitted only in those
states that authorize such expansion.
State Bank Investments and Activities. The Iowa Banks and the Illinois Bank
generally are permitted to make investments and engage in activities directly or
through subsidiaries as authorized by Iowa law or Illinois law, respectively.
However, under federal law and FDIC regulations, FDIC-insured state banks are
prohibited, subject to certain exceptions, from making or retaining equity
investments of a type, or in an amount, that are not permissible for a national
bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks
and their subsidiaries, subject to certain exceptions, from engaging as
principal in any activity that is not permitted for a national bank unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. These restrictions have
not had, and are not currently expected to have, a material impact on the
operations of the Banks.
Federal Reserve System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $47.6 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $47.6 million, the reserve
requirement is $1.218 million plus 10% of the aggregate amount of total
transaction accounts in excess of $47.6 million. The first $7.0 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Banks are in compliance with the foregoing requirements.
74
Appendix B
GUIDE 3 INFORMATION
The Following tables and schedules show selected comparative financial
information required by the Securities and Exchange Commission Securities Act
Guide 3, regarding the business of QCR Holdings, Inc. ("the Company") for the
periods shown.
Dual presentation of the tables and schedules is provided. The first
presentation is comparative financial information for periods as presented in
the Company's December 31, 2004 10-K. The second presentation is comparative
financial information restated in calendar year periods consistent with the
Company's current fiscal year, which was adopted in August 2002.
75
I. Distribution of Assets, Liabilities and Stockholders Equity, Interest Rates
and Interest Differential
A. and B. Consolidated Average Balance Sheets and Analysis of Net Interest
Earnings
Years Ended December 31,
---------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ----------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Earned Yield or Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost Balance or Paid Cost
---------------------------------------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Interest earnings assets:
Federal funds sold ................. $ 6,619 $ 42 0.63% $ 23,864 $ 221 0.93% $ 9,813 $ 195 1.99%
Interest-bearing deposits at
at financial institutions ........ 9,030 224 2.48 14,705 432 2.94 20,221 826 4.08
Investment securities (1) .......... 130,408 4,933 3.78 92,558 3,995 4.32 74,500 4,090 5.49
Gross loans receivable (2) ......... 587,450 33,112 5.64 480,314 28,984 6.03 387,936 25,928 6.68
------------------- -------------------- ------------------
Total interest earning assets ... 733,507 38,311 5.22 611,441 33,632 5.50 492,470 31,039 6.30
Noninterest-earning assets:
Cash and due from banks ............ $ 29,891 $ 28,394 $ 22,124
Premises and equipment, net ........ 14,346 9,852 9,216
Less allowance for estimated
losses on loans .................. (9,517) (7,997) (5,902)
Other .............................. 31,300 18,362 13,572
--------- -------- --------
Total assets .................... $ 799,527 $660,052 $531,480
========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ... $171,552 1,379 0.80% $158,287 1,450 0.92% $119,388 1,751 1.47%
Savings deposits ................... 15,553 50 0.32 12,817 58 0.45 10,072 100 0.99
Time deposits ...................... 228,563 5,423 2.37 199,328 5,498 2.76 180,345 6,458 3.58
Short-term borrowings .............. 100,944 1,209 1.20 40,122 327 0.82 31,217 468 1.50
Federal Home Loan Bank advances .... 91,912 3,463 3.77 77,669 3,255 4.19 54,113 2,592 4.79
Junior subordinated debentures ..... 23,293 1,641 7.05 12,000 1,134 9.45 12,000 1,134 9.45
Other borrowings ................... 5,125 160 3.12 8,071 228 2.82 5,000 217 4.34
------------------- -------------------------- ------------------
Total interest-bearing
liabilities ..................... 636,942 13,325 2.09 508,294 11,950 2.35 412,135 12,720 3.09
Noninterest-bearing demand ......... 110,748 102,825 70,265
Other noninterest-bearing
liabilities ...................... 7,947 9,720 16,141
Total liabilities .................. 755,637 620,839 498,541
Stockholders' equity ............... 43,890 39,213 32,939
-------- -------- --------
Total liabilities and
stockholders' equity ............ $799,527 $660,052 $531,480
======== ======== ========
Net interest income ................ $24,986 $ 21,682 $18,319
======= ======== =======
Net interest spread ................ 3.13% 3.15% 3.21%
====== ====== ======
Net interest margin ................ 3.41% 3.55% 3.72%
====== ====== ======
Ratio of average interest earning
assets to average interest-
bearing liabilities .............. 115.16% 120.29% 119.49%
======== ======== ========
<FN>
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
</FN>
76
Six months Ended December 31,
------------------------------------------------------------
2002 2001
----------------------------- -----------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost (3) Balance or Paid Cost (3)
------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Interest earnings assets:
Federal funds sold ........................... $ 10,593 $ 74 1.40% $ 8,277 $ 137 3.31%
Interest-bearing deposits at
at financial institutions .................. 6,441 203 6.30 9,811 315 6.42
Investment securities (1) .................... 82,723 2,058 4.98 63,294 1,780 5.62
Net loans receivable (2) ..................... 412,560 13,748 6.66 307,683 11,538 7.50
Other interest earning assets ................ 17,521 158 1.80 5,746 168 5.85
------------------ ------------------
Total interest earning assets ............. 529,837 16,241 6.13 394,811 13,938 7.05
Noninterest-earning assets:
