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, 2005.
Commission file number: 0-22208
QCR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 42-1397595
(State of incorporation) (I.R.S. Employer Identification No.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
(Address of principal executive offices)
(309) 736-3580
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None.
Securities registered pursuant to Section 12(g)of the Exchange Act:
Common stock, $1 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [ x ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on The
Nasdaq SmallCap Market on June 30, 2005, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$86,474,472.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: As of March 1, 2006, the
Registrant had outstanding 4,537,711 shares of common stock, $1.00 par value per
share.
Documents incorporated by reference:
Part III of Form 10-K - Proxy statement for annual meeting of
stockholders to be held in May 2006.
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 through 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. ("Bancard"), based in Moline, Illinois
and in direct financing lease contracts through its 80% equity investment in M2
Lease Funds, LLC ("M2 Lease Funds"), based in the Milwaukee, Wisconsin area.
Quad City Bank & Trust was capitalized on October 13, 1993 and commenced
operations on January 7, 1994. Quad City Bank & Trust is an Iowa-chartered
commercial bank that is a member of the Federal Reserve System with depository
accounts insured to the maximum amount permitted by law by the Federal Deposit
Insurance Corporation (the "FDIC"). Quad City Bank & Trust provides full service
commercial and consumer banking and trust and asset management services in the
Quad Cities and adjacent communities through its five offices that are located
in Bettendorf and Davenport, Iowa and in Moline, Illinois. At December 31, 2005,
Quad City Bank & Trust had total assets of $718.5 million.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member
of the Federal Reserve System with depository accounts insured to the maximum
amount permitted by law by the FDIC. The Company commenced operations in Cedar
Rapids in June 2001 operating as a branch of Quad City Bank & Trust. The Cedar
Rapids branch operation then began functioning under the Cedar Rapids Bank &
Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service
commercial and consumer banking and trust and asset management services to Cedar
Rapids, Iowa and adjacent communities through its two new facilities, which were
both completed in the summer of 2005. The headquarters for Cedar Rapids Bank &
Trust is located in downtown Cedar Rapids, and its first branch location is
located in northern Cedar Rapids. At December 31, 2005, Cedar Rapids Bank &
Trust had total assets of $289.9 million.
On January 3, 2005, Rockford Bank & Trust opened as the Company's third bank
subsidiary. The Company commenced operations in Rockford, Illinois in September
2004 operating as a branch of Quad City Bank & Trust. Rockford Bank & Trust is
an Illinois-chartered commercial bank that is a member of the Federal Reserve
System with depository accounts insured to the maximum amount permitted by law
by the FDIC. It provides full-service commercial and consumer banking to
Rockford and adjacent communities through its original office located in
downtown Rockford and its recently opened branch location in a temporary modular
facility on Guilford Road at Alpine Road in Rockford. The Company plans to build
a 20,000 square foot banking facility at a projected cost of $4.4 million with
completion scheduled for October 2006. At December 31, 2005, Rockford Bank &
Trust had total assets of $41.3 million.
Bancard was capitalized in April 1995 as a Delaware corporation that provides
merchant and cardholder credit card processing services. In October 2002,
Bancard sold 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.
On August 26, 2005, the Quad City Bank & Trust acquired 80% of the membership
units of M2 Lease Funds. John Engelbrecht, the President and Chief Executive
Officer of M2 Lease Funds, retained 20% of the membership units. M2 Lease Funds,
which is based in the Milwaukee, Wisconsin area, is engaged in the business of
leasing machinery and equipment to commercial and industrial businesses under
direct financing lease contracts. Quad City Bank & Trust acquired assets and
assumed liabilities totaling $35.0 million and $30.0 million, respectively, for
a purchase price of $5.0 million, which resulted in goodwill of $3.4 million and
minority interest of $573 thousand. In accordance with the provisions of FAS
Statement 142, goodwill is not being amortized, but will be evaluated annually
for impairment.
2
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.
On May 5, 2005, the Company issued $5,000,000 of floating rate capital
securities through a newly formed subsidiary, QCR Holdings Statutory Trust IV
("Trust IV"). Trust IV is a 100% owned non-consolidated subsidiary of the
Company. Trust IV used the proceeds from the sale of the trust preferred
securities, along with the funds from its equity, to purchase junior
subordinated debentures of the Company in the amount of $5,155,000.
On February 24, 2006, the Company issued $10,000,000 of fixed/floating rate
capital securities through a newly formed subsidiary, QCR Holdings Statutory
Trust V ("Trust V"). Trust V is a 100% owned non-consolidated subsidiary of the
Company. Trust V used the proceeds from the sale of the trust preferred
securities, along with the funds from its equity, to purchase junior
subordinated debentures of the Company in the amount of $10,310,000.
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, Trust III, Trust IV, and Trust V. The Company also holds an 80% equity
interest in M2 Lease Funds. In addition to such ownership, the Company invests
its capital in stocks of financial institutions and mutual funds, as well as
participates in loans with the subsidiary banks. In addition, to its
wholly-owned and majority-owned subsidiaries, the Company has an aggregate
investment of $308 thousand in three associated companies, Nobel Electronic
Transfer, LLC, Nobel Real Estate Investors, LLC, and Velie Plantation Holding
Company, LLC. The Company owns 20% equity positions in each of these affiliated
companies. In June 2005, Cedar Rapids Bank & Trust entered into a joint venture
as a 50% owner of Cedar Rapids Mortgage Company, LLC ("Cedar Rapids Mortgage
Company").
The Company and its subsidiaries collectively employed 305 individuals at
December 31, 2005. No one customer accounts for more than 10% of revenues, loans
or deposits.
Business. The Company's principal business consists of attracting deposits from
the public and investing those deposits in loans and securities. The deposits of
the subsidiary banks are insured to the maximum amount allowable by the FDIC.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loans and
securities and the interest paid on deposits and borrowings. Its operating
results are affected by merchant credit card fees, trust fees, deposit service
charge fees, fees from the sale of residential real estate loans and other
income. Operating expenses include employee compensation and benefits, occupancy
and equipment expense, professional and data processing fees, advertising and
marketing expenses, bank service charges, insurance, and other administrative
expenses. The Company's operating results are also affected by economic and
competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities, as described more fully in this
form 10-K.
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 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 FDIC.
Rockford Bank & Trust is regulated by the State of Illinois Department of
Financial and Professional Regulation ("the Illinois DFPR") and the FDIC.
3
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 $9.4
million. As of December 31, 2005, commercial loans made up approximately 80% of
the loan portfolio, while residential mortgages comprised approximately 10% and
consumer loans comprised approximately 10%.
Cedar Rapids Bank & Trust's current corporate lending limit is approximately
$3.5 million. As of December 31, 2005, commercial loans made up approximately
88% of the loan portfolio, while residential mortgages comprised approximately
5% and consumer loans comprised approximately 7%.
Rockford Bank & Trust's current corporate lending limit is approximately $2.3
million. As of December 31, 2005, commercial loans made up approximately 83% of
the loan portfolio, while residential mortgages comprised approximately 9% and
consumer loans comprised approximately 8%.
As part of the loan monitoring activity at the three subsidiary banks, credit
administration personnel interact closely with senior bank management. The
Company has also instituted a separate loan review function to analyze credits
of the subsidiary banks. Management has attempted to identify problem loans at
an early stage and to aggressively seek a resolution of these situations.
As noted above, the subsidiary banks are active commercial lenders. The areas of
emphasis include loans to wholesalers, manufacturers, building contractors,
developers, business services companies and retailers. The banks provide a wide
range of business loans, including lines of credit for working capital and
operational purposes and term loans for the acquisition of facilities, equipment
and other purposes. Collateral for these loans generally includes accounts
receivable, inventory, equipment and real estate. In addition, the subsidiary
banks often take personal guarantees to help assure repayment. Loans may be made
on an unsecured basis if warranted by the overall financial condition of the
borrower. Terms of commercial business loans generally range from one to five
years. A significant portion of the subsidiary banks' commercial business loans
has floating interest rates or reprice within one year. The banks also make
commercial real estate loans. Collateral for these loans generally includes the
underlying real estate and improvement3, and may include additional assets of
the borrower.
Residential mortgage lending continues to be a focal point for the banks, and
they sell the majority of their real estate loans in the secondary market.
During the year ended December 31, 2005, the subsidiary banks originated $122.1
million of real estate loans and sold $99.6 million, or 82%, of these loans.
During the year ended December 31, 2004, the subsidiary banks originated $124.6
million of real estate loans and sold $83.5 million, or 67%, of these loans.
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.
Generally, the subsidiary banks' residential mortgage loans conform to the
underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary
banks to resell loans in the secondary market. The subsidiary banks structure
most loans that will not conform to those underwriting requirements as
adjustable rate mortgages that mature in one to five years, and then retain
these loans in their portfolios. The subsidiary banks' real estate loan
portfolios, net of loans held for sale, were approximately $56.9 million at
December 31, 2005. Servicing rights are not presently retained on the loans sold
in the secondary market.
The consumer lending departments of each bank provide a,l types of consumer
loans including motor vehicle, home improvement, home equity, signature loans
and small personal credit lines.
Change in Fiscal Years. 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 2006 annual meeting will be held on May 3, 2006. 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 2005 are for the year ended December 31, 2005, and
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, 2005, 2004,
and 2003, along with the six-month transition period and the previous fiscal
year ended June 30, 2002.
4
Appendices. The commercial banking business is a highly regulated business. See
Appendix A for a summary of the federal and state statutes and regulations,
which are applicable to the Company and its subsidiaries. Supervision,
regulation and examination of banks and bank holding companies by bank
regulatory agencies are intended primarily for the protection of depositors
rather than stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative
statistical information required pursuant to the securities laws, relating to
the business of the Company. Consistent with the information presented in Form
10-K, results are presented for the fiscal years ended December 31, 2005, 2004
and 2003, along with the six-month transition period ended December 31, 2002,
and the previous two fiscal years ended June 30. A second presentation shows
comparative financial information restated in calendar year periods for 2000,
2001 and 2002 consistent with the Company's current fiscal year.
Internet Site. 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. Also
available are many of our corporate governance documents, including our Code of
Ethics. The sites are www.qcrh.com, www.qcbt.com, www.crbt.com, and
www.rfrdbank.com.
Item 1.A. Risk Factors
In addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:
Our business is concentrated in and dependent upon the continued growth and
welfare of the Quad City, Cedar Rapids and Rockford markets.
We operate primarily in the Quad City, Cedar Rapids and Rockford markets, and as
a result, our financial condition, results of operations and cash flows are
subject to changes in the economic conditions in those areas. We have developed
a particularly strong presence in Bettendorf, Cedar Rapids and Davenport, Iowa
and Moline, Illinois and their surrounding communities. Our success depends upon
the business activity, population, income levels, deposits and real estate
activity in these markets. Although our customers' business and financial
interests may extend well beyond these market areas, adverse economic conditions
that affect these market areas could reduce our growth rate, affect the ability
of our customers to repay their loans to us and generally affect our financial
condition and results of operations. Because of our geographic concentration, we
are less able than other regional or national financial institutions to
diversify our credit risks across multiple markets.
We face intense competition in all phases of our business from other banks and
financial institutions.
The banking and financial services businesses in our markets are highly
competitive. Our competitors include large regional banks, local community
banks, savings and loan associations, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market mutual
funds, credit unions and other non-bank financial service providers. Many of
these competitors are not subject to the same regulatory restrictions as we are.
Many of our unregulated competitors compete across geographic boundaries and are
able to provide customers with a feasible alternative to traditional banking
services. Additionally, if the regulatory trend toward reducing restrictions on
the interstate operations of financial institutions continues, we will continue
to experience increased competition as a result.
Increased competition in our markets may also result in a decrease in the
amounts of our loans and deposits, reduced spreads between loan rates and
deposit rates or loan terms that are more favorable to the borrower. Any of
these results could have a material adverse effect on our ability to grow and
remain profitable. If increased competition causes us to significantly discount
the interest rates we offer on loans or increase the amount we pay on deposits,
our net interest income could be adversely impacted. If increased competition
causes us to relax our underwriting standards, we could be exposed to higher
losses from lending activities. Additionally, many of our competitors are much
larger in total assets and capitalization, have greater access to capital
markets and larger lending limits and offer a broader range of financial
services than we can offer.
Our community banking strategy relies heavily on our subsidiaries' independent
management teams, and the unexpected loss of key managers may adversely affect
our operations.
5
We rely heavily on the success of our bank subsidiaries' independent management
teams. Accordingly, much of our success to date has been influenced strongly by
our ability to attract and to retain senior management experienced in banking
and financial services and familiar with the communities in our market areas.
Our ability to retain executive officers, the current management teams, branch
managers and loan officers of our operating subsidiaries will continue to be
important to the successful implementation of our strategy. It is also critical,
as we grow, to be able to attract and retain qualified additional management and
loan officers with the appropriate level of experience and knowledge about our
market areas to implement our community-based operating strategy. The unexpected
loss of services of any key management personnel, or the inability to recruit
and retain qualified personnel in the future, could have an adverse effect on
our business, financial condition and results of operations.
Our continued pace of growth may require us to raise additional capital in the
future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate
levels of capital to support our operations. We anticipate that our existing
capital resources will satisfy our capital requirements for the foreseeable
future. However, we may at some point need to raise additional capital to
support our continued growth. Our ability to raise additional capital, if
needed, will depend on conditions in the capital markets at that time, which are
outside our control, and on our financial performance. Accordingly, we cannot
assure you of our ability to raise additional capital, if needed, on terms
acceptable to us. If we cannot raise additional capital when needed, our ability
to further expand our operations through internal growth, branching, de novo
bank formations and/or acquisitions could be materially impaired.
We may experience difficulties in managing our growth and our growth strategy
involves risks that may negatively impact our net income.
As part of our general growth strategy, we may expand into additional
communities or attempt to strengthen our position in our current markets by
undertaking additional de novo bank formations or branch openings. Based on our
experience, we believe that it generally takes several years for new banking
facilities to achieve overall profitability, due to the impact of organization
and overhead expenses and the start-up phase of generating loans and deposits.
To the extent that we undertake additional branching and de novo bank and
business formations, we are likely to continue to experience the effects of
higher operating expenses relative to operating income from the new operations,
which may have an adverse effect on our levels of reported net income, return on
average equity and return on average assets. Other effects of engaging in such
growth strategies may include potential diversion of our management's time and
attention and general disruption to our business.
In addition to branching and de novo bank formations, we may acquire banks and
related businesses that we believe provide a strategic fit with our business. To
the extent that we grow through acquisitions, we cannot assure you that we will
be able to adequately and profitably manage this growth. Acquiring other banks
and businesses will involve similar risks to those commonly associated with
branching and de novo bank formations, but may also involve additional risks,
including:
o potential exposure to unknown or contingent liabilities of banks and
businesses we acquire;
o exposure to potential asset quality issues of the acquired bank or
related business;
o difficulty and expense of integrating the operations and personnel of
banks and businesses we acquire; and
o the possible loss of key employees and customers of the banks and
businesses we acquire.
Interest rates and other conditions impact our results of operations.
Our profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities. Like most banking institutions, our net
interest spread and margin will be affected by general economic conditions and
other factors, including fiscal and monetary policies of the federal government,
that influence market interest rates and our ability to respond to changes in
such rates. At any given time, our assets and liabilities will be such that they
are affected differently by a given change in interest rates. As a result, an
increase or decrease in rates, the length of loan terms or the mix of adjustable
and fixed rate loans in our portfolio could have a positive or negative effect
on our net income, capital and liquidity. We measure interest rate risk under
various rate scenarios and using specific criteria and assumptions. A summary of
this process, along with the results of our net interest income simulations is
presented at "Quantitative and Qualitative Disclosures About Market Risk"
included under Item 7A of Part II of this Form 10-K. Although we believe our
current level of interest rate sensitivity is reasonable and effectively
managed, significant fluctuations in interest rates may have an adverse effect
on our business, financial condition and results of operations.
We must effectively manage our credit risk.
6
There are risks inherent in making any loan, including risks inherent in dealing
with individual borrowers, risks of nonpayment, risks resulting from
uncertainties as to the future value of collateral and risks resulting from
changes in economic and industry conditions. We attempt to minimize our credit
risk through prudent loan application approval procedures, careful monitoring of
the concentration of our loans within specific industries and periodic
independent reviews of outstanding loans by our credit review department.
However, we cannot assure you that such approval and monitoring procedures will
reduce these credit risks.
The majority of our subsidiary banks' loan/lease portfolios are invested in
commercial loans/leases, and we focus on lending to small to medium-sized
businesses. The size of the loans/leases we can offer to commercial customers is
less than the size of the loans/leases that our competitors with larger lending
limits can offer. This may limit our ability to establish relationships with the
area's largest businesses. As a result, we may assume greater lending risks than
financial institutions that have a lesser concentration of such loans/leases and
tend to make loans/leases to larger businesses. Collateral for these
loans/leases generally includes accounts receivable, inventory, equipment and
real estate. However, depending on the overall financial condition of the
borrower, some loans are made on an unsecured basis. In addition to commercial
loans/leases, our subsidiary banks are also active in residential mortgage and
consumer lending.
Commercial and industrial loans/leases make up a large portion of our loan/lease
portfolio.
Commercial and industrial loans/leases were $359.4 million, or approximately 48%
of our total loan/lease portfolio as of December 31, 2005. Our commercial
loans/leases are primarily made based on the identified cash flow of the
borrower and secondarily on the underlying collateral provided by the borrower.
Most often, this collateral is accounts receiv!ble, inventory, or equipment.
Credit support provided by the borrower for most of these loans/leases and the
probability of repayment is based on the liquidation of the pledged collateral
and enforcement of a personal guarantee, if any exists. As a result, in the case
of loans secured by accounts receivable, the availability of funds for the
repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers. The collateral securing
other loans/leases may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the business.
Our loan/lease portfolio has a significant concentration of commercial real
estate loans, which involve risks specific to real estate value.
Commercial real estate lending comprised a significant portion of our loan/lease
portfolio, $269.7 million or approximately 36%, as of December 31, 2005. The
market value of real estate can fluctuate significantly in a short period of
time as a result of market conditions in the geographic area in which the real
estate is located. Although a significant portion of such loans are secured by
real estate as a secondary form of collateral, adverse developments affecting
real estate values in one or more of our markets could increase the credit risk
associated with our loan portfolio. Additionally, real estate lending typically
involves higher loan principal amounts and the repayment of the loans generally
is dependent, in large part, on sufficient income from the properties securing
the loans to cover operating expenses and debt service. Economic events or
governmental regulations outside of the control of the borrower or lender could
negatively impact the future cash flow and market values of the affected
properties.
If the loans that are collateralized by real estate become troubled during a
time when market conditions are declining or have declined, then we may not be
able to realize the amount of security that we anticipated at the time of
originating the loan, which could cause us to increase our provision for loan
losses and adversely affect our operating results and financial condition.
Our allowance for loan/lease losses may prove to be insufficient to absorb
potential losses in our loan/lease portfolio.
We established our allowance for loan/lease losses in consultation with
management of our subsidiaries and maintain it at a level considered adequate by
management to absorb loan/lease losses that are inherent in the portfolio. The
amount of future loan/lease losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, which may
be beyond our control, and such losses may exceed current estimates. At December
31, 2005, our allowance for loan/lease losses as a percentage of total
loans/leases was 1.17% and as a percentage of total non-performing loans/leases
was approximately 254%. Although management believes that the allowance for
loan/lease losses is adequate to absorb losses on any existing loans/leases that
may become uncollectible, we cannot predict loan/lease losses with certainty,
and we cannot assure you that our allowance for loan/lease losses will prove
sufficient to cover actual loan/lease losses in the future. Loan/lease losses in
excess of our reserves may adversely affect our business, financial condition
and results of operations. Additional information regarding our allowance for
loan/lease losses and the methodology we use to determine an appropriate level
of reserves is located in the "Management's Discussion and Analysis" section
included under Item 5 of Part II of this Form 10-K.
7
Our Bancard operation faces other risks.
Bancard, our credit card processing subsidiary, is subject to certain risks,
which could have a negative impact on its operations. Primarily, for Bancard
these risks are competition, credit risks and the possibility that merchants'
willingness to accept credit cards will decline. Many of Bancard's competitors
have greater financial, technological, marketing and personnel resources than
Bancard and there can be no assurance that Bancard will be able to compete
effectively with such entities.
Bancard is also subject to credit risks. When a billing dispute arises between a
cardholder and a merchant, and if the dispute is not resolved in favor of the
merchant, the transaction is charged back to the merchant. If Bancard is unable
to collect such chargeback from the merchant's account, and if the merchant
refuses or is unable to reimburse Bancard for the chargeback due to bankruptcy
or other reasons, Bancard bears the loss for the amount of the refund paid to
the cardholder. Bancard, in general, handles processing for smaller, less
seasoned merchants, which may present greater risk of loss. Although Bancard
maintains a reserve against these losses, there is no assurance that it will be
adequate.
Additionally, VISA and MasterCard have the ability to increase the "interchange"
rates charged to merchants for credit card transactions. There can be no
assurance that merchants will continue to accept credit cards as payment if they
feel rates are too high. Bancard is also subject to an approval process by the
VISA and MasterCard credit card associations. In the event Bancard fails to
comply with these standards, Bancard's designation as a certified processor
could be suspended or terminated. There can be no assurance that VISA or
MasterCard will maintain Bancard's registrations or that the current VISA or
MasterCard rules allowing Bancard to provide transaction processing services
will remain in effect.
We have a continuing need for technological change and we may not have the
resources to effectively implement new technology.
The financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend in part upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations as we continue to grow and expand our market areas. Many of our
larger competitors have substantially greater resources to invest in
technological improvements. As a result, they may be able to offer additional or
superior products to those that we will be able to offer, which would put us at
a competitive disadvantage. Accordingly, we cannot provide you with assurance
that we will be able to effectively implement new technology-driven products and
services or be successful in marketing such products and services to our
customers.
System failure or breaches /f our network security could subject us to increased
operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to
unforeseen problems. Our operations are dependent upon our ability to protect
our computer equipment against damage from physical theft, fire, power loss,
telecommunications failure or a similar catastrophic event, as well as from
security breaches, denial of service attacks, viruses, worms and other
disruptive problems caused by hackers. Any damage or failure that causes an
interruption in our operations could have a material adverse effect on our
financial condition and results of operations. Computer break-ins, phishing and
other disruptions could also jeopardize the security of information stored in
and transmitted through our computer systems and network infrastructure, which
may result in significant liability to us and may cause existing and potential
customers to refrain from doing business with us. Although we, with the help of
third-party service providers, intend to continue to implement security
technology and establish operational procedures to prevent such damage, there
can be no assurance that these security measures will be successful. In
addition, advances in computer capabilities, new discoveries in the field of
cryptography or other developments could result in a compromise or breach of the
algorithms we and our third-party service providers use to encrypt and protect
customer transaction data. A failure of such security measures could have a
material adverse effect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to,
customer or employee fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to
financial losses or regulatory sanctions and seriously harm our reputation.
Misconduct by our employees could include hiding unauthorized activities from
us, improper or unauthorized activities on behalf of our customers or improper
use of confidential information. It is not always possible to prevent employee
errors and misconduct, and the precautions we take to prevent and detect this
activity may not be effective in all cases. Employee errors could also subject
us to financial claims for negligence.
8
We maintain a system of internal controls and insurance coverage to mitigate
against operational risks, including data processing system failures and errors
and customer or employee fraud. Should our internal controls fail to prevent or
detect an occurrence, or if any resulting loss is not insured or exceeds
applicable insurance limits, it could have a material adverse effect on our
business, financial condition and results of operations.
