U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from July 1, 2002 to
December 31, 2002.
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:
----------------------------------------------------
Preferred Securities of QCR Holdings Capital Trust I
Securities registered pursuant to Section 12(g)
of the Exchange Act:
-----------------------------------------------
Common stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ x ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on The
Nasdaq SmallCap Market on December 31, 2002, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$43,700,000. As of March 3, 2003, the issuer had 2,773,062 shares of common
stock outstanding.
Documents incorporated by reference:
-------------------------------------------------------------
Part III of Form 10-K - Proxy statement for annual meeting of
stockholders to be held in May 2003.
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 and Cedar Rapids
communities. Its wholly owned subsidiaries, Quad City Bank and Trust Company,
("Quad City Bank & Trust") which is based in Bettendorf, Iowa and commenced
operations in 1994, and Cedar Rapids Bank and Trust Company, ("Cedar Rapids Bank
& Trust") which is based in Cedar Rapids, Iowa and commenced operations in 2001,
provide full-service commercial and consumer banking and trust and asset
management services. The Company also engages in merchant credit card processing
through its wholly owned subsidiary, Quad City Bancard, Inc., based in Moline,
Illinois.
Quad City Bank & Trust was capitalized on October 13, 1993 and commenced
operations on January 7, 1994. Quad City Bank & Trust is organized as an
Iowa-chartered commercial bank that is a member of the Federal Reserve System
with depository accounts insured to the maximum amount permitted by law by the
Federal Deposit Insurance Corporation. Quad City Bank & Trust provides full
service commercial and consumer banking, and trust and asset management services
in the Quad Cities and adjacent communities through its four offices that are
located in Bettendorf and Davenport, Iowa and in Moline, Illinois.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member
of the Federal Reserve System with depository accounts insured to the maximum
amount permitted by law by the Federal Deposit Insurance Corporation. The
Company commenced operations in Cedar Rapids in June 2001 operating as a branch
of Quad City Bank & Trust. The Cedar Rapids branch operation then began
functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar
Rapids Bank & Trust provides full-service commercial and consumer banking, and
trust and asset management services to Cedar Rapids and adjacent communities
through its office located in downtown Cedar Rapids, Iowa.
Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a
Delaware corporation that provides merchant and cardholder credit card
processing services. This operation had previously been a division of Quad City
Bank & Trust since July 1994. On October 22, 2002, the Company announced
Bancard's sale of its independent sales organization (ISO) related merchant
credit card operations to iPayment, Inc. At December 31, 2002, Bancard continued
to temporarily process transactions for iPayment, Inc., and approximately 28,000
merchants. When iPayment, Inc. discontinues processing with Bancard in calendar
2003, it is expected that processing volumes will decrease significantly.
Bancard will, however, continue to provide credit card processing for its local
merchants and agent banks and for cardholders of the Company's subsidiary banks.
On March 29, 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), to generate merchant
credit card processing business. Bancard owns 100% of Allied. As a result of
Bancard's sale of its ISO related merchant credit card operations to iPayment,
Inc. in October 2002, Allied ceased its operations as an ISO. Included in the
sale to iPayment, Inc., were all of the merchant credit card processing
relationships owned by Allied.
QCR Holdings Capital Trust I ("Capital Trust") was formed in April 1999 and
capitalized in June 1999 in connection with the public offering of $12 million
of 9.2% trust preferred capital securities due June 30, 2029, which are callable
on June 30, 2004.
The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust, and
Bancard, and 100% of the common securities of Capital Trust, and in addition to
such ownership invests its capital in stocks of financial institutions and
mutual funds, as well as participates in loans with the subsidiary banks. In
addition, to its wholly- owned subsidiaries, the Company has an aggregate
investment of $260 thousand in four associated companies, Nobel Electronic
Transfer, LLC, Nobel Real Estate Investors, LLC, Velie Plantation Holding
Company, LLC, and Clarity Merchant Services. Inc.
The Company and its subsidiaries collectively employed 215 individuals at
December 31, 2002. No one customer accounts for more than 10% of revenues, loans
or deposits. In August 2002, the Company's board of directors elected to change
the Company's fiscal year end from June 30 to December 31. Due to this change,
the Company is filing this Form 10-K for the transition period from July 1, 2002
to December 31, 2002 and will, in the future, hold its annual meetings in May of
each year instead of October. Therefore, the 2003 annual meeting will be held in
May 2003. The Company's subsidiaries have also changed their fiscal years
aligning their financial reporting with that of the Company. Throughout this
document references to the transition period are for the six months ended
December 31, 2002. References to fiscal 2002, fiscal 2001, and fiscal 2000 are
for the years ended June 30, 2002, 2001, and 2000, respectively. In most
instances, the six-month transition period results are shown in addition to the
three previous fiscal years ended June 30.
2
Competition. The Company currently operates in the highly competitive Quad City
and Cedar Rapids markets. Competitors include not only other commercial banks,
credit unions, thrift institutions, and mutual funds, but also, insurance
companies, finance companies, brokerage firms, investment banking companies, and
a variety of other financial services and advisory companies. Many of these
competitors are not subject to the same regulatory restrictions as the Company.
Many of these unregulated competitors compete across geographic boundaries and
provide customers increasing access to meaningful alternatives to banking
services. Additionally, the Company competes in markets with a number of much
larger financial institutions with substantially greater resources and larger
lending limits. These competitive trends are likely to continue and may increase
as a result of the continuing reduction on restrictions on the interstate
operations of financial institutions. Under the Gramm-Leach-Bliley Act of 1999,
effective in March of 2000, securities firms and insurance companies that elect
to become financial holding companies may acquire banks and other financial
institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which the Company and its subsidiary banks conduct
business. The financial services industry is also likely to become more
competitive as further technological advances enable more companies to provide
financial services.
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") regulates the Company and its subsidiaries. In addition, Quad City Bank
& Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent
of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance
Corporation (the "FDIC").
Business. The Company's principal business consists of attracting deposits from
the public and investing those deposits in loans and securities. The deposits of
Quad City Bank & Trust and Cedar Rapids Bank & Trust are insured to the maximum
amount allowable by the FDIC. The Company's results of operations are dependent
primarily on net interest income, which is the difference between the interest
earned on its loans and securities and the interest paid on deposits and
borrowings. Its operating results are affected by merchant credit card fees,
trust fees, deposit service charge fees, fees from the sale of residential real
estate loans and other income. Operating expenses include employee compensation
and benefits, occupancy and equipment expense, professional and data processing
fees, advertising and marketing expenses and other administrative expenses. The
Company's operating results are also affected by economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
Lending. The Company and its subsidiaries provide a broad range of commercial
and retail lending and investment services to corporations, partnerships,
individuals and government agencies. Quad City Bank & Trust and Cedar Rapids
Bank & Trust actively market their services to qualified lending customers.
Lending officers actively solicit the business of new borrowers entering their
market areas as well as long-standing members of the local business community.
The subsidiary banks have established lending policies which include a number of
underwriting factors to be considered in making a loan, including location,
loan-to-value ratio, cash flow, interest rate and the credit history of the
borrower.
Quad City Bank & Trust's current lending limit is approximately $6.4 million.
Its loan portfolio is comprised primarily of commercial, residential real estate
and consumer loans. As of December 31, 2002, commercial loans made up
approximately 76% of the loan portfolio, while residential mortgages comprised
approximately 13% and consumer loans comprised approximately 11%.
Cedar Rapids Bank & Trust's current lending limit is approximately $1.6 million.
Its loan portfolio is comprised primarily of commercial, residential real estate
and consumer loans. As of December 31, 2002, commercial loans made up
approximately 86% of the loan portfolio, while residential mortgages comprised
approximately 8% and consumer loans comprised approximately 6%.
As part of the loan monitoring activity at both subsidiary banks, credit
administration personnel interact with senior bank management weekly. The
Company has also instituted a separate loan review function to analyze credits
of Quad City Bank & Trust and Cedar Rapids Bank & Trust. Management has
attempted to identify problem loans at an early stage and to aggressively seek a
resolution of these situations.
3
As noted above, both subsidiary banks are active commercial lenders. The areas
of emphasis include loans to wholesalers, manufacturers, building contractors,
developers, business services companies and retailers. Quad City Bank & Trust
and Cedar Rapids Bank & Trust provide a wide range of business loans, including
lines of credit for working capital and operational purposes and term loans for
the acquisition of facilities, equipment and other purposes. Collateral for
these loans generally includes accounts receivable, inventory, equipment and
real estate. In addition, the subsidiary banks often take personal guarantees to
help assure repayment. Loans may be made on an unsecured basis if warranted by
the overall financial condition of the borrower. Terms of commercial business
loans generally range from one to five years. A significant portion of the
subsidiary banks' commercial business loans has floating interest rates or
reprice within one year. Commercial real estate loans are also made. Collateral
for these loans generally includes the underlying real estate and improvements,
and may include additional assets of the borrower.
Residential mortgage lending has been a focal point of Quad City Bank & Trust
and Cedar Rapids Bank & Trust as they continue to build their real estate
lending business. As a result of this focus, the subsidiary banks' real estate
loan portfolios have grown to approximately $54.7 million at December 31, 2002.
The subsidiary banks currently have 8 mortgage originators.
The subsidiary banks sell the majority of their real estate loans in the
secondary market. They typically sell virtually all of the fixed rate loans that
they originate. During the six months ended December 31, 2002, the subsidiary
banks originated $145.1 million of real estate loans and sold $121.5 million, or
84%, of these loans. During fiscal 2002, the subsidiary banks originated $175.5
million of real estate loans and sold $144.3 million, or 82%, of these loans.
Generally, the subsidiary banks' residential mortgage loans conform to the
underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary
banks to resell loans in the secondary market. The subsidiary banks structure
most loans that will not conform to those underwriting requirements as
adjustable rate mortgages that mature in one to five years. The subsidiary banks
generally retain these loans in their portfolios. Servicing rights are not
presently retained on the loans sold in the secondary market.
The consumer lending departments of each bank provide all types of consumer
loans including motor vehicle, home improvement, home equity, signature loans
and small personal credit lines.
Appendices. The commercial banking business is a highly regulated business. See
Appendix A for a brief summary of the federal and state statutes and
regulations, which are applicable to the Company and its subsidiaries.
Supervision, regulation and examination of banks and bank holding companies by
bank regulatory agencies are intended primarily for the protection of depositors
rather than stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative
statistical information required pursuant to the industry guides promulgated
under the Securities Act of 1933 and 1934, relating to the business of the
Company. The change in the fiscal year end from June 30 to December 31 resulted
in a six-month transition period ended December 31, 2002. The six-month
transition period results are shown in addition to the previous three fiscal
years ended June 30.
The Company maintains Internet sites for its two banking subsidiaries and the
Company makes available free of charge through these sites its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act after it electronically files such material with, or furnishes it to, the
Securities and Exchange Commission. The sites are and www.crbt.com.
Item 2. Property
The original office of Quad City Bank & Trust is in a 6,700 square foot
facility, which was completed in January 1994. In March 1994, Quad City Bank &
Trust acquired that facility, which is located at 2118 Middle Road in
Bettendorf, Iowa.
Construction of a second full service banking facility was completed in July
1996 to provide for the convenience of customers and to expand the market
territory. Quad City Bank & Trust also owns its portion of 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. Quad City Bank & Trust owns the
south half of the building, while the northern half is owned by the developer.
Each segment contains 6,000 square feet. Quad City Bank & Trust occupies its
first floor and utilizes the basement for operational functions, item processing
and storage. At December 31, 2002, approximately 1,500 square feet on the second
floor was leased to a professional services firm and approximately 4,500 square
feet was vacant and leasable. In January 2003, various operational and
administrative functions, previously located in an adjacent office building,
were moved to occupy the vacant space on the second floor. In addition, the
residential real estate department of Quad City Bank & Trust leases
approximately 2,500 square feet on the first floor in the north half of the
building.