Cash and due from banks ...................... $ 23,651 $ 16,896
Premises and equipment, net .................. 9,174 9,033
Other ........................................ 4,355 5,855
-------- --------
Total assets .............................. $567,017 $426,595
======== ========
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ............. $129,247 874 1.35% $100,840 1,084 2.15%
Savings deposits ............................. 10,880 45 0.83 8,145 57 1.40
Time deposits ................................ 189,891 3,233 3.41 155,353 3,596 4.63
Short-term borrowings ........................ 35,810 225 1.26 28,651 350 2.44
Federal Home Loan Bank advances .............. 66,415 1,440 4.34 33,155 896 5.40
Junior subordinated debentures ............... 12,000 567 9.45 12,000 567 9.45
Other borrowings ............................. 5,000 100 4.00 3,125 84 5.38
------------------ ------------------
Total interest-bearing
liabilities ............................... 449,243 6,484 2.90 341,269 6,634 3.89
Noninterest-bearing demand ................... 70,028 54,613
Other noninterest-bearing
liabilities ............................... 13,026 3,016
Total liabilities ............................ 532,297 398,898
Stockholders' equity ......................... 34,720 27,697
-------- --------
Total liabilities and
stockholders' equity ...................... $567,017 $426,595
======== ========
Net interest income .......................... $ 9,757 $ 7,304
======== =======
Net interest spread .......................... 3.23% 3.16%
====== ======
Net interest margin .......................... 3.68% 3.70%
====== ======
Ratio of average interest earning
assets to average interest-
bearing liabilities ........................ 117.94% 115.69%
======== ========
<FN>
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
(3) Average yields/costs for the six months ended December 31, 2002 and 2001
are annualized.
</FN>
77
Years Ended June 30,
------------------------------------------------------------------
2002 2001
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost
------------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Interest earnings assets:
Federal funds sold ........................... $ 8,831 $ 258 2.92% $ 21,404 $ 1,267 5.92%
Interest-bearing deposits at
at financial institutions .................. 9,233 590 6.39 11,102 702 6.32
Investment securities (1) .................... 68,019 3,789 5.57 57,454 3,477 6.05
Net loans receivable (2) ..................... 329,578 23,718 7.20 261,404 22,971 8.79
Other interest earning assets ................ 8,642 386 4.47 4,915 245 4.98
-------------------- -------------------
Total interest earning assets ............. 424,303 28,741 6.77 356,279 28,662 8.04
Noninterest-earning assets:
Cash and due from banks ...................... $ 18,665 $ 15,085
Premises and equipment, net .................. 9,308 8,295
Other ........................................ 8,777 5,231
-------- --------
Total assets .............................. $461,053 $384,890
======== ========
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ............. $104,021 1,962 1.89% $ 86,639 2,918 3.37
Savings deposits ............................. 8,597 112 1.30 6,707 132 1.97
Time deposits ................................ 164,542 6,821 4.15 159,822 9,972 6.24
Short-term borrowings ........................ 27,466 592 2.16 22,477 992 4.41
Federal Home Loan Bank advances .............. 41,310 2,048 4.96 24,324 1,463 6.01
Junior subordinated debentures ............... 12,000 1,134 9.45 12,000 1,135 9.46
Other borrowings ............................. 3,846 201 5.23 -- -- --
-------------------- -------------------
Total interest-bearing
liabilities ............................... 361,782 12,870 3.56 311,969 16,612 5.32
Noninterest-bearing demand ................... 59,715 45,902
Other noninterest-bearing
liabilities ................................ 10,143 5,133
Total liabilities ............................ 431,640 363,004
Stockholders' equity ......................... 29,413 21,886
-------- --------
Total liabilities and
stockholders' equity ...................... $461,053 $384,890
======== ========
Net interest income .......................... $ 15,871 $ 12,050
======== ========
Net interest spread .......................... 3.22% 2.72%
====== ======
Net interest margin .......................... 3.74% 3.38%
====== ======
Ratio of average interest earning
assets to average interest-
bearing liabilities ........................ 117.28% 114.20%
======== ========
<FN>
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
</FN>
78
C. Analysis of Changes of Interest Income/Interest Expense
For the years ended December 31, 2004, 2003 and 2002
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Year Rate Volume
------------------------------
2004 vs. 2003
-----------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ............................................................. $ (179) $ (65) $ (114)
Interest-bearing deposits at other financial institut(208) .................... (60) (148)
Investment securities (2) ...................................................... 938 (561) 1,499
Gross loans receivable (2) (3) ................................................. 4,128 (2,066) 6,194
-----------------------------
Total change in interest income ...................................... $ 4,679 $(2,752) $ 7,431
=============================
INTEREST EXPENSE
Interest-bearing demand deposits ............................................... $ (71) $ (199) $ 128
Savings deposits ............................................................... (8) (19) 11
Time deposits .................................................................. (75) (842) 767
Short-term borrowings .......................................................... 882 197 685
Federal Home Loan Bank advances ................................................ 208 (358) 566
Junior subordinated debentures ................................................. 507 (346) 853
Other borrowings ............................................................... (68) 22 (90)