Government regulation can result in limitations on our operations.
We operate in a highly regulated environment and are subject to supervision and
regulation by a number of governmental regulatory agencies, including the
Federal Reserve System, the FDIC, the Iowa Department of Banking ("IDOB") and
the Illinois Department of Financial and Professional Regulation ("IDFPR").
Regulations adopted by these agencies, which are generally intended to provide
protection for depositors and customers rather than for the benefit of
stockholders, govern a comprehensive range of matters relating to ownership and
control of our shares, our acquisition of other companies and businesses,
permissible activities for us to engage in, maintenance of adequate capital
levels and other aspects of our operations. These bank regulators possess broad
authority to prevent or remedy unsafe or unsound practices or violations of law.
The laws and regulations applicable to the banking industry could change at any
time and we cannot predict the effects of these changes on our business and
profitability. Increased regulation could increase our cost of compliance and
adversely affect profitability. For example, new legislation or regulation may
limit the manner in which we may conduct our business, including our ability to
offer new products, obtain financing, attract deposits, make loans and achieve
satisfactory interest spreads.
Failure to pay interest on our debt may adversely impact our ability to pay
dividends.
As of December 31, 2005, we had $25.8 million of junior subordinated debentures
held by three business trusts that we control. Interest payments on the
debentures, which totaled $1.6 million for 2005, must be paid before we pay
dividends on our capital stock, including our Common Stock. We have the right to
defer interest payments on the debentures for up to 20 consecutive quarters.
However, if we elect to defer interest payments, all deferred interest must be
paid before we may pay dividends on our capital stock. Deferral of interest
payments could also cause a decline in the market price of our Common Stock.
There is a limited trading market for our common shares, and you may not be able
to resell your shares at or above the price stockholders paid for them.
Although our common shares are listed for quotation on the Nasdaq Capital
Market, the trading in our common shares has substantially less liquidity than
many other companies quoted on Nasdaq. A public trading market having the
desired characteristics of depth, liquidity and orderliness depends on the
presence in the market of willing buyers and sellers of our common shares at any
given time. This presence depends on the individual decisions of investors and
general economic and market conditions over which we have no control. We cannot
assure you that volume of trading in our common shares will increase in the
future.
Item 1.B. Unresolved Staff Comments
There are no unresolved staff comments.
Item 2. Properties
The original office of Quad City Bank & Trust is in a 6,700 square foot
facility, which was completed in January 1994. In March 1994, Quad City Bank &
Trust acquired that facility, which is located at 2118 Middle Road in
Bettendorf, Iowa.
Construction of a second full service banking facility was completed in July
1996 to provide for the convenience of customers and to expand the market
territory. Quad City Bank & Trust also owns that facility which is located at
4500 Brady Street in Davenport, Iowa. The two-story building is in two segments
that are separated by an atrium. 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.
9
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.
In September 2003, the Company announced plans for a fifth Quad City Bank &
Trust banking facility, to be located in west Davenport, Iowa at Five Points.
Total costs were approximately $3.6 million. The facility was completed and
began operations in March 2005. Quad City Bank & Trust's Five Points branch is a
12,000 square foot facility.
The Company announced plans, in April 2001, to expand its banking operations to
the Cedar Rapids, Iowa market. Initially, from June until mid-September 2001,
the Cedar Rapids operation functioned as a branch of Quad City Bank & Trust
while waiting for regulatory approvals for a new state bank charter. On
September 14, 2001, the Cedar Rapids branch operation was converted into the new
charter and began operations as Cedar Rapids Bank & Trust Company. Until the
summer of 2005, Cedar Rapids Bank & Trust leased approximately 8,200 square feet
in the GreatAmerica Building in downtown Cedar Rapids, which had served as its
only office.
In February 2004, Cedar Rapids Bank & Trust announced plans to build a four
floor building in downtown Cedar Rapids. The bank's main office relocated to
this site in July 2005, when construction was completed. Cedar Rapids Bank &
Trust owns the lower three floors of the facility, and an unrelated third party
owns the fourth floor in a condominium arrangement with the bank. In the summer
of 2005, Cedar Rapids Bank & Trust also completed construction on a branch
office in northern Cedar Rapids on Council Street. Cedar Rapids Bank & Trust's
first branch facility began operations on June 2, 2005.
The Company announced plans in June 2004 to expand banking operations to the
Rockford, Illinois market. Initially, from September through December 2004, the
Rockford operation functioned as a branch of Quad City Bank & Trust while
waiting for regulatory approvals for a new state bank charter in Illinois. On
January 3, 2005, the Rockford branch operation was converted into the Company's
third charter and began operations as Rockford Bank and Trust Company. Rockford
Bank & Trust leases approximately 7,800 square feet in the newly restored
Morrissey Building at 127 North Wyman Street in downtown Rockford, which serves
as its main office. In the third quarter of 2005, Rockford Bank & Trust moved
forward with plans for a second banking location on Guilford Road at Alpine Road
in Rockford. A temporary modular facility opened in December 2005. The Company
plans to construct a 20,000 square foot building projected for completion in
August 2006.
The subsidiary banks intend to limit their investment in premises to no more
than 50% of their capital. Management believes that the facilities are of sound
construction, in good operating condition, are appropriately insured and are
adequately equipped for carrying on the business of the Company.
No individual real estate property or mortgage amounts to 10% or more of
consolidated assets.
10
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, 2005.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock, par value $1.00 per share, of the Company is listed for
quotation on The Nasdaq Capital Market under the symbol "QCRH". The stock began
trading on October 6, 1993. As of December 31, 2005, there were 4,531,224 shares
of common stock outstanding held by approximately 2,600 holders of record. The
following table sets forth the high and low sales prices of the common stock, as
reported by The Nasdaq Capital Market, for the periods indicated.
2005 2004 2003
sales price sales price sales price
--------------------- ------------------- ------------------
High Low High Low High Low
--------------------------------------------------------------------
First quarter........ $22.000 $20.000 $22.000 $18.667 $12.100 $11.220
Second quarter....... 22.060 19.830 19.667 17.400 13.333 11.633
Third quarter........ 22.750 20.500 19.940 17.550 16.667 13.207
Fourth quarter....... 20.500 17.920 21.990 18.000 19.387 15.000
On April 28, 2005, the board of directors declared a cash dividend of $0.04
payable on July 6, 2005, to stockholders of record on June 15, 2005. On October
27, 2005, the board of directors declared a cash dividend of $0.04 per share
payable on January 6, 2006, to stockholders of record on December 23, 2005. In
the future, it is the Company's intention to continue to consider the payment of
dividends on a semi-annual basis. The Company anticipates an ongoing need to
retain much of its operating income to help provide the capital for continued
growth, but believes that operating results have reached a level that can
sustain dividends to stockholders as well. The Company has issued junior
subordinated debentures in four private placements. Under the terms of the
debentures, the Company may be prohibited, under certain circumstances, from
paying dividends on shares of its common stock. None of these circumstances
currently exist.
Under applicable state laws, the banks are restricted as to the maximum amount
of dividends that they may pay on their common stock. 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.
The Federal Reserve Act also imposes limitations on the amount of dividends that
may be paid by state member banks, such as the banks. Generally, a member bank
may pay dividends out of its undivided profits, in such amounts and at such
times as the bank's board of directors deems prudent. Without prior Federal
Reserve approval, however, a state member bank may not pay dividends in any
calendar year that, in the aggregate, exceed the bank's calendar year-to-date
net income plus the bank's retained net income for the two preceding calendar
years. The Federal Reserve's approval for Rockford Bank & Trust to become a
member bank is conditioned upon Rockford Bank & Trust's commitment that without
prior Federal Reserve approval, it will not pay dividends until after it has
been in operation for three years and has received two consecutive satisfactory
composite CAMELS ratings. Notwithstanding the availability of funds for
dividends, however, the banks' regulators may prohibit the payment of any
dividends by the banks if they determine that such payment would constitute an
unsafe or unsound practice. The Company's ability to pay dividends to its
shareholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding companies. The
payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized.
The Company did not repurchase any of its common stock during the fourth quarter
of 2005.
11
Item 6. Selected Financial Data
The following "Selected Consolidated Financial Data" of the Company is derived
in part from, and should be read in conjunction with, our consolidated financial
statements and the accompanying notes thereto. See Item 8 "Financial
Statements." Results for past periods are not necessarily indicative of results
to be expected for any future period.
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
Years Ended December 31, Six Year Ended June 30,
----------------------------------- Months ----------------------
Ended
December 31,
2005 2004 2003 2002 2002 2001
-----------------------------------------------------------------------
Statement of Income Data:
Interest income ........................ $ 48,688 $ 38,017 $ 33,378 $ 16,120 $ 28,520 $ 28,544
Interest expense ....................... 21,281 13,325 11,950 6,484 12,870 16,612
Net interest income .................... 27,407 24,692 21,428 9,636 15,650 11,932
Provision for loan/lease losses ........ 877 1,372 3,405 2,184 2,265 889
Noninterest income ..................... 10,073 8,682 11,168 8,840 7,915 6,313
Noninterest expenses ................... 29,433 24,281 21,035 11,413 17,023 13,800
Pre-tax net income ..................... 7,170 7,721 8,156 4,879 4,277 3,556
Minority interest in income of
consolidated subsidiary ................ 78 -- -- -- -- --
Income tax expense ..................... 2,282 2,504 2,695 1,683 1,315 1,160
Net income ............................. 4,810 5,217 5,461 3,196 2,962 2,396
Per Common Share Data:
Net income-basic ....................... $ 1.06 $ 1.23 $ 1.31 $ 0.77 $ 0.74 $ 0.71
Net income-diluted ..................... 1.04 1.20 1.28 0.76 0.72 0.69
Cash dividends declared ................ 0.08 0.08 0.07 0.03 -- --
Dividend payout ratio .................. 7.55% 6.50% 5.34% 3.90% --% --%
Balance Sheet:
Total assets ........................... $1,042,614 $ 870,084 $ 710,040 $ 604,600 $ 518,828 $ 400,948
Securities ............................. 182,365 149,561 128,843 81,654 76,231 56,710
Loans/leases ........................... 756,254 648,351 522,471 449,736 390,594 287,865
Allowance for estimated losses
on loans/leases ....................... 8,884 9,262 8,643 6,879 6,111 4,248
Deposits ............................... 698,504 588,016 511,652 434,748 376,317 302,155
Stockholders' equity:
Common ............................... 54,467 50,774 41,823 36,587 32,578 23,817
Key Ratios:
Return on average assets ............... 0.51% 0.65% 0.83% 1.13% 0.64% 0.62%
Return on average
common equity .......................... 9.14 11.89 13.93 18.41 10.07 10.95
Net interest margin (TEY) (1) .......... 3.25 3.41 3.55 3.68 3.74 3.38
Efficiency ratio (2) ................... 78.53 72.75 64.53 61.71 72.20 75.64
Nonperforming assets to
total assets ........................... 0.36 1.23 0.70 0.83 0.44 0.44
Allowance for estimated losses on
loans/leases to total loans/leases ..... 1.17 1.43 1.65 1.53 1.56 1.48
Net charge-offs to
average loans/leases ................... 0.25 0.13 0.34 0.34 0.12 0.10
Average stockholders' equity to
average assets ......................... 5.63 5.49 5.94 6.12 6.38 5.69
Earnings to fixed charges
Excluding interest on
Deposits ............................. 1.78 x 2.11 x 2.51 x 2.90 x 1.95 x 1.90 x
Including interest on
Deposits ............................. 1.32 1.56 1.66 1.73 1.32 1.21
(1) Interest earned and yields on nontaxable investments are determined on
a tax equivalent basis using a 34% tax rate.
(2) Noninterest expenses divided by the sum of net interest income before
provision for loan/lease losses and noninterest income.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion provides additional information regarding our
operations for the twelve-month periods ending December 31, 2005, 2004, and
2003, and financial condition at December 31, 2005 and 2004. This discussion
should be read in conjunction with "Selected Consolidated Financial Data" and
our consolidated financial statements and the accompanying notes thereto
included or incorporated by reference elsewhere in this document.
Overview
The Company was formed in February 1993 for the purpose of organizing Quad City
Bank & Trust. Over the past thirteen years, the Company has grown to include two
additional banking subsidiaries and a number of nonbanking subsidiaries, which
in aggregate totaled $1.04 billion in consolidated assets as of December 31,
2005.
The Company reported earnings of $4.8 million or $1.06 basic earnings per share
for 2005, as compared to $5.2 million or $1.23 basic earnings per share for
2004, and $5.5 million or $1.31 basic earnings per share for 2003. Earnings for
2005 were negatively impacted by anticipated increases in both personnel and
facilities costs, as the subsidiary banks opened four new banking locations
during the year, and by a related write-off of $332 thousand of tenant
improvements at a previously occupied facility. Also during 2005, the Company
absorbed the start-up losses experienced by Rockford Bank & Trust, which opened
at the beginning of 2005. Earnings for 2004 reflected the Company's issuance of
$8.0 million in floating rate and $12.0 million in fixed/floating rate trust
preferred securities. In connection with this issuance, the Company redeemed, on
June 30, 2004, $12.0 million of trust preferred securities originally issued in
1999. Prior to this redemption, the Company had expensed $747 thousand of
unamortized issuance costs associated with the 1999 trust preferred securities
in March 2004. The write-off of these costs, combined with the additional
interest costs of supporting both the original and the new securities from
February through June, resulted in an after-tax reduction to net income during
2004 of $729 thousand, or $0.17 in diluted earnings per share. 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.
For 2004, excluding the one-time write-off of the unamortized issuance costs and
the additional interest costs incurred for approximately four months, net income
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 2004, there was solid growth in 2005 in both net interest
income and noninterest income for the Company. For 2005, net interest income and
noninterest income improved by 11% and 16%, respectively, for a combined
increase of $4.1 million when compared to 2004. A decrease in the provision for
loan/lease losses of $495 thousand from 2004 to 2005 also contributed positively
to net income. The successful resolution of several large credits in the
subsidiary banks' loan portfolios, through foreclosure, payoff, or
restructuring, resulted in reductions to both provision expense and the level of
allowance for loan/lease losses. Merchant credit card fees, net of processing
costs and trust department fees also contributed an additional $661 thousand, in
aggregate, to the Company's noninterest income. Partially offsetting these
revenue contributions for the Company was an increase in noninterest expense of
$5.2 million. The primary contributors to the increase in noninterest expense
were salaries and employee benefits, which increased $2.8 million from the same
period in 2004 and occupancy and equipment expense, which increased $1.0 million
with the addition of four new banking locations during the year. Also during
2005, the Company incurred $1.9 million of pretax operating costs associated
with the start-up of the new banking operation in Rockford, Illinois.
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
averag% tax equivalent yield on interest earning assets increased 0.53% for 2005
as compared to 2004. With the same comparison, the average cost of
interest-bearing liabilities increased 0.70%, which resulted in a 0.17% decrease
in the net interest spread of 3.13% for 2004 to 2.96% for 2005. The significant
narrowing of the net interest spread from year to year, in turn depressed net
interest margin. For 2005, net interest margin was 3.25% compared to 3.41% for
2004. 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.
13
The Company's operating results are also affected by sources of noninterest
income, including merchant credit card fees, trust fees, deposit service charge
fees, gains from the sales of residential real estate loans and other income.
Operating expenses of the Company include employee compensation and benefits,
occupancy and equipment expense and other administrative expenses. The Company's
operating results are also affected by economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. The majority of the subsidiary banks' loan portfolios
are invested in commercial loans. Deposits from commercial customers represent a
significant funding source as well.
The Company has continued to add facilities and employees to accommodate both
our historical growth and anticipated future growth. As such, overhead expenses
have had a significant impact on earnings. This trend is likely to continue as
the Company and our three banks continue to add the facilities and resources
necessary to attract and serve additional customers.
Trust department income continues to be a significant contributor to noninterest
income. During 2005, trust department fees totaled $2.8 million. Trust
department fees contributed $2.5 million in revenues during 2004. During 2003,
trust department fees totaled $2.2 million. 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,
2005 increased $32.8 million during the year to $811.2 million, resulting
primarily from the development of existing relationships and the addition of new
trust relationships. Assets under administration at December 31, 2004 were
$778.4 million, which was an increase of $104.9 million from December 31, 2003,
when assets totaled $673.5 million.
Critical Accounting Policy
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan/lease
losses. The Company's allowance for loan/lease loss methodology incorporates a
variety of risk considerations, both quantitative and qualitative in
establishing an allowance for loan/lease loss that management believes is
appropriate at each reporting date. Quantitative factors include the Company's
historical loss experience, delinquency and charge-off trends, collateral
values, governmental guarantees, payment status, changes in nonperforming
loans/leases, and other factors. Quantitative factors also incorporate known
information about individual loans/leases, including borrowers' sensitivity to
interest rate movements. Qualitative factors include the general economic
environment in the Company's markets, including economic conditions throughout
the Midwest and in particular, the state of certain industries. Size and
complexity of individual credits in relation to loan/lease structure, existing
loan/lease policies and pace of portfolio growth are other qualitative factors
that are considered in the methodology. As the Company adds new products and
increases the complexity of its loan/lease portfolio, it enhances its
methodology accordingly. Management may report a materially different amount for
the provision for loan/lease losses in the statement of operations to change the
allowance for loan/lease losses if its assessment of the above factors were
different. This discussion and analysis should be read in conjunction with the
Company's financial statements and the accompanying notes presented elsewhere
herein, as well as the portion of this Management's Discussion and Analysis
section entitled "Financial Condition - Allowance for Loan/Lease Losses."
Although management believes the levels of the allowance as of December 31,
2003, 2004, and 2005 were adequate to absorb losses inherent in the loan/lease
portfolio, a decline in local economic conditions, or other factors, could
result in increasing losses that cannot be reasonably predicted at this time.
Results of Operations
2005 compared with 2004
Overview. Net income for 2005 was $4.8 million as compared to net income of $5.2
million for 2004 for a decrease of $407 thousand or 8%. Basic earnings per share
for 2005 were $1.06 as compared to $1.23 for 2004. The decrease in net income
was comprised of an increase in net interest income after provision for loan
losses of $3.2 million in combination with an increase in aggregate noninterest
income of $1.4 million and a decrease in federal and state income taxes of $222
thousand, offset by an increase in noninterest expenses of $5.1 million. Several
specific factors contributed to the decline in net income from 2004 to 2005.
Primary factors included a $2.8 million, or 21%, increase in salaries and
employee benefits, an increase in occupancy and equipment expense of 32%, or
$1.0 million, and $1.9 million of pretax operating costs associated with the
start-up of the new banking operation in Rockford.
14
Interest income. Interest income grew from $38.0 million for 2004 to $48.7
million for 2005. The 28% increase in interest income was attributable to
greater average outstanding balances in interest-earning assets, principally
loans receivable, in combination with an improved aggregate asset yield. The
average yield on interest earning assets for 2005 was 5.75% as compared to 5.22%
for 2004.
Interest expense. Interest expense increased by $8.0 million, from $13.3 million
for 2004 to $21.3 million for 2005. The 60% increase in interest expense was
primarily att2ibutable to an aggregate increase in interest rates, in
combination with greater average outstanding balances in interest-bearing
liabilities. The average cost on interest bearing liabilities was 2.79% for 2005
as compared to 2.09% for 2004.
Provision for loan/lease losses. The provision for loan/lease losses is
established based on a number of factors, including the local and national
economy and the risk associated with the loans/leases in the portfolio. The
Company had an allowance for estimated losses on loans/leases of approximately
1.17% of total gross loans/leases at December 31, 2005, as compared to
approximately 1.43% of total gross loans at December 31, 2004, and 1.65% at
December 31, 2003. The provision for loan/lease losses declined significantly to
$877 thousand for 2005, as compared to $1.4 million for 2004. During both
periods, management made monthly provisions for loan/lease losses based upon a
number of factors, principally the increase in loans/leases and a detailed
analysis of the loan/lease portfolio. During 2005, the successful resolution of
several large credits primarily in Quad City Bank & Trust's loan/lease
portfolio, through foreclosure, payoff, or restructuring, resulted in reductions
to both provision expense and the level of allowance for loan/lease losses.
During 2005, the net growth in the loan/lease portfolio generated a provision
expense of $889 thousand; however, 44%, or $394 thousand, was offset by
adjustments to the allowance for estimated losses on loans/leases based on the
write-offs, payoffs, or restructures of several large credits within the
portfolio. During 2005, there were transfers totaling $169 thousand of loans to
other real estate owned. For 2005, commercial loans/leases had total charge-offs
of $1.5 million, of which $926 thousand, or 61%, resulted from two customer
relationships at Quad City Bank & Trust, and there were $245 thousand of
commercial recoveries. Consumer loan charge-offs and recoveries totaled $359
thousand and $90 thousand, respectively, for 2005. For 2005, credit cards
accounted for 49% of the consumer loan, net charge-offs. Real estate loans had
$160 thousand of charge-offs and $25 thousand of recovery activity during 2005.
The ability to grow profitably is, in part, dependent upon the ability to
maintain asset quality. The Company continually focuses its efforts at the
subsidiary banks to attempt to improve the overall quality of the Company's
loan/lease portfolio.
Noninterest income. Noninterest income increased by $1.4 million from $8.7
million for 2004 to $10.1 million for 2005. 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 merchant credit card fees, net of processing costs
and trust department fees.
Merchant credit card fees, net of processing costs for 2005 increased by 26% to
$1.8 million from $1.4 million for 2004. Through September 2003, Bancard
processed ISO-related Visa/Mastercard activity and carried ISO-specific
reserves, which provided coverage for the related exposure. In the first and
third quarters of 2004, the Company recognized aggregate recoveries of $277
thousand from the reduction of these ISO-specific reserves. For 2004, Bancard's
ISO-related income was $327 thousand, and Bancard's core merchant credit card
fees, net of processing costs, were $1.1 million, which included the expense of
specific provisions of $196 thousand that were made for local merchant
chargeback losses. For 2005, Bancard's core merchant credit card fees, net of
processing costs, were $1.8 million, which was an improvement of $373 thousand
when compared to 2004. Significantly contributing to the 26% increase from year
to year were aggregate reversals during 2005 of $134 thousand of specific
allocations to the allowance for local merchant chargeback losses, and $118
thousand in recoveries during 2005 of prior period expenses.
In 2005, trust department fees grew to $2.8 million from $2.5 million in 2004.
The $288 thousand, or 11%, increase from year to year was primarily a reflection
of continued development of existing trust relationships and the addition of new
trust customers, as well as an improvement in the market values of securities
held in trust accounts, when compared to one year ago. Each of these factors had
a resulting impact in the calculation and realization of trust fees. Total trust
assets under management were $811.2 million at December 31, 2005 compared to
$778.4 million at December 31, 2004.
Deposit service fees decreased $49 thousand, or 3%, remaining at $1.6 million
for 2005, as well as for 2004. This decrease was primarily a result of the
reduction in collected service fees on commercial noninterest bearing demand
deposit accounts at Quad City Bank & Trust due to earnings credit rates which
more than doubled during 2005. The year-to-date average balance of consolidated
noninterest bearing demand deposits at December 31, 2005 decreased $2.6 million
from December 31, 2004. Service charges and NSF (non-sufficient funds or
overdraft) charges related to demand deposit accounts were the main components
of deposit service fees.
15
Gains on sales of loans, net, were $1.2 million for 2005, which reflected an
increase of 9%, or $104 thousand, from $1.1 million for 2004. The slight
increase was a result of stagnant volumes of residential real estate loan
originations from year to year, and the effect on the subsequent sale of the
majority of residential mortgages into the secondary market.