4
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 and Quad City Bank & Trust and Bancard are its major tenants.
The Company has purchased a 20% interest in the company that owns the building.
Quad City Bank & Trust occupies 10,000 square feet on the main floor of the
structure. 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.
In March 1999, Quad City Bank & Trust acquired a 3,000 square foot office
building adjacent to the Brady Street location. At December 31, 2002, the office
space was utilized for various operational and administrative functions. In
January 2003, this building was sold, and these operations were moved to occupy
vacant space on the second floor of the Brady street facility.
Construction of a fourth full service banking facility was completed in October
2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City Bank & Trust leases
approximately 6,000 square feet on the first floor and 2,200 square feet on the
lower level of the 24,000 square foot facility. The office opened in October
2000.
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 and Trust Company. Cedar
Rapids Bank & Trust leases approximately 8,200 square feet in the GreatAmerica
Building, 625 First Street, S.E. in Cedar Rapids, which currently serves as its
only office.
Management believes that the facilities are of sound construction, in good
operating condition, are appropriately insured and are adequately equipped for
carrying on the business of the Company.
Quad City Bank & Trust and Cedar Rapids Bank & Trust intend to limit their
investment in premises to no more than 50% of their capital. The subsidiary
banks frequently invest in commercial real estate mortgages and also invest in
residential mortgages. Quad City Bank & Trust and Cedar Rapids Bank & Trust have
established lending policies which include a number of underwriting factors to
be considered in making a loan including, location, loan-to-value ratio, cash
flow, interest rate and credit worthiness of the borrower.
No individual real estate property or mortgage amounts to 10% or more of
consolidated assets.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held at The Lodge (formerly Jumer's
Castle Lodge) located at 900 Spruce Hills Drive, Bettendorf, Iowa on Wednesday,
October 23, 2002 at 10:00 a.m. At the meeting, Article XII of the certificate of
incorporation was amended to change the number of directors from a range of
three to nine to a range of three to twelve. The certificate of incorporation
was also amended to permit the board of directors to consider non-stockholder
factors when considering a change in control proposal. At the meeting,
stockholders approved the adoption of the QCR Holdings, Inc. Employee Stock
Purchase Plan. Also at the meeting, Patrick S. Baird was elected and John K.
Lawson and Ronald G. Peterson were re-elected to serve as Class III directors,
with terms expiring in 2005. Continuing as Class I directors, with terms
expiring in 2003, are Michael A. Bauer, James J. Brownson, and Henry Royer.
Continuing as Class II directors, with terms expiring in 2004, are Larry J.
Helling, Douglas M. Hultquist, and John W. Schricker.
5
At the time of the annual meeting, there were 2,809,818 issued shares and
2,749,672 outstanding shares of common stock. Either in person or by proxy,
there were 2,323,455 common shares represented at the meeting, constituting
approximately 84% of the outstanding shares. The voting was as follows:
Votes Votes Votes Broker
For Against Abstained Non-votes
------------------------------------------------
Amendment of Article XII .... 2,212,189 86,085 25,181 0
Amendment regarding
consideration of
non-stockholder interests . 1,399,850 122,782 24,055 776,768
Approval of the QCR
Holdings, Inc. Employee
Stock Purchase Plan ....... 2,175,885 120,387 27,183 0
Votes Votes
For Withheld
------------------------------
Patrick S. Baird ............................ 2,304,476 18,979
John K. Lawson .............................. 2,311,776 11,679
Ronald G. Peterson .......................... 2,304,776 18,679
6
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock, par value $1.00 per share, of the Company is traded on The
Nasdaq SmallCap Market under the symbol "QCRH". The stock began trading on
October 6, 1993. As of December 31, 2002, there were 2,762,915 shares of common
stock outstanding held by approximately 2,800 holders of record. The following
table sets forth the high and low sales prices of the common stock, as reported
by The Nasdaq SmallCap Market, for the periods indicated.
Six Months Ended
December 31, 2002 Fiscal 2002 Fiscal 2001
Sales Price Sales Price Sales Price
----------------- ----------------- ------------------
High Low High Low High Low
----------------------------------------------------------
First quarter ...... $ 15.50 $ 13.62 $ 12.50 $ 10.10 $ 17.25 $ 11.313
Second quarter ..... 17.00 14.56 11.79 10.80 12.25 9.938
Third quarter ...... NA NA 13.45 11.18 12.56 9.750
Fourth quarter ..... NA NA 15.15 13.00 10.81 9.250
On October 23, 2002, the board of directors declared the Company's first cash
dividend of $0.05 per share payable on January 3, 2003, to stockholders of
record on December 16, 2002. In the future, it is the Company's intention 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.
7
Under Iowa law, Quad City Bank & Trust and Cedar Rapids Bank & Trust are
restricted as to the maximum amount of dividends they may pay on their common
stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in
an amount greater than its undivided profits. Quad City Bank & Trust and Cedar
Rapids Bank & Trust are members of the Federal Reserve System. The total of all
dividends declared by the subsidiary banks in a calendar year may not exceed the
total of their net profits of that year combined with their retained net profits
of the preceding two years. In addition, the Federal Reserve Board, the Iowa
Superintendent and the FDIC are authorized under certain circumstances to
prohibit the payment of dividends by Quad City Bank & Trust and Cedar Rapids
Bank & Trust. In the case of the Company, further restrictions on dividends may
be imposed by the Federal Reserve Board.
Item 6. Selected Financial Data
The "Selected Consolidated Financial Data" of the Company set forth below is
derived in part from, and should be read in conjunction with, our consolidated
financial statements and the accompanying notes thereto. See Item 8 "Financial
Statements and Supplementary Data." Results for past periods are not necessarily
indicative of results to be expected for any future period.
SELECTED CONSOLIDATED FINANCIAL DATA
Six Months
Ended Years Ended June 30,
December 31, ---------------------------------------------------
2002 2002 2001 2000 1999 1998
------------ ----------------------------------------------------
Statement of Income Data:
Interest income ....................... $ 16,120 $ 28,520 $ 28,544 $ 24,079 $ 20,116 $ 15,077
Interest expense ...................... 6,484 12,870 16,612 13,289 11,027 8,342
Net interest income ................... 9,636 15,650 11,932 10,790 9,089 6,735
Provision for loan losses ............. 2,184 2,265 889 1,052 892 902
Noninterest income (1) ................ 8,840 7,915 6,313 6,154 5,561 6,148
Noninterest expenses .................. 11,413 17,023 13,800 11,467 9,679 7,910
Pre-tax net income .................... 4,879 4,277 3,556 4,425 4,079 4,071
Income tax expense .................... 1,683 1,315 1,160 1,680 1,614 1,678
Net income ............................ 3,196 2,962 2,396 2,745 2,465 2,393
Per Common Share Data:
Net income-basic ...................... $ 1.16 $ 1.10 $ 1.06 $ 1.19 $ 0.98 $ 1.00
Net income-diluted .................... 1.13 1.08 1.04 1.15 0.93 0.93
Cash dividends declared ............... 0.05 -- -- -- -- --
Dividend payout ratio ................. 4.31% -- -- -- -- --
Balance Sheet:
Total assets .......................... $604,600 $518,828 $400,948 $367,622 $321,346 $250,151
Securities ............................ 81,654 76,231 56,710 56,129 50,258 33,276
Loans ................................. 449,736 390,594 287,865 241,853 197,977 162,975
Allowance for estimated losses on loans 6,879 6,111 4,248 3,617 2,895 2,350
Deposits .............................. 434,748 376,317 302,155 288,067 247,966 197,384
Stockholders' equity:
Common .............................. 36,587 32,578 23,817 20,071 18,473 16,602
Preferred ........................... -- -- -- -- -- 2,500
Key Ratios:
Return on average assets .............. 1.13% 0.64% 0.62% 0.82% 0.86% 1.14%
Return on average common equity ....... 18.41 10.07 10.95 14.17 13.69 16.40
Net interest margin ................... 3.68 3.74 3.38 3.56 3.42 3.55
Efficiency ratio (2) .................. 61.71 72.20 75.64 67.68 66.07 61.40
Nonperforming assets to total assets .. 0.83 0.44 0.44 0.20 0.51 0.51
Allowance for estimated losses on loans
to total loans ...................... 1.53 1.56 1.48 1.50 1.46 1.44
Net charge-offs to average loans ...... 0.34 0.12 0.10 0.16 0.26 0.13
Average common stockholders' equity
to average assets ................... 6.12 6.38 5.69 5.77 6.26 6.97
Average stockholders' equity
to average assets ................... 6.12 6.38 5.69 5.77 7.05 7.97
Earnings to fixed charges
Excluding interest on deposits ...... 2.90 x 1.95 x 1.90 x 2.29 x 2.81 x 3.78 x
Including interest on deposits ...... 1.73 1.32 1.21 1.33 1.36 1.48
(1) Year ended June 30, 1998 noninterest income includes a pre-tax gain of
$2,168 from Bancard's restructuring of an agreement with an independent
sales organization (ISO). Year ended June 30, 1999 noninterest income
includes amortization of $732 from Bancard's restructuring of an ISO
agreement. Six months ended December 31, 2002 noninterest income includes a
pre-tax gain of $3,460 from Bancard's gain on sale of merchant credit card
portfolio
(2) Noninterest expenses divided by the sum of net interest income before
provision for loan losses and noninterest income.
8
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 six months ended December 31, 2002 and 2001 and the fiscal
years ended June 30, 2002, 2001 and 2000, and financial condition at December
31, 2002, June 30, 2002, and June 30, 2001. 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 is filing for the transition period
from July 1, 2002 to December 31, 2002. Throughout this document, reference to
the transition period, fiscal 2002, 2001, and 2000 are for the six months ended
December 31, 2002 and the years ended June 30, 2002, 2001, and 2000,
respectively. This discussion should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and the
accompanying notes thereto included or incorporated by reference elsewhere in
this document.
Overview
The Company was formed in February 1993 for the purpose of organizing Quad City
Bank & Trust and has grown to $604.6 million in consolidated assets as of
December 31, 2002. Management expects continued opportunities for growth, even
though the rate of growth may be slower than that experienced to date.
The Company reported earnings of $3.2 million or $1.16 basic earnings per share
for the six-month transition period ended December 31, 2002 as compared to $3.0
million or $1.10 basic earnings per share for fiscal 2002, $2.4 million and
$1.06 basic earnings per share for fiscal 2001, and $2.7 million and $1.19 basic
earnings per share for fiscal 2000. The sale of Bancard's ISO related merchant
credit card operations to iPayment, Inc. in October 2002, was a significant
contributor to the 139% increase in earnings for the six-months ended December
31, 2002 when compared to the same period in 2001. The 24% increase in fiscal
2002 earnings from fiscal 2001 was attributable primarily to significant
increases in both net interest income and noninterest income, partially offset
by an increase in noninterest expense. The decrease in fiscal 2001 earnings from
fiscal 2000 was attributable to an increase in noninterest expense partially
offset by increases in both noninterest income and net interest income.