-----------------------------
Total change in interest expense ..................................... $ 1,375 $(1,545) $ 2,920
-----------------------------
Total change in net interest income ............................................ $ 3,304 $(1,207) $ 4,511
=============================
Components
Inc./(Dec.) of Change (1)
from -----------------
Prior Year Rate Volume
-----------------------------
2003 vs. 2002
-----------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ............................................................. $ 26 $ (144) $ 170
Interest-bearing deposits at other financial institut(394) .................... (200) (194)
Investment securities (2) ...................................................... (95) (973) 878
Gross loans receivable (2) (3) ................................................. 3,056 (2,692) 5,748
-----------------------------
Total change in interest income ...................................... $ 2,593 $(4,009) $ 6,602
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits ............................................... $ (301) $ (772) $ 471
Savings deposits ............................................................... (42) (64) 22
Time deposits .................................................................. (960) (1,591) 631
Short-term borrowings .......................................................... (141) (251) 110
Federal Home Loan Bank advances ................................................ 663 (355) 1,018
Junior subordinated debentures ................................................. -- -- --
Other borrowings ............................................................... 11 (93) 104
-----------------------------
Total change in interest expense ..................................... $ (770) $(3,126) $ 2,356
-----------------------------
Total change in net interest income ............................................ $ 3,363 $ (883) $ 4,246
=============================
<FN>
(1) The column "increase/decrease from prior year" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(3) Loan fees are not material and are included in interest income from loans
receivable.
</FN>
79
For the six months ended December 31, 2002 and 2001
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Year Rate Volume
------------------------------
2002 vs. 2001
-----------------------------
(Dollars in Thousands)
2002 vs. 2001
------------------------------
INTEREST INCOME
Federal funds sold ............................................................ $ (63) $ (146) $ 83
Certificates of deposit at other financial institutions ....................... (6) (106)
Investment securities (2) ..................................................... 278 (521) 799
Net loans receivable (2) (3) .................................................. 2,210 (3,330) 5,540
Other interest earning assets ................................................. (10) (350) 340
-----------------------------
Total change in interest income ..................................... $ 2,303 $(4,353) $ 6,656
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .............................................. $ (210) $ (814) $ 604
Savings deposits .............................................................. (12) (49) 37
Time deposits ................................................................. (363) (1,935) 1,572
Short-term borrowings ......................................................... (125) (314) 189
Federal Home Loan Bank advances ............................................... 544 (502) 1,046
Junior subordinated debentures ................................................ -- -- --
Other borrowings .............................................................. 16 (56) 72
-----------------------------
Total change in interest expense .................................... $ (150) $(3,670) $ 3,520
-----------------------------
Total change in net interest income ........................................... $ 2,453 $ (683) 3,136
=============================
For the years ended June 30, 2002 and 2001
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Year Rate Volume
------------------------------
2002 vs. 2001
-----------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ............................................................ $(1,009) $ (467) $ (542)
Certificates of deposit at other financial institutions ....................... 7 (119)
Investment securities (2) ..................................................... 312.00 (292) 604
Net loans receivable (2) (3) .................................................. 747 (4,604) 5,351
Other interest earning assets ................................................. 141 (27) 168
-----------------------------
Total change in interest income ..................................... 79 $(5,383) $ 5,462
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .............................................. $ (956) $(1,461) $ 505
Savings deposits .............................................................. (20) (52) 32
Time deposits ................................................................. (3,151) (3,438) 287
Short-term borrowings ......................................................... (400) (586) 186
Federal Home Loan Bank advances ............................................... 585 (293) 878
Junior subordinated debentures ................................................ (1) (1) --
Other borrowings .............................................................. 201 -- 201
-----------------------------
Total change in interest expense .................................... $(3,742) $(5,831) $ 2,089
-----------------------------
Total change in net interest income ........................................... $ 3,821 $ 448 $ 3,373
=============================
<FN>
(1) The column "increase/decrease from prior year" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(3) Loan fees are not material and are included in interest income from loans
receivable.