During 2005, earnings on the cash surrender value of life insurance grew $28
thousand, or 4%, to $656 thousand from $628 thousand for 2005. During the first
quarter of 2004, the Company made significant investments in bank-owned life
insurance ("BOLI") on key executives at the two existing subsidiary banks. Quad
City Bank & Trust purchased $8.6 million of BOLI, and Cedar Rapids Bank & Trust
made a purchase of $3.6 million of BOLI. During 2005, Rockford Bank & Trust
purchased $777 thousand of BOLI.
Investment advisory and management fees increased $182 thousand from $510
thousand for 2004 to $692 thousand for 2005. The 36% increase from year to year
was due to the increased volume of investment services provided by
representatives of LPL Financial Services at the subsidiary banks, primarily at
Quad City Bank & Trust.
For 2005, other noninterest income increased $419 thousand, or 48%, to $1.3
million from $867 thousand for 2004. The increase in 2005 was primarily due to
income from affiliated companies. During the first quarter of 2005, one of the
Company's affiliated companies, Nobel Electronic Transfer, LLC, completed a
large, one-time sales transaction, which contributed $219 thousand to other
noninterest income. Income from affiliated companies, earnings on other assets,
Visa check card fees, and ATM fees were primary contributors to other
noninterest income during 2005.
Noninterest expenses. Noninterest expenses for 2005 were $29.4 million as
compared to $24.3 million for 2004 for an increase of $5.2 million, or 21%. For
2005, noninterest expenses for the new charter at Rockford Bank & Trust were
$2.4 million. For both 2005 and 2004, the main components of noninterest
expenses were primarily salaries and benefits, occupancy and equipment expenses,
and professional and data processing fees. During the first quarter of 2004,
there was also a loss of $747 thousand associated with the redemption of junior
subordinated debentures at their earliest call date of June 30, 2004.
The following table sets forth the various categories of noninterest expenses
for the years 2005 and 2004.
Twelve Months Ended December 31,
---------------------------------------
2005 2004 % Change
---------------------------------------
Salaries and employee benefits .............................. $16,630,868 $13,773,439 21%
Professional and data processing fees ....................... 2,865,064 2,199,984 30%
Advertising and marketing ................................... 1,221,039 1,014,664 20%
Occupancy and equipment expense ............................. 4,316,443 3,263,540 32%
Stationery and supplies ..................................... 645,985 543,904 19%
Postage and telephone ....................................... 842,779 684,964 23%
Bank service charges ........................................ 516,537 570,374 (9%)
Insurance ................................................... 594,282 420,080 41%
Loss on disposals/sales of fixed assets ..................... 332,283 1,048 NA
Loss on redemption of junior subordinated debentures ........ -- 747,490 NA
Other ....................................................... 1,467,868 1,061,364 38%
--------------------------
Total noninterest expenses .................... $29,433,148 $24,280,851 21%
==========================
16
For 2005, total salaries and benefits increased to $16.6 million, which was up
$2.8 million from the previous year's total of $13.8 million. The increase of
21% was primarily due to the Company's increase in compensation and benefits
related to an increase in employees from 243 full time equivalents ("FTEs") to
305 from year-to-year. The staffing of Rockford Bank & Trust created 18 FTEs and
38% of the increase in total salaries and benefits. Occupancy and equipment
expense increased $1.0 million, or 32%, from year to year. The increase was a
proportionate reflection of the Company's investment in new facilities at the
subsidiary banks, in combination with the related costs associated with
additional furniture, fixtures and equipment, such as depreciation, maintenance,
utilities, and property taxes. In conjunction with Cedar Rapids Bank & Trust's
move into their new main office facility, the Company took a one-time $332
thousand write-off of tenant improvements which had been made to the
GreatAmerica Building, which had initially served as that subsidiary's main
office. Professional and data processing fees experienced a 30% increase from
$2.2 million for 2004 to $2.9 million for 2005. The $665 thousand increase was
primarily the result of legal and other professional fees related to the
organization of Rockford Bank & Trust, consulting fees incurred in conjunction
with Sarbanes-Oxley compliance work, and increased legal fees incurred at the
subsidiary banks. Other noninterest expense increased $406 thousand to $1.5
million for 2005 from $1.1 million for 2004. The increase was primarily the
result of $327 thousand of write-downs on property values of other real estate
owned (OREO) at the subsidiary banks, $128 thousand of other expense incurred on
OREO property, $442 of other loan expense at the subsidiary banks, and $122
thousand of cardholder program expense at Bancard. For 2005, advertising and
marketing expense increased to $1.2 million from $1.0 million for 2004. The $206
thousand increase was predominately due to the addition of Rockford Bank &
Trust, in combination with special promotional events at Quad City Bank & Trust
and Cedar Rapids Bank & Trust revolving around the openings of their new
facilities. As a result of overall growth at the subsidiary banks, in
combination with their increased investments in facilities throughout 2005, as
well as an increase in the level of directors and officers insurance coverage,
insurance expense grew 41% from $420 thousand in 2004 to $594 thousand in 2005.
Income tax expense. The provision for income taxes was $2.3 million for 2005
compared to $2.5 million for 2004, a decrease of $222 thousand or 9%. The
decrease was primarily attributable to decreased income before income taxes of
$551 thousand or 7% for 2005, in combination with a slight decrease in the
Company's effective tax rate for 2005 to 32.2% from 32.4% for 2004.
2004 compared with 2003
Overview. Net income for 2004 was $5.2 million as compared to net income of $5.5
million for 2003 for a decrease of $244 thousand or 4%. Basic earnings per share
for 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 2003 to
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 2003 to $38.0
million for 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 2004 was 5.22% as compared to 5.50% for
2003.
Interest expense. Interest expense increased by $1.4 million, from $11.9 million
for 2003 to $13.3 million for 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
2004 as compared to 2.35% for 2003.
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 1.43% 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 2004, as compared to $3.4
million for 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 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 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
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 2004. For
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 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 2003 to $8.7 million for 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 2004 decreased by 36% to
$1.4 million from $2.2 million for 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 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 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 2004, which were the result of two merchant
situations involving fraudulent activity.
In 2004, trust department fees grew to $2.5 million from $2.2 million in 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 2004 and for 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.
Gains on sales of loans, net, were $1.1 million for 2004, which reflected a
decrease of 69%, or $2.6 million, from $3.7 million for 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.
18
During 2004, earnings on the cash surrender value of life insurance grew $421
thousand, or 203%, to $628 thousand from $207 thousand for 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 2003 to $510 thousand for 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 2004, other noninterest income decreased $142 thousand, or 14%, to $$867
thousand from $1.0 million for 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 2004 and 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 2004 were
$24.3 million as compared to $21.0 million for 2003 for an increase of $3.2
million, or 15%.
The following table sets forth the various categories of noninterest expenses
for the 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 disposals/sales of fixed assets ......................... 1,048 50,446 (98%)
Loss on redemption of junior subordinated debentures ............ 747,490 -- NA
Other ........................................................... 1,061,364 893,313 19%
---------------------------
Total noninterest expenses ........................ $ 24,280,851 $ 21,035,252 15%
===========================
For 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
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.
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 2004 to
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.
Income tax expense. The provision for income taxes was $2.5 million for 2004
compared to $2.7 million for 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 2004, in combination with a slight decrease in the
Company's effective tax rate for 2004 to 32.4% from 33.0% for 2003.
19
Financial Condition
Total assets of the Company increased by $172.5 million, or 20%, to $1.04
billion at December 31, 2005 from $870.1 million at December 31, 2004. 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. The growth over
these years primarily resulted from an increase in the loan portfolio funded by
deposits received from customers and by proceeds from Federal Home Loan Bank
advances.
Cash and Cash Equivalent Assets. Cash and due from banks increased by $17.6
million, or 82%, to $39.0 million at December 31, 2005 from $21.4 million at
December 31, 2004. Cash and due from banks 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 represented both cash maintained at the subsidiary banks, as
well as funds that the Company and its subsidiaries had deposited in other banks
in the form of noninterest-bearing demand deposits. At December 31, 2005 and
December 31, 2004, cash maintained at the subsidiary banks totaled $15.4 million
and $9.0 million. At December 31, 2005 and December 31, 2004, funds maintained
as noninterest-bearing deposits at other banks totaled $23.5 million and $12.3
million.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
increased by $1.6 million to $4.5 million at December 31, 2005 from $2.9 million
at December 31, 2004. Federal funds sold decreased by $1.1 million to $2.9
million at December 31, 2004 from $4.0 million at December 31, 2003.
Fluctuations are attributed to a combination of both varying demands for Federal
funds purchases by Quad City Bank & Trust's downstream correspondent banks and
to varying levels of liquidity at the Company's subsidiary banks.
Interest-bearing deposits at financial institutions decreased by $2.6 million,
or 67%, to $1.3 million at December 31, 2005 from $3.9 million at December 31,
2004. 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 $1.8 million and maturities
of certificates of deposit totaling $822 thousand. 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. 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. As a result of the interest rate
environment, during 2005 and 2004, the subsidiary banks reduced their deposits
in other banks in the form of certificates of deposit, increased their
utilization of Federal funds sold, gained liquidity and sacrificed modest yield.
Investments. Securities increased by $32.8 million, or 22%, to $182.4 million at
December 31, 2005 from $149.6 million at December 31, 2004. The net increase was
the result of a number of transactions in the securities portfolio. The Company
purchased additional securities, classified as available for sale, in the amount
of $82.3 million. This increase was partially offset by paydowns of $1.2 million
that were received on mortgage-backed securities, proceeds from calls and
maturities of $45.8 million, the amortization of premiums, net of the accretion
of discounts, of $525 thousand, and a decrease in unrealized gains on securities
available for sale, before applicable income tax of $2.0 million.
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.
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, 2005, 2004, and 2003. The balance at December 31,
2005 was $150 thousand, which was an increase of $50 thousand from the balance
of $100 thousand at December 31, 2004. 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. Market values at December 31, 2005, 2004, and
2003 were $155, $108 thousand, and $417 thousand, respectively.
All of the Company's, Cedar Rapids Bank & Trust's and Rockford Bank & Trust's
securities, and a majority of Quad City Bank & Trust's securities are placed in
the available for sale category as the securities may be liquidated to provide
cash for operating, investing or financing purposes. These securities were
reported at fair value and increased by $32.8 million, or 22%, to $182.2 million
at December 31, 2005, from $149.5 million at December 31, 2004. 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. The
amortized cost of such securities at December 31, 2005, 2004, and 2003 was
$183.1, $148.4, and $125.6 million.
20
As of December 31, 2005, there existed no security in the investment portfolio
(other than U.S. Government and U.S. Government agency securities) that exceeded
10% of stockholders' equity at that date.
Loans/leases. Total gross loans/leases receivable increased by $107.9 million,
or 17%, to $756.3 million at December 31, 2005 from $648.4 million at December
31, 2004. The increase was the result of the origination or purchase of $716.9
million of commercial business, consumer and real estate loans/leases, less
loans transferred to other real estate owned (OREO) of $169 thousand, loan/lease
charge-offs, net of recoveries, of $1.7 million and loan/lease repayments or
sales of loans of $607.4 million. Included in purchases, was the acquisition on
August 26, 2005 of M2 Lease Fund's lease portfolio of $32.0 million. During
2005, Quad City Bank & Trust contributed $370.5 million, or 52%, Cedar Rapids
Bank & Trust contributed $271.3 million, or 38%, Rockford Bank & Trust
contributed $35.7 million, or 5%, and M2 Lease Funds contributed $39.3, or 5%,
of the Company's loan/lease originations or purchases. As of December 31, 2005,
Quad City Bank & Trust's legal lending limit was approximately $9.4 million,
Cedar Rapids Bank & Trust's legal lending limit was approximately $3.5 million,
and Rockford Bank & Trust's legal lending limit was approximately $2.3 million.
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 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. As expected, many of these
loans were sold to a Wisconsin bank during 2005 with a balance remaining at
December 31, 2005 of $5.8 million. 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.
Allowance for Loan/Lease Losses. The allowance for estimated losses on
loans/leases was $8.9 million at December 31, 2005 compared to $9.3 million at
December 31, 2004, for a decrease of $378 thousand, or 4%. The allowance for
estimated losses on loans/leases 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%.
During 2005, the increased level of allowance required, as a result of net
growth in the loan/lease portfolio, was more than offset by negative adjustments
to the allowance based on the write-offs, payoffs, or restructures of several
large credits within the portfolio. The adequacy of the allowance for estimated
losses on loans/leases was determined by management based on factors that
included the overall composition of the loan/lease portfolio, types of
loans/leases, past loss experience, loan/lease delinquencies, potential
substandard and doubtful credits, economic conditions and other factors that, in
management's judgment, deserved evaluation in estimating loan/lease losses. To
ensure that an adequate allowance was maintained, provisions were made based on
the increase in loans/leases and a detailed analysis of the loan/lease
portfolio. The loan/lease portfolio was reviewed and analyzed monthly utilizing
the percentage allocation method with specific detailed reviews completed on all
credits risk-rated less than "fair quality" and carrying aggregate exposure in
excess of $250 thousand. The adequacy of the allowance for estimated losses on
loans/leases was monitored by the credit administration staff, and reported to
management and the board of directors.
Net charge-offs for the years ended December 31, 2005, 2004, and 2003, were $1.7
million, $753 thousand, and $1.6 million, respectively. One measure of the
adequacy of the allowance for estimated losses on loans/leases is the ratio of
the allowance to the total loan/lease portfolio. Provisions were made monthly to
ensure that an adequate level was maintained. The allowance for estimated losses
on loans/leases as a percentage of total gross loans/leases was 1.17% at
December 31, 2005, 1.43% at December 31, 2004, and 1.65% at December 31, 2003.
Although management believes that the allowance for estimated losses on
loans/leases at December 31, 2005 was at a level adequate to absorb probable
losses on existing loans/leases, there can be no assurance that such losses will
not exceed the estimated amounts or that the Company will not be required to
make additional provisions for loan/lease losses in the future. Asset quality is
a priority for the Company and its subsidiaries. The ability to grow profitably
is in part dependent upon the ability to maintain that quality. The Company is
focusing efforts at its subsidiary banks in an attempt to improve the overall
quality of the Company's loan/lease portfolio. Future events could at any time
adversely affect cash flows for both commercial and individual borrowers, as a
result of which, the Company could experience increases in problem assets,
delinquencies and losses on loans/leases, and require further increases in the
provision.
21
Nonperforming Assets. The policy of the Company is to place a loan/lease on
nonaccrual status if: (a) payment in full of interest or principal is not
expected or (b) principal or interest has been in default for a period of 90
days or more unless the obligation is both in the process of collection and well
secured. Well secured is defined as collateral with sufficient market value to
repay principal and all accrued interest. A debt is in the process of collection
if collection of the debt is proceeding in due course either through legal
action, including judgment enforcement procedures, or in appropriate
circumstances, through collection efforts not involving legal action which are
reasonably expected to result in repayment of the debt or in its restoration to
current status.
Nonaccrual loans/leases were $2.6 million at December 31, 2005 compared to $7.6
million at December 31, 2004, for a decrease of $5.0 million, or 66%. The
decrease in nonaccrual loans/leases was comprised of decreases in commercial
loans of $4.9 million and real estate loans of $205 thousand, and an increase in
consumer loans of $69 thousand. Nonaccrual commercial loans totaled $1.7
million, of which $1.5 million was due to three large lending relationships at
Quad City Bank & Trust. Nonaccrual loans at December 31, 2005 represented 0.3%
of the Company's held for investment loan portfolio. All of the Company's
nonaccrual loans were located in the loan portfolio at Quad City Bank & Trust.
None of the loans in the loan portfolios at Cedar Rapids Bank & Trust or
Rockford Bank & Trust were in nonaccrual status at December 31, 2005.
Nonaccrual loans/leases 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. None of the loans in the loan
portfolio at Cedar Rapids Bank & Trust were in nonaccrual status at December 31,
2004.
As of December 31, 2005, 2004, and 2003, past due loans of 30 days or more
amounted to $8.7 million, $10.2 million, and $6.9 million, respectively. Past
due loans as a percentage of gross loans receivable were 1.2% at December 31,
2005, 1.6 % at December 31, 2004, and 1.3% at December 31, 2003.
During 2005, the Company transferred $169 thousand from the loan portfolio into
other real estate owned. At December 31, 2005, $545 thousand of other real
estate was held at Quad City Bank & Trust. No assets were held in other real
estate owned at Cedar Rapids Bank & Trust or Rockford Bank & Trust at December
31, 2005. During 2004, the Company transferred $1.9 million from the loan
portfolio into other real estate owned. At December 31, 2004, $1.4 million was
held at Quad City Bank & Trust and $506 thousand was held at Cedar Rapids Bank &
Trust. At December 31, 2003, the Company held no assets in other real estate
owned.
Other Assets. Premises and equipment increased by $7.5 million, or 42%, to $25.6
million at December 31, 2005 from $18.1 million at December 31, 2004. During the
year, there were purchases of additional land, furniture, fixtures and equipment
and leasehold improvements of $9.8 million, which were partially offset by both
depreciation expense of $2.0 million and a one-time $332 thousand write-off of
Cedar Rapids Bank & Trust tenant improvements made to the Great America
Building, which had initially served as that subsidiary's main office, but was
vacated during the year.
In September 2003, the Company announced plans for a fifth Quad City Bank &
Trust banking facility, to be located in west Davenport at Five Points. Costs
incurred during 2005 were $1.2 million, and total costs were approximately $3.6
million, when the facility was completed and began operations in March 2005. In
February 2004, Cedar Rapids Bank & Trust announced plans to build a facility in
downtown Cedar Rapids. The Bank's main office was relocated to this site in July
2005. Costs for this facility during 2005 were $4.0 million, and total costs for
this project were $6.7 million. Cedar Rapids Bank & Trust also completed
construction of a branch office located on Council Street, which opened for
business in June 2005. The Company has incurred costs for this project of $1.7
million during 2005 and $2.4 million in total. During 2005, costs associated
with the establishment of the full-service banking facility in leased space in
downtown Rockford, which opened as the Company's third bank subsidiary on
January 3, 2005, were $259 thousand, and total costs were $472 thousand. In the
third quarter of 2005, Rockford Bank & Trust moved forward with plans for a
second banking location on Guilford Road at Alpine Road in Rockford. A temporary
modular facility opened in December 2005. The Company plans to construct a
20,000 square foot building projected for completion in October 2006. During
2005, $1.5 million of costs were incurred on this project.
22
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. Additional
information regarding the composition of this account and related accumulated
depreciation is described in Note 5 to the consolidated financial statements.
On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units
of M2 Lease Funds. The purchase price of $5.0 million resulted in $3.2 million
in goodwill. In accordance with the provisions of FAS statement 142, goodwill is
not being amortized, but will be evaluated annually for impairment.
Accrued interest receivable on loans, securities, and interest-bearing deposits
at financial institutions increased by $777 thousand, or 19%, to $4.8 million at
December 31, 2005 from $4.1 million at December 31, 2004. 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. Increases were due to a combination
of greater average outstanding balances in interest-bearing assets, as well as
increased average yields on interest-bearing assets.
Bank-owned life insurance ("BOLI") increased by $1.5 million from $15.9 million
at December 31, 2004 to $17.4 million at December 31, 2005. BOLI increased by
$12.8 million from $3.1 million at December 31, 2003 to $15.9 million at
December 31, 2004. Banks may generally buy BOLI as a financing or cost recovery
vehicle for pre-and post-retirement employee benefits. During 2004, the
subsidiary banks purchased $8.0 million of BOLI to finance the expenses
associated with the establishment of supplemental retirement benefits plans
("SERPs") for the executive officers. Additionally in 2004, the subsidiary banks
purchased BOLI totaling $4.2 million on the lives of a number of senior
management personnel for the purpose of funding the expenses of new deferred
compensation arrangements for senior officers. During the first quarter of 2005,
Rockford Bank & Trust purchased $777 thousand of BOLI. These purchases combined
with existing BOLI, resulted in each subsidiary bank holding investments in BOLI
policies near the regulatory maximum of 25% of capital. As the owners and
beneficiaries of these holdings, the banks monitor the associated risks,
including diversification, lending-limit, concentration, interest rate risk,
credit risk, and liquidity. Quarterly financial information on the insurance
carriers is provided to the Company by its compensation consulting firm. Benefit
expense associated with both the supplemental retirement benefits and deferred
compensation arrangements was $176 thousand and $125 thousand, respectively, for
2005. Earnings on BOLI totaled $656 thousand for 2005. Benefit expense
associated with the supplemental retirement benefits and deferred compensation
arrangements was $134 thousand and $107 thousand, respectively, for 2004.
Earnings on BOLI totaled $628 thousand for 2004.
Other assets increased by $1.9 million, or 13%, to $17.1 million at December 31,
2005 from $15.2 million at December 31, 2004. The largest components of other
assets at December 31, 2005 were $8.8 million in Federal Reserve Bank and
Federal Home Loan Bank stocks, $3.7 million in deferred tax assets, $1.7 million
in various prepaid expenses, $1.1 million in net equity in unconsolidated
subsidiaries and $545 thousand in net other real estate owned (OREO). 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 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, $2.0 million in various
prepaid expenses, $1.9 million in net other real estate owned (OREO) and $939
thousand in net equity in unconsolidated subsidiaries. At both December 31, 2005
and 2004, other assets also included accrued trust department fees, and other
miscellaneous receivables.
Deposits. Deposits increased by $110.5 million, or 19% , to $698.5 million at
December 31, 2005 from $588.0 million at December 31, 2004. The increase
resulted from a $95.9 million net increase in non-interest bearing, NOW, money
market and savings accounts combined with a $14.6 million net increase in
interest-bearing certificates of deposit. The subsidiary banks experienced a net
increase in brokered certificates of deposit of $7.2 million during 2005.
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 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. During 2005,
approximately $2.4 million of these deposits were sold at book value to a de
novo Wisconsin bank.
23
Short-term Borrowings. Short-term borrowings increased by $2.7 million, or 3%,
from $104.8 million as of December 31, 2004 to $107.5 million as of December 31,
2005. 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. 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
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 $54.7 million, $47.6 million, and $34.7 million at
December 31, 2005, 2004, and 2003, respectively, as well as federal funds
purchased from correspondent banks of $52.8 million at December 31, 2005, $57.2
million at December 31, 2004, and $16.9 million at December 31, 2003.
FHLB Advances and Other Borrowings. FHLB advances increased $38.0 million, or
41%, from $92.0 million as of December 31, 2004 to $130.0 million as of December
31, 2005. 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. As of December
31, 2005, the subsidiary banks held $7.3 million of FHLB stock in aggregate. As
a result of their memberships in the FHLB of Des Moines and Chicago, the
subsidiary banks have the ability to borrow funds for short-term or long-term
purposes under a variety of programs. The subsidiary banks utilized FHLB
advances for loan matching as a hedge against the possibility of rising interest
rates or when these advances provided a less costly source of funds than
customer deposits.
Other borrowings increased to $10.8 million at December 31, 2005 for an increase
of $4.8 million, or 79%, from December 31, 2004. In January 2005, the Company
drew an additional $5.0 million advance as partial funding for the initial
capitalization of Rockford Bank & Trust. In May 2005, with proceeds from the
issuance of trust preferred securities, the Company made a payment to reduce the
balance on the line of credit by $5.0 million. As part of the acquisition of M2
Lease Funds in August 2005, the Company acquired $289 thousand of nonrecourse
loans. In September 2005, the Company drew an advance of $4.0 million to provide
$2.5 million of additional capital to Quad City Bank & Trust and $1.5 million of
additional capital to Cedar Rapids Bank & Trust for capital maintenance purposes
at each of the subsidiaries. In December 2005, the Company drew an additional
$500 thousand for general corporate purposes.