When compared to the same period in 2001, the six months ended December 31, 2002
reflected significant growth in both net interest income and noninterest income
for the Company. For the 2002 period, net interest income and noninterest income
improved by 34% and 119%, respectively, for a combined increase of $7.2 million
when compared to the six months ended December 31, 2001. Both Quad City Bank &
Trust and Cedar Rapids Bank & Trust generated marked improvement in net interest
margin, as well as increases in the gains on sales of residential real estate
loans for the 2002 period. The sale of the ISO-related merchant credit card
portfolio at Bancard contributed $3.5 million of noninterest income. Offsetting
these revenue improvements for the Company were increases in noninterest expense
of $3.2 million and the provision for loan losses of $1.1 million. The primary
contributors to the increase in noninterest expense were contractual
compensation and severance payments at Bancard and Allied resulting from the
sale of the ISO-related merchant credit card operations. For the six months
ended December 31, 2002, operating costs associated with Cedar Rapids Bank &
Trust were approximately $1.5 million as compared to $1.1 million for the same
period in 2001. While the after-tax start-up losses at Cedar Rapids Bank & Trust
were $275 thousand for the six months ended December 31, 2002, these losses were
less than anticipated, and Cedar Rapids Bank and Trust's growth was more rapid
than expected. Management remains confident that the Cedar Rapids operations
will provide significant long-term benefits to the Company.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between interest income, principally from loans
and investment securities, and interest expense, principally on customer
deposits and borrowings. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar level of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities. The Company's
average tax equivalent yield on interest earning assets decreased 0.92% for the
six months ended December 31, 2002 as compared to the same period in 2001. With
the same comparison, the average cost of interest-bearing liabilities decreased
0.99%, which resulted in a 0.07% increase in the net interest spread of 3.16% at
December 31, 2001 compared to 3.23% at December 31, 2002. The relative stability
in the net interest spread from year to year also carried over to the net
interest margin. For the six months ended December 31, 2002, net interest margin
was 3.68% compared to 3.70% for the like period in 2001. Management continues to
closely monitor and manage net interest margin. From a profitability standpoint,
an important challenge for the subsidiary banks in the near term is to maintain
their net interest margins. However, very competitive local loan rate
environments have resulted in the subsidiary banks' interest margins being below
their national peer groups. Management continues to address this issue with
alternative funding sources and pricing strategies.
9
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 added facilities and employees to accommodate both its
historical growth and anticipated future growth. As such, overhead expenses have
had a significant impact on earnings. This trend is likely to continue as Cedar
Rapids Bank & Trust moved to its permanent facility in the fall of 2001, and
both banks continue to add the facilities and resources necessary to attract and
serve additional customers
During 1994, Quad City Bank & Trust began to develop internally a merchant
credit card processing operation and in 1995 transferred this function to
Bancard, a separate subsidiary of the Company. Bancard initially had an
arrangement to provide processing services exclusively to customers of a single
independent sales organization or ISO. This ISO was sold in 1998, and the
purchaser requested a reduction in the term of the contract. Bancard agreed to
amend the contract to reduce the term and accept a fixed monthly processing fee
of $25 thousand for merchants existing at the time the agreement was signed, and
a lower transaction fee for new merchants, in exchange for a payment of $2.9
million, the ability to transact business with other ISOs and the assumption of
the credit risk by the ISO. Approximately two thirds of the income from this
settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of
$732 thousand being recognized during fiscal 1999. Bancard terminated its
processing for this ISO in May 2000, eliminating approximately 64% of its
average monthly processing volume. Prior to this ISO's termination, Bancard's
average monthly processing volume for fiscal 2000 was $91 million. During both
fiscal 2001 and 2002, Bancard worked to establish additional ISO relationships
and further develop the relationships with existing ISOs successfully rebuilding
and expanding processing volumes. Bancard's average monthly dollar volume of
transactions processed during fiscal 2001 was $76 million. During fiscal 2002,
the average monthly dollar volume of transactions processed by Bancard increased
36% to $104 million. Monthly processing volumes at Bancard during fiscal 2002
climbed to a level above that existing prior to the termination of all
processing with the initial ISO.
On October 22, 2002, the Company announced Bancard's sale of its ISO related
merchant credit card operations to iPayment, Inc. for $3.5 million. After
contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a net gain of $1.3 million, or $0.47
per share, which was realized during the quarter ended December 31, 2002. Also
included in the sale, were all of the merchant credit card processing
relationships owned by Bancard's subsidiary, Allied. Bancard will continue to
provide credit card processing for its local merchants and cardholders of the
subsidiary banks and agent banks. It is anticipated that the Company's
termination of ISO related merchant credit card processing will reduce Bancard's
future earnings. However, the Company believes that Bancard can be profitable
with its narrowed business focus of providing credit card processing for its
local merchants and agent banks and for cardholders of the Company's subsidiary
banks. Currently, Bancard continues to process transactions for iPayment, Inc.,
but it is anticipated that this activity will cease in the near future.
During fiscal 1998, Quad City Bank & Trust expanded its presence in the mortgage
banking market by hiring several experienced loan originators and an experienced
underwriter, and now has seven loan originators on staff. Cedar Rapids Bank &
Trust currently has one mortgage loan originator. Quad City Bank & Trust and
Cedar Rapids Bank & Trust originate mortgage loans on personal residences and
sell the majority of these loans into the secondary market to avoid the interest
rate risk associated with long-term fixed rate financing. The subsidiary banks
realize revenue from this mortgage banking activity from a combination of loan
origination fees and gains on the sale of the loans in the secondary market.
During the six months ended December 31, 2002, the subsidiary banks originated
$145.1 million of real estate loans and sold $121.5 million, or 84%, of these
loans resulting in gains of $1.9 million. During fiscal 2002, the subsidiary
banks originated $175.5 million of real estate loans and sold $144.3 million, or
82%, of these loans, which resulted in gains of $2.0 million. The depressed
interest rates during these periods have caused a significant increase in the
subsidiary banks' mortgage origination volume. In fiscal 2001, Quad City Bank &
Trust originated $97.6 million of real estate loans and sold $92.9 million, or
95%, of these loans resulting in gains of $1.1 million.
10
Trust department income continues to be a significant contributor to noninterest
income. In the six months ended December 31, 2002, trust department fees
contributed $1.0 million in revenues. Trust department fees grew from $1.9
million in fiscal 2000 to $2.1 million in fiscal 2001 and to $2.2 million in
fiscal 2002. Income is generated primarily from fees charged based on assets
under administration for corporate and personal trusts and for custodial
services. At December 31, 2002, assets under administration were $642.7 million.
The decrease of $23.0 million in trust assets from June 30 to December 31, 2002
was a reflection of the reduced market values of securities held in trust
accounts. Primarily the result of new trust relationships, assets under
administration had grown from $617.5 at June 30, 2001 to $665.7 million at June
30, 2002.
The Company's initial public offering during the fourth calendar quarter of 1993
raised approximately $14 million. In order to provide additional capital to
support the growth of Quad City Bank & Trust, the Company formed a statutory
business trust, which issued $12 million of capital securities to the public for
cash in June 1999. In conjunction with the formation of Cedar Rapids Bank &
Trust, the Company sold approximately $5.0 million of its common stock through a
private placement offering in September 2001, primarily to investors in the
Cedar Rapids area.
Critical Accounting Policy
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision for loan losses in
the statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis section entitled "Financial Condition -
Allowance for Loan Losses." Although management believes the levels of the
allowance as of December 31, 2002 and both June 30, 2002 and 2001 were adequate
to absorb losses inherent in the loan portfolio, a decline in local economic
conditions, or other factors, could result in increasing losses that cannot be
reasonably predicted at this time.
Results of Operations
Six months ended December 31, 2002 compared with six months ended December 31,
2001
Overview. Net income for the six months ended December 31, 2002 was $3.2 million
as compared to net income of $1.3 million for the six-month period ended
December 31, 2001 for an increase of $1.9 million or 139%. Basic earnings per
share for the six-month period ended December 31, 2002 were $1.16 as compared to
$0.51 for the comparable period in 2001. The increase in net income was
comprised of an increase in net interest income after provision for loan losses
of $1.3 million and an increase in noninterest income of $4.8 million, partially
offset by increases in noninterest expenses of $3.2 million and an increase in
federal and state income taxes of $1.1 million. Several specific factors
contributed to the improvement in net income from 2001 to 2002 for the six-month
periods. Primary factors included the $3.5 million gain on sale of the merchant
credit card portfolio, a 34% improvement in net interest margin prompted by
increased volumes, and a 51% increase in gains on sales of real estate loans.
Interest income. Interest income grew from $13.8 million for the six months
ended December 31, 2001 to $16.1 million for the comparable period in 2002. The
increase in interest income was attributable to greater average outstanding
balances in interest-earning assets, principally loans receivable, partially
offset by a decrease in interest rates. The average yield on interest earning
assets for the six months ended December 31, 2002 was 6.13% as compared to 7.05%
for the six-month period ended December 31, 2001.
11
Interest expense. Interest expense decreased by $150 thousand, from $6.6 million
for the six months ended December 31, 2001 to $6.5 million for the same period
in 2002. The 2% decrease in interest expense was primarily attributable to a
reduction in interest rates almost entirely offset by greater average
outstanding balances in interest-bearing liabilities. The average cost on
interest bearing liabilities was 2.90% for the six months ended December 31,
2002 as compared to 3.89% for the like period in 2001.
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.53% of total gross loans at
December 31, 2002, as compared to approximately 1.56% at June 30, 2002 and 1.43%
at December 31, 2001. The provision for loan losses increased by $1.2 million,
from $1.0 million for the six months ended December 31, 2001 to $2.2 million for
the six-month period ended December 31, 2002. During the period, management made
monthly provisions for loan losses based upon a number of factors, principally
the increase in loans and a detailed analysis of the loan portfolio. During the
six months ended December 31, 2002, $786 thousand, or 36%, of the provision for
loan losses resulted from the deterioration of a single, significant loan
relationship at Quad City Bank and Trust. For the six-month period ended
December 31, 2002, commercial loans had total, net charge-offs of $1.3 million.
The charge-off of a single commercial loan relationship at Quad City Bank and
Trust accounted for $1.1 million, or 82%, of the commercial loan charge-offs for
the period. Consumer loan charge-offs and recoveries totaled $105 thousand and
$37 thousand, respectively, for the six months ended December 31, 2002. Real
estate loans had no charge-off or recovery activity during this period in 2002.
The ability to grow profitably is, in part, dependent upon the ability to
maintain asset quality.
Noninterest income. Noninterest income increased by $4.8 million from $4.0
million for the six months ended December 31, 2001 to $8.8 million for the same
period in 2002. In the six months ended December 31, 2002, the primary component
of the increase in noninterest income was the gain on sale of the ISO related
portion of the merchant credit card portfolio of $3.5 million, which accounted
for 72% of the increase. Noninterest income for both periods consisted of income
from the merchant credit card operation, fees from the trust department,
depository service fees, gains on the sale of residential real estate mortgage
loans, and other miscellaneous fees. Also making significant contributions to
the 119% increase in noninterest income from year to year were increases in
gains on sales of loans and merchant credit card fees net of processing costs.
During the six-month period ended December 31, 2002, merchant credit card fees
net of processing costs, increased by $270 thousand to $1.3 million, from $1.0
million for the comparable period in 2001. The increase was due to a 66%
improvement from year to year in the volume of credit card transactions
processed during the six months ended December 31. During the six-month period
ended December 31, 2001, Bancard processed $568.3 million of transactions, which
grew to $941.6 million for the same period in 2002. As a result of the sale of
the ISO-related merchant credit card operations, processing volumes are expected
to decrease dramatically in future months. Bancard will operate with a narrowed
focus of processing for its local merchants and agent banks and for cardholders
of the Company's subsidiary banks.
For the six-month periods ended both December 31, 2002 and 2001, trust
department fees were $1.0 million. The $48 thousand, or 5%, increase from year
to year was primarily a reflection of the further development of existing trust
relationships and the addition of new trust relationships during the 2002
period, almost entirely offset by the reduced market value of securities held in
trust accounts and the resulting impact on the calculation of trust fees.