</FN>
80
II. Investment Portfolio
A. Investment Securities
The following tables present the amortized cost and fair value of investment
securities as of December 31, 2004, 2003 and 2002.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------------------------------------
(Dollars in Thousands)
December 31, 2004
- ----------------------------------
Securities held to maturity:
Municipal securities ............. $ --
Foreign bonds .................... 100 8 108
---------------------------------------------
Totals ...................... $ 100 $ 8 $ -- $ 108
=============================================
Securities available for sale:
U.S. Treasury securities ......... $ 100 $ (1) $ 99
U.S. agency securities ........... 114,649 368 (392) 114,625
Mortgage-backed securities ....... 3,864 20 (19) 3,865
Municipal securities ............. 15,923 654 (132) 16,445
Corporate securities ............. 6,704 230 (9) 6,925
Trust preferred securities ....... 1,149 94 -- 1,243
Other securities ................. 5,995 264 -- 6,259
---------------------------------------------
Totals ...................... $148,384 $ 1,630 $ (553) $149,461
=============================================
December 31, 2003
- ----------------------------------
Securities held to maturity:
Municipal securities ............. $ 250 $ 4 $ -- $ 254
Other bonds ...................... 150 13 -- 163
---------------------------------------------
Totals ...................... $ 400 $ 17 $ -- $ 417
=============================================
Securities available for sale:
U.S. Treasury securities ......... $ 1,002 $ 3 $ -- $ 1,005
U.S. agency securities ........... 86,732 1,105 (64) 87,773
Mortgage-backed securities ....... 5,656 67 (8) 5,715
Municipal securities ............. 15,664 1,018 (1) 16,681
Corporate securities ............. 9,466 492 (4) 9,954
Trust preferred securities ....... 1,350 105 -- 1,455
Other securities ................. 5,688 173 (1) 5,860
---------------------------------------------
Totals ...................... $125,558 $ 2,963 $ (78) $128,443
=============================================
December 31, 2002
- ----------------------------------
Securities held to maturity:
Municipal securities ............. $ 250 $ 9 $ -- $ 259
Other bonds ...................... 175 17 -- 192
---------------------------------------------
Totals ...................... $ 425 $ 26 $ -- $ 451
=============================================
Securities available for sale:
U.S. Treasury securities ......... $ 1,017 $ 20 $ -- $ 1,037
U.S. agency securities ........... 47,535 1,702 (1) 49,236
Mortgage-backed securities ....... 5,601 170 0 5,771
Municipal securities ............. 13,941 978 -- 14,919
Corporate securities ............. 7,691 475 -- 8,166
Trust preferred securities ....... 1,350 93 (11) 1,432
Other securities ................. 659 20 (11) 668
---------------------------------------------
Totals ...................... $ 77,794 $ 3,458 $ (23) $ 81,229
=============================================
81
The following tables present the amortized cost and fair value of investment
securities as of June 30, 2002.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------------------------------------
(Dollars in Thousands)
June 30, 2002
- ---------------------------------------
Securities held to maturity:
Municipal securities .................. $ 250 $ 8 $ -- $ 258
Other bonds ........................... 175 4 -- 179
-------------------------------------------
Totals ........................... $ 425 $ 12 $ -- $ 437
===========================================
Securities available for sale:
U.S. Treasury securities .............. $ 1,024 $ 9 $ -- $ 1,033
U.S. agency securities ................ 42,251 1,088 -- 43,339
Mortgage-backed securities ............ 5,758 124 -- 5,882
Municipal securities .................. 13,664 538 (15) 14,187
Corporate securities .................. 9,291 191 (6) 9,476
Trust preferred securities ............ 1,350 111 (15) 1,446
Other securities ...................... 408 39 (4) 443
-------------------------------------------
Totals ........................... $73,746 $ 2,100 $ (40) $75,806
===========================================
82
B. Investment Securities, Maturities, and Yields
The following table presents the maturity of securities held on December 31,
2004 and the weighted average stated coupon rates by range of maturity:
Weighted
Amortized Average
Cost Yield
----------------------
(Dollars in Thousands)
U.S. Treasury securities:
Within 1 year ........................... $ 100 1.66%
===================
U.S. Agency securities:
Within 1 year ........................... $ 13,995 2.91%
After 1 but within 5 years .............. 95,590 3.36%
After 5 but within 10 years ............. 5,064 4.65%
-------------------
Total ........................... $114,649 3.36%
===================
Mortgage-backed securities:
Within 1 year ........................... $ 33 5.09%
After 1 but within 5 years .............. 1,722 3.88%
After 5 but within 10 years ............. 2,109 4.37%
-------------------
Total ........................... $ 3,864 4.16%
===================
Municipal securities:
Within 1 year ........................... $ 580 6.84%