Other borrowings decreased to $6.0 million at December 31, 2004 for a decrease
of $4.0 million, or 40%, from December 31, 2003. 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 $5.2 million, or 25%, from $20.6
million at December 31, 2004 to $25.8 million at December 31, 2005. On May 5,
2005, the Company issued $5,000,000 of floating rate capital securities through
a newly formed subsidiary, QCR Holdings Statutory Trust IV ("Trust IV"). Trust
IV is a 100% owned non-consolidated subsidiary of the Company. Trust IV used the
proceeds from the sale of the trust preferred securities, along with the funds
from its equity, to purchase junior subordinated debentures of the Company in
the amount of $5.2 million.
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 QCR
Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III
("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.
24
Other liabilities increased by $7.1 million, or 90%, to $15.0 million as of
December 31, 2005 from $7.9 million as of December 31, 2004. The increase was
primarily due to $3.6 million in accounts payable leases that was a portion of
the acquisition of M2 Lease Funds. In the normal course of business, M2 Lease
Funds often makes arrangements with vendors to pay for asset purchases in
installments over periods of time, primarily less than one year. Other
liabilities 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 were comprised of unpaid amounts for
various products and services, and accrued but unpaid interest on deposits. At
both December 31, 2005 and December 31, 2004, the largest single component of
other liabilities was accrued expenses of $4.5 million and $3.4 million,
respectively.
Stockholders' Equity. Common stock of $4.5 million as of December 31, 2004
increased by $34 thousand, or 1%, to remain at $4.5 million at December 31,
2005. The slight increase was the result of stock issued from the net exercise
of stock options and stock purchased under the employee stock purchase plan.
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.
Additional paid-in capital increased to $20.8 million as of December 31, 2005
from $20.3 million at December 31, 2004. The increase of $447 thousand, or 2%,
resulted primarily from proceeds received in excess of the $1.00 per share par
value for the 34,494 net shares of common stock issued as the result of the
exercise of stock options and purchases of stock under the employee stock
purchase plan. 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.
Retained earnings increased by $4.4 million, or 18%, to $29.7 million at
December 31, 2005 from $25.3 million at December 31, 2004. The increase
reflected net income for the year reduced by the $362 thousand in dividends
declared during 2005. On April 28, 2005, the board of directors declared a cash
dividend of $0.04 payable on July 6, 2005, to stockholders of record on June 15,
2005. On October 27, 2005, the board of directors declared a cash dividend of
$0.04 per share payable on January 6, 2006, to stockholders of record on
December 23, 2005. 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.
Accumulated other comprehensive loss was $567 thousand as of December 31, 2005,
as compared to $669 thousand of accumulated other comprehensive income as of
December 31, 2004. The turnaround from comprehensive income to loss was
attributable to the decrease during the period in the fair value of the
securities identified as available for sale, primarily as a result of the steady
climb in market interest rates. 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.
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 $44.7 million at December 31,
2005, $28.1 million at December 31, 2004, and $38.9 million at December 31,
2003. 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.
25
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 net income and proceeds on the sale of loans, was
$10.8 million for 2005 compared to $7.4 million for 2004. Net cash provided by
operating activities, comprised predominately of net income and proceeds on the
sale of loans, was $7.4 million for 2004 compared to net cash provided by
operating activities, primarily net income and proceeds on the sale of loans, of
$30.2 million for 2003. Net cash used in investing activities, consisting
principally of loan funding and the purchase of securities, was $129.0 million
for 2005 and $165.1 million for 2004. Net cash used in investing activities,
consisting principally of loan funding and the purchase of securities, was
$165.1 million for 2004 and $132.5 million for 2003, comprised predominately of
loan originations and the purchase of securities. Net cash provided by financing
activities, consisting primarily of deposit growth and proceeds from Federal
Home Loan Bank advances, was $135.7 million for 2005 compared to $154.6 million,
comprised predominately of growth in deposits and proceeds from short-term
borrowings, for 2004. Net cash provided by financing activities, consisting
primarily of deposit growth and proceeds from short-term borrowings, was $154.6
million for 2004 compared to $101.8 million, comprised predominately of growth
in deposits and proceeds from short-term borrowings for 2003.
At December 31, 2005, the subsidiary banks had fourteen lines of credit totaling
$104.5 million, of which $13.0 million was secured and $91.5 million was
unsecured. At December 31, 2005, Quad City Bank & Trust had drawn $19.5 million
of their available balance of $83.0 million. As of December 31, 2005, the
Company had two unsecured revolving credit notes totaling $15.0 million in
aggregate. The Company had a 364-day revolving note, which matures December 21,
2006, for $10.0 million and had a balance outstanding of $5.5 million as of
December 31, 2005. The Company also had a 3-year revolving note, which matures
December 30, 2007, for $5.0 million and carried a balance of $5.0 million as of
December 31, 2005. On January 3, 2005, the 3-year note was fully drawn as
partial funding for the capitalization of Rockford Bank & Trust. For both notes,
interest is payable monthly at the Federal Funds rate plus 1% per annum, as
defined in the credit agreements. As of December 31, 2005, the interest rate on
both notes was 5.19%.
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%.
On February 18, 2004, the Company issued $12.0 million of fixed/floating rate
capital securities and $8.0 million of floating rate capital securities of Trust
II and Trust III, respectively. The securities issued by Trust II and Trust III
mature in 30 years. The fixed/floating rate capital securities are callable at
par after seven years, and the floating rate capital securities are callable at
par after five years. The fixed/floating rate capital securities have a fixed
rate of 6.93%, payable quarterly, for seven years, at which time they have a
variable rate based on the three-month LIBOR, reset quarterly, and the floating
rate capital securities have a variable rate based on the three-month LIBOR,
reset quarterly, with the rate set at 4.83% at December 31, 2004. Both Trust II
and Trust III used the proceeds from the sale of the trust preferred securities
to purchase junior subordinated debentures of QCR Holdings, Inc. Partial
proceeds from the issuance were used for redemption in June 2004 of the $12.0
million of 9.2% cumulative trust preferred securities issued by Trust I in 1999.
On May 5, 2005, the Company issued $5.0 million of floating rate capital
securities through a newly formed subsidiary, Trust IV. The securities issued by
Trust IV mature in 30 years, but are callable at par after five years. The
floating rate capital securities have a variable rate based on the three-month
LIBOR, reset quarterly, with the rate set at 6.40% for the first quarter of
2006. Interest is payable quarterly. Trust IV is a 100% owned non-consolidated
subsidiary of the Company. Trust IV used the proceeds from the sale of the trust
preferred securities, along with the funds from its equity, to purchase junior
subordinated debentures of the Company in the amount of $5.2 million. The
Company used the net proceeds for general corporate purposes, including the
paydown of its other borrowings.
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.
26
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, 2005 and
2004, no amounts had been recorded as liabilities for the banks' potential
obligations under these guarantees.
As of December 31, 2005 and 2004, commitments to extend credit aggregated $385.8
million and $257.6 million, respectively. As of December 31, 2005 and 2004,
standby letters of credit aggregated $15.2 million and $12.7 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 $2.6 million and $3.5 million as of December
31, 2005 and 2004, respectively. These amounts were included in loans held for
sale at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold
with varying recourse provisions. Essentially, all loan sales agreements require
the repurchase of a mortgage loan by the seller in situations such as, breach of
representation, warranty, or covenant, untimely document delivery, false or
misleading statements, failure to obtain certain certificates or insurance,
unmarketability, etc. Certain loan sales agreements contain repurchase
requirements based on payment-related defects that are defined in terms of the
number of days/months since the purchase, the sequence number of the payment,
and/or the number of days of payment delinquency. Based on the specific terms
stated in the agreements of investors purchasing residential mortgage loans from
the Company's subsidiary banks, the Company had $43.4 million and $35.6 million
of sold residential mortgage loans with recourse provisions still in effect at
December 31, 2005 and December 31, 2004, respectively. The subsidiary banks did
not repurchase any loans from secondary market investors under the terms of
loans sales agreements during the years ended December 31, 2005, 2004 or 2003.
In the opinion of management, the risk of recourse to the subsidiary banks is
not significant, and accordingly no liabilities have been established related to
such.
During 2004, Quad City Bank & Trust joined the Federal Home Loan Bank's (FHLB)
Mortgage Partnership Finance (MPF) Program, which offers a "risk-sharing"
alternative to selling residential mortgage loans to investors in the secondary
market. Lenders funding mortgages through the MPF Program manage the credit risk
of the loans they originate. The loans are funded by the FHLB and held within
their portfolio, thereby managing the liquidity, interest rate, and prepayment
risks of the loans. Lenders participating in the MPF Program receive monthly
credit enhancement fees for managing the credit risk of the loans they
originate. Any credit losses incurred on those loans will be absorbed first by
private mortgage insurance, second by an allowance established by the FHLB, and
third by withholding monthly credit enhancements due to the participating
lender. At December 31, 2005, Quad City Bank & Trust had funded $13.8 million of
mortgages through the FHLB's MPF Program with an attached credit exposure of
$279 thousand. 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 $48 thousand at December 31, 2005 and
$11 thousand at December 31, 2004.
27
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. Until 2004, Bancard had
not experienced any noteable chargeback activity in which the local or agent
bank merchant's cash reserves on deposit were not sufficient to cover the
chargeback volumes. However, in 2004, two of Bancard's local merchants
experienced cases of fraud and subsequent chargeback volumes that surpassed
their cash reserves. As a result, Bancard incurred $196 thousand of chargeback
loss expense due to the fraudulent activity on these two merchants and the
establishment in August of an allowance for chargeback losses. Throughout 2005
monthly provisions were made to the allowance for chargeback losses based on the
dollar volumes of merchant credit card activity. For the year ended December 31,
2005, monthly provisions were made totaling $48 thousand. An aggregate of $135
thousand of reversals of specific merchant reserves during 2005 more than offset
these provisions. At Deccember 31, 2005 and 2004, Bancard had a merchant
chargeback reserve of $77 thousand and $164 thousand, respectively. Management
will continually monitor merchant credit card volumes, related chargeback
activity, and Bancard's level of the allowance for chargeback losses.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed by a $750 thousand letter of credit from Northern Trust Company. As of
December 31, 2005 and 2004, there were no significant pending liabilities.
Aside from cash on-hand and in-vault, the majority o& 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 $9.8 million and $10.9 million as of December 31, 2005 and
2004, respectively. In the opinion of management, no material risk of loss
exists due to the financial condition of the upstream correspondent banks.
In an arrangement with Goldman, Sachs and Company, Cedar Rapids Bank & Trust
offers a cash management program for select customers. Using this cash
management tool, the customer's demand deposit account performs like an
investment account. Based on a predetermined minimum balance, which must be
maintained in the account, excess funds are automatically swept daily to an
institutional money market fund distributed by Goldman Sachs. As with a
traditional demand deposit account, customers retain complete check-writing and
withdrawal privileges. If the demand deposit account balance drops below the
predetermined threshold, funds are automatically swept back from the money
market fund at Goldman Sachs to the account at Cedar Rapids Bank & Trust to
maintain the required minimum balance. Balances swept into the money market
funds are not bank deposits, are not insured by any U.S. government agency, and
do not require cash reserves to be set against the balances. At December 31,
2005 and December 31, 2004, the Company had $36.1 million and $3.5 million,
respectively, of customer funds invested in this cash management program.
The Company has various financial obligations, including contractual obligations
and commitments, which may require future cash payments. The following table
presents, as of December 31, 2005, 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 .................. $ 390,838 $ 390,838 $ -- $ -- $ --
stated maturity
Certificates of deposits (6) ........ 307,666 246,128 44,810 16,728 --
Short-term borrowings (7) ........... 107,470 107,470 -- -- --
Federal Home Loan ................... 130,001 19,410 59,300 22,300 28,991
Bank advances (8)
Other borrowings (9) ................ 10,765 10,765 -- -- --
Junior subordinated ................. 25,775 -- -- -- 25,775
debentures (10)
Rental commitments (5) .............. 5,003 643 1,105 1,095 2,160
Purchase obligations (17) ........... 2,900 2,900 -- -- --
Operating contracts (17) ............ 4,513 1,547 2,951 7 8
-----------------------------------------------------------------
Total contractual
cash obligations .................. $ 984,931 $ 779,701 $ 108,166 $ 40,130 $ 56,934
=================================================================
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.
28
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Impact of New Accounting Standards
In 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 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
for the Company on January 1, 2006.
The Company will adopt the provisions of FAS 123(R) using a modified prospective
application. Under that approach, FAS 123(R) will apply to new awards, the
unvested portions of outstanding awards, and to awards that are outstanding on
the effective date and are subsequently modified or cancelled. The Company will
incur additional expense beginning in the first quarter of 2006 related to new
awards granted and the unvested portions of earlier awards. The SFAS 123 pro
forma compensation costs, presented in Note 14. of 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
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "bode," "predict,"
"suggest," "project," "appear," "plan," "intend," "estimate," "may," "will,"
"would," "could," "should" "likely," or other similar expressions. Additionally,
all statements in this document, including forward-looking statements, speak
only as of the date they are made, and the Company undertakes no obligation to
update any statement in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. The factors, which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries are detailed in the "Risk Factors" section included under Item 1A.
of Part I of this Form 10-K. In addition to the risk factors described in that
section, there are other factors that may impact any public company, including
ours, which could have a material adverse effect on the operations and future
prospects of the Company and its subsidiaries. These additional factors include,
but are not limited to, the following:
o The economic impact of past and any future terrorist attacks, acts of
war or threats thereof and the response of the United States to any
such threats and attacks.
o The 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, the Financial Accounting
Standards Board, the Securities and Exchange Commission and the Public
Company Accounting Oversight Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
o These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on
such statements.
29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and
indirect market risk. Direct market risk exists from changes in interest rates.
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Each subsidiary bank has an
asset/liability management committee of the board of directors that meets
quarterly to review the bank's interest rate risk position and profitability,
and to make or recommend adjustments for consideration by the full board of each
bank . Management also reviews the subsidiary banks' securities portfolios,
formulates investment strategies, and oversees the timing and implementation of
transactions to assure attainment of the board's objectives in the most
effective manner. Notwithstanding the Company's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
In adjusting the Company's asset/liability position, the board and management
attempt to manage the Company's interest rate risk while maintaining or
enhancing net interest margins. At times, depending on the level of general
interest rates, the relationship between long-term and short-term interest
rates, market conditions and competitive factors, the board and management may
decide to increase the Company's interest rate risk position somewhat in order
to increase its net interest margin. The Company's results of operations and net
portfolio values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long-term and short-term interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk
summary, which is a detailed and dynamic simulation model used to quantify the
estimated exposure of net interest income to sustained interest rate changes.
This simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all interest sensitive
assets and liabilities reflected on the Company's consolidated balance sheet.
This sensitivity analysis demonstrates net interest income exposure over a one
year horizon, assuming no balance sheet growth and a 200 basis point upward and
a 200 basis point downward shift in interest rates, where interest-bearing
assets and liabilities reprice at their earliest possible repricing date. The
model assumes a parallel and pro rata shift in interest rates over a
twelve-month period. Application of the simulation model analysis at December
31, 2005 demonstrated a 4.03% decrease in interest income with a 200 basis point
increase in interest rates, and a 1.98% increase in interest income with a 200
basis point decrease in interest rates. Both simulations are within the
board-established policy limits of a 10% decline in value.
Interest rate risk is the most significant market risk affecting the Company.
For that reason, the Company engages the assistance of a national consulting
firm and their risk management system to monitor and control the Company's
interest rate risk exposure. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities.
30
Item 8. Financial Statements
McGladrey & Pullen, LLP
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, 2005 and 2004, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2005. 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of QCR Holdings,
Inc. and subsidiaries' internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated January 27, 2006 expressed an unqualified
opinion on management's assessment of the effectiveness of QCR Holdings, Inc.
and subsidiaries' internal control over financial reporting and an unqualified
opinion on the effectiveness of QCR Holdings, Inc. and subsidiaries' internal
control over financial reporting.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 27, 2006
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
31
QCR Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
December 31, 2005 and 2004
Assets 2005 2004
- ------------------------------------------------------------------------------------------------------
Cash and due from banks ......................................... $ 38,956,627 $ 21,372,342
Federal funds sold .............................................. 4,450,000 2,890,000
Interest-bearing deposits at financial institutions ............. 1,270,666 3,857,563
Securities held to maturity, at amortized cost (fair value
2005 $154,828; 2004 $108,254) (Note 3) ........................ 150,000 100,000
Securities available for sale, at fair value (Note 3) ........... 182,214,719 149,460,886
----------------------------------
182,364,719 149,560,886
----------------------------------
Loans receivable, held for sale (Note 4) ........................ 2,632,400 3,498,809
Loans/leases receivable, held for investment (Note 4) ........... 753,621,630 644,852,018
----------------------------------
756,254,030 648,350,827
Less allowance for estimated losses on loans/leases (Note 4) .... 8,883,855 9,261,991
----------------------------------
747,370,175 639,088,836
----------------------------------
Premises and equipment, net (Note 5) ............................ 25,621,741 18,100,590
Goodwill (Note 6) ............................................... 3,222,688 --
Accrued interest receivable ..................................... 4,849,378 4,072,762
Bank-owned life insurance ....................................... 17,367,660 15,935,000
Other assets .................................................... 17,139,874 15,205,568
----------------------------------
Total assets .................................................... $ 1,042,613,528 $ 870,083,547
==================================
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ......................................... $ 114,176,434 $ 109,361,817
Interest-bearing ............................................ 584,327,465 478,653,866
----------------------------------
Total deposits (Note 7) .................................... 698,503,899 588,015,683
Short-term borrowings (Note 8) ................................ 107,469,851 104,771,178
Federal Home Loan Bank advances (Note 9) ...................... 130,000,854 92,021,877
Other borrowings (Note 10) .................................... 10,764,914 6,000,000
Junior subordinated debentures (Note 11) ...................... 25,775,000 20,620,000
Other liabilities ............................................. 14,981,346 7,881,009
----------------------------------
Total liabilities .......................................... 987,495,864 819,309,747
----------------------------------
Minority interest in consolidated subsidiary .................... 650,965 --
----------------------------------
Commitments and Contingencies (Note 17)
Stockholders' Equity (Note 15):
Preferred stock, stated value of $1 per shares; shares authorized
250,000; shares issued none ................................. -- --
Common stock, $1 par value; shares authorized 10,000,000
2005 - 4,531,224 shares issued and outstanding
2004 - 4,496,730 shares issued and outstanding ............. 4,531,224 4,496,730
Additional paid-in capital .................................... 20,776,254 20,329,033
Retained earnings ............................................. 29,726,700 25,278,666
Accumulated other comprehensive income (loss) ................. (567,479) 669,371
----------------------------------
Total stockholders' equity ................................. 54,466,699 50,773,800
----------------------------------
Total liabilities and stockholders' equity ................. $ 1,042,613,528 $ 870,083,547
==================================
See Notes to Consolidated Financial Statements.
32
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2005, 2004, and 2003
2005 2004 2003
- ------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans/leases, including fees ............................... $ 42,427,118 $ 33,111,498 $ 28,984,000
Securities:
Taxable .................................................. 5,345,980 4,067,826 3,248,115
Nontaxable ............................................... 579,817 571,405 493,162
Interest-bearing deposits at financial institutions ........ 129,460 224,293 432,119
Federal funds sold ......................................... 205,893 41,818 220,865
-------------------------------------------
Total interest and di6idend income ...................... 48,688,268 38,016,840 33,378,261
-------------------------------------------
Interest expense:
Deposits ................................................... 12,842,421 6,852,108 7,005,306
Short-term borrowings ...................................... 2,181,997 1,208,494 326,916
Federal Home Loan Bank advances ............................ 4,168,077 3,464,122 3,255,416
Other borrowings ........................................... 501,241 159,165 228,433
Junior subordinated debentures ............................. 1,587,049 1,640,879 1,133,506
-------------------------------------------
Total interest expense .................................. 21,280,785 13,324,768 11,949,577
-------------------------------------------
Net interest income ..................................... 27,407,483 24,692,072 21,428,684
Provision for loan/lease losses (Note 4) ..................... 877,084 1,372,208 3,405,427
-------------------------------------------
Net interest income after provision for loan/lease losses 26,530,399 23,319,864 18,023,257
-------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ......... 1,782,452 1,409,237 2,194,974
Trust department fees ...................................... 2,818,832 2,530,907 2,242,747
Deposit service fees ....................................... 1,582,530 1,631,713 1,505,200
Gains on sales of loans, net ............................... 1,254,242 1,149,791 3,667,513
Securities gains (losses), net ............................. 50 (45,428) 5
Earnings on bank-owned life insurance ...................... 656,005 627,796 206,893
Investment advisory and management fees .................... 691,800 509,988 340,812
Other ...................................................... 1,286,592 867,437 1,009,465
-------------------------------------------
Total noninterest income ................................ 10,072,503 8,681,441 11,167,609
-------------------------------------------
Noninterest expenses:
Salaries and employee benefits ............................. 16,630,868 13,773,439 12,710,505
Professional and data processing fees ...................... 2,865,064 2,199,984 1,962,243
Advertising and marketing .................................. 1,221,039 1,014,664 786,054
Occupancy and equipment expense ............................ 4,316,443 3,263,540 2,640,602
Stationery and supplies .................................... 645,985 543,904 460,421
Postage and telephone ...................................... 842,779 684,964 632,354
Bank service charges ....................................... 516,537 570,374 454,367
Insurance .................................................. 594,282 420,080 444,947
Loss on disposals/sales of fixed assets .................... 332,283 1,048 50,446
Loss on redemption of junior subordinated debentures ....... -- 747,490 --
Other ...................................................... 1,467,868 1,061,364 893,313
-------------------------------------------
Total noninterest expenses .............................. 29,433,148 24,280,851 21,035,252
-------------------------------------------
Minority interest in income of consolidated subsidiary ....... 77,538 -- --
-------------------------------------------
Income before income taxes .............................. 7,092,216 7,720,454 8,155,614
Federal and state income taxes (Note 12) ..................... 2,282,201 2,503,782 2,694,687
-------------------------------------------
Net income .............................................. $ 4,810,015 $ 5,216,672 $ 5,460,927
===========================================
Earnings per common share (Note 16):
Basic ...................................................... $ 1.06 $ 1.23 $ 1.31
Diluted .................................................... $ 1.04 $ 1.20 $ 1.28
Weighted average common shares outstanding ................. 4,518,162 4,234,345 4,173,063
Weighted average common and common equivalent
shares outstanding ....................................... 4,616,556 4,344,765 4,282,583
Cash dividends declared per common share ..................... $ 0.08 $ 0.08 $ 0.07
See Notes to Consolidated Financial Statements.