Gains on sales of loans were $1.9 million for the six months ended December 31,
2002, which reflected an increase of 51%, or $632 thousand, from $1.2 million
for the like period in 2001. The increase resulted from the decline in mortgage
rates during calendar year 2002. This situation created significantly more home
refinances during the period and the subsequent sale of the majority of these
loans into the secondary market. Because the gains on sales of loans have an
indirect relationship with interest and mortgage rates, it is unlikely that the
subsidiary banks will continue to maintain this level of activity in the long
term.
The $3.5 million gain on sale of merchant credit card portfolio made the most
significant contribution to the increase in noninterest income for the six
months ended December 31, 2002 over the comparable period in 2001. In October
2002, the Company sold Bancard's ISO related merchant credit card operations to
iPayment, Inc. Also included in the sale were all of the merchant credit card
processing relationships owned by Allied.
12
Noninterest expenses. For the six months ended December 31, 2002, the main
components of noninterest expenses were primarily salaries and benefits,
compensation and other expenses related to sale of merchant credit card
portfolio, occupancy and equipment expenses, and professional and data
processing fees. For the six months ended December 31, 2001 noninterest expenses
were comprised predominately of salaries and benefits, occupancy and equipment
expenses, and professional and data processing fees. Noninterest expenses for
the six-month period ended December 31, 2002 were $11.4 million as compared to
$8.2 million for the same period in 2001 for an increase of $3.2 million or 38%.
The following table sets forth the various categories of noninterest expenses
for the six months ended December 31, 2002 and 2001.
Six Months Ended December 31,
-----------------------------------------
2002 2001 % Change
-----------------------------------------
Salaries and employee benefits ............................ $ 6,075,885 $ 4,774,358 27%
Compensation and other expenses related to sale of ........
merchant credit card portfolio .......................... 1,413,734 -- NA
Professional and data processing fees ..................... 872,750 784,701 11%
Advertising and marketing ................................. 341,093 286,643 19%
Occupancy and equipment expense ........................... 1,322,826 1,137,585 16%
Stationery and supplies ................................... 229,066 235,766 -3%
Postage and telephone ..................................... 291,737 229,462 27%
Other ..................................................... 865,960 796,399 9%
----------------------------------------
Total noninterest expenses .................. $11,413,051 $ 8,244,914 38%
========================================
Compensation and other expenses related to sale of merchant credit card
portfolio of $1.4 million accounted for 45% of the $3.2 million increase
experienced in noninterest expenses in aggregate. Contractual bonus and
severance payments were based on the gain realized from the sale of Bancard's
ISO related merchant credit card operations to iPayment, Inc. in October 2002.
For the six months ended December 31, 2002, total salaries and benefits
increased to $6.1 million or $1.3 million over the $4.8 million for the
comparable period in 2001. The change was attributable to increased incentive
compensation to real estate officers and processors proportionate to the
increased volumes of gains on sales of loans, in combination with the addition
of employees at Cedar Rapids Bank & Trust and a slight increase in the number of
Quad City Bank & Trust employees. Occupancy and equipment expense increased $185
thousand, or 16%, for the period. The increase was predominately due to
increased levels of rent, property taxes, utilities, depreciation, maintenance,
and other occupancy expenses. Professional and data processing fees increased
$88 thousand, or 11%, when comparing the six months ended December 31, 2001 to
the comparable period in 2002. The increase was primarily attributable to the
additional data processing fees incurred by the subsidiary banks. For the
six-month period ended December 31, 2002, other noninterest expense increased
$70 thousand, or 9%, from the like period in 2001. The primary contributor to
the increase in other noninterest expense was increased expense incurred by
subsidiary banks for service charges from upstream banks. From 2001 to 2002,
postage and telephone expense for the six months ended December 31, increased
27%, or $62 thousand. The growth at Cedar Rapids Bank & Trust accounted for $40
thousand, or 65% of this increase.
Income tax expense. The provision for income taxes was $1.7 million for the six
months ended December 31, 2002 compared to $630 thousand for the comparable
period in 2001, an increase of $1.1 million or 167%. The increase was primarily
attributable to increased income before income taxes of $2.9 million or 148% for
the six-month period ended December 31, 2002, in combination with an increase in
the Company's effective tax rate for the 2002 period to 34.5% from 32.0% for the
same period in 2001. The increase in the Company's effective tax rate was due to
a much lower percentage of the Company's income coming from federal tax-exempt
securities, (primarily tax-free municipal bonds) in 2002 versus 2001.
Fiscal 2002 compared with fiscal 2001
Overview. Net income for fiscal 2002 was $3.0 million as compared to net income
of $2.4 million in fiscal 2001 for an increase of $567 thousand or 24%. Basic
earnings per share for fiscal 2002 were $1.10 as compared to $1.06 for fiscal
2001. The increase in net income was comprised of an increase in net interest
income after provision for loan losses of $2.3 million and an increase in
noninterest income of $1.6 million partially offset by increases in noninterest
expenses of $3.2 million and an increase in federal and state income taxes of
$155 thousand. Several factors contributed to the improvement in net income
during fiscal 2002. Primary factors included the significant improvement of 36
basis points in net interest margin and the 75% increase in gains on sales of
real estate loans.
13
Interest income. Interest income was $28.5 million for fiscal 2001 and fiscal
2002. The stability in interest income was attributable to greater average
outstanding balances in interest-earning assets, principally loans receivable,
that was offset by the reduction in interest rates. The average yield on
interest earning assets for fiscal 2002 was 6.77% as compared to 8.04% for
fiscal 2001.
Interest expense. Interest expense decreased by $3.7 million, from $16.6 million
for fiscal 2001 to $12.9 million for fiscal 2002. The 23% decrease in interest
expense was primarily attributable to significant reductions in interest rates
partially offset by greater average outstanding balances in interest-bearing
liabilities. The average cost on interest bearing liabilities was 3.56% for
fiscal 2002 as compared to 5.32% for fiscal 2001.
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.56% of total loans at June 30, 2002
as compared to approximately 1.48% at June 30, 2001. The provision for loan
losses increased by $1.4 million, from $900 thousand for fiscal 2001 to $2.3
million for fiscal 2002. During fiscal 2002, management made monthly provisions
for loan losses based upon a number of factors, principally the increase in
loans and a detailed analysis of the loan portfolio. For fiscal 2002, commercial
loans had total charge-offs of $437 thousand and total recoveries of $101
thousand. Consumer loan charge-offs and recoveries totaled $204 thousand and
$138 thousand, respectively, for fiscal 2002. Real estate loans had no
charge-off or recovery activity during fiscal 2002. The ability to grow
profitably is, in part, dependent upon the ability to maintain asset quality.
Noninterest income. Noninterest income increased by $1.6 million, from $6.3
million for fiscal 2001 to $7.9 million for fiscal 2002. Noninterest income for
fiscal 2002 and 2001 consisted of income from the merchant credit card
operation, fees from the trust department, depository service fees, gains on the
sale of residential real estate mortgage loans, and other miscellaneous fees.
The 25% increase was primarily due to the increases in gains on sales of loans,
merchant credit card fees net of processing costs, and deposit service fees
received during the period.
During fiscal 2002, merchant credit card fees net of processing costs, increased
by $424 thousand to $2.1 million, from $1.7 million for fiscal 2001. The
increase was due to a 36% increase in the volume of credit card transactions
processed during fiscal 2002, partially offset by the one-time charge during the
third quarter related to an arbitration settlement involving Bancard.
For fiscal 2002, trust department fees increased $90 thousand, or 4%, to $2.2
million from $2.1 million for fiscal 2001. The increase was primarily a
reflection of the development of existing trust relationships and the addition
of new trust relationships during the period, almost entirely offset by the
reduced market value of securities held in trust accounts and the resulting
impact on the calculation of trust fees.
Gains on sales of loans were $2.0 million for fiscal 2002, which reflected an
increase of 75%, or $855 thousand, from $1.1 million for fiscal 2001. The
increase resulted from a significant decline in mortgage rates, which was driven
by corresponding cuts by the Federal Reserve during calendar 2001. This created
significantly more home refinances and home purchases during the fiscal year and
the subsequent sale of the majority of these loans into the secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 2002 were
$17.0 million as compared to $13.8 million for the same period in 2001 for an
increase of $3.2 million or 23%.
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 2002 and 2001.
Years Ended June 30,
----------------------------------------
2002 2001 % Change
----------------------------------------
Salaries and employee benefits ......................... $10,077,583 $ 8,014,268 26%
Professional and data processing fees .................. 1,410,770 1,159,929 22%
Advertising and marketing .............................. 604,002 579,524 4%
Occupancy and equipment expense ........................ 2,331,806 1,925,820 21%
Stationery and supplies ................................ 476,158 352,441 35%
Postage and telephone .................................. 486,053 409,626 19%
Other .................................................. 1,636,056 1,358,345 20%
----------------------------------------
Total noninterest expenses ............... $17,022,428 $13,799,953 23%
========================================
14
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2002, total salaries and benefits
increased to $10.1 million or $2.1 million over the fiscal 2001 total of $8.0
million. The change was primarily attributable to the addition of employees to
staff the Cedar Rapids Bank & Trust operation, which accounted for $1.7 million,
or 82%, of the increase. A slight increase in the number of Quad City Bank &
Trust employees, and increased incentive compensation to real estate officers
proportionate to the increased volumes of gains on sales of loans, comprised the
balance of the change. Occupancy and equipment expense increased $406 thousand
or 21% for the period. The increase was predominately due to the addition of
Quad City Bank & Trust's fourth full service banking facility in late October
2000, and Cedar Rapids Bank & Trust's permanent full service banking facility in
September 2001, and the resulting increased levels of rent, utilities,
depreciation, maintenance, and other occupancy expenses. Professional and data
processing fees increased $251 thousand, or 22%, during fiscal 2002. The
increase was primarily attributable to legal fees resulting from an arbitration
involving Bancard, combined with the additional professional and data processing
fees related to Cedar Rapids Bank & Trust. During fiscal 2002, stationary and
supplies increased 35%, or $124 thousand. The addition of Cedar Rapids Bank &
Trust accounted for $85 thousand, or 68% of this increase. Other noninterest
expense increased $278 thousand, or 20% for the fiscal year. Significantly
contributing to this increase was a $170 thousand merchant credit card loss
resulting from the settlement of an arbitration dispute between Bancard and Nova
Information Services, Inc. A settlement amount was paid to Bancard, which was
the receivable due from Nova less an amount that approximated the costs of
continued arbitration. Also contributing to the increase in noninterest expense
were increased insurance expense and increased expense incurred by subsidiary
banks for service charges from upstream banks.
Income tax expense. The provision for income taxes was $1.3 million for fiscal
2002 compared to $1.2 million for fiscal 2001, an increase of $155 thousand or
13%. The increase was primarily attributable to increased income before income
taxes of $722 thousand or 20% for fiscal 2002, partially offset by a reduction
in the Company's effective tax rate for fiscal 2002 of 30.7% versus 32.6% for
fiscal 2001.
Fiscal 2001 compared with fiscal 2000
Overview. Net income for fiscal 2001 was $2.4 million as compared to net income
of $2.7 million in fiscal 2000 for a decrease of $300,000 or 13%. Basic earnings
per share for fiscal 2001 were $1.06 as compared to $1.19 for fiscal 2000. The
decrease in net income was comprised of an increase in noninterest expenses of
$2.3 million partially offset by an increase in net interest income after
provision for loan losses of $1.3 million, an increase in noninterest income of
$200,000 and a decrease in federal and state income taxes of $500,000. Several
factors contributed to the reduction in net income. These factors included the
opening of the Company's fourth full-service banking facility on Utica Ridge
Road in Davenport, a reduction in processing volumes and profitability at Quad
City Bancard and initial start-up expenses associated with the Company's
expansion to the Cedar Rapids market.