After 1 but within 5 years .............. 6,081 5.57%
After 5 but within 10 years ............. 6,857 7.13%
After 10 years .......................... 2,405 7.84%
-------------------
Total ........................... $ 15,923 6.63%
===================
Corporate securities:
Within 1 year ........................... $ 2,001 4.29%
After 1 but within 5 years .............. 4,703 5.66%
-------------------
Total ........................... $ 6,704 5.25%
===================
Trust preferred securities:
After 10 years .......................... $ 1,149 8.81%
===================
Other bonds:
After 1 but within 5 years .............. 50 5.30%
After 5 but within 10 years ............. 50 6.55%
-------------------
Total ........................... $ 100 5.93%
===================
Other securities with no maturity or
stated face rate ........................ $ 5,995
=========
83
The following table presents the maturity of securities held on December 31,
2003 and the weighted average stated coupon rates by range of maturity:
Weighted
Amortized Average
Cost Yield
----------------------
(Dollars in Thousands)
U.S. Treasury securities:
Within 1 year ................................ $ 1,002 3.20%
======================
U.S. Agency securities:
Within 1 year ................................ $12,563 3.58%
After 1 but within 5 years ................... 60,976 2.91%
After 5 but within 10 years .................. 13,193 2.94%
----------------------
Total ................................ $86,732 3.00%
======================
Mortgage-backed securities:
After 1 but within 5 years ................... $ 2,508 4.02%
After 5 but within 10 years .................. 3,148 4.67%
--------------------
Total ................................ $ 5,656 4.38%
====================
Municipal securities:
Within 1 year ................................ $ 750 6.25%
After 1 but within 5 years ................... 4,757 6.36%
After 5 but within 10 years .................. 5,599 6.83%
After 10 years ............................... 4,808 7.83%
--------------------
Total ................................ $15,914 6.96%
====================
Corporate securities:
Within 1 year ................................ $ 2,687 4.91%
After 1 but within 5 years ................... 6,779 5.19%
--------------------
Total ................................ $ 9,466 5.11%
====================
Trust preferred securities:
After 10 years ............................... $ 1,350 8.92%
====================
Other bonds:
Within 1 year ................................ $ 50 6.60%
After 1 but within 5 years ................... 50 5.30%
After 5 but within 10 years .................. 50 6.55%
--------------------
Total ................................ $ 150 6.15%
====================
Other securities with no maturity or
stated face rate ............................. $ 5,688
=======
C. Investment Concentrations
At December 31, 2004 and 2003, there were no securities in the investment
portfolio above (other than U.S. Government, U.S. Government agencies, and
corporations) that exceeded 10% of the stockholders' equity.
84
III. Loan Portfolio
A. Types of Loans
The composition of the loan portfolio is presented as follows:
December 31, June 30,
----------------------------------- ------------------------------------
2004 2003 2002 2002 2001 2000
----------------------------------- ------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate ................ $ 532,517 $ 435,345 $ 350,206 $ 305,019 $ 209,933 $ 167,733
Real estate loans held for sale - residential
mortgage ........................................... 3,499 3,790 23,691 8,498 5,824 1,122
Real estate - residential mortgage ................... 52,423 29,604 28,761 34,034 32,191 35,180
Real estate - construction ........................... 3,608 2,254 2,230 2,861 2,568 3,464
Installment and other consumer ....................... 55,736 50,984 44,567 40,037 37,362 34,405
--------------------------------------------------------------------------
Total loans .......................... 647,783 521,977 449,455 390,449 287,878 241,904
Deferred loan origination costs (fees), net .......... 568 494 281 145 (13) (51)
Less allowance for estimated
losses on loans .............................. (9,262) (8,643) (6,879) (6,111) (4,248) (3,617)
---------------------------------------------------------------------------
Net loans ............................ $ 639,089 $ 513,828 $ 442,857 $ 384,483 $ 283,617 $ 238,236
===========================================================================
December 31,
---------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
---------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate ................ $ 532,517 $ 435,345 $ 350,206 $ 255,486 $ 186,952 $ 142,219
Real estate loans held for sale - residential
mortgage .......................................... 3,499 3,790 23,691 13,470 1,627 1,177
Real estate - residential mortgage ................... 52,423 29,604 28,761 30,457 37,388 31,360
Real estate - construction ........................... 3,608 2,254 2,230 3,399 2,117 2,668
Installment and other consumer ....................... 55,736 50,984 44,567 40,103 37,434 33,899