33
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2005, 2004, and 2003
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
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 (loss), 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 (loss), net of tax (Note 2) .... -- -- -- (1,133,293) -- (1,133,293)
------------
Comprehensive income .............................. 4,083,379
------------
Retirement of 90,219 treasury shares, April 30, 2004.. (60,146) (341,028) (453,362) -- 854,536 --
3:2 common stock split, May 28, 2004 ................. 1,133,019 (1,133,019) (2,549) -- -- (2,549)
Proceeds from issuance of 250,506 shares of
common stock ....................................... 250,506 4,537,713 -- -- -- 4,788,219
Cash dividends declared, $0.08 per share ............. -- -- (348,844) -- -- (348,844)
Proceeds from issuance of 9,057 shares of common
stock as a result of stock purchased under the
Employee Stock Purchase Plan (Note 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 ............................. 4,496,730 20,329,033 25,278,666 669,371 -- 50,773,800
Comprehensive income:
Net income ......................................... -- -- 4,810,015 -- -- 4,810,015
Other comprehensive (loss), net of tax (Note 2) .... -- -- -- (1,236,850) -- (1,236,850)
------------
Comprehensive income .............................. 3,573,165
------------
Cash dividends declared, $0.08 per share ............. -- -- (361,981) -- -- (361,981)
Proceeds from issuance of 10,584 shares of common
stock as a result of stock purchased under the
Employee Stock Purchase Plan (Note 14) ............. 10,584 181,458 -- -- -- 192,042
Proceeds from issuance of 25,335 shares of common
stock as a result of stock options exercised
(Note 14)........................................... 25,335 167,764 -- -- -- 193,099
Exchange of 1,425 shares of common
stock in connection with options exercised ......... (1,425) (27,994) -- -- -- (29,419)
Tax benefit of nonqualified stock options exercised .. -- 125,993 -- -- -- 125,993
-------------------------------------------------------------------------
Balance, December 31, 2005 ............................. $ 4,531,224 $20,776,254 $29,726,700 $ (567,479)$ -- $54,466,699
=========================================================================
See Notes to Consolidated Financial Statements.
34
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004, and 2003
2005 2004 2003
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .............................................. $ 4,810,015 $ 5,216,672 $ 5,460,927
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .......................................... 2,008,773 1,475,453 1,072,943
Provision for loan/lease losses ....................... 877,084 1,372,208 3,405,427
Deferred income taxes ................................. (109,452) (185,676) (674,681)
Amortization of offering costs on junior subordinated
debentures .......................................... 14,317 17,933 29,506
Loss on redemption of junior subordinated debentures .. -- 747,490 --
Minority interest in income of consolidated subsidiary 77,538 -- --
Amortization of premiums on securities, net ........... 524,808 983,256 788,263
Investment securities losses (gains), net ............. (50) 45,428 (5)
Loans originated for sale ............................. (98,719,913) (83,176,326) (245,414,955)
Proceeds on sales of loans ............................ 100,840,794 84,617,339 268,983,441
Net gains on sales of loans ........................... (1,254,242) (1,149,791) (3,667,513)
Net losses on disposals/sales of premises and equipment 332,283 1,048 50,446
Tax benefit of nonqualified stock options exercised ... 125,993 190,248 274,871
Increase in accrued interest receivable ............... (776,616) (426,654) (424,862)
(Increase) decrease in other assets ................... (883,573) (3,461,144) 2,075,198
Increase (decrease) in other liabilities .............. 2,973,423 1,146,173 (1,722,249)
-----------------------------------------------
Net cash provided by operating activities ............ 10,841,182 7,413,657 30,236,757
-----------------------------------------------
Cash Flows from Investing Activities:
Net decrease (increase) in federal funds sold ........... (1,560,000) 1,140,000 10,365,000
Net decrease in interest-bearing deposits at
financial institutions ................................ 2,586,897 6,568,529 4,159,703
Activity in securities portfolio:
Purchases ............................................. (82,280,843) (86,743,594) (91,746,856)
Calls and maturities .................................. 45,787,488 53,006,001 39,195,000
Paydowns .............................................. 1,197,070 1,754,343 4,025,159
Sales of securities available for sale ................ -- 8,428,590 --
Activity in bank-owned life insurance:
Purchases ............................................. (776,634) (12,221,428) (66,312)
Increase in cash value ................................ (656,026) (627,775) (190,873)
Net loans/leases originated and held for investment ..... (78,520,322) (128,849,187) (94,278,016)
Purchase of premises and equipment ...................... (9,779,493) (7,611,586) (4,152,033)
Proceeds from sales of premises and equipment ........... -- 63,027 224,654
Payment for acquisition of M2 Lease Funds, LLC (Note 6) . (4,967,300) -- --
-----------------------------------------------
Net cash used in investing activities ................ (128,969,163) (165,093,080) (132,464,574)
-----------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ........................ 110,488,216 76,363,820 76,904,240
Net increase in short-term borrowings ................... 2,698,673 53,161,377 18,747,355
Activity in Federal Home Loan Bank advances:
Advances .............................................. 49,700,000 35,500,000 12,550,000
Payments .............................................. (11,721,023) (19,710,471) (11,305,972)
Net (decrease) increase in other borrowings ............. (20,603,724) (4,000,000) 5,000,000
Proceeds from issuance of junior subordinated
debentures ............................................ 5,155,000 20,620,000 --
Redemption of junior subordinated debentures ............ -- (12,000,000) --
Payment of cash dividends ............................... (360,598) (336,816) (277,086)
Payment of fractional shares on 3:2 stock split ......... -- (2,549) --
Proceeds from issuance of common stock, net ............. 355,722 5,028,831 148,503
-----------------------------------------------
Net cash provided by financing activities ............ 135,712,266 154,624,192 101,767,040
-----------------------------------------------
Net increase (decrease) in cash and due from banks .. 17,584,285 (3,055,231) (460,777)
Cash and due from banks:
Beginning ............................................... 21,372,342 24,427,573 24,888,350
-----------------------------------------------
Ending .................................................. $ 38,956,627 $ 21,372,342 $ 24,427,573
===============================================
35
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2005, 2004, and 2003
2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information,
cash payments for:
Interest ................................................... $ 20,407,363 $ 13,024,698 $ 12,516,692
Income and franchise taxes ................................. 1,340,742 2,566,493 4,904,697
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
losses on securities available for sale, net ............. (1,236,850) (1,133,293) (341,390)
Exchange of shares of common stock in connection
with options exercised ................................... (29,419) (141,338) (339,462)
Transfers of loans to other real estate owned .............. 169,441 1,925,320 --
Acquisition of M2 Lease Funds, LLC, cash paid at
settlement (Note 6) ........................................ $ 4,967,300
=============
Fair value of assets acquired and liabilities assumed:
Leases receivable held for investment, net ................. $ 31,673,951
Premises and equipment, net ................................ 82,714
Goodwill ................................................... 3,222,688
Other assets ............................................... 47,177
Other borrowings ........................................... (25,368,638)
Other liabilities .......................................... (4,117,165)
Minority interest .......................................... (573,427)
-------------
$ 4,967,300
=============
See Notes to Consolidated Financial Statements.
36
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), Rockford Bank and Trust Company (Rockford Bank & Trust), Quad City
Bancard, Inc. (Bancard), M2 Lease Funds, LLC (M2 Lease Funds), QCR Holdings
Statutory Trust II (Trust II), QCR Holdings Statutory Trust III (Trust III), and
QCR Holdings Statutory Trust IV (Trust IV). Quad City Bank & Trust is a
commercial bank that serves the Iowa and Illinois Quad Cities and adjacent
communities. Cedar Rapids Bank & Trust is a commercial bank that serves Cedar
Rapids, Iowa, and adjacent communities. Rockford Bank & Trust is a commercial
bank that serves Rockford, Illinois, and adjacent communities. Quad City Bank &
Trust and Cedar Rapids Bank & Trust are chartered and regulated by the state of
Iowa, and Rockford Bank & Trust is chartered and regulated by the state of
Illinois. All three subsidiary banks are insured and subject to regulation by
the Federal Deposit Insurance Corporation, and are members of and regulated by
the Federal Reserve System. Bancard conducts the Company's credit card operation
and is regulated by the Federal Reserve System. In August 2005, Quad City Bank &
Trust acquired 80% of the equity interests of M2 Lease Funds. M2 Lease Funds,
which is based in the Milwaukee, Wisconsin, area is engaged in the business of
direct financing lease contracts (see Note 6). Trust II, III and IV were formed
for the purpose of issuing various trust preferred securities (see Note 11).
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.
Lease residual values and the allowance for estimat%d losses on loans/leases are
inherently subjective as they require material estimates that are susceptible to
significant change. The fair value disclosure of financial instruments is an
estimate that can be computed within a range.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and all wholly-owned subsidiaries, except
Trust II, III and IV, 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/leases, 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 $9,500,000 and $9,700,000 as of December 31, 2005
and 2004, 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.
Loans receivable held for sale: Residential real estate loans, which are
originated and intended for resale in the secondary market in the foreseeable
future, are classified as held for sale. These loans are carried at the lower of
cost or estimated market value in the aggregate. As assets specifically acquired
for resale, the origination of, disposition of, and gain/loss on these loans are
classified as operating activities in the statement of cash flows.
37
Loans receivable held for investment: Loans that management has the intent and
ability to hold for the foreseeable future, or until pay-off or maturity occurs,
are classified as held for investment. These loans are stated at the amount of
unpaid principal adjusted for charge-offs, the allowance for estimated losses on
loans, and any deferred fees and/or costs on originated loans. Interest is
credited to earnings as earned based on the principal amount outstanding.
Deferred direct loan origination fees and/or costs are amortized as an
adjustment of the related loan's yield. As assets held for and used in the
production of services, the origination and collection of these loans is
classified as an investing activity in the statement of cash flows.
Direct finance leases receivable held for investment: The Company leases
machinery and equipment to customers under leases that qualify as direct
financing leases for financial reporting and as operating leases for income tax
purposes. Under the direct financing method of accounting, the minimum lease
payments to be received under the lease contract, together with the estimated
unguaranteed residual values (approximately 3% to 15% of the cost of the related
equipment), are recorded as lease receivables when the lease is signed and the
lease property delivered to the customer. The excess of the minimum lease
payments and residual values over the cost of the equipment is recorded as
unearned lease income. Unearned lease income is recognized over the term of the
lease on a basis that results in an approximate level rate of return on the
unrecovered lease investment. Lease income is recognized on the accrual basis.
Residual is the estimated fair market value of the equipment on lease at lease
termination. In estimating the equipment's fair value at lease termination, the
Company relies on historical experience by equipment type and manufacturer and,
where available, valuations by independent appraisers, adjusted for known
trends. The Company's estimates are reviewed continuously to ensure
reasonableness; however, the amounts the Company will ultimately realize could
differ from the estimated amounts.
When collection of lease payments is considered doubtful, income recognition is
ceased and the lease receivable is placed on nonaccrual status. Previously
recorded but uncollected amounts on nonaccrual leases are reversed at the time
the lease is placed on nonaccrual status. Cash collected on nonaccrual leases is
recorded as income unless the principal is doubtful of collection in which case
cash received is applied to principal.
The Company defers and amortizes fees and certain incremental direct costs over
the contractual term of the lease as an adjustment to the yield. These initial
direct leasing costs generally approximate 3% of the leased asset's cost. The
unamortized direct costs are recorded as a reduction of unearned lease income.
Allowance for estimated losses on loans/leases: The allowance for estimated
losses on loans/leases is maintained at the level considered adequate by
management of the Company and the subsidiaries 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, the subsidiary banks, and M2 Lease Funds consider the overall
composition of the loan/lease portfolio. Loans/leases which have identified
weaknesses are classified into higher risk groups, or are identified for
continued monitoring. Historical and projected loss percentages are then applied
to various classifications and, considering economic conditions and other
factors that in management's judgment deserve evaluation, additional identified
and unidentified loss amounts are added.
Loans/leases are considered impaired when, based on current information and
events, it is probable the Company and the bank involved will not be able to
collect all amounts due. The portion of the allowance for loan/lease losses
applicable to an impaired loan/lease is computed based on the present value of
the estimated future cash flows of interest and principal discounted at the
loan's/lease's effective interest rate or on the fair value of the collateral
for collateral dependent loans/leases. The entire change in present value of
expected cash flows of impaired loans/leases is reported as bad debt expense in
the same manner in which impairment initially was recognized or as a reduction
in the amount of bad debt expense that otherwise would be reported. The Company
and subsidiaries recognize interest income on impaired loans/leases on a cash
basis.
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.
38
Bank-owned life insurance: Bank-owned life insurance is carried at cash
surrender value with increases/decreases reflected as income/expense in the
statement of income.
Foreclosed assets: Assets acquired through, or in lieu of, loan foreclosures,
which are included in other assets on the consolidated balance sheets are held
for sale and are 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.
Stock-based compensation plans: At December 31, 2005, the Company has three
stock-based employee compensation plans, which are described more fully in Note
14. The Company currently 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.
2005 2004 2003
-----------------------------------------------
Net income, as reported ............... $ 4,810,015 $ 5,216,672 $ 5,460,927
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects .. (174,598) (132,297) (96,447)
-----------------------------------------------
Net income ....................... $ 4,635,417 $ 5,084,375 $ 5,364,480
===============================================
Earnings per share:
Basic:
As reported ....................... $ 1.06 $ 1.23 $ 1.31
Pro forma ......................... 1.03 1.20 1.29
Diluted:
As reported ....................... 1.04 1.20 1.28
Pro forma ......................... 1.01 1.18 1.26
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, 2005, 2004, and 2003: dividend rate of 0.36% to 0.58% for the years
ended December 31, 2005, 2004, and 2003; risk-free interest rates based upon
current rates at the date of grant (3.68% to 4.85% for stock options and 0.82%
to 3.31% 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 15.85% 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 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
for the Company on January 1, 2006.
The Company will adopt the provisions of FAS 123(R) using a modified prospective
application. Under that approach, FAS 123(R) will apply to new awards, the
unvested portions of outstanding awards, and to awards that are outstanding on
the effective date and are subsequently modified or cancelled. The Company will
incur additional expense beginning in the first quarter of 2006 related to new
awards granted and the unvested portions of earlier awards. The SFAS 123 pro
forma compensation costs presented previously in this note 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 C/mpany 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.
39
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.
Reclassifications: 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
(loss), which for the Company is comprised entirely of unrealized gains and
losses on securities available for sale.
Other comprehensive (loss) for the years ended December 31, 2005, 2004, and 2003
is comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------
Year ended December 31, 2005:
Unrealized (losses) on securities available for sale:
Unrealized holding (losses) arising during the period ............................. $(1,967,594) $ (730,775) $(1,236,819)
Less reclassification adjustment for gains
included in net income .......................................................... 50 19 31
-----------------------------------------
Other comprehensive (loss) ...................................................... $(1,967,644) $ (730,794) $(1,236,850)
=========================================
Year ended December 31, 2004:
Unrealized (losses) on securities available for sale:
Unrealized holding (losses) arising during the period ............................. $(1,853,560) $ (691,794) $(1,161,766)
Less reclassification adjustment for (losses)
included in net income .......................................................... (45,428) (16,955) (28,473)
-----------------------------------------
Other comprehensive (loss) ...................................................... $(1,808,132) $ (674,839) $(1,133,293)
=========================================
Year ended December 31, 2003:
Unrealized (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)
=========================================
40
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of December 31,
2005 and 2004 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------------
December 31, 2005:
Securities held to maturity:
Other bonds ................................ $ 150,000 $ 5,063 $ (235) $ 154,828
===============================================================
Securities available for sale:
U.S. Treasury securities ................... $ 100,090 $ -- $ (58) $ 100,032
U.S. govt. sponsored agency securities ..... 150,114,707 54,821 (1,629,892) 148,539,636
Mortgage-backed securities ................. 2,720,059 4,218 (54,532) 2,669,745
Municipal securities ....................... 18,485,304 368,495 (40,330) 18,813,469
Corporate securities ....................... 4,672,242 72,117 (1,877) 4,742,482
Trust preferred securities ................. 850,000 68,700 -- 918,700
Other securities ........................... 6,162,792 372,582 (104,719) 6,430,655
---------------------------------------------------------------
$ 183,105,194 $ 940,933 $ (1,831,408) $ 182,214,719
===============================================================
December 31, 2004:
Securities held to maturity:
Other bonds ................................ $ 100,000 $ 8,254 $ -- $ 108,254
===============================================================
Securities available for sale:
U.S. Treasury securities ................... $ 100,214 $ -- $ (1,025) $ 99,189
U.S. govt. sponsored 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
===============================================================
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, 2005 and 2004, 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, 2005:
Securities held to maturity:
Other bonds ............................. $ 49,765 $ (235) $ -- $ -- $ 49,765 $ (235)
====================================================================================
Securities available for sale:
U.S. Treasury securities ................ $ 100,032 $ (58) $ -- $ -- $ 100,032 $ (58)
U.S. govt. sponsored agency
securities ............................ 72,540,169 (550,284) 63,436,475 (1,079,608) 135,976,644 (1,629,892)
Mortgage-backed securities .............. 304,813 (1,756) 1,934,980 (52,776) 2,239,793 (54,532)
Municipal securities .................... 6,408,329 (38,636) 684,743 (1,694) 7,093,072 (40,330)
Corporate securities .................... -- -- 500,877 (1,877) 500,877 (1,877)
Other securities ........................ -- -- 4,895,855 (104,719) 4,895,855 (104,719)
------------------------------------------------------------------------------------
$ 79,353,343 $ (590,734) $71,452,930 $(1,240,674) $ 150,806,273 $ (1,831,408)
====================================================================================
December 31, 2004:
Securities available for sale:
U.S. Treasury securities ................ $ 99,189 $ (1,025) $ -- $ -- $ 99,189 $ (1,025)
U.S. govt. sponsored 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)
===================================================================================
41
Management evaluates securities for other-than-temporary impairment on a
quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Banks(s)/Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
At December 31, 2005, the investment portfolio included 270 securities. Of this
number, 73 securities have current unrealized losses, which have existed for
twelve months or more. All of these securities are considered to be acceptable
credit risks. Based upon an evaluation of the available evidence, including
recent changes in market rates, credit rating information and information
obtained from regulatory filings, management believes the declines in fair value
for those securities are temporary. In addition, the Bank(s)/Company have the
intent and ability to hold these investment securities for a period of time
sufficient to allow for an anticipated recovery.
Should the impairment of any of these securities become other than temporary,
the cost basis of the investment will be reduced and the resulting loss
recognized in net earnings in the period on which the other-than-temporary
impairment is identified.
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 years ended December 31, 2005 and December 31, 2003. Information on
proceeds received, as well as the gains and losses from the sale of those
securities is as follows:
2005 2004 2003
----------------------------------
Proceeds from sales of securities .......... $ -- $8,428,590 $ --
Gross gains from sales of securities ....... -- 26,188 --
Gross losses from sales of securities ...... -- 71,616 --
The amortized cost and fair value of securities as of December 31, 2005 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 .......... $ 100,000 $ 100,166
Due after five years ........................... 50,000 54,662
---------------------------
$ 150,000 $ 154,828
===========================
Securities available for sale:
Due in one year or less ........................ $ 49,882,321 $ 49,565,250
Due after one year through five years .......... 111,506,823 110,416,620
Due after five years ........................... 12,833,199 13,132,449
---------------------------
174,222,343 173,114,319
Mortgage-backed securities ..................... 2,720,059 2,669,745
Other securities ............................... 6,162,792 6,430,655
---------------------------
$183,105,194 $182,214,719
===========================
As of December 31, 2005 and 2004, investment securities with a carrying value of
$135,757,114 and $117,144,212, respectively, were pledged on securities sold
under agreements to repurchase and for other purposes as required or permitted
by law.
42
Note 4. Loans/Leases Receivable
The composition of the loan/lease portfolio as of December 31, 2005 and 2004 is
presented as follows:
2005 2004
------------------------------
Commercial and commercial real estate loans .......... $ 593,462,081 $ 532,517,321
Direct financing leases .............................. 34,911,537 --
Real estate loans held for sale - residential mortgage 2,632,400 3,498,809
Real estate loans - residential mortgage ............. 54,124,667 52,423,387
Real estate loans - construction ..................... 2,810,610 3,607,525
Installment and other consumer loans ................. 67,089,900 55,736,029
------------------------------
755,031,195 647,783,071
Deferred loan/lease origination costs, net ........... 1,222,835 567,756
Less allowance for estimated losses on loans/leases .. (8,883,855) (9,261,991)
------------------------------
$ 747,370,175 $ 639,088,836
==============================
Direct financing leases:
Net minimum lease payments to be received .......... $ 35,447,343 $ --
Estimated residual values of leased assets ......... 7,633,646 --
Unearned lease/residual income ..................... (7,661,027) --
Fair value adjustment at acquisition ............... (508,425) --
------------------------------
$ 34,911,537 $ --
==============================
Loans on nonaccrual status amounted to $2,578,862 and $7,607,977 as of December
31, 2005 and 2004, respectively. Interest income in the amount of $570,055,
$490,866, and $468,758 for the years ended December 31, 2005, 2004, and 2003,
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 $298,168, $230,810, and $262,819 for the years ended
December 31, 2005, 2004, and 2003, respectively. There were no direct financing
leases on nonaccrual status at December 31, 2005.
Changes in the allowance for estimated losses on loans/leases for the years
ended December 31, 2005, 2004, and 2003 are presented as follows:
2005 2004 2003
-----------------------------------------
Balance, beginning ................................ $ 9,261,991 $ 8,643,012 $ 6,878,953
Provisions charged to expense ................... 877,084 1,372,208 3,405,427
Loans/leases charged off ........................ (2,045,846) (964,708) (2,075,406)
Recoveries on loans/leases previously charged off 357,172 211,479 434,038
Acquisition of M2 Lease Funds ................... 433,454 -- --
-----------------------------------------
Balance, ending ................................... $ 8,883,855 $ 9,261,991 $ 8,643,012
=========================================
Loans considered to be impaired as of December 31, 2005 and 2004 are as follows:
2005 2004
----------------------
Impaired loans for which an allowance has been provided $1,826,429 $ 92,653
======================
Allowance provided for impaired loans, included in
the allowance for loan/lease losses ................. $1,096,493 $ 90,153
======================
Impaired loans for which no allowance has been provided $ -- $ 96,944
======================
Impaired loans for which no allowance has been provided have adequate
collateral, based on management's current estimates.
43
The average recorded investment in impaired loans during the years ended
December 31, 2005, 2004, and 2003 was $1,508,112, $3,485,989, and $5,213,072,
respectively. Interest income on impaired loans of $120,120, $56,532, and
$205,366 was recognized for cash payments received for the years ended December
31, 2005, 2004, and 2003, respectively. There were no impaired direct financing
leases at December 31, 2005, or during the period August 26, 2005 to December
31, 2005.
Loans past due 90 days or more and still accruing interest totaled $603,637 and
$1,132,574 as of December 31, 2005 and 2004, respectively. There were no direct
financing leases which were past due 90 days or more and still accruing interest
as of December 31, 2005.
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, 2005, 2004, and 2003 was as follows:
2005 2004 2003
--------------------------------------------
Balance, beginning .............................. $ 17,533,546 $ 23,925,005 $ 23,267,366
Net increase (decrease) due to change in
related parties ............................. 248,623 -- (359)
Advances ...................................... 7,801,170 6,414,002 10,589,823
Repayments .................................... (14,197,146) (12,805,461) (9,931,825)
--------------------------------------------
Balance, ending ................................. $ 11,386,193 $ 17,533,546 $ 23,925,005
============================================
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of December
31, 2005 and 2004:
2005 2004
-----------------------------
Land ....................................... $ 4,088,126 $ 2,945,414
Buildings .................................. 17,726,327 12,052,192
Furniture and equipment .................... 12,185,429 9,566,067
-----------------------------
33,999,882 24,563,673
Less accumulated depreciation .............. 8,378,141 6,463,083
-----------------------------
$25,621,741 $18,100,590
=============================
Certain facilities are leased under operating leases. Rental expense was
$1,037,747, $866,581, and $837,271 for the years ended December 31, 2005, 2004,
and 2003, respectively.