Interest income. Interest income increased by $4.4 million, from $24.1 million
for fiscal 2000 to $28.5 million for fiscal 2001. The 19% rise in interest
income was basically attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable. Despite the Federal
Reserve's dramatic reduction in short-term interest rates by 2.75% between
January and June of 2001, the average yield on interest earning assets for
fiscal 2001 was 8.04% as compared to 7.91% for fiscal 2000.
Interest expense. Interest expense increased by $3.3 million, from $13.3 million
for fiscal 2000 to $16.6 million for fiscal 2001. The 25% increase in interest
expense was primarily attributable to greater average outstanding balances in
interest-bearing liabilities and higher interest rates. Despite the Federal
Reserve's dramatic reduction in short-term interest rates by 2.75% between
January and June of 2001, the average cost on interest bearing liabilities was
5.32% for fiscal 2001 as compared to 4.90% for 2000.
15
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 1.48% of total loans at June 30, 2001
as compared to approximately 1.50% at June 30, 2000. The provision for loan
losses decreased by $200,000, from $1.1 million for fiscal 2000 to $900,000 for
fiscal 2001. During the year, management made monthly provisions for loan losses
based upon the increase in loans and a detailed analysis of the loan portfolio.
For fiscal 2001, commercial loans combined for total charge-offs of $87,000 and
total recoveries of $2,000. Consumer loan charge-offs and recoveries totaled
$214,000 and $39,000, respectively, for fiscal 2001. Indirect auto loans
accounted for a majority of the consumer loan charge-offs. Because asset quality
is a priority for the Company and its subsidiaries, management made the decision
in the first quarter of fiscal 1999 to downscale indirect auto loan activity
based on charge-off history. The average balance in the indirect auto loan
portfolio for fiscal 2001 was $3.4 million compared to $8.2 million for fiscal
2000. This 59% decrease in the average portfolio brought with it a 56% decrease
in the net charge-offs of indirect auto loans. Net charge-offs for the indirect
auto loan portfolio were $46,000 for fiscal 2001 compared to $77,000 for fiscal
2000, for a decrease of $31,000. The ability to grow profitably is, in part,
dependent upon the ability to maintain asset quality.
Noninterest income. Noninterest income increased by $200,000, from $6.1 million
for fiscal 2000 to $6.3 million for fiscal 2001. Noninterest income for fiscal
2001 and 2000 consisted of income from the merchant credit card operation, the
trust department, depository service fees, gains on the sale of residential real
estate mortgage loans, and other miscellaneous fees. The 3% increase was
primarily due to an increase in gains on sales of loans, and increased trust
fees and deposit service fees received during the period, offset by the decrease
in merchant credit card fees.
During fiscal 2001, merchant credit card fees, net of processing costs,
decreased by $600,000 to $1.7 million, from $2.3 million for fiscal 2000. The
decrease was due to decreased volumes of credit card transactions processed
during fiscal 2001. As previously discussed, Bancard terminated processing for
its largest ISO in May 2000.
For fiscal 2001, trust department fees increased $200,000, or 10%, to $2.1
million from $1.9 million for fiscal 2000. The increase was primarily a
reflection of the development of additional trust relationships during the
period.
Gains on sales of loans were $1.1 million for fiscal 2001, which reflected an
increase of 159%, or $700,000, from $400,000 for fiscal 2000. The increase
resulted from a dramatic decline in interest rates between January and June
2001, which was driven by corresponding cuts by the Federal Reserve during the
first half of calendar 2001. This created significantly more home refinances and
home purchases during the fiscal year and the subsequent sale of the majority of
these loans into the secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 2001 were
$13.8 million as compared to $11.5 million for the same period in 2000 for an
increase of $2.3 million or 20%.
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 2001 and 2000.
Years Ended June 30,
--------------------------------------
2001 2000 % Change
--------------------------------------
Salaries and employee benefits ......................... $ 8,014,268 $ 6,878,213 17%
Professional and data processing fees .................. 1,159,929 860,216 35%
Advertising and marketing .............................. 579,524 410,106 41%
Occupancy and equipment expense ........................ 1,925,820 1,580,911 22%
Stationery and supplies ................................ 352,441 324,219 9%
Postage and telephone .................................. 409,626 361,623 13%
Other .................................................. 1,358,345 1,052,173 29%
-------------------------
Total noninterest expenses ............... $13,799,953 $11,467,461 20%
=========================
16
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2001, total salaries and benefits
increased to $8.0 million or $1.1 million over the fiscal 2000 total of $6.9
million. The change was primarily attributable to the addition of new Quad City
Bank & Trust employees during the period. Advertising and marketing increased
$200,000 or 41%. The increase was the result of the development and start-up of
Quad City Bank & Trust's new website (qcbt.com), the establishment of an online
partnership with America Online, Inc. creating local access to that website, and
media expenses incurred in support of marketing efforts for Quad City Bank &
Trust's Utica location and various Quad City Bank & Trust products and
departments. Professional and data processing fees increased $300,000 or 35%.
The increase was primarily attributable to legal fees resulting from an
arbitration involving Bancard, combined with increased fees to outside
consultants addressing compliance, efficiency and profitability issues for Quad
City Bank & Trust. Other noninterest expense increased $300,000 or 29% for the
fiscal year. The increase was primarily the result of increased service charges
from upstream banks incurred by Quad City Bank & Trust and increased expenses
related to Bancard's cardholder program.
Income tax expense. The provision for income taxes was $1.2 million for fiscal
2001 compared to $1.7 million for fiscal 2000, a decrease of $500,000 or 31%.
The decrease was primarily attributable to decreased net income generated in
fiscal 2001 compared to fiscal 2000, and a reduction in the effective tax rate
for fiscal 2001 of 32.6% versus 38.0% for fiscal 2000.
Financial Condition
Total assets of the Company increased by $85.8 million or 17% to $604.6 million
at December 31, 2002 from $518.8 million at June 30, 2002. The growth primarily
resulted from an increase in the loan portfolio funded by deposits received from
customers and by proceeds from Federal Home Loan Bank advances. Total assets of
the Company increased by $117.9 million or 29% to $518.8 million at June 30,
2002 from $400.9 million at June 30, 2001. Again, the growth primarily resulted
from an increase in the loan portfolio funded by deposits received from
customers and by proceeds from Federal Home Loan Bank advances and short-term
borrowings.
Cash and Cash Equivalent Assets. Cash and due from banks increased by $7.9
million or 30% to $34.1 million at December 31, 2002 from $26.2 million at June
30, 2002. Cash and due from banks increased by $6.0 million or 30% to $26.2
million at June 30, 2002 from $20.2 million at June 30, 2001. 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 demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
increased by $13.6 million to $14.4 million at December 31, 2002 from $760
thousand at June 30, 2002. Federal funds sold decreased by $7.0 million or 90%
to $760 thousand at June 30, 2002 from $7.8 million at June 30, 2001. These
fluctuations were attributable to the Company's varying levels of liquidity at
the subsidiary banks.
Certificates of deposit at financial institutions decreased by $1.9 million or
26% to $5.4 million at December 31, 2002 from $7.3 million at June 30, 2002.
During the six months ended December 31, 2002, the certificate of deposit
portfolio had 19 maturities totaling $1.9 million and no purchases. Certificates
of deposit at financial institutions decreased by $3.2 million or 31% to $7.3
million at June 30, 2002 from $10.5 million at June 30, 2001. During fiscal
2002, the certificate of deposit portfolio had 50 maturities totaling $4.9
million and 17 purchases totaling $1.7 million. As the result of depressed
interest rates and a strong loan demand, the subsidiary banks reduced their
deposits in other banks in the form of certificates of deposit and increased
their utilization of Federal funds sold.
Investments. Securities increased by $5.5 million or 7% to $81.7 million at
December 31, 2002 from $76.2 million at June 30, 2002. The net increase was the
result of a number of transactions in the securities portfolio. The Company
purchased additional securities, classified as available for sale, in the amount
of $14.8 million, and recognized an increase in unrealized gains on securities
available for sale, before applicable income tax of $1.4 million. These
increases were partially offset by paydowns of $1.2 million that were received
on mortgage-backed securities, proceeds from the sales of securities available
for sale of $2.1 million, proceeds from calls and maturities of $7.3 million,
and amortization of premiums, net of the accretion of discounts, of $149
thousand.
17
Securities increased by $19.5 million or 34% to $76.2 million at June 30, 2002
from $56.7 million at June 30, 2001. 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 $29.9 million and
classified as held to maturity, of $100 thousand, and recognized an increase in
unrealized gains on securities available for sale, before applicable income tax
of $1.2 million. These increases were partially offset by paydowns of $1.8
million that were received on mortgage-backed securities, proceeds from the
sales of securities available for sale of $101 thousand, proceeds from calls and
maturities of $9.7 million, and amortization of premiums, net of the accretion
of discounts, of $163 thousand.
Certain investment securities of the subsidiary banks are 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, 2002, June 30, 2002 and June 31, 2001. The
balance at both December 31, 2002 and June 30, 2002 was $425 thousand, a
decrease of $151 thousand from $576 thousand at June 30, 2001. Market values at
December 31, 2002, June 30, 2002 and June 31, 2001 were $451 thousand, $437
thousand, and $583 thousand, respectively.
All of the Company's and Cedar Rapids Bank & Trust's securities, and a majority
of Quad City Bank & Trust's securities are placed in the available for sale
category as the securities may be liquidated to provide cash for operating,
investing or financing purposes. These securities were reported at fair value
and increased by $5.4 million, or 7%, to $81.2 million at December 31, 2002,
from $75.8 million at June 30, 2002. These securities were reported at fair
value and increased by $19.7 million, or 35%, to $75.8 million at June 30, 2002,
from $56.1 million at June 30, 2001. The amortized cost of such securities at
December 31, 2002, June 30, 2002 and June 31, 2001 was $77.8 million, $73.7
million, and $55.3 million, respectively.
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk and as of December 31, 2002 there existed no security
in the investment portfolio (other than U.S. Government and U.S. Government
agency securities) that exceeded 10% of stockholders' equity at that date.
Loans. Total gross loans receivable increased by $59.1 million or 15% to $449.7
million at December 31, 2002 from $390.6 million at June 30, 2002. The increase
was the result of the origination or purchase of $305.1 million of commercial
business, consumer and real estate loans, less loan charge-offs, net of
recoveries, of $1.4 million and loan repayments or sales of loans of $244.6
million. During the six months ended December 31, 2002, Quad City Bank & Trust
contributed $231.4 million, or 76%, and Cedar Rapids Bank & Trust contributed
$73.7 million, or 24% of the company's loan originations or purchases. The
majority of residential real estate loans originated by the subsidiary banks
were sold on the secondary market to avoid the interest rate risk associated
with long-term fixed rate loans. As of December 31, 2002, Quad City Bank &
Trust's legal lending limit was approximately $6.4 million and Cedar Rapids Bank
& Trust's legal lending limit was approximately $1.6 million.
Total gross loans receivable increased by $102.7 million or 36% to $390.6
million at June 30, 2002 from $287.9 million at June 30, 2001. The increase was
the result of the origination or purchase of $556.5 million of commercial
business, consumer and real estate loans, less loan charge-offs, net of
recoveries, of $402 thousand and loan repayments or sales of loans of $453.3
million. During fiscal 2002, Quad City Bank & Trust contributed $452.3 million,
or 81%, and Cedar Rapids Bank & Trust contributed $104.2 million, or 19% of the
Company's loan originations or purchases. The majority of residential real
estate loans originated by the subsidiary banks were sold on the secondary
market to avoid the interest rate risk associated with long-term fixed rate
loans. As of June 30, 2002, Quad City Bank & Trust's legal lending limit was
approximately $5.7 million and Cedar Rapids Bank & Trust's legal lending limit
was approximately $1.5 million.