---------------------------------------------------------------------------
Total loans .......................... 647,783 521,977 449,455 342,915 265,518 211,323
Deferred loan origination costs (fees), net .......... 568 494 281 84 100 53
Less allowance for estimated
losses on loans .............................. (9,262) (8,643) (6,879) (4,939) (3,972) (3,341)
---------------------------------------------------------------------------
Net loans ............................ $ 639,089 $ 513,828 $ 442,857 $ 338,060 $ 261,646 $ 208,035
===========================================================================
85
III. Loan Portfolio
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
Maturities After One Year
------------------------------
At December 31, 2004 Due in one Due after one Due after Predetermined Adjustable
year or less through 5 years 5 years interest rates interest rates
--------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate .................... $167,946 $309,430 $ 55,141 $250,590 $113,981
Real estate loans held for sale - residential mortgage ... -- -- 3,499 3,471 28.00
Real estate - residential mortgage ....................... 1,042 231 51,150 4,568 46,813
Real estate - construction ............................... 3,527 81 -- 81 --
Installment and other consumer ........................... 13,760 40,334 1,642 28,638 13,338
-----------------------------------------------------------------------
Total loans .............................. $186,275 $350,076 $111,432 $287,348 $174,160
=======================================================================
Maturities After One Year
------------------------------
At December 31, 2003 Due in one Due after one Due after Predetermined Adjustable
year or less through 5 years 5 years interest rates interest rates
--------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate .................... $116,545 $273,007 $ 45,793 $241,491 $ 77,309
Real estate loans held for sale - residential mortgage ... -- -- 3,790 3,790 --
Real estate - residential mortgage ....................... 964 218 28,422 7,241 21,399
Real estate - construction ............................... 2,174 80 -- 80 --
Installment and other consumer ........................... 13,675 34,490 2,819 26,436 10,873
-----------------------------------------------------------------------
Total loans .............................. $133,358 $307,795 $ 80,824 $279,038 $109,581
=======================================================================
86
III. Loan Portfolio
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The following tables represent Nonaccrual, Past Due, Renegotiated Loans, and
other Real Estate Owned:
December 31, June 30,
---------------------------- ---------------------------
2004 2003 2002 2002 2001 2000
---------------------------- ---------------------------
(Dollars in Thousands)
Loans accounted for on nonaccrual basis ............ $ 7,608 $ 4,204 $ 4,608 $ 1,560 $ 1,232 $ 383
Accruing loans past due 90 days or more ............ 1,133 756 431 708 495 352
Other real estate owned ............................ 1,925 -- -- -- 47 --
Troubled debt restructurings ....................... -- -- -- -- -- --
----------------------------------------------------------
Totals .............................. $10,666 $ 4,960 $ 5,039 $ 2,268 $ 1,774 $ 735
==========================================================
December 31,
----------------------------------------------------------
2004 2003 2002 2001 2000 1999
----------------------------------------------------------
(Dollars in Thousands)
Loans accounted for on nonaccrual basis ........... $ 7,608 $ 4,204 $ 4,608 $ 1,846 $ 655 $ 1,178
Accruing loans past due 90 days or more ........... 1,133 756 431 1,765 1,197 200
Other real estate owned ........................... 1,925 -- -- 47 -- --
Troubled debt restructurings ...................... -- -- -- -- -- --
----------------------------------------------------------
Totals ............................. $10,666 $ 4,960 $ 5,039 $ 3,658 $ 1,852 $ 1,378
==========================================================
The policy of the company is to place a loan on nonaccrual status if: (a)
payment in full of interest or principal is not expected, or (b) principal or
interest has been in default for a period of 90 days or more unless the
obligation is both in the process of collection and well secured. Well secured
is defined as collateral with sufficient market value to repay principal and all
accrued interest. A debt is in the process of collection if collection of the
debt is proceeding in due course either through legal action, including judgment
enforcement procedures, or in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in restoration to current status.
2. Potential Problem Loans. To management's best knowledge, there are no such
significant loans that have not been disclosed in the above table.
3. Foreign Outstandings. None.
4. Loan Concentrations. At December 31, 2004, there were no concentrations of
loans exceeding 10% of the total loans which are not otherwise disclosed in
Item III. A.
D. Other Interest-Bearing Assets
There are no interest-bearing assets required to be disclosed here.