Future minimum rental commitments under noncancelable leases are as follows as
of December 31, 2005:
Year ending December 31:
2006............................................... $ 642,941
2007............................................... 551,882
2008............................................... 552,626
2009............................................... 554,858
2010............................................... 540,085
Thereafter......................................... 2,160,535
----------
$5,002,927
==========
44
Note 6. Acquisition
On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units
of M2 Lease Funds. Quad City Bank & Trust acquired assets and assumed
liabilities totaling $35.0 million and $30.0 million, respectively, for a
purchase price of $5.0 million, which resulted in goodwill of $3.2 million and
minority interest of $573 thousand. In accordance with the provisions of FAS
Statement 142, goodwill is not being amortized, but will be evaluated annually
for impairment. M2 Lease Funds, which is based in the Milwaukee, Wisconsin,
area, is engaged in the business of leasing machinery and equipment to
commercial and industrial businesses under direct financing lease contracts. M2
Lease Funds' operating results are included in the Company's Consolidated
Statements of Income from August 26, 2005 through December 31, 2005.
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition:
Leases receivable held for investment, net ................ $ 31,673,951
Premises and equipment, net ............................... 82,714
Goodwill .................................................. 3,222,688
Other assets .............................................. 47,177
------------
Total assets acquired ................................ $ 35,026,530
------------
Other borrowings .......................................... (25,368,638)
Other liabilities ......................................... (4,117,165)
Minority interest ......................................... (573,427)
------------
Total liabilities assumed ............................ $(30,059,230)
------------
Net assets acquired .................................. $ 4,967,300
============
Note 7. Deposits
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000, was $170,994,735 and $165,685,917 as of December 31,
2005 and 2004, respectively.
As of December 31, 2005, the scheduled maturities of certificates of deposit
were as follows:
Year ending December 31:
2006............................................ $246,127,949
2007............................................ 40,682,057
2008............................................ 4,127,720
2009............................................ 10,943,271
2010............................................ 5,785,018
------------
$307,666,015
============
Note 8. Short-Term Borrowings
Short-term borrowings as of December 31, 2005 and 2004 are summarized as
follows:
2005 2004
---------------------------
Overnight repurchase agreements with customers ... $ 54,659,851 $ 47,551,178
Federal funds purchased .......................... 52,810,000 57,220,000
---------------------------
$107,469,851 $104,771,178
===========================
45
Information concerning repurchase agreements is summarized as follows as of
December 31, 2005 and 2004:
2005 2004
----------------------------
Average daily balance during the period ................. $ 55,092,272 $ 43,148,089
Average daily interest rate during the period ........... 1.43% 0.88%
Maximum month-end balance during the period ............. $ 60,024,590 $ 48,354,535
Weighted average rate as of end of period ............... 1.47% 0.75%
Securities underlying the agreements as of end of period:
Carrying value ........................................ $104,145,318 $ 86,843,644
Fair value ............................................ 104,145,318 86,843,644
The securities underlying the agreements as of December 31, 2005 and 2004 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, 2005 and 2004:
2005 2004
--------------------------------
Average daily balance during the period ..... $ 51,536,446 $ 65,298,766
Average daily interest rate during the
period .................................... 3.07% 1.76%
Maximum month-end balance during the period . $ 83,125,000 $ 95,775,000
Weighted average rate as of end of period ... 3.15% 1.57%
Note 9. Federal Home Loan Bank Advances
The subsidiary banks are members of either the Federal Home Loan Bank of Des
Moines or the Federal Home Loan Bank of Chicago (FHLB). As of December 31, 2005
and 2004, the subsidiary banks held $7,270,300 and $5,586,800, respectively, of
FHLB stock. Maturity and interest rate information on advances from the FHLB as
of December 31, 2005 and 2004 is as follows:
December 31, 2005
----------------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
----------------------------------
Maturity:
Year ending December 31:
2006 ............................ $ 19,410,000 3.02%
2007 ............................ 42,200,000 3.84
2008 ............................ 17,100,000 3.69
2009 ............................ 14,200,000 4.05
2010 ............................ 8,100,000 5.16
Thereafter ...................... 28,990,854 4.22
------------
Total FHLB advances $130,000,854 3.89
============
46
Of the advances maturing after December 31, 2006, $30,000,000 have options which
allow the FHLB, at its discretion, to terminate the advances and require the
subsidiary banks to repay at predetermined dates prior to the stated maturity
date of the advances.
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
============
Advances are collateralized by securities with a carrying value of $14,978,433
and $6,112,175 as of December 31, 2005 and 2004, respectively. Advances as of
December 31, 2005 and 2004 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, 2005, the aggregate total of loans
pledged was $247,864,749.
Note 10. Other Borrowings
Other borrowings as of December 31, 2005 and 2004 are summarized as follows:
2005 2004
------------------------
364-day revolving note ............................... $ 5,500,000 $ 6,000,000
3-year revolving note ................................ 5,000,000 --
Non-recourse notes ................................... 264,914 --
------------------------
$10,764,914 $ 6,000,000
========================
As of December 31, 2005, the Company had two unsecured revolving credit notes
totaling $15,000,000 in the aggregate. There was a 364-day revolving note, which
matures December 21, 2006, for $10,000,000 and had a balance outstanding of
$5,500,000 as of December 31, 2005. There was a 3-year revolving note, which
matures December 30, 2007, for $5,000,000 and carried a balance of $5,000,000 at
December 31, 2005. For both notes, interest is payable monthly at the Federal
Funds rate plus 1% per annum, as defined in the credit agreements. As of
December 31, 2005, the interest rate on both notes was 5.19%.
At December 31, 2005, the Company held two fixed rate, non-recourse notes
totaling $264,914, which were assumed in the acquisition of M2 Lease Funds in
August 2005. Each of the notes is collateralized by leased machinery and
equipment, and the terms of the notes are determined by the terms of the related
leases. As of December 31, 2005, one note had an outstanding balance of $64,385
at an interest rate of 8.48% and a maturity date in May 2006. As of December 31,
2005, the second note had an outstanding balance of $200,529 at an interest rate
of 6.00% and a maturity date in August 2007.
The revolving credit note agreements contain certain covenants that place
restrictions on additional debt and stipulate minimum capital and various
operating ratios.
47
As of December 31, 2004, the Company had two unsecured revolving credit notes
totaling $15,000,000 in aggregate. There was a 365-day revolving note, which
matured December 22, 2005, for $10,000,000 and had a balance outstanding of
$6,000,000 as of December 31, 2004. There was a 3-year revolving note, which
matures December 30, 2007, for $5,000,000 and carried no balance at December 31,
2004. For both notes, interest was 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 both notes was 3.23%.
Unused lines of credit of the subsidiary banks as of December 31, 2005 and 2004
are summarized as follows:
2005 2004
-----------------------------------
Secured .......................... $ 13,000,000 $ 13,000,000
Unsecured ........................ 91,500,000 86,500,000
-----------------------------------
$104,500,000 $ 99,500,000
===================================
Note 11. Junior Subordinated Debentures
Junior subordinated debentures are summarized as of December 31, 2005 and 2004
as follows:
2005 2004
-------------------------
Note Payable to Trust II ........................... $12,372,000 $12,372,000
Note Payable to Trust III .......................... 8,248,000 8,248,000
Note Payable to Trust IV ........................... 5,155,000 --
-------------------------
$25,775,000 $20,620,000
=========================
In June 1999, the Company issued 1,200,000 shares of 9.2% cumulative trust
preferred securities through a newly formed subsidiary, Trust I, which used the
proceeds from the sale of the trust preferred securities to purchase junior
subordinated debentures of the Company. These securities were $12,000,000 at
December 31, 2003. In February 2004, the Company issued, in a private
transaction, $12,000,000 of fixed/floating rate capital securities and $8.0
million of floating rate capital securities through two newly formed
subsidiaries, Trust II and Trust III, respectively. The securities issued by
Trust II and Trust III mature in thirty years. The fixed/floating rate capital
securities are callable at par after seven years, and the floating rate capital
securities are callable at par after five years. The fixed/floating rate capital
securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly, and the floating rate capital securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the rate set at 7.38% for the
first quarter of 2006. Trust II and Trust III used the proceeds from the sale of
the trust preferred securities, along with the funds from their equity, to
purchase junior subordinated debentures of the Company in the amounts of
$12,400,000 and $8,200,000, respectively. These securities were $20,000,000 in
aggregate at December 31, 2005. On June 30, 2004, the Company redeemed the
$12,000,000 of 9.2% cumulative trust preferred securities issued by Trust I in
1999. During 2004, the Company recognized a loss of $747,490 on the redemption
of these trust preferred securities at their earliest call date, which resulted
from the one-time write-off of unamortized costs related to the original
issuance of the securities in 1999.
On May 5, 2005, the Company announced the issuance of $5,000,000 of floating
rate capital securities of QCR Holdings Statutory Trust IV. The securities
represent the undivided beneficial interest in Trust IV, which was established
by the Company for the sole purpose of issuing the Trust Preferred Securities.
The Trust Preferred Securities were sold in a private transaction exempt from
registration under the Securities Act of 1933, as amended and were not
registered under the Act.
The securities issued by Trust IV mature in thirty years, but are callable at
par after five years. The Trust Preferred Securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the rate set at 6.40% for the
first quarter of 2006. Interest is payable quarterly. Trust IV used the
$5,000,000 of proceeds from the sale of the Trust Preferred Securities, in
combination with $155,000 of proceeds from its own equity, to purchase
$5,155,000 of junior subordinated debentures of the Company. The Company
incurred no issuance costs as a result of the transaction. The Company used the
net proceeds for general corporate purposes, including the paydown of its other
borrowings.
48
The current debentures were included on the balance sheet as liabilities;
however, for regulatory purposes, approximately $16,619,000 and $16,702,000 were
allowed in the calculation of Tier I capital at December 31, 2005 and 2004,
respectively, with the remainder allowed as Tier II capital. The required
deconsolidation of trust preferred subsidiaries, such as Trust II, Trust III,
and Trust IV, 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 12. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components
for the years ended December 31, 2005, 2004, and 2003:
2005 2004 2003
--------------------------------------------------
Current ............... $ 2,391,653 $ 2,689,458 $ 3,369,368
Deferred .............. (109,452) (185,676) (674,681)
--------------------------------------------------
$ 2,282,201 $ 2,503,782 $ 2,694,687
=================================================
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, 2005, 2004, and 2003:
Year Ended December 31,
-----------------------------------------------------------------------------------
2005 2004 2003
-------------------------- -------------------------- -----------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-----------------------------------------------------------------------------------
Computed "expected"
tax expense ................................ $ 2,482,276 35.0% $ 2,702,159 35.0% $ 2,854,465 35.0%
Effect of graduated
tax rates interest ......................... (70,922) (1.0) (77,205) (1.0) (81,556) (1.0)
Tax exempt income, net ....................... (231,370) (3.3) (220,560) (2.9) (212,105) (2.6)
Bank-owned life
insurance .................................. (213,388) (3.0) (212,060) (2.7) (62,390) (0.8)
State income taxes, net
of federal benefit ......................... 262,850 3.7 303,735 3.9 226,446 2.8
Other ........................................ 52,755 0.7 7,713 0.1 (30,173) (0.4)
-----------------------------------------------------------------------------------
$ 2,282,201 32.1% $ 2,503,782 32.4% $ 2,694,687 33.0%
===================================================================================
The net deferred tax assets included with other assets on the consolidated
balance sheets consisted of the following as of December 31, 2005 and 2004:
2005 2004
-----------------------
Deferred tax assets:
Net unrealized losses on securities
available for sale ................................. $ 322,996 $ --
Compensation ......................................... 1,465,821 1,291,563
Loan and credit card losses .......................... 3,039,498 3,309,991
Other ................................................ 120,704 116,997
-----------------------
4,949,019 4,718,551
-----------------------
Deferred tax liabilities:
Net unrealized gains on securities available for sale -- 407,798
Premises and equipment ............................... 920,329 1,052,783
Investment accretion ................................. 33,098 37,260
Deferred loan origination fees, net .................. 168,177 223,339
Other ................................................ 106,881 117,083
-----------------------
1,228,485 1,838,263
-----------------------
Net deferred tax asset ........................... $3,720,534 $2,880,288
=======================
49
The change in deferred income taxes was reflected in the consolidated financial
statements as follows for the years ended December 31, 2005, 2004, and 2003:
2005 2004 2003
-----------------------------------
Provision for income taxes .............. $(109,452) $(185,676) $(674,681)
Statement of stockholders' equity-
accumulated other comprehensive
income, unrealized (losses)
on securities available for sale, net . (730,794) (674,839) (208,088)
-----------------------------------
$(840,246) $(860,515) $(882,769)
===================================
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, 2005, 2004, and 2003 were as
follows:
2005 2004 2003
-------------------------------
Matching contribution .......................... $557,299 $415,582 $377,854
Discretionary contribution ..................... 90,100 89,000 90,000
-------------------------------
$647,399 $504,582 $467,854
===============================
The Company has offered nonqualified supplemental executive retirement plans
(SERPs) with certain executive officers. The SERPs allow certain executives to
accumulate retirement benefits beyond those provided by the qualified plans.
During the years ended December 31, 2005 and 2004, the Company's contributions
were $176,313 and $134,000, respectively. As of December 31, 2005 and 2004, the
liability related to the SERPs was $310,313 and $134,000, respectively.
The Company has entered into deferred compensation agreements with certain
executive officers. Under the provisions of the agreements the officers may
defer compensation and the Company matches the deferral up to certain maximums.
The Company'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, 2005, 2004, and 2003 the Company expensed $124,562, $107,420,
and $86,275, respectively, related to the agreements. As of December 31, 2005
and 2004 the liability related to the agreements totals $830,222 and $627,160,
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 between
4% and 10% of officer's compensation. Interest on the deferred amounts is earned
at The Wall Street Journal's prime rate plus one percentage point, and has a
minimum of 4% and shall not exceed 8%. Upon retirement, the officer will receive
the deferral balance in 180 equal monthly installments. During the years ended
December 31, 2005 and 2004, the Company expensed $44,111 and $21,448,
respectively related to the agreements. As of December 31, 2005 and 2004, the
liability related to the agreements totaled $170,949 and $62,152, respectively.
50
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, 2005, there are 170,312 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).
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, 2005, 2004, and 2003 and
changes during the years then ended is presented below:
December 31,
----------------------------------------------------------------------------
2005 2004 2003
----------------------- ----------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------
Outstanding, beginning ............................ 244,816 $ 11.56 224,800 $ 8.57 300,566 $ 7.56
Granted ......................................... 34,400 21.08 60,100 19.33 7,350 13.47
Exercised ....................................... (25,335) 20.62 (38,604) 6.35 (75,998) 4.98
Forfeited ....................................... (1,223) 12.63 (1,480) 8.99 (7,118) 9.41
----------------------------------------------------------------------------
Outstanding, ending ............................... 252,658 13.25 244,816 11.56 224,800 8.57
============================================================================
Exercisable, ending ............................... 146,979 135,210 145,598
Weighted average fair
value per option of
options granted
during the period ............................... $ 8.99 $ 8.29 $ 5.58
51
A further summary of options outstanding as of December 31, 2005 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
- ----------------------------------------------------------------------------------------------------------
$5.89 to $6.90 22,722 $ 4.62 $ 6.61 19,242 $ 6.55
$7.00 to $7.13 35,450 5.22 7.01 26,000 7.01
$7.45 to $9.39 38,878 1.74 8.88 37,978 8.91
$9.87 to $11.64 34,892 5.70 10.33 25,782 10.40
$11.83 to $18.40 45,986 3.49 15.66 27,626 14.25
$18.67 to $20.90 45,130 8.44 19.78 10,351 19.68
$21.00 to $22.00 29,600 9.05 21.29 -- --
-------------- -------------
252,658 146,979
============== =============
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, 2005, 2004, and 2003
there were 104,775, 111,375, and 135,525 SARs, respectively, outstanding, with
93,435, 84,810, and 92,310, respectively, exercisable. During the years ended
2005, 2004, and 2003 the Company expensed ($137,026), $297,441, and $915,224,
respectively, related to the SARs. As of December 31, 2005 and 2004 the
liability related to the SARs totals $1,035,935 and $1,251,908, respectively.
A further summary of SARs is presented below:
December 31, 2005 Liability Recorded for SARs
------------------------------- --------------------------------
December 31,
SARs SARs --------------------------------
Exercise Price Outstanding Exercisable 2005 2004
- -----------------------------------------------------------------------------------------------
$6.90 32,250 25,410 $ 412,800 $ 488,565
$7.00 12,600 8,100 160,020 193,200
$9.11 12,750 12,750 134,980 151,555
$10.75 16,575 16,575 148,346 185,269
$11.83 4,425 4,425 34,810 54,313
$12.17 750 750 5,650 6,625
$13.55 -- -- -- --
$14.22 25,425 25,425 139,329 172,381
----------------------------------------------------------------
104,775 93,435 $ 1,035,935 $ 1,251,908
================================================================
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, 2005 there were 128,185 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, 2005, 10,516 shares were granted and 10,584 purchased.
Shares granted during the year ended December 31, 2005 had a weighted average
fair value of $3.09 per share.
52
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, 2005 and 2004, that the Company and the subsidiary banks met all
capital adequacy requirements to which they are subject.
As of December 31, 2005, 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, 2005 and
2004 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, 2005:
Company:
Total risk-based capital $ 86,515 10.14% $ 68,252 >= 8.0% N/A N/A
Tier 1 risk-based capital 69,081 8.10% 34,126 >= 4.0 N/A N/A
Leverage ratio 69,081 6.84% 40,373 >= 4.0 N/A N/A
Quad City Bank & Trust:
Total risk-based capital $ 60,670 10.22% $ 47,480 >= 8.0% $ 59,350 >= 10.0%
Tier 1 risk-based capital 54,609 9.20% 23,740 >= 4.0 35,610 >= 6.0
Leverage ratio 54,609 7.84% 27,876 >= 4.0 34,845 >= 5.0
Cedar Rapids Bank & Trust:
Total risk-based capital $ 23,476 10.26% $ 18,313 >= 8.0% $ 22,891 >= 10.0%
Tier 1 risk-based capital 20,869 9.12% 9,156 >= 4.0 13,735 >= 6.0
Leverage ratio 20,869 7.46% 11,186 >= 4.0 13,983 >= 5.0
Rockford Bank & Trust (A):
Total risk-based capital $ 9,019 29.77% $ 2,424 >= 8.0% $ 3,030 >= 10.0%
Tier 1 risk-based capital 8,757 28.90% 1,212 >= 4.0 1,818 >= 6.0
Leverage ratio 8,757 24.16% 1,450 >= 4.0 1,813 >= 5.0
53
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:
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
(A) As a de novo bank, Rockford Bank & Trust cannot, without the prior consent
of the Federal Reserve Bank, pay dividends until TTED] after the first
three years of operations and two consecutive satisfactory CAMELS ratings.
In addition, the Bank is 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 Rockford Bank & Trust will expire in January 2008.
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.
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, 2005, 2004, and 2003:
2005 2004 2003
------------------------------------
Net income ....................................... $4,810,015 $5,216,672 $5,460,927
====================================
Weighted average common shares outstanding ....... 4,518,162 4,234,345 4,173,063
Weighted average common shares issuable upon
exercise of stock options and under the Employee
Stock Purchase Plan ............................ 98,394 110,420 109,520
------------------------------------
Weighted average common and common
equivalent shares outstanding .................. 4,616,556 4,344,765 4,282,583
====================================
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.
54
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, 2005 and 2004 no amounts have been recorded
as liabilities for the subsidiary banks' potential obligations under these
guarantees.
As of December 31, 2005 and 2004, commitments to extend credit aggregated
$385,779,000 and $257,569,000, respectively. As of December 31, 2005 and 2004,
standby letters of credit aggregated $15,242,000 and $12,653,000, 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 $2,632,400 and $3,498,809 as of December 31,
2005 and 2004, respectively. These amounts are included in loans held for sale
at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold
with varying recourse provisions. Essentially, all loan sales agreements require
the repurchase of a mortgage loan by the seller in situations such as, breach of
representation, warranty, or covenant, untimely document delivery, false or
misleading statements, failure to obtain certain certificates or insurance,
unmarketability, etc. Certain loan sales agreements contain repurchase
requirements based on payment-related defects that are defined in terms of the
number of days/months since the purchase, the sequence number of the payment,
and/or the number of days of payment delinquency. Based on the specific terms
stated in the agreements of investors purchasing residential mortgage loans from
the Company's subsidiary banks, the Company had $43,439,000 and $35,587,000 of
sold residential mortgage loans with recourse provisions still in effect at
December 31, 2005 and 2004, respectively. The subsidiary banks did not
repurchase any loans from secondary market investors under the terms of loans
sales agreements during the years ended December 31, 2005, 2004, and 2003. 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 o& 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, 2005, Quad City Bank & Trust had funded $13,800,000 of
mortgages through the FHLB's MPF Program with an attached credit exposure of
$279,000. At December 31, 2004, Quad City Bank & Trust had funded $11,700,000 of
mortgages through the FHLB's MPF Program with an attached credit exposure of
$240,000. In conjunction with its participation in this program, Quad City Bank
& Trust had an allowance for credit losses on these off-balance sheet exposures
of $48 thousand and $11 thousand at December 31, 2005 and December 31, 2004,
respectively.
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. Until 2004, Bancard had not
experienced any notable chargeback activity in which local or agent bank
merchant's cash reserves on deposit were not sufficient to cover the chargeback
volumes. However, in 2004, two of these merchants experienced cases of fraud and
subsequent chargeback volumes that surpassed their cash reserves. As a result,
Bancard incurred $196,000 of chargeback loss expense due to the fraudulent
activity on these two merchants and in the establishment in August of an
allowance for chargeback losses. Throughout 2005 monthly provisions were made to
the allowance for chargeback losses based on the dollar volumes of merchant
credit card activity. For the year ended December 31, 2005, monthly provisions
were made totaling $48,000. An aggregate of $135,000 of reversals of specific
merchant reserves during 2005 more than offset these provisions. At December 31,
2005 and 2004, Bancard had a merchant chargeback reserve of $77,000 and
$164,000, respectively. Management will continually monitor merchant credit card
volumes, related chargeback activity, and Bancard's level of the allowance for
chargeback losses.
The Company also has a limited guarantee to MasterCard International,
Incorporated, which is backed by a $750,000 letter of credit from The Northern
Trust Company. As of December 31, 2005 and 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 $9,800,000 and $10,900,000 as of December 31, 2005 and 2004,
respectively. In the opinion of management, no material risk of loss exists due
to the financial condition of the upstream correspondent banks.
In an arrangement with Goldman, Sachs and Company (Goldman Sachs), Cedar Rapids
Bank & Trust offers a cash management program for select customers. Using this
cash management tool, the customer's demand deposit account performs like an
investment account. Based on a predetermined minimum balance, which must be
maintained in the account, excess funds are automatically swept daily to an
institutional money market fund distributed by Goldman Sachs. As with a
traditional demand deposit account, customers retain complete check-writing and
withdrawal privileges. If the demand deposit account balance drops below the
predetermined threshold, funds are automatically swept back from the money
market fund at Goldman Sachs to the account at Cedar Rapids Bank & Trust to
maintain the required minimum balance. Balances swept into the money market
funds are not bank deposits, are not insured by any U.S. government agency, and
do not require cash reserves to be set against the balances. At December 31,
2005 and December 31, 2004, the Company had $36,052,000 and $3,546,000,
respectively, of customer funds invested in this cash management program.
The Company has various financial obligations, including contractual obligations
and commitments, which may require future cash payments. The 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, 2005, 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, 2005, significant fixed and
determinable contractual obligations to these third parties by payment date.