Allowance for Loan Losses. The allowance for estimated losses on loans was $6.9
million at December 31, 2002 compared to $6.1 million at June 30, 2002 for an
increase of $800 thousand or 13%. The allowance for estimated losses on loans
was $6.1 million at June 30, 2002 compared to $4.2 million at June 30, 2001 for
an increase of $1.9 million or 44%. The adequacy of the allowance for estimated
losses on loans was determined by management based on factors that included the
overall composition of the loan portfolio, types of loans, past loss experience,
loan delinquencies, potential substandard and doubtful credits, economic
conditions and other factors that, in management's judgment, deserved evaluation
in estimating loan losses. To ensure that an adequate allowance was maintained,
provisions were made based on the increase in loans and a detailed analysis of
the loan portfolio. The loan portfolio was reviewed and analyzed monthly with
specific detailed reviews completed on all credits risk-rated less than "fair
quality" and carrying aggregate exposure in excess of $250 thousand. The
adequacy of the allowance for estimated losses on loans was monitored by the
credit administration staff, and reported to management and the board of
directors.
18
Net charge-offs for the six months ended December 31, 2002 and 2001, were $1.4
million and $349 thousand respectively. Net charge-offs for the years ended June
30, 2002 and 2001, were $402 thousand and $260 thousand respectively. One
measure of the adequacy of the allowance for estimated losses on loans is the
ratio of the allowance to the total loan portfolio. Provisions were made monthly
to ensure that an adequate level was maintained. The allowance for estimated
losses on loans as a percentage of total gross loans was 1.53% at December 31,
2002, 1.56% at June 30, 2002, and 1.48% at June 31, 2001.
Although management believes that the allowance for estimated losses on loans at
December 31, 2002 was at a level adequate to absorb losses on existing loans,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional provisions for loan
losses in the future. Asset quality is a priority for the Company and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality. Along with other financial institutions,
management shares a concern for the outlook of the economy during calendar 2003.
A slowdown in economic activity beginning in 2001 severely impacted several
major industries as well as the economy as a whole. Even though there are
numerous indications of emerging strength, it is not certain that this strength
is sustainable. In addition, consumer confidence may still be negatively
impacted by the recent substantial decline in equity security prices. These
events could still adversely affect cash flows for both commercial and
individual borrowers, as a result of which, the Company could experience
increases in problem assets, delinquencies and losses on loans, and require
further increases in the provision.
Nonperforming Assets. The policy of the Company is to place a loan on nonaccrual
status if: (a) payment in full of interest or principal is not expected or (b)
principal or interest has been in default for a period of 90 days or more unless
the obligation is both in the process of collection and well secured. Well
secured is defined as collateral with sufficient market value to repay principal
and all accrued interest. A debt is in the process of collection if collection
of the debt is proceeding in due course either through legal action, including
judgment enforcement procedures, or in appropriate circumstances, through
collection efforts not involving legal action which are reasonably expected to
result in repayment of the debt or in its restoration to current status.
Nonaccrual loans were $4.6 million at December 31, 2002 compared to $1.6 million
at June 30, 2002 for an increase of $3.0 million or 196%. The increase in
nonaccrual loans was comprised of increases in commercial loans of $2.9 million
and real estate loans of $143 thousand, partially offset by a decrease in
consumer loans of $10 thousand. The increase in nonaccrual commercial loans was
due primarily to the transfer to nonaccrual status of two commercial lending
relationships at Quad City Bank & Trust with an outstanding balance of $2.7
million. Nonaccrual loans at December 31, 2002 represented approximately one
percent of the Company's loan portfolio. All of the Company's nonperforming
assets are located in the loan portfolio at Quad City Bank & Trust. The loans in
the Cedar Rapids Bank & Trust loan portfolio have been made relatively recently,
and none of the loans have been categorized as nonperforming assets. As the loan
portfolio at Cedar Rapids Bank & Trust matures, it is likely that there will be
nonperforming loans or charge-offs associated with the portfolio.
Nonaccrual loans were $1.6 million at June 30, 2002 compared to $1.2 million at
June 30, 2001 for an increase of $328 thousand or 27%. The increase in
nonaccrual loans was comprised of increases in commercial loans of $760 thousand
partially offset by decreases in both real estate loans of $407 thousand and in
consumer loans of $25 thousand. The increase in nonaccrual commercial loans was
due primarily to the addition of a single, fully collateralized loan at Quad
City Bank & Trust with an outstanding balance of $737 thousand. Nonaccrual loans
at June 30, 2002 represented less than one half of one percent of the Company's
loan portfolio. All of the Company's nonperforming assets were located in the
loan portfolio at Quad City Bank & Trust.
As of December 31, 2002, June 30, 2002, and June 30, 2001 past due loans of 30
days or more amounted to $9.6 million, $4.3 million, and $3.2 million,
respectively. Past due loans as a percentage of gross loans receivable were 2.1%
at December 31, 2002 and 1.1% at both June 30, 2002 and 2001.
Other Assets. Premises and equipment increased by $18 thousand, or less than 1%,
to remain at $9.2 million at December 31, 2002 as at June 30, 2002. Premises and
equipment increased by $548 thousand or 6% to $9.2 million at June 30, 2002 from
$8.7 million at June 30, 2001. The increases resulted from the purchase of
additional furniture, fixtures and equipment offset by depreciation expense.
Additional information regarding the composition of this account and related
accumulated depreciation is described in footnote 5 to the consolidated
financial statements.
19
Accrued interest receivable on loans, securities, and interest-bearing cash
accounts increased by $95 thousand or 3% to $3.2 million at December 31, 2002
from $3.1 million at June 30, 2002. Accrued interest receivable on loans,
securities, and interest-bearing cash accounts increased by $263 thousand or 9%
to $3.1 million at June 30, 2002 from $2.9 million at June 30, 2001. Increases
were primarily due to greater average outstanding balances in interest-bearing
assets.
Other assets increased by $2.3 million or 19% to $13.8 million at December 31,
2002 from $11.5 million at June 30, 2002. The three largest components of other
assets at December 31, 2002 were $4.3 million in Federal Reserve Bank and
Federal Home Loan Bank stocks, $2.8 million in cash surrender value of life
insurance contracts, and $3.3 million in prepaid Visa/Mastercard processing
fees. Other assets increased by $948 thousand or 9% to $11.5 million at June 30,
2002 from $10.6 million at June 30, 2001. The three largest components of other
assets at June 30, 2002 were $3.0 million in Federal Reserve Bank and Federal
Home Loan Bank stocks, $2.6 million in cash surrender value of life insurance
contracts and $2.4 million in prepaid Visa/Mastercard processing fees. At both
December 31, and June 30, 2002, other assets also included accrued trust
department fees, other miscellaneous receivables, and various prepaid expenses.
Deposits. Deposits increased by $58.4 million or 16% to $434.7 million at
December 31, 2002 from $376.3 million at June 30, 2002. The increase resulted
from a $43.8 million net increase in noninterest bearing, NOW, money market and
other savings accounts and a $14.6 million net increase in certificates of
deposit. Deposits increased by $74.1 million or 25% to $376.3 million at June
30, 2002 from $302.2 million at June 30, 2001. The increase resulted from a
$12.8 million net increase in noninterest bearing, NOW, money market and other
savings accounts and a $61.3 million net increase in certificates of deposit.
Short-term Borrowings. Short-term borrowings decreased by $1.7 million or 5%
from $34.6 million as of June 30, 2002 to $32.9 million as of December 31, 2002.
Short-term borrowings increased by $6.3 million or 22% from $28.3 million as of
June 30, 2001 to $34.6 million as of June 30, 2002. The subsidiary banks offer
short-term repurchase agreements to some of their significant deposit customers.
Also, on occasion, the subsidiary banks must purchase Federal funds for
short-term funding needs from the Federal Reserve Bank, or from a correspondent
bank. Short-term borrowings were comprised of customer repurchase agreements of
$32.9 million, $29.1 million, and $28.3 million at December 31, 2002, June 30,
2002 and 2001, respectively, as well as federal funds purchased from
correspondent banks of $5.5 million at June 30, 2002 and none at both December
31, 2002 and June 30, 2001.
FHLB Advances and Other Borrowings. FHLB advances increased $22.6 million or 43%
from $52.4 million as of June 30, 2002 to $75.0 million as of December 31, 2002.
FHLB advances increased $22.7 million or 76% from $29.7 million as of June 30,
2001 to $52.4 million as of June 30, 2002. As of December 31, 2002, the
subsidiary banks held $3.9 million of FHLB stock in aggregate. As a result of
their memberships in the FHLB of Des Moines, the subsidiary banks have the
ability to borrow funds for short-term or long-term purposes under a variety of
programs. Both Quad City Bank & Trust and Cedar Rapids Bank & Trust utilized
FHLB advances for loan matching as a hedge against the possibility of rising
interest rates or when these advances provided a less costly source of funds
than customer deposits.
Other borrowings were $5.0 million at December 31, 2002 and at June 30, 2002. In
September 2001, the Company drew a $5.0 million advance on a line of credit at
its primary correspondent bank as partial funding for the initial capitalization
of Cedar Rapids Bank & Trust.
In June 1999, the Company issued 1,200,000 shares of trust preferred securities
through its newly formed Capital Trust subsidiary. On the Company's financial
statements, these securities are listed as company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely subordinated
debentures and were $12,000,000 at December 31, 2002 and June 30, 2002 and 2001.
Under current regulatory guidelines, these securities are considered to be Tier
1 capital, with certain limitations that are applicable to the Company.
Other liabilities increased by $2.5 million or 43% to $8.4 million as of
December 31, 2002 from $5.9 million as of June 30, 2002. The increase was
primarily the result of accrued severance compensation and income taxes related
to Bancard's sale of its ISO related merchant credit card operations in October
2002. Other liabilities increased by $971 thousand or 20% to $5.9 million as of
June 30, 2002 from $4.9 million as of June 30, 2001. Other liabilities were
comprised of unpaid amounts for various products and services, and accrued but
unpaid interest on deposits. At both December 31, 2002 and June 31, 2002, the
largest single component of other liabilities was interest payable at $1.8
million and $1.9 million, respectively.
Stockholders' Equity. Common stock at December 31, 2002 was $2.8 million, which
was unchanged from June 30, 2002. A slight increase of $13 thousand was the
result of proceeds received from the exercise of stock options. Common stock of
$2.3 million as of June 30, 2001 increased by $484 thousand, or 21%, to $2.8
million at June 30, 2002. The increase was primarily the result of the Company's
private placement of 475,424 additional shares of common stock at $11.00 per
share in September 2001. The funds received as a result of this issuance were
largely from residents of the Cedar Rapids area and were used as partial funding
for the capitalization of Cedar Rapids Bank & Trust. During fiscal 2001, the
Company acquired 18,650 treasury shares at a total cost of $255 thousand.
20
Additional paid-in capital totaled $16.8 million at December 31, 2002 compared
to $16.7 million at June 30, 2002. An increase of $76 thousand resulted
primarily from proceeds received in excess of the $1.00 per share par value for
the 13,468 shares of common stock issued as the result of the exercise of stock
options. Additional paid-in capital increased to $16.7 million as of June 30,
2002 from $12.1 million at June 30, 2001. The increase of $4.6 million, or 37%,
resulted primarily from proceeds received in excess of the $1.00 per share par
value, net of issuance costs, for the 475,424 shares of common stock issued as
the result of the Company's private placement offering.
Retained earnings increased by $3.0 million, or 24%, to $15.7 million at
December 31, 2002 from $12.7 million at June 30, 2002. The increase reflected
net income for the six-month period reduced by the $138 thousand dividend
declared in December. On October 23, 2002, the board of directors declared a
cash dividend of $0.05 per share payable on January 3, 2003, to stockholders of
record on December 16, 2002. Retained earnings increased by $3.0 million or 31%
to $12.7 million as of June 30, 2002 from $9.7 million as of June 30, 2001. The
increase reflected net income for the year.