87
IV. Summary of Loan Loss Experience
A. Analysis of the Allowance for Estimated Losses on Loans
The following tables summarize activity in the allowance for estimated losses on
loans of the Company:
Six months
Years ended ended Years ended
December 31, December 31, June 30,
----------------------- ------------- -------------------------------------
2004 2003 2002 2002 2001 2000
----------------------- --------- -------------------------------------
(Dollars in Thousands)
Average amount of loans outstanding,
before allowance for estimated losses
on loans ................................... $ 587,450 $ 480,314 $ 419,104 $ 334,205 $ 265,350 $ 212,497
Allowance for estimated losses on loans:
Balance, beginning of fiscal period .......... 8,643 6,879 6,111 4,248 3,617 2,895
Charge-offs:
Commercial ............................... (624) (1,777) (1,349) (437) (87) (43)
Real Estate .............................. (49) -- -- -- -- (7)
Installment and other consumer ........... (292) (298) (105) (204) (213) (377)
--------------------------------------------------------------------------------
Subtotal charge-offs .............. (965) (2,075) (1,454) (641) (300) (427)
-------------------------------------------------------------------------------
Recoveries:
Commercial ............................... 137 192 0 101 2 1
Real Estate .............................. -- -- -- -- -- --
Installment and other consumer ........... 75 242 38 138 39 96
-------------------------------------------------------------------------------
Subtotal recoveries ............... 212 434 38 239 41 97
-------------------------------------------------------------------------------
Net charge-offs ................... (753) (1,641) (1,416) (402) (259) (330)
Provision charged to expense ................. 1,372 3,405 2,184 2,265 890 1,052
-------------------------------------------------------------------------------
Balance, end of fiscal year .................. $ 9,262 $ 8,643 $ 6,879 $ 6,111 $ 4,248 $ 3,617
===============================================================================
Ratio of net charge-offs to average loans
outstanding ................................ 0.13% 0.34% 0.34% 0.12% 0.10% 0.16%
Years Ended
December 31,
-------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
(Dollars in Thousands)
Average amount of loans outstanding,
before allowance for estimated losses
on loans ................................... $ 587,450 $ 480,314 $ 387,936 $ 294,708 $ 237,947 $ 199,401
Allowance for estimated losses on loans:
Balance, beginning of fiscal period .......... 8,643 6,879 4,939 3,972 3,341 2,629
Charge-offs:
Commercial ............................... (624) (1,777) (1,455) (332) (87) (57)
Real Estate .............................. (49) -- -- -- -- (32)
Installment and other consumer ........... (292) (298) (214) (205) (355) (342)
-------------------------------------------------------------------------------
Subtotal charge-offs .............. (965) (2,075) (1,669) (537) (442) (431)
-------------------------------------------------------------------------------
Recoveries:
Commercial ............................... 137 192 73 29 2 4
Real Estate .............................. -- -- -- -- -- --
Installment and other consumer ........... 75 242 126 66 71 102
-------------------------------------------------------------------------------
Subtotal recoveries ............... 212 434 199 95 73 106
-------------------------------------------------------------------------------
Net charge-offs ................... (753) (1,641) (1,470) (442) (369) (325)
Provision charged to expense ................. 1,372 3,405 3,410 1,409 1,000 1,037
-------------------------------------------------------------------------------
Balance, end of fiscal year .................. $ 9,262 $ 8,643 $ 6,879 $ 4,939 $ 3,972 $ 3,341
===============================================================================
Ratio of net charge-offs to average loans
outstanding ................................ 0.13% 0.34% 0.38% 0.15% 0.16% 0.16%
88
B. Allocation of the Allowance for Estimated Losses on Loans
The following tables present the allowance for the estimated losses on loans by
type of loans and the percentage of loans in each category to total loans:
December 31, 2004 December 31, 2003 December 31, 2002
---------------------------------------------------------------------------
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
---------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate................ $ 8,423 82.21% $ 7,676 83.40% $ 6,176 77.91%
Real estate loans held for sale - residential
mortgage .......................................... 17 0.54% 4 0.73% 24 5.27%
Real estate - residential mortgage .................. 205 8.09% 272 5.67% 159 6.40%
Real estate - construction .......................... 21 0.56% 11 0.43% 11 0.50%
Installment and other consumer ...................... 591 8.60% 678 9.77% 507 9.92%
Unallocated ......................................... 5 0.00% 2 NA 2 NA
---------------------------------------------------------------------------
Total ....................................... $ 9,262 100.00% $ 8,643 100.00% $ 6,879 100.00%
===========================================================================
June 30, 2002 June 30, 2001 June 30, 2000
---------------------------------------------------------------------------
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
---------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate................ $ 5,240 78.12% $ 3,231 72.92% $ 2,863 69.33%
Real estate loans held for sale - residential
mortgage .......................................... 1 2.18% -- 2.02% -- 0.46%
Real estate - residential mortgage .................. 302 8.72% 182 11.18% 121 14.55%
Real estate - construction .......................... 14 0.73% -- 0.89% 9 1.43%
Installment and other consumer ...................... 554 10.25% 835 12.99% 618 14.23%
Unallocated ......................................... -- NA -- NA 6 NA
---------------------------------------------------------------------------
Total ....................................... $ 6,111 100.00% $ 4,248 100.00% $ 3,617 100.00%
===========================================================================
December 31, 2004 December 31, 2003 December 31, 2002
---------------------------------------------------------------------------
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
---------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate................ $ 8,423 82.21% $ 7,676 83.40% $ 6,176 77.91%
Real estate loans held for sale - residential
mortgage .......................................... 17 0.54% 4 0.73% 24 5.27%
Real estate - residential mortgage .................. 205 8.09% 272 5.67% 159 6.40%
Real estate - construction .......................... 21 0.56% 11 0.43% 11 0.50%
Installment and other consumer ...................... 591 8.60% 678 9.77% 507 9.92%
Unallocated ......................................... 5 0.00% 2 NA 2 NA
---------------------------------------------------------------------------
Total ....................................... $ 9,262 100.00% $ 8,643 100.00% $ 6,879 100.00%
===========================================================================
December 31, 2001 December 31, 2000 December 31, 1999
---------------------------------------------------------------------------
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
---------------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate................ $ 4,305 74.50% $ 3,339 70.41% $ 2,674 67.30%
Real estate loans held for sale - residential
mortgage .......................................... 14 3.93% 2 0.61% 1 0.56%
Real estate - residential mortgage .................. 140 8.88% 183 14.08% 62 14.84%
Real estate - construction .......................... 17 0.99% 11 0.80% 13 1.26%
Installment and other consumer ...................... 461 11.70% 437 14.10% 585 16.04%
Unallocated ......................................... 2 NA - NA 6 NA
---------------------------------------------------------------------------
Total ....................................... $ 4,939 100.00% $ 3,972 100.00% $ 3,341 100.00%