Purchase Operating
Obligations Contracts
----------------------------------
Year ending December 31:
2006 ..................................... $ 2,900,000 $ 1,546,712
2007 ..................................... -- 1,072,451
2008 ..................................... -- 995,837
2009 ..................................... -- 883,113
2010 ..... ............................... -- 3,750
Thereafter ............................... -- 11,950
----------------------------------
$ 2,900,000 $ 4,513,813
==================================
The Company also has operating lease obligations under noncancelable leases for
several of its facilities. See Note 5.
In the third quarter of 2005, Rockford Bank & Trust initiated plans for a second
banking location in Rockford, Illinois on Guilford Road at Alpine. A temporary
modular facility opened in December providing a drive-up lane and drive-up ATM.
The Company plans to build a 20,000 square foot banking facility at a projected
cost of $4.4 million. Completion of the new facility is anticipated to occur in
October of 2006. During 2005, capitalized costs associated with this project
were $1.5 million.
56
Note 18. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2005
----------------------------------------------------------
March June September December
2005 2005 2005 2005
----------------------------------------------------------
Total interest income ................................... $ 10,679,989 $ 11,538,870 $ 12,502,512 $ 13,966,897
Total interest expense .................................. 4,191,650 4,781,874 5,642,350 6,664,911
----------------------------------------------------------
Net interest income ................................ 6,488,339 6,756,996 6,860,162 7,301,986
Provision for loan losses (gains) ....................... 301,206 (147,418) 382,752 340,544
Noninterest income ...................................... 2,516,475 2,434,878 2,508,535 2,612,615
Noninterest expenses .................................... 6,752,705 7,443,341 7,589,747 7,647,355
Minority interest in income of
consolidated subsidiary ............................... -- -- 20,651 56,887
----------------------------------------------------------
Net income before
income taxes ....................................... 1,950,903 1,895,951 1,375,547 1,869,815
Federal and state income taxes .......................... 627,153 633,428 419,968 601,652
----------------------------------------------------------
Net income ......................................... $ 1,323,750 $ 1,262,523 $ 955,579 $ 1,268,163
==========================================================
Earnings per common share:
Basic ................................................. $ 0.29 $ 0.28 $ 0.21 $ 0.28
Diluted ............................................... 0.29 0.27 0.21 0.27
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
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, 2005 and 2004
Assets 2005 2004
- ----------------------------------------------------------------------------------
Cash and due from banks ........................... $ 842,260 $ 6,125,728
Interest-bearing deposits at financial
institutions .................................... 95,727 415,439
Securities available for sale, at fair value ...... 1,593,719 1,638,617
Investment in bank subsidiaries ................... 86,100,599 66,900,880
Investment in nonbank subsidiaries ................ 1,376,780 1,250,673
Net loans receivable .............................. -- 21,764
Other assets ...................................... 2,070,084 2,552,837
----------------------------
Total assets ................................. $ 92,079,169 $ 78,905,938
============================
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------
Liabilities:
Other borrowings ................................ $ 10,500,000 $ 6,000,000
Junior subordinated debentures .................. 25,775,000 20,620,000
Other liabilities ............................... 1,337,470 1,512,138
----------------------------
Total liabilities ............................ 37,612,470 28,132,138
----------------------------
Stockholders' Equity:
Common stock .................................... 4,531,224 4,496,730
Additional paid-in capital ...................... 20,776,254 20,329,033
Retained earnings ............................... 29,726,700 25,278,666
Accumulated other comprehensive income (loss) ... (567,479) 669,371
----------------------------
Total stockholders' equity ................... 54,466,699 50,773,800
----------------------------
Total liabilities and stockholders' equity ... $ 92,079,169 $ 78,905,938
============================
Condensed Statements of Income
Years Ended December 31, 2005, 2004, and 2003
2005 2004 2003
- ------------------------------------------------------------------------------------
Total interest income ....................... $ 48,991 $ 114,731 $ 83,894
Securities gains, net ....................... 50 26,188 5
Equity in net income of bank subsidiaries ... 6,491,611 7,643,815 6,075,566
Equity in net income of nonbank subsidiaries 405,220 259,660 867,217
Other ....................................... 386,382 212,814 303,052
------------------------------------
Total income ........................... 7,332,254 8,257,208 7,329,734
------------------------------------
Interest expense ............................ 1,988,963 2,547,534 1,361,939
Salaries and employee benefits .............. 778,402 1,135,333 720,989
Professional and data processing fees ....... 508,237 361,063 288,217
Other ....................................... 344,280 423,347 292,914
------------------------------------
Total expenses ......................... 3,619,882 4,467,277 2,664,059
------------------------------------
Income before income tax benefit ....... 3,712,372 3,789,931 4,665,675
Income tax benefit .......................... 1,097,643 1,426,741 795,252
------------------------------------
Net income ............................. $4,810,015 $5,216,672 $5,460,927
====================================
58
Condensed Statements of Cash Flows
Years Ended December 31, 2005, 2004, and 2003
2005 2004 2003
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .............................................. $ 4,810,015 $ 5,216,672 $ 5,460,927
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Distributions in excess of (less than) earnings of:
Bank subsidiaries ................................... (6,491,611) (6,643,815) (5,075,566)
Nonbank subsidiaries ................................ 28,893 2,662,973 41,775
Depreciation .......................................... 3,877 4,507 4,506
Provision for loan losses ............................. 3,269 -- --
Loss on redemption of junior subordinated debentures .. -- 747,490 --
Investment securities gains, net ...................... (50) (26,188) (5)
Tax benefit of nonqualified stock options exercised ... 125,993 190,248 274,871
(Increase) decrease in accrued interest receivable .... 26,788 (28,252) (6,715)
(Increase) decrease in other assets ................... 424,737 (1,103,348) (299,820)
Increase (decrease) in other liabilities .............. (176,051) 523,507 (47,516)
--------------------------------------------
Net cash (used in) provided by operating activities (1,244,140) 1,543,794 352,457
--------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing deposits at
financial institutions ................................ 319,712 (281,648) 153,118
Purchase of securities available for sale ............... (167,736) (307,392) (28,496)
Proceeds from calls and maturities of securities ........ 298,988 227,001 200,000
Capital infusion, bank subsidiaries ..................... (14,000,000) (4,000,000) (5,000,000)
Capital infusion, nonbank subsidiaries .................. (155,000) (620,000) (500,000)
Net loans (originated) repaid ........................... 22,084 -- (757)
Purchase of premises and equipment ...................... (7,500) -- --
--------------------------------------------
Net cash used in investing activities ............. (13,689,452) (4,982,039) (5,176,135)
--------------------------------------------
Cash Flows from Financing Activities:
Net (decrease) increase in other borrowings ............. 4,500,000 (4,000,000) 5,000,000
Proceeds from issuance of junior subordinated debentures 5,155,000 20,620,000 --
Redemption of junior subordinated debentures ............ -- (12,000,000) --
Payment of cash dividends ............................... (360,598) (336,816) (277,086)
Payment from fractional shares on 3:2 stock split ....... -- (2,549) --
Proceeds from issuance of common stock, net ............. 355,722 5,028,831 148,503
--------------------------------------------
Net cash provided by financing activities ......... 9,650,124 9,309,466 4,871,417
--------------------------------------------
Net increase (decrease) in cash and due from banks (5,283,468) 5,871,221 47,739
Cash and due from banks:
Beginning ............................................... 6,125,728 254,507 206,768
--------------------------------------------
Ending .................................................. $ 842,260 $ 6,125,728 $ 254,507
============================================
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.
59
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/leases receivable: The fair values for variable rate loans equal their
carrying values. The fair values for all other types of loans/leases are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans/leases with similar terms to borrowers with similar
credit quality. The fair value of loans held for sale is based on quoted market
prices of similar loans sold in the secondary market.
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 analyses,
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.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 2005 and 2004 are presented as follows:
2005 2004
--------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------------------------------------------------
Cash and due from banks .................................... $ 38,956,627 $ 38,956,627 $ 21,372,342 $ 21,372,342
Federal funds sold ......................................... 4,450,000 4,450,000 2,890,000 2,890,000
Interest-bearing deposits at financial
institutions ............................................. 1,270,666 1,270,666 3,857,563 3,857,563
Investment securities:
Held to maturity ......................................... 150,000 154,828 100,000 108,254
Available for sale ....................................... 182,214,719 182,214,719 149,460,886 149,460,886
Loans/leases receivable, net ............................... 747,370,175 745,921,173 639,088,836 639,212,836
Accrued interest receivable ................................ 4,849,379 4,849,379 4,072,762 4,072,762
Deposits ................................................... 698,503,899 696,761,899 588,015,683 587,509,683
Short-term borrowings ...................................... 107,469,851 107,469,851 104,771,178 104,771,178
Federal Home Loan Bank advances ............................ 130,000,854 128,861,854 92,021,877 92,107,877
Other borrowings ........................................... 10,764,914 10,764,914 6,000,000 6,000,000
Junior subordinated debentures ............................. 25,775,000 27,653,149 20,620,000 22,049,216
Accrued interest payable ................................... 2,410,398 2,410,398 1,536,976 1,536,976
60
Note 21. Business Segment Information
Selected financial information on the Company's business segments, with all
intercompany accounts and transactions eliminated, is presented as follows for
the years ended December 31, 2005, 2004, and 2003:
2005 2004 2003
-------------------------------------------------
Commercial banking:
Quad City Bank & Trust:
Revenue ................ $ 36,732,246 $ 32,342,266 $ 32,624,650
Net income ............. 4,965,565 5,914,913 5,148,423
Assets ................. 668,896,016 634,206,797 555,403,875
Depreciation ........... 1,476,476 1,245,853 902,175
Capital expenditures ... 1,787,723 3,783,114 3,851,445
Intangible assets ...... -- -- --
Cedar Rapids Bank & Trust:
Revenue ................ 14,627,423 9,809,878 6,920,826
Net income ............. 1,274,625 873,348 249,866
Assets ................. 288,537,122 228,249,176 149,673,720
Depreciation ........... 392,491 185,869 140,606
Capital expenditures ... 6,170,123 3,582,029 292,260
Intangible assets ...... -- -- --
Rockford Bank & Trust:
Revenue ................ 1,084,242 16,476 --
Net (loss) ............. (1,297,322) (346,490) --
Assets ................. 41,206,869 1,660,473 --
Depreciation ........... 97,125 10,689 --
Capital expenditures ... 1,744,149 207,239 --
Intangible assets ...... -- -- --
2005 2004 2003
-------------------------------------------------
Credit card processing:
Revenue ................... $ 2,056,474 $ 1,612,824 $ 2,372,619
Net income ................ 631,954 441,117 1,056,399
Assets .................... 575,974 889,407 736,710
Depreciation .............. 29,359 28,535 25,656
Capital expenditures ...... 32,533 39,204 8,328
Intangible assets ......... -- -- --
Trust management:
Revenue ................... 2,818,832 2,530,907 2,242,747
Net income ................ 611,647 625,459 490,018
Assets .................... N/A N/A N/A
Depreciation .............. N/A N/A N/A
Capital expenditures ...... N/A N/A N/A
Intangible assets ......... -- -- --
Leasing services:
Revenue ................... 958,854 -- --
Net income ................ 663,084 -- --
Assets .................... 38,585,572 -- --
Depreciation .............. 9,445 -- --
Capital expenditures ...... 37,465 -- --
Intangible assets ......... 3,222,688 -- --
All other:
Revenue ................... 482,700 385,930 385,028
Net (loss) ................ (2,039,538) (2,291,675) (1,483,779)
Assets .................... 4,811,975 5,077,694 4,225,250
Depreciation .............. 3,877 4,507 4,506
Capital expenditures ...... 7,500 -- --
Intangible assets ......... -- -- --
61
Note 22. Subsequent Event
On February 24, 2006, the Company announced the issuance of $10,000,000 of
fixed/floating rate capital securities of QCR Holdings Statutory Trust V ("Trust
V"). The securities represent the undivided beneficial interest in Trust V,
which was established by the Company for the sole purpose of issuing the Trust
Preferred Securities. The Trust Preferred Securities were sold in a private
transaction exempt from registration under the Securities Act of 1933, as
amended and were not registered under the Act.
The securities issued by Trust V mature in thirty years, but are callable at par
after five years. The Trust Preferred Securities have a fixed rate of 6.62%,
payable quarterly, for five years, at which time they have a variable rate based
on the three-month LIBOR, reset quarterly. Trust V used the $10,000,000 of
proceeds from the sale of the Trust Preferred Securities, in combination with
$310,000 of proceeds from its own equity, to purchase $10,310,000 million of
junior subordinated debentures of the Company. The Company treats these
issuances as Tier 1 capital for regulatory capital purposes, subject to current
established limitations. The Company incurred no issuance costs as a result of
the transaction. The Company used the net proceeds for general corporate
purposes, including the paydown of its other borrowings.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. An evaluation was performed
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act)
as of December 31, 2005. Based on that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports filed and submitted
under the Exchange Act was recorded, processed, summarized and reported as and
when required.
Management's Report on Internal Control Over Financial Reporting. The Company's
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of
the Exchange Act). Internal control over financial reporting includes controls
and procedures designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies
and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions of the
Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on the financial
statements.
All internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention of
overriding controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
The Company's management assessed the effectiveness of the Company's internal
control, over financial reporting as of December 31, 2005. Management's
assessment is based on the criteria established in the Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and was designed to provide reasonable assurance that the
Company maintained effective internal control over financial reporting as of
December 31, 2005. Based on this assessment, management believes that the
Company maintained effective internal control over financial reporting as of
December 31, 2005.
McGladrey & Pullen, LLP, the Company's independent registered public accounting
firm, has issued an attestation report on the Company's internal control over
financial reporting as of December 31, 2005 and management's assessment of the
internal control over financial reporting which is included following in this
Form 10-K.
62
McGladrey & Pullen, LLP
Certified Public Accountants
Report of Independent Registered Public Accounting Firm.
To the Board of Directors
QCR Holdings, Inc.
Moline, Illinois
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that QCR
Holdings, Inc. and subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
The Company acquired an 80% ownership interest in M2 Lease Funds, LLC. (M2)
during 2005, and management excluded from its assessment of the effectiveness of
the Company's internal control over financial reporting as of December 31, 2005,
M2's internal control over financial reporting associated with total assets of
$38.6 million, total revenues of $948,000, and net income of $392,000 included
in the consolidated financial statements of the Company as of and for the year
ended December 31, 2005. Our audit of internal control over financial reporting
of the Company also excluded an evaluation of the internal control over
financial reporting of M2.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2005 and 2004, and the related consolidated
statements of income, changes in stockholder's equity, and cash flows for each
of the years in the three-year period ended December 31, 2005, and our report
dated January 27, 2006 expressed an unqualified opinion on those consolidated
financial statements.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 27, 2006
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
63
Changes in Internal Control over Financial Reporting. The Company recently
underwent a comprehensive effort to ensure compliance with the requirements
under Section 404 of the Sarbanes-Oxley Act of 2002. As a result, several
enhancements to the Company's internal controls over financial reporting have
been implemented, including, but not limited to, changes in wire transfer
access, reviews of file maintenance reports, and changes in the access to the
issuance of credit cards. During 2005, the Company implemented one of the more
significant changes, which was a comprehensive Reconciliation and Account
Certification Policy, creating a centralized reconciliation process throughout
the Company, culminating in a consolidated reporting package that is submitted
to the Chief Financial Officer. At December 31, 2005, the Company had fully
completed its evaluation and the implementation of many significant control
enhancements. These control enhancements were not made in response to material
weaknesses in the Company's internal control over financial reporting, but
rather as part of the Company's ongoing efforts to improve internal control over
financial reporting. The Company will continue to work throughout 2006 to
implement additional control enhancements. Other than changes as described
above, there have been no other significant changes to the Company's internal
control over financial reporting during the period covered by this report that
have materially effected, or are reasonably likely to affect the Company's
internal control over financial reporting.
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.
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, 2005 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............... 255,102 $13.29 287,981 (1)
Equity compensation plans
not approved by security holders.. -- -- --
Total............................. 255,102 $13.29 287,981 (1)
(1) Includes 117,669 shares available under the QCR Holdings, Inc.
Employee Stock Purchase Plan.
64
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
"Independent Registered 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.
(a) 3. Exhibits
The following exhibits are either filed as a part of this Annual
Report on Form 10-K or are incorporated herein by reference:
Exhibit Number. Exhibit Description
3.1 Certificate of Incorporation of QCR Holdings,
Inc., as amended (incorporated herein by reference
to Exhibit 3(i) of Registrant's Annual Report on
Form 10K for the year ended December 31, 2004).
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).
65
Exhibit Number. Exhibit Description
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 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
66
10.19 Non-Qualified Supplemental Executive Retirement
Agreement between Quad City Bank and Trust Company
and Certain Key Executives dated February 1, 2004
(incorporated herein by reference to Exhibit 10.20
of Registrant's Annual Report on form 10K for the
year ended December 31, 2004).
10.20 Non-Qualified Supplemental Executive Retirement
Agreement between Cedar Rapids Bank and Trust
Company and Certain Key Executives dated February
1, 2004 (incorporated herein by reference to
Exhibit 10(xxi) of Registrant's Annual Report on
Form 10K for the year ended December 31, 2004).
10.21 Executive Deferred Compensation Agreement between
QCR Holdings, Inc. and Thomas Budd dated July 15,
2004 (incorporated herein by reference to Exhibit
10(xxii) of Registrant's Annual Report on Form 10K
for the year ended December 31, 2004).
10.22 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).
10.23 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).
10.24 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).
10.25 Indenture by and between QCR Holdings, Inc./QCR
Holdings Statutory Trust IV and Wells Fargo Bank,
National Association, as debenture and
institutional trustee, dated May 4, 2005
(incorporated herein by reference to Exhibit 10(i)
of Registrant's Quarterly Report on Form 10Q for
the quarter ended March 31, 2005).
10.26 Second Amended and Restated Operating Agreement
between Quad City Bank and Trust Company and John
Engelbrecht dated August 26, 2005 (incorporated
herein by reference to Exhibit 10(i) of
Registrant's Quarterly Report on Form 10Q for the
quarter ended September 30, 2005).
10.27 Indenture by and between QCR Holdings, Inc./QCR
Holdings Statutory Trust V and Wells Fargo Bank,
National Association, as debenture and
institutional trustee, dated February 24, 2006
(exhibit is being filed herewith).
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 Registered Public
Accounting Firm - 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.
67
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 13, 2006 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 13, 2006
- ----------------------------
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive March 13, 2006
- ----------------------------
Douglas M. Hultquist Officer and Director
/s Patrick S. Baird Director March 13, 2006
- ----------------------------
Patrick Baird
/s/ James J. Brownson Director March 13, 2006
- ----------------------------
James J. Brownson
/s/ Larry J. Helling Director March 13, 2006
- ----------------------------
Larry J. Helling
/s/ Mark C. Kilmer Director March 13, 2006
- ----------------------------
Mark C. Kilmer
/s/ John K. Lawson Director March 13, 2006
- ----------------------------
John K. Lawson
/s/ Ronald G. Peterson Director March 13, 2006
- ----------------------------
Ronald G. Peterson
/s/ Henry Royer Director March 13, 2006
- ----------------------------
Henry Royer
68
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, as the sole shareholder of the Banks, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). In accordance with Federal Reserve policy, 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.
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.
69
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 not applied for 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, 2005, 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.
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.
70
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, 2005, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2006, 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, 2005, the FICO assessment rate for
BIF and SAIF members was approximately 0.01% 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. The amount of the assessment payable by each
Bank is calculated on the basis of that Bank's total assets. During the year
ended December 31, 2005, the Iowa Banks paid supervisory assessments to the
Superintendent totaling $92 thousand and the Illinois Bank paid supervisory
assessments to the DFPR totaling $6 thousand.
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%. In general, 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.
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.
71
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 cert!in
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, 2005: (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, 2005. As of December 31, 2005, approximately $1.9 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.
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.
72
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, the 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 the laws of which expressly 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 $48.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $48.3 million, the reserve
requirement is $1.215 million plus 10% of the aggregate amount of total
transaction accounts in excess of $48.3 million. The first $7.8 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.
Recent Regulatory Developments. On February 8, 2006, President Bush signed the
Federal Deposit Insurance Reform Act of 2005 ("FDIRA") into law as part of the
Deficit Reduction Act of 2005 and on February 15, 2006, President Bush signed
into law the technical and conforming amendments designed to implement FDIRA.
FDIRA provides for legislative reforms to modernize the federal deposit
insurance system.
73
Among other things, FDIRA: (i) merges the BIF and the SAIF of the FDIC into a
new Deposit Insurance Fund (the "DIF"); (ii) allows the FDIC, after
March 31, 2010, to increase deposit insurance coverage by an adjustment for
inflation and requires the FDIC's Board of Directors, not later than April 1,
2010 and every five years thereafter, to consider whether such an increase is
warranted; (iii) increases the deposit insurance limit for certain employee
benefit plan deposits from $100,000 to $250,000, subject to adjustments for
inflation after March 31, 2010, and provides for pass-through insurance coverage
for such deposits; (iv) increases the deposit insurance limit for certain
retirement account deposits from $100,000 to $250,000, subject to adjustments
for inflation after March 31, 2010; (v) allows the FDIC's Board of Directors to
set deposit insurance premium assessments in any amount the Board of Directors
deems necessary or appropriate, after taking into account various factors
specified in FDIRA; (vi) replaces the fixed designated reserve ratio of 1.25%
with a reserve ratio range of 1.15%-1.50%, with the specific reserve ratio to be
determined annually by the FDIC by regulation; (vii) permits the FDIC to revise
the risk-based assessment system by regulation; (viii) requires the FDIC, at the
end of any year in which the reserve ratio of the DIF exceeds 1.50% of estimated
insured deposits, to declare a dividend payable to insured depository
institutions in an amount equal to 100% of the amount held by the DIF in excess
of the amount necessary to maintain the DIF's reserve ratio at 1.5% of estimated
insured deposits or to declare a dividend equal to 50% of the amount in excess
of the amount necessary to maintain the reserve ratio at 1.35% if the reserve
ratio is between 1.35%-1.50% of estimated insured deposits; and (ix) provides a
one-time credit based upon the assessment base of the institution on
December 31, 1996 to each insured depository institution that was in existence
as of December 31, 1996 and paid a deposit insurance assessment prior to that
date (or a successor to any such institution).
The merger of the BIF and SAIF will take effect no later than July 1, 2006,
while the remaining provisions are not effective until the FDIC issues final
regulations. FDIRA requires the FDIC to issue final regulations no later than
270 days after enactment: (i) designating a reserve ratio; (ii) implementing
increases in deposit insurance coverage; (iii) implementing the dividend
requirement; (iv) implementing the one-time assessment credit; and (v) providing
for assessments in accordance with FDIRA.
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 in Items III and IV is provided. The first
presentation is comparative financial information for periods as presented in
the Company's December 31, 2005 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.