Accumulated other comprehensive income consisting of net unrealized gains on
securities available for sale, net of related income taxes, was $2.1 million as
of December 31, 2002 as compared to $1.3 million as of June 30, 2002.
Accumulated other comprehensive income was $1.3 million as of June 30, 2002 as
compared to $506 thousand as of June 30, 2001. The increases in the gains were
both attributable to the increases during the periods in the fair value of the
securities identified as available for sale, primarily as a result of a decline
in market interest rates.
In April 2000, the Company announced that the board of directors approved a
stock repurchase program enabling the Company to repurchase approximately 60,000
shares of its common stock. This stock repurchase program was completed in the
fall of 2000 and at both December 31, 2002 and June 30, 2002 the Company held in
treasury 60,146 shares at a total cost of $855 thousand. The weighted average
cost of the shares was $14.21.
Liquidity
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 $53.9 million at December 31,
2002, $34.2 million at June 30, 2002 and $38.5 million at June 30, 2001. Quad
City Bank & Trust and Cedar Rapids Bank & Trust have a variety of sources of
short-term liquidity available to them, including federal funds purchased from
correspondent banks, sales of securities available for sale, FHLB advances,
lines of credit and loan participations or sales. The Company also generates
liquidity from the regular principal payments and prepayments made on its
portfolio of loans and mortgage-backed securities.
The liquidity of the Company is comprised of three primary classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash used in operating activities,
consisting primarily of loan originations for sale, was $12.9 million for the
six months ended December 31, 2002 compared to net cash provided by operating
activities of $470 thousand for the six months ended December 31, 2001. Net cash
provided by operating activities was $3.5 million for fiscal 2002 compared to
net cash used in operating activities of $1.7 million for fiscal 2001. Net cash
used in investing activities, consisting principally of loan funding and the
purchase of securities and federal funds was $58.5 million for the six-month
period ended December 31, 2002 and $59.7 million for the comparable period in
2001. Net cash used in investing activities, consisting principally of loan
funding and the purchase of securities was $110.6 million for fiscal 2002 and
$21.9 million for fiscal 2001. Net cash provided by financing activities,
consisting primarily of deposit growth and proceeds from Federal Home Loan Bank
advances, was $79.2 million for the six months ended December 31, 2002 compared
to $60.2 million for the same period in 2001. Net cash provided by financing
activities, consisting primarily of deposit growth and proceeds from Federal
Home Loan Bank advances and short-term borrowings was $113.1 million for fiscal
2002 compared to $28.7 million for fiscal 2001.
At December 31, 2002, the subsidiary banks had seven unused lines of credit
totaling $38.0 million of which $4.0 million was secured and $34.0 million was
unsecured. At June 30, 2002, the subsidiary banks had seven unused lines of
credit totaling $36.0 million of which $4.0 million was secured and $32.0
million was unsecured. At both December 31, 2002 and June 30, 2002, the Company
also had a secured line of credit for $10.0 million, of which $5.0 million had
been used as partial funding for the capitalization of Cedar Rapids Bank and
Trust. At June 30, 2001, Quad City Bank & Trust had six unused lines of credit
totaling $31.0 million of which $8.0 million was secured and $23.0 million was
unsecured. Also at June 30, 2001, the Company had an unused line of credit for
$3.0 million, which was secured.
21
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
The Financial Accounting Standards Board has issued Statement 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability and Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The Statement provides that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. For the Company, the provisions of
the Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. Implementation of the Statement is not expected to have
a material impact on the Company's consolidated financial statements.
The Financial Accounting Standards Board has issued Statement 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
No. 123. This Statement amends Statement No. 123 to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation will
be effective for the fiscal year ending December 31, 2003 and implementation is
not expected to have a material impact on the Company's consolidated financial
statements. The amended annual disclosure requirements, which would have been
effective for the fiscal year ending December 31, 2003, have been early adopted
in the financial statements for the six-month period ending December 31, 2002.
The amended interim disclosure requirements are effective for the Company for
the quarter ending March 31, 2003 and implementation is not expected to have a
material impact on the financial statements.
The Financial Accounting Standards Board has issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Implementation
of these provisions of the Interpretation is not expected to have a material
impact on the Company's consolidated financial statements. The disclosure
requirements of the Interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002, and have been adopted
in the consolidated financial statements for December 31, 2002.
FORWARD LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "bode," "predict,"
"suggest," "appear," "plan," "intend," "estimate," "may," "will," "would,"
"could," "should" 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.
22
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and
indirect market risk. Direct market risk exists from changes in interest rates.
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
23
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Each subsidiary bank has an
asset/liability management committee of the board of directors that meets
quarterly to review the bank's interest rate risk position and profitability,
and to make or recommend adjustments for consideration by the full board of each
bank . Management also reviews Quad City Bank & Trust and Cedar Rapids Bank &
Trust's securities portfolios, formulates investment strategies, and oversees
the timing and implementation of transactions to assure attainment of the
board's objectives in the most effective manner. Notwithstanding the Company's
interest rate risk management activities, the potential for changing interest
rates is an uncertainty that can have an adverse effect on net income.
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 approach used to quantify interest rate risk is the net portfolio value
analysis. In essence, this analysis calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance-sheet contracts. The following table sets forth, at
December 31, 2002 and June 30, 2002, an analysis of the Company's interest rate
risk as measured by the estimated changes in the net portfolio value resulting
from instantaneous and sustained parallel shifts in the yield curve (+ or - 200
basis points).
Estimated Increase
Change In (Decrease) in NPV
Interest Estimated -------------------------------------------------------------
Rates NPV Amount Amount Percent
- -------------------------------------------------------------------------------------------------------------
(Basis points) Dec.31, 2002 June 30, 2002 Dec.31, 2002 June 30, 2002 Dec.31, 2002 June 30, 2002
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 $ 45,225 $ 40,931 $ (2,584) $ (2,754) (5.40)% (6.30)%
--- $ 47,809 $ 43,685
-200 $ 50,013 $ 46,162 $ 2,204 2,477 4.61% 5.67%
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the board of directors, the Company does not
intend to engage in such activities in the immediate future. Interest rate risk
is the most significant market risk affecting the Company. 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.
24
Item 8. Financial Statements
QCR HOLDINGS, INC.
Index to Consolidated Financial Statements
INDEPENDENT AUDITOR'S REPORT 32
FINANCIAL STATEMENTS
Consolidated balance sheets as of December 31, 2002 and
June 30, 2002 and 2001 33
Consolidated statements of income for the six months ended
December 31, 2002 and the years ended June 30, 2002, 2001 and 2000 34
Consolidated statements of changes in stockholders' equity for
the six months ended December 31, 2002 and the years ended
June 20, 2002, 2001, and 2000 35
Consolidated statements of cash flows for the six months ended
December 31, 2002 and and the years ended June 30, 2002, 2001,
and 2000 36 - 37
Notes to consolidated financial statements 38 - 67
25
McGladrey & Pullen
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
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, 2002 and June 30, 2002 and 2001, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the six months ended December 31, 2002 and the years ended
June 30, 2002, 2001, and 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and June 30, 2002 and 2001, and the
results of their operations and their cash flows for the six months ended
December 31, 2002 and the years ended June 30, 2002, 2001, and 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ McGladrey & Pullen
- ----------------------
Davenport, Iowa
January 24, 2003
McGladrey & Pullen, LLP is an independent member
firm of RSM International, an affiliation of
independent accounting and consulting firms.
26
QCR HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
December 31, ------------------------------
ASSETS 2002 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Cash and due from banks .............................................. $ 34,073,932 $ 26,207,676 $ 20,217,219
Federal funds sold ................................................... 14,395,000 760,000 7,775,000
Certificates of deposit at financial institutions .................... 5,400,213 7,272,213 10,512,585
Securities held to maturity, at amortized cost (fair value
December 31, 2002 $451,121; June 30, 2002 $437,116;
June 30, 2001 $583,411) (Note 3) ................................... 425,332 425,440 575,559
Securities available for sale, at fair value (Note 3) ................ 81,228,749 75,805,678 56,134,521
-----------------------------------------------
81,654,081 76,231,118 56,710,080
-----------------------------------------------
Loans receivable, held for sale (Note 4) ............................. 23,691,004 8,498,345 5,823,820
Loans receivable, held for investment (Note 4) ....................... 426,044,732 382,095,469 282,040,946
Less allowance for estimated losses on loans (Note 4) .............. (6,878,953) (6,111,454) (4,248,182)
-----------------------------------------------
442,856,783 384,482,360 283,616,584
-----------------------------------------------
Premises and equipment, net (Note 5) ................................. 9,224,542 9,206,761 8,658,883
Accrued interest receivable .......................................... 3,221,246 3,125,992 2,863,178
Other assets ......................................................... 13,774,559 11,542,375 10,594,405
-----------------------------------------------
Total assets ................................................. $ 604,600,356 $ 518,828,495 $ 400,947,934
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing .............................................. $ 89,675,609 $ 65,384,902 $ 52,582,264
Interest-bearing ................................................. 345,072,014 310,932,407 249,572,960
-----------------------------------------------
Total deposits (Note 6) ...................................... 434,747,623 376,317,309 302,155,224
Short-term borrowings (Note 7) ....................................... 32,862,446 34,628,709 28,342,542
Federal Home Loan Bank advances (Note 8) ............................. 74,988,320 52,414,323 29,712,759
Other borrowings (Note 9) ............................................ 5,000,000 5,000,000 --
Company Obligated Mandatorily Redeemable Preferred Securities
of subsidiary trust holding solely subordinated debentures (Note 10) 12,000,000 12,000,000 12,000,000
Other liabilities .................................................... 8,415,365 5,890,551 4,919,949
-----------------------------------------------
Total liabilities ............................................ 568,013,754 486,250,892 377,130,474
-----------------------------------------------
Commitments and Contingencies (Note 17)
Stockholders' Equity (Note 15):
Preferred stock, stated value of $1 per share; shares
authorized 250,000; shares issued none ........................... -- -- --
Common stock, $1 par value; shares authorized 5,000,000;
December 31, 2002 - shares issued 2,823,061 and outstanding
2,762,915; June 30, 2002 - shares issued 2,809,593 and outstanding
2,749,447; June 30, 2001 - shares issued 2,325,566 and outstanding
2,265,420 ........................................................ 2,823,061 2,809,593 2,325,566
Additional paid-in capital ......................................... 16,761,423 16,684,605 12,148,759
Retained earnings .................................................. 15,712,600 12,654,202 9,691,749
Accumulated other comprehensive income ............................. 2,144,054 1,283,739 505,922
-----------------------------------------------
37,441,138 33,432,139 24,671,996
Less cost of 60,146 common shares acquired for the treasury ........ 854,536 854,536 854,536
-----------------------------------------------
Total stockholders' equity ................................... 36,586,602 32,577,603 23,817,460
-----------------------------------------------
Total liabilities and stockholders' equity ................... $ 604,600,356 $ 518,828,495 $ 400,947,934
===============================================
See Notes to Consolidated Financial Statements.