===========================================================================
89
V. Deposits.
The average amount of and average rate paid for the categories of deposits for
the years ended December 31, 2004, 2003, and 2002, six months ended December 31,
2002 and 2001, and the years ended June 30, 2002 and 2001 are discussed in the
consolidated average balance sheets and can be found on pages 2,3, and 4 of
Appendix B.
Included in interest bearing deposits at December 31, 2004, 2003 and 2002, and
June 30, 2002 and 2001 were certificates of deposit totaling $165,685,917,
$73,799,534, $69,373,970, $62,919,139, and $50,298,559 respectively, that were
$100,000 or greater. Maturities of these certificates were as follows:
December 31, June 30,
------------------------------ -------------------
2004 2003 2002 2002 2001
------------------------------ -------------------
(Dollars in Thousands)
One to three months ......................................................... $ 39,352 $ 28,120 $ 28,053 $ 18,223 $ 20,949
Three to six months ......................................................... 60,456 21,176 20,713 11,202 11,488
Six to twelve months ........................................................ 40,699 17,600 12,591 24,464 12,973
Over twelve months .......................................................... 25,179 6,904 8,017 9,030 4,889
----------------------------------------------------
Total certificates of
deposit greater than $100,000 ....................................... $165,686 $ 73,800 $ 69,374 $ 62,919 $ 50,299
====================================================
December 31,
-----------------------------------------
2004 2003 2002 2001
-----------------------------------------
(Dollars in Thousands)
One to three months ......................................................... $ 39,352 $ 28,120 $ 28,053 $ 33,024
Three to six months ......................................................... 60,456 21,176 20,713 20,360
Six to twelve months ........................................................ 40,699 17,600 12,591 3,640
Over twelve months .......................................................... 25,179 6,904 8,017 6,388
-----------------------------------------
Total certificates of
deposit greater than $100,000 ....................................... $165,686 $ 73,800 $ 69,374 $ 63,412
=========================================
90
VI. Return on Equity and Assets.
The following tables present the return on assets and equity and the equity to
assets ratio of the Company:
Six months
Years ended ended Years ended
December 31, December 31, June 30,
-------------------------- ------------ --------------------------
2004 2003 2002 2002 2001
-------------------------- ----------- --------------------------
(Dollars in Thousands)
Average total assets ..................................... $ 799,527 $ 660,052 $ 567,017 $ 461,053 $ 384,890
Average equity ........................................... 43,890 39,213 34,720 29,413 21,886
Net income ............................................... 5,217 5,461 3,196 2,962 2,396
Return on average assets ................................. 0.65% 0.83% 1.13% 0.64% 0.62%
Return on average equity ................................. 11.89% 13.93% 18.40% 10.07% 10.95%
Dividend payout ratio .................................... 6.50% 5.34% 3.90% NA NA
Average equity to average assets ratio ................... 5.49% 5.94% 6.12% 6.38% 5.69%
Years ended
December 31,
--------------------------------------------------------
2004 2003 2002 2001
--------------------------------------------------------
(Dollars in Thousands)
Average total assets ..................................... $ 799,527 $ 660,052 $ 531,480 $ 413,611
Average equity ........................................... 43,890 39,213 32,939 25,440
Net income ............................................... 5,217 5,461 4,821 2,729
Return on average assets ................................. 0.65% 0.83% 0.91% 0.66%
Return on average equity ................................. 11.89% 13.93% 14.64% 10.73%
Dividend payout ratio .................................... 6.50% 5.34% 2.86% NA
Average equity to average assets ratio ................... 5.49% 5.94% 6.20% 6.15%
VII. Short Term Borrowings.
The information requested is disclosed in the Notes to the December 31, 2004
Consolidated Financial Statements in Note 7.
91