74
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,
----------------------------------------------------------------------------------------
2005 2004 2003
----------------------------------------------------------------------------------------
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 ..................... $ 6,256 $ 206 3.29% $ 6,619 $ 42 0.63% $ 23,864 $ 221 0.93%
Interest-bearing deposits at
at financial institutions ............ 3,583 129 3.60 9,030 224 2.48 14,705 432 2.94
Investment securities (1) .............. 159,467 6,224 3.90 130,408 4,933 3.78 92,558 3,995 4.32
Gross loans/leases receivable (2) ..... 682,858 42,427 6.21 587,450 33,112 5.64 480,314 28,984 6.03
------------------- -------------------- -------------------
Total interest earning assets .... 852,164 48,986 5.75 733,507 38,311 5.22 611,441 33,632 5.50
Noninterest-earning assets:
Cash and due from banks ................ $ 29,576 $ 29,891 $ 28,394
Premises and equipment, net ............ 23,016 14,346 9,852
Less allowance for estimated
losses on loans/leases ............... (9,048) (9,517) (7,997)
Other .................................. 39,198 31,300 18,362
--------- --------- ---------
Total assets ...................... $ 934,906 $ 799,527 $ 660,052
========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ....... $ 198,359 3,356 1.69% $ 171,552 1,379 0.80% $ 158,287 1,450 0.92%
Savings deposits ....................... 22,823 264 1.16 15,553 50 0.32 12,817 58 0.45
Time deposits .......................... 299,673 9,222 3.08 228,563 5,423 2.37 199,328 5,498 2.76
Short-term borrowings .................. 98,089 2,183 2.23 100,944 1,209 1.20 40,122 327 0.82
Federal Home Loan Bank advances ........ 107,927 4,168 3.86 91,912 3,463 3.77 77,669 3,255 4.19
Junior subordinated debentures ......... 23,842 1,587 6.66 23,293 1,641 7.05 12,000 1,134 9.45
Other borrowings ....................... 11,074 501 4.52 5,125 160 3.12 8,071 228 2.82
------------------- -------------------- -------------------
Total interest-bearing
liabilities ....................... 761,787 21,281 2.79 636,942 13,325 2.09 508,294 11,950 2.35
Noninterest-bearing demand ............. 108,116 110,748 102,825
Other noninterest-bearing
liabilities .......................... 12,353 7,947 9,720
Total liabilities ...................... 882,256 755,637 620,839
Stockholders' equity ................... 52,650 43,890 39,213
--------- --------- ---------
Total liabilities and
stockholders' equity .............. $ 934,906 $ 799,527 $ 660,052
========= ========= =========
Net interest income .................... $ 27,705 $ 24,986 $ 21,682
======== ========= ========
Net interest spread .................... 2.96% 3.13% 3.15%
====== ====== ======
Net interest margin .................... 3.25% 3.41% 3.55%
====== ====== ======
Ratio of average interest earning
assets to average interest-
bearing liabilities .................. 111.86% 115.16% 120.29%
======== ======= ========
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan/lease fees are not material and are included in interest income from
loans/leases receivable.
75
C. Analysis of Changes of Interest Income/Interest Expense
For the years ended December 31, 2005, 2004 and 2003
Components
Inc./(Dec.) of Change (1)
from -------------------
Prior Year Rate Volume
---------------------------------
2005 vs. 2004
---------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ................................................ $ 164 $ 166 $ (2)
Interest-bearing deposits at other
financial institutions .......................................... (95) 75 (170)
Investment securities (2) ......................................... 1,289 159 1,130
Gross loans/leases receivable (2) (3) ............................. 9,315 3,600 5,715
--------------------------------
Total change in interest income ......................... $ 10,673 $ 4,000 $ 6,673
--------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................................. $ 1,977 $ 1,732 $ 245
Savings deposits .................................................. 214 182 32
Time deposits ..................................................... 3,799 1,856 1,943
Short-term borrowings ............................................. 974 1,009 (35)
Federal Home Loan Bank advances ................................... 705 89 616
Junior subordinated debentures .................................... (54) (92) 38
Other borrowings .................................................. 341 95 246
--------------------------------
Total change in interest expense ............................. $ 7,956 $ 4,871 $ 3,085
--------------------------------
Total change in net interest income ............................... $ 2,717 $ (871) $ 3,588
================================
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 institution ........................................... (208) (60) (148)
Investment securities (2) ......................................... 938 (561) 1,499
Gross loans/leases 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
================================
(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/lease fees are not material and are included in interest income from
loans/leases receivable.
76
II. Investment Portfolio
A. Investment Securities
The following tables present the amortized cost and fair value of investment
securities as of December 31, 2005, 2004 and 2003.
Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------
(Dollars in Thousands)
December 31, 2005
- ---------------------------------------------------------------
Securities held to maturity:
Other bonds ................................................... $ 150 $ 5 $ -- $ 155
-----------------------------------------------
Totals .................................................. $ 150 $ 5 $ -- $ 155
===============================================
Securities available for sale:
U.S. Treasury securities ...................................... $ 100 $ -- $ -- $ 100
U.S. gov't.sponsored agency
securities .................................................. 150,115 55 (1,630) 148,540
Mortgage-backed securities .................................... 2,720 4 (54) 2,670
Municipal securities .......................................... 18,485 368 (40) 18,813
Corporate securities .......................................... 4,672 72 (2) 4,742
Trust preferred securities .................................... 850 69 -- 919
Other securities .............................................. 6,163 373 (105) 6,431
-----------------------------------------------
Totals ................................................... $ 183,105 $ 941 $ (1,831) $ 182,215
===============================================
December 31, 2004
- ---------------------------------------------------------------
Securities held to maturity:
Other bonds ................................................... $ 100 $ 8 $ -- $ 108
-----------------------------------------------
Totals .................................................. $ 100 $ 8 $ -- $ 108
===============================================
Securities available for sale:
U.S. Treasury securities ...................................... $ 100 $ -- $ (1) $ 99
U.S. gov't.sponsored 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. gov't.sponsored 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
===============================================
77
B. Investment Securities, Maturities, and Yields
The following table presents the maturity of securities held on December 31,
2005 and the weighted average stated coupon rates by range of maturity:
Weighted
Amortized Average
Cost Yield
------------------------
(Dollars in Thousands)
U.S. Treasury securities:
After 1 but within 5 years ........................ $ 100 4.30%
=======================
U.S. Gov't.Sponsored Agency securities:
Within 1 year ..................................... $ 46,876 3.65%
After 1 but within 5 years ........................ 101,728 4.01%
After 5 but within 10 years ....................... 1,511 3.87%
-----------------------
Total ..................................... $150,115 3.89%
=======================
Mortgage-backed securities:
After 1 but within 5 years ........................ 2,294 3.99%
After 5 but within 10 years ....................... 426 5.94%
-----------------------
Total ..................................... $ 2,720 4.30%
=======================
Municipal securities:
Within 1 year ..................................... $ 703 6.10%
After 1 but within 5 years ........................ 7,310 5.33%
After 5 but within 10 years ....................... 8,673 6.86%
After 10 years .................................... 1,799 4.93%
-----------------------
Total ..................................... $ 18,485 6.03%
=======================
Corporate securities:
Within 1 year ..................................... $ 2,303 5.29%
After 1 but within 5 years ........................ 2,369 6.14%
-----------------------
Total ..................................... $ 4,672 5.72%
=======================
Trust preferred securities:
After 10 years .................................... $ 850 1.90%
=======================
Other bonds:
After 1 but within 5 years ........................ 100 5.00%
After 5 but within 10 years ....................... 50 6.55%
-----------------------
Total ..................................... $ 150 5.52%
=======================
Other securities with no maturity or stated
face rate ......................................... $ 6,163
========
78
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. Gov't.Sponsored 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
========
C. Investment Concentrations
At December 31, 2005 and 2004, 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.
79
III. Loan/Lease Portfolio
A. Types of Loans/Leases
The composition of the loan/lease portfolio is presented as follows:
December 31, June 30,
-------------------------------------------------- ------------------------
2005 2004 2003 2002 2002 2001
-------------------------------------------------- ------------------------
(Dollars in Thousands)
Commercial and commercial real
estate loans ................................ $ 593,462 $ 532,517 $ 435,345 $ 350,206 $ 305,019 $ 209,933
Direct financing leases ....................... 34,911 -- -- -- -- --
Real estate loans held for sale -
residential mortgage ........................ 2,632 3,499 3,790 23,691 8,498 5,824
Real estate loans - residential mortgage ...... 54,125 52,423 29,604 28,761 34,034 32,191
Real estate loans - construction .............. 2,811 3,608 2,254 2,230 2,861 2,568
Installment and other consumer loans .......... 67,090 55,736 50,984 44,567 40,037 37,362
--------------------------------------------------------------------------
Total loans/leases ............ 755,031 647,783 521,977 449,455 390,449 287,878
Deferred loan/lease origination costs
(fees), net ................................. 1,223 568 494 281 145 (13)
Less allowance for estimated
losses on loans/leases ...................... (8,884) (9,262) (8,643) (6,879) (6,111) (4,248)
--------------------------------------------------------------------------
Net loans/leases .............. $ 747,370 $ 639,089 $ 513,828 $ 442,857 $ 384,483 $ 283,617
===========================================================================
Direct financing leases:
Net minimum lease payments to be received ... 35,447 -- -- -- -- --
Estimated residual values of leased assets .. 7,633 -- -- -- -- --
Unearned lease/residual income .............. (7,661) -- -- -- -- --
Fair value adjustment at acquisition ........ (508) -- -- -- -- --
--------------------------------------------------------------------------
Total leases .................. $ 34,911 $ -- $ -- $ -- $ -- $ --
===========================================================================
December 31, June 30,
-------------------------------------------------- ------------------------
2005 2004 2003 2002 2002 2001
-------------------------------------------------- ------------------------
(Dollars in Thousands)
Commercial and commercial real
estate loans ................................ $ 593,462 $ 532,517 $ 435,345 $ 350,206 $ 255,486 $ 186,952
Direct financing leases ....................... 34,911 -- -- -- -- --
Real estate loans held for sale -
residential mortgage ........................ 2,632 3,499 3,790 23,691 13,470 1,627
Real estate loans - residential mortgage ...... 54,125 52,423 29,604 28,761 30,457 37,388
Real estate loans - construction .............. 2,811 3,608 2,254 2,230 3,399 2,117
Installment and other consumer loans .......... 67,090 55,736 50,984 44,567 40,103 37,434
--------------------------------------------------------------------------
Total loans/leases ............ 755,031 647,783 521,977 449,455 342,915 265,518
Deferred loan/lease origination costs
(fees), net ................................. 1,223 568 494 281 84 100
Less allowance for estimated
losses on loans/leases ...................... (8,884) (9,262) (8,643) (6,879) (4,939) (3,972)
--------------------------------------------------------------------------
Net loans/leases .............. $ 747,370 $ 639,089 $ 513,828 $ 442,857 $ 338,060 $ 261,646
===========================================================================
Direct financing leases:
Net minimum lease payments to be received ... 35,447 -- -- -- -- --
Estimated residual values of leased assets .. 7,633 -- -- -- -- --
Unearned lease/residual income .............. (7,661) -- -- -- -- --
Fair value adjustment at acquisition ........ (508) -- -- -- -- --
--------------------------------------------------------------------------
Total leases .................. $ 34,911 $ -- $ -- $ -- $ -- $ --
===========================================================================
80
III. Loan/Lease Portfolio
B. Maturities and Sensitivities of Loans/Leases to Changes in Interest Rates
Maturities After One Year
------------------------------
At December 31, 2005 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
loans ................................... $ 184,853 $ 324,872 $ 83,737 $ 305,137 $ 103,472
Direct financing leases ................... 1,122 22,789 11,000 33,789 --
Real estate loans held for sale -
residential mortgage .... -- -- 2,632 2,632 --
Real estate loans - residential
mortgage .................. 909 531 52,685 6,855 46,361
Real estate loans - construction .......... 2,811 -- -- -- --
Installment and other consumer loans ...... 21,997 43,643 1,450 30,245 14,848
-------------------------------------------------------------------------
Total loans/leases ........ $ 211,692 $ 391,835 $ 151,504 $ 378,658 $ 164,681
========================================================================
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
loans ................................... $ 167,946 $ 309,430 $ 55,141 $ 250,590 $ 113,981
Direct financing leases ................... -- -- -- -- --
Real estate loans held for sale -
residential mortgage .................... -- -- 3,499 3,471 28
Real estate loans - residential
mortgage ................................ 1,042 231 51,150 4,568 46,813
Real estate loans - construction .......... 3,527 81 -- 81 --
Installment and other consumer loans ...... 13,760 40,334 1,642 28,638 13,338
-------------------------------------------------------------------------
Total loans/leases ........ $ 186,275 $ 350,076 $ 111,432 $ 287,348 $ 174,160
========================================================================
81
III. Loan/Lease Portfolio
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans/Leases
The following tables represent Nonaccrual, Past Due, Renegotiated Loans/Leases,
and other Real Estate Owned:
December 31, June 30,
---------------------------------------------------------
2005 2004 2003 2002 2002 2001
---------------------------------------------------------
(Dollars in Thousands)
Loans/leases accounted for on nonaccrual basis ............ $ 2,579 $ 7,608 $ 4,204 $ 4,608 $ 1,560 $ 1,232
Accruing loans/leases past due 90 days or more ............ 604 1,133 756 431 708 495
Other real estate owned ................................... 545 1,925 -- -- -- 47
Troubled debt restructurings .............................. -- -- -- -- -- --
---------------------------------------------------------
Totals .................................... $ 3,728 $10,666 $ 4,960 $ 5,039 $ 2,268 $ 1,774
=========================================================
December 31,
---------------------------------------------------------
2005 2004 2003 2002 2001 2000
---------------------------------------------------------
(Dollars in Thousands)
Loans/leases accounted for on nonaccrual basis ............ $ 2,579 $ 7,608 $ 4,204 $ 4,608 $ 1,846 $ 655
Accruing loans/leases past due 90 days or more ............ 604 1,133 756 431 1,765 1,197
Other real estate owned ................................... 545 1,925 -- -- 47 --
Troubled debt restructurings .............................. -- -- -- -- -- --
---------------------------------------------------------
Totals .................................... $ 3,728 $10,666 $ 4,960 $ 5,039 $ 3,658 $ 1,852
=========================================================
The policy of the company is to place a loan/lease on nonaccrual status if: (a)
payment in full of interest or principal is not expected, or (b) principal or
interest has been in default for a period of 90 days or more unless the
obligation is both in the process of collection and well secured. Well secured
is defined as collateral with sufficient market value to repay principal and all
accrued interest. A debt is in the process of collection if collection of the
debt is proceeding in due course either through legal action, including judgment
enforcement procedures, or in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in restoration to current status.
2. Potential Problem Loans/Leases. To management's best knowledge, there are
no such significant loans/leases that have not been disclosed in the above
table.
3. Foreign Outstandings. None.
4. Loan/Lease Concentrations. At December 31, 2005, there were no
concentrations of loans/leases exceeding 10% of the total loans/leases
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.
82
IV. Summary of Loan/Lease Loss Experience
A. Analysis of the Allowance for Estimated Losses on Loans/Leases
The following tables summarize activity in the allowance for estimated losses on
loans/leases of the Company:
Six months
Years ended ended Years ended
December 31, December 31, June 30,
--------------------------------------------------------------------------------
2005 2004 2003 2002 2002 2001
--------------------------------------------------------------------------------
(Dollars in Thousands)
Average amount of loans/leases outstanding,
before allowance for estimated losses
on loans/leases ................................ $ 682,858 $ 587,450 $ 480,314 $ 419,104 $ 334,205 $ 265,350
Allowance for estimated losses on loans/
leases:
Balance, beginning of fiscal period .............. 9,262 8,643 6,879 6,111 4,248 3,617
Charge-offs:
Commercial ................................... (1,530) (624) (1,777) (1,349) (437) (87)
Real Estate .................................. (160) (49) -- -- -- --
Installment and other consumer ............... (356) (292) (298) (105) (204) (213)
--------------------------------------------------------------------------------
Subtotal charge-offs .................. (2,046) (965) (2,075) (1,454) (641) (300)
--------------------------------------------------------------------------------
Recoveries:
Commercial ................................... 245 137 192 -- 101 2
Real Estate .................................. 25 -- -- -- -- --
Installment and other consumer ............... 87 75 242 38 138 39
--------------------------------------------------------------------------------
Subtotal recoveries ................... 357 212 434 38 239 41
--------------------------------------------------------------------------------
Net charge-offs ....................... (1,689) (753) (1,641) (1,416) (402) (259)
Provision charged to expense ..................... 877 1,372 3,405 2,184 2,265 890
Acquisition of M2 Lease Funds, LLC ............... 434 -- -- -- -- --
--------------------------------------------------------------------------------
Balance, end of fiscal year ...................... $ 8,884 $ 9,262 $ 8,643 $ 6,879 $ 6,111 $ 4,248
================================================================================
Ratio of net charge-offs to average loans/
leases outstanding ............................. 0.25% 0.13% 0.34% 0.34% 0.12% 0.10%
Years ended
December 31,
--------------------------------------------------------------------------------
2005 2004 2003 2002 2001 2000
--------------------------------------------------------------------------------
(Dollars in Thousands)
Average amount of loans/leases outstanding,
before allowance for estimated losses
on loans/leases ................................ $ 682,858 $ 587,450 $ 480,314 $ 387,936 $ 294,708 $ 237,947
Allowance for estimated losses on loans/
leases:
Balance, beginning of fiscal period .............. 9,262 8,643 6,879 4,939 3,972 3,341
Charge-offs:
Commercial ................................... (1,530) (624) (1,777) (1,455) (332) (87)
Real Estate .................................. (160) (49) -- -- -- --
Installment and other consumer ............... (356) (292) (298) (214) (205) (355)
--------------------------------------------------------------------------------
Subtotal charge-offs .................. (2,046) (965) (2,075) (1,669) (537) (442)
--------------------------------------------------------------------------------
Recoveries:
Commercial ................................... 245 137 192 73 29 2
Real Estate .................................. 25 -- -- -- -- --
Installment and other consumer ............... 87 75 242 126 66 71
--------------------------------------------------------------------------------
Subtotal recoveries ................... 357 212 434 199 95 73
--------------------------------------------------------------------------------
Net charge-offs ....................... (1,689) (753) (1,641) (1,470) (442) (369)
Provision charged to expense ..................... 877 1,372 3,405 3,410 1,409 1,000
Acquisition of M2 Lease Funds, LLC ............... 434 -- -- -- -- --
--------------------------------------------------------------------------------
Balance, end of fiscal year ...................... $ 8,884 $ 9,262 $ 8,643 $ 6,879 $ 4,939 $ 3,972
================================================================================
Ratio of net charge-offs to average
loans/leases outstanding ....................... 0.25% 0.13% 0.34% 0.38% 0.15% 0.16%
83
B. Allocation of the Allowance for Estimated Losses on Loans/Leases
The following tables present the allowance for the estimated losses on
loans/leases by type of loans/leases and the percentage of loans/leases in each
category to total loans/leases:
December 31, 2005 December 31, 2004 December 31, 2003
--------------------------------------------------------------------
% of % of % of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
--------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate loans ............... $7,331 78.60% $8,423 82.21% $7,676 83.40%
Direct financing leases ................................... 546 4.62% -- --% -- --%
Real estate loans held for sale - residential
mortgage ................................................ 16 0.35% 17 0.54% 4 0.73%
Real estate loans - residential mortgage .................. 250 7.17% 205 8.09% 272 5.67%
Real estate loans - construction .......................... 12 0.37% 21 0.56% 11 0.43%
Installment and other consumer loans ...................... 725 8.89% 591 8.60% 678 9.77%
Unallocated ............................................... 4 NA 5 NA 2 NA
--------------------------------------------------------------------
Total ........................................ $8,884 100.00% $9,262 100.00% $8,643 100.00%
====================================================================
December 31, 2002 June 30, 2002 June 30, 2001
--------------------------------------------------------------------
% of % of % of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
--------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate loans ............... $6,176 77.91% $5,240 78.12% $3,231 72.92%
Direct financing leases ................................... -- --% -- --% -- --%
Real estate loans held for sale - residential
mortgage ................................................ 24 5.27% 1 2.18% -- 2.02%
Real estate loans - residential mortgage .................. 159 6.40% 302 8.72% 182 11.18%
Real estate loans - construction .......................... 11 0.50% 14 0.73% -- 0.89%
Installment and other consumer loans ...................... 507 9.92% 554 10.25% 835 12.99%
Unallocated ............................................... 2 NA -- NA -- NA
--------------------------------------------------------------------
Total ........................................ $6,879 100.00% $6,111 100.00% $4,248 100.00%
====================================================================
December 31, 2005 December 31, 2004 December 31, 2003
---------------------------------------------------------------------
% of Loans/ % of Loans % of Loans
Leases to Total Leases to Total Leases to Total
Amount Loans/Leases Amount Loans/Leases Amount Loans/Leases
---------------------------------------------------------------------
Commercial and commercial real estate loans ............... $7,331 78.60% $8,423 82.21% $7,676 83.40%
Direct financing leases ................................... 546 4.62% -- --% -- --%
Real estate loans held for sale - residential
mortgage ................................................ 16 0.35% 17 0.54% 4 0.73%
Real estate loans - residential mortgage .................. 250 7.17% 205 8.09% 272 5.67%
Real estate loans - construction .......................... 12 0.37% 21 0.56% 11 0.43%
Installment and other consumer loans ...................... 725 8.89% 591 8.60% 678 9.77%
Unallocated ............................................... 4 NA 5 NA 2 NA
-------------------------------------------------------------------
Total ........................................ $8,884 100.00% $9,262 100.00% $8,643 100.00%
====================================================================
December 31, 2002 December 31, 2001 December 31, 2000
--------------------------------------------------------------------
% of % of % of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------------------------------------------------------------------
(Dollars in Thousands)
Commercial and commercial real estate loans ............... $6,176 77.91% $4,305 74.50% $3,339 70.41%
Direct financing leases ................................... -- --% -- --% -- 0.00%
Real estate loans held for sale - residential
mortgage ................................................ 24 5.27% 14 3.93% 2 0.61%
Real estate loans - residential mortgage .................. 159 6.40% 140 8.88% 183 14.08%
Real estate loans - construction .......................... 11 0.50% 17 0.99% 11 0.80%
Installment and other consumer loans ...................... 507 9.92% 461 11.70% 437 14.10%
Unallocated ............................................... 2 NA 2 NA -- NA
--------------------------------------------------------------------
Total ........................................ $6,879 100.00% $4,939 100.00% $3,972 100.00%
====================================================================
84
V. Deposits.
The average amount of and average rate paid for the categories of deposits for
the years ended December 31, 2005, 2004, and 2003 are discussed in the
consolidated average balance sheets and can be found on pages 2 and 3 of
Appendix B.
Included in interest bearing deposits at December 31, 2005, 2004 and 2003 were
certificates of deposit totaling $170,994,735 $165,685,917, and $73,799,534
respectively, that were $100,000 or greater. Maturities of these certificates
were as follows:
December 31,
---------------------------------------
2005 2004 2003
---------------------------------------
(Dollars in Thousands)
One to three months $ 52,276 $ 39,352 $ 28,120
Three to six months 55,123 60,456 21,176
Six to twelve months 35,580 40,699 17,600
Over twelve months 28,016 25,179 6,904
---------------------------------------
Total certificates of
deposit greater than $100,000 $ 170,995 $ 165,686 $ 73,800
=======================================
VI. Return on Equity and Assets.
The following tables present the return on assets and equity and the equity to
assets ratio of the Company:
Years ended
December 31,
---------------------------------------
2005 2004 2003
---------------------------------------
(Dollars in Thousands)
Average total assets $ 934,906 $ 799,527 $ 660,052
Average equity 52,650 43,890 39,213
Net income 4,810 5,217 5,461
Return on average assets 0.51% 0.65% 0.83%
Return on average equity 9.14% 11.89% 13.93%
Dividend payout ratio 7.55% 6.50% 5.34%
Average equity to average assets ratio 5.63% 5.49% 5.94%
VII. Short Term Borrowings.
The information requested is disclosed in Note 8 to the December 31, 2005
Consolidated Financial Statements.
85