27
QCR HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six Months
Ended Year Ended June 30,
December 31, -------------------------------------------
2002 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ..................................... $ 13,747,643 $ 23,718,322 $ 22,970,407 $ 18,364,812
Interest and dividends on securities:
Taxable ...................................................... 1,702,046 3,166,323 3,067,722 3,214,722
Nontaxable ................................................... 235,155 429,138 290,990 233,793
Interest on certificates of deposit at financial institutions .. 203,397 589,946 701,663 753,630
Interest on federal funds sold ................................. 73,611 258,256 1,267,062 1,488,267
Other interest ................................................. 157,821 358,152 246,092 23,974
----------------------------------------------------------
Total interest income .................................... 16,119,673 28,520,137 28,543,936 24,079,198
----------------------------------------------------------
Interest expense:
Interest on deposits ........................................... 4,151,446 8,894,578 13,022,210 10,125,235
Interest on short-term borrowings .............................. 225,093 592,382 992,219 665,133
Interest on Federal Home Loan Bank advances .................... 1,440,326 2,048,273 1,462,779 1,360,823
Interest on other borrowings ................................... 99,645 201,415 -- --
Interest on Company Obligated Mandatorily Redeemable
Preferred Securities ........................................... 566,753 1,133,506 1,134,541 1,137,402
----------------------------------------------------------
Total interest expense ................................... 6,483,263 12,870,154 16,611,749 13,288,593
----------------------------------------------------------
Net interest income ...................................... 9,636,410 15,649,983 11,932,187 10,790,605
Provision for loan losses (Note 4) ............................... 2,183,745 2,264,965 889,670 1,051,818
----------------------------------------------------------
Net interest income after provision for loan losses ...... 7,452,665 13,385,018 11,042,517 9,738,787
----------------------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ............. 1,292,213 2,097,209 1,673,444 2,346,296
Trust department fees .......................................... 1,045,046 2,161,677 2,071,971 1,884,310
Deposit service fees ........................................... 596,999 994,630 816,489 600,219
Gains on sales of loans, net ................................... 1,864,813 1,991,437 1,136,572 438,799
Securities gains (losses), net ................................. 61,514 6,433 (14,047) (28,221)
Gain on sale of merchant credit card portfolio (Note 11) ....... 3,460,137 -- -- --
Other .......................................................... 518,999 663,273 628,639 913,013
----------------------------------------------------------
Total noninterest income ................................. 8,839,721 7,914,659 6,313,068 6,154,416
----------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits ................................. 6,075,885 10,077,583 8,014,268 6,878,213
Compensation and other expenses related to sale of
merchant credit card portfolio (Note 11) ..................... 1,413,734 -- -- --
Professional and data processing fees .......................... 872,750 1,410,770 1,159,929 860,216
Advertising and marketing ...................................... 341,093 604,002 579,524 410,106
Occupancy and equipment expense ................................ 1,322,826 2,331,806 1,925,820 1,580,911
Stationery and supplies ........................................ 229,066 476,158 352,441 324,219
Postage and telephone .......................................... 291,737 486,053 409,626 361,623
Other .......................................................... 865,960 1,636,056 1,358,345 1,052,173
----------------------------------------------------------
Total noninterest expenses ............................... 11,413,051 17,022,428 13,799,953 11,467,461
----------------------------------------------------------
Income before income taxes ............................... 4,879,335 4,277,249 3,555,632 4,425,742
Federal and state income taxes (Note 12) ......................... 1,682,791 1,314,796 1,159,900 1,680,215
----------------------------------------------------------
Net income ............................................... $ 3,196,544 $ 2,962,453 $ 2,395,732 $ 2,745,527
==========================================================
Earnings per common share (Note 16):
Basic .......................................................... $ 1.16 $ 1.10 $ 1.06 $ 1.19
Diluted ........................................................ $ 1.13 $ 1.08 $ 1.04 $ 1.15
Weighted average common shares outstanding ..................... 2,752,739 2,685,996 2,268,465 2,309,453
Weighted average common and common equivalent shares outstanding 2,819,416 2,743,805 2,314,334 2,385,840
See Notes to Consolidated Financial Statements.
28
QCR HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended December 31, 2002 and Years Ended June 30, 2002, 2001, and 2000
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 ........................ $2,296,251 $11,959,080 $ 4,550,490 $ (332,350) $ -- $18,473,471
Comprehensive income:
Net income .................................. -- -- 2,745,527 -- -- 2,745,527
Other comprehensive (loss), net of tax
(Note 2) .................................. -- -- -- (766,168) -- (766,168)
-------------
Comprehensive income .................. 1,979,359
-------------
Proceeds from issuance of 37,310 shares of
common stock as a result of warrants
and stock options exercised (Note 14) ....... 37,310 219,544 -- -- -- 256,854
Exchange of 8,145 shares of common
stock in connection with options exercised .. (8,145) (111,818) -- -- -- (119,963)
Tax benefit of nonqualified stock options
exercised ................................... -- 81,178 -- -- -- 81,178
Purchase of 41,496 shares of common stock
for the treasury ............................ -- -- -- -- (599,480) (599,480)
----------------------------------------------------------------------------------
Balance, June 30, 2000 ........................ 2,325,416 12,147,984 7,296,017 (1,098,518) (599,480) 20,071,419
Comprehensive income:
Net income ................................ -- -- 2,395,732 -- -- 2,395,732
Other comprehensive income, net of tax
(Note 2) ................................ -- -- -- 1,604,440 -- 1,604,440
-------------
Comprehensive income .................. 4,000,172
-------------
Proceeds from issuance of 150 shares of
common stock as a result of stock
options exercised (Note 14) ................. 150 775 -- -- -- 925
Purchase of 18,650 shares of common stock
for the treasury ............................ -- -- -- -- (255,056) (255,056)
----------------------------------------------------------------------------------
Balance, June 30, 2001 ........................ 2,325,566 12,148,759 9,691,749 505,922 (854,536) 23,817,460
Comprehensive income:
Net income ................................ -- -- 2,962,453 -- -- 2,962,453
Other comprehensive income, net of tax
(Note 2) ................................ -- -- -- 777,817 -- 777,817
-------------
Comprehensive income .................. 3,740,270
-------------
Proceeds from issuance of 23,375 shares of
common stock as a result of stock
options exercised (Note 14) ............... 23,375 133,607 -- -- -- 156,982
Exchange of 14,772 shares of common
stock in connection with options exercised (14,772) (171,291) -- -- -- (186,063)
Proceeds from issuance of 475,424 shares
of common stock ........................... 475,424 4,513,198 -- -- -- 4,988,622
Tax benefit of nonqualified stock options
exercised ................................. -- 60,332 -- -- -- 60,332
----------------------------------------------------------------------------------
Balance, June 30, 2002 ........................ 2,809,593 16,684,605 12,654,202 1,283,739 (854,536) 32,577,603
Comprehensive income:
Net income ................................ -- -- 3,196,544 -- -- 3,196,544
Other comprehensive income, net of tax
(Note 2) ................................ -- -- -- 860,315 -- 860,315
-------------
Comprehensive income .................. 4,056,859
-------------
Cash dividends declared, $.05 per share ....... -- -- (138,146) -- -- (138,146)
Proceeds from issuance of 24,270 shares of
common stock as a result of stock
options exercised (Note 14) ............... 24,270 140,404 -- -- -- 164,674
Exchange of 10,802 shares of common
stock in connection with options exercised (10,802) (151,508) -- -- -- (162,310)
Tax benefit of nonqualified stock options
exercised ................................. -- 87,922 -- -- -- 87,922
----------------------------------------------------------------------------------
Balance, December 31, 2002 .................... $2,823,061 $6,761,423 $15,712,600 $2,144,054 $(854,536) $36,586,602
==================================================================================
See Notes to Consolidated Financial Statements.
29
QCR HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months
Ended Year Ended June 30,
December 31, ----------------------------------------------
2002 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ...................................................... $ 3,196,544 $ 2,962,453 $ 2,395,732 $ 2,745,527
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation .................................................. 497,460 923,747 768,310 633,418
Provision for loan losses ..................................... 2,183,745 2,264,965 889,670 1,051,818
Deferred income taxes ......................................... (403,312) (634,045) (362,995) (398,971)
Amortization of offering costs on subordinated
debentures .................................................. 14,753 29,506 29,506 29,453
Amortization of premiums on securities, net ................... 148,782 162,642 60,062 62,539
Investment securities (gains) losses, net ...................... (61,514) (6,433) 14,047 28,221
Loans originated for sale ...................................... (136,646,900) (146,973,634) (97,605,425) (36,774,571)
Proceeds on sales of loans ..................................... 123,319,054 146,290,546 94,039,651 38,124,921
Net gains on sales of loans .................................... (1,864,813) (1,991,437) (1,136,572) (438,799)
Gain on sale of merchant credit card portfolio ................. (3,460,137) -- -- --
Tax benefit of nonqualified stock options exercised ............ 87,922 60,332 -- 81,178
Increase in accrued interest receivable ........................ (95,254) (262,814) (230,058) (626,617)
(Increase) decrease in other assets ............................ (2,193,369) (283,790) (1,166,767) 170,192
Increase (decrease) in other liabilities ....................... 2,386,668 970,602 633,631 (528,780)
-------------------------------------------------------------
Net cash provided by (used in) operating activities ....... (12,890,371) 3,512,640 (1,671,208) 4,159,529
-------------------------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold ................... (13,635,000) 7,015,000 18,330,000 13,020,000
Net (increase) decrease in certificates of deposit at
financial institutions ........................................ 1,872,000 3,240,372 2,263,878 (241,270)
Purchase of securities available for sale ....................... (14,778,519) (29,934,923) (17,003,552) (23,659,480)
Purchase of securities held to maturity ......................... -- (100,000) -- (50,000)
Proceeds from calls and maturities of securities ................ 7,335,000 9,702,500 15,045,000 6,200,000
Proceeds from paydowns on securities ............................ 1,166,490 1,789,042 1,537,072 1,389,269
Proceeds from sales of securities available for sale ............ 2,141,382 101,285 1,262,841 5,191,661
Purchase of life insurance contracts ............................ (195,000) (401,087) -- (2,023,543)
Increase in cash value of life insurance contracts .............. (9,388) (115,888) (87,840) (14,640)
Proceeds from sale of merchant credit card portfolio ............ 3,500,000 -- -- --
Net loans originated and held for investment .................... (45,365,509) (100,456,216) (41,568,458) (45,117,584)
Purchase of premises and equipment, net ......................... (515,241) (1,471,625) (1,713,387) (795,423)
-------------------------------------------------------------
Net cash used in investing activities ..................... (58,483,785) (110,631,540) (21,934,446) (46,101,010)
------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ................................ 58,430,314 74,162,085 14,088,468 40,100,877
Net increase (decrease) in short-term borrowings ................ (1,766,263) 6,286,167 7,570,818 11,085,847
Proceeds from Federal Home Loan Bank advances ................... 29,000,000 25,000,000 16,750,000 8,000,000
Payments on Federal Home Loan Bank advances ..................... (6,426,003) (2,298,436) (9,462,639) (10,180,492)
Proceeds from other borrowings .................................. -- 5,000,000 -- --
Purchase of treasury stock ...................................... -- -- (255,056) (599,480)
Proceeds from issuance of common stock, net ..................... 2,364 4,959,541 925 136,891
--------------------------------------------------------------
Net cash provided by financing activities ................. $ 79,240,412 $ 113,109,357 $ 28,692,516 $ 48,543,643
--------------------------------------------------------------
Net increase in cash and due from banks ................... $ 7,866,256 $ 5,990,457 $ 5,086,862 $ 6,602,162
Cash and due from banks:
Beginning ....................................................... 26,207,676 20,217,219 15,130,357 8,528,195
--------------------------------------------------------------
Ending .......................................................... $ 34,073,932 $ 26,207,676 $ 20,217,219 $ 15,130,357
==============================================================
Supplemental Disclosures of Cash Flow Information,
cash payments for:
Interest ........................................................ $ 6,537,656 $ 13,405,861 $ 16,069,527 $ 13,024,589
Income and franchise taxes ...................................... 1,112,741 1,363,292 1,480,894 2,001,216
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income (loss),
unrealized gains (losses) on securities available for sale, net 860,315 777,817 1,604,440 (766,168)
Due from broker for call of securities available for sale ....... -- -- (1,000,000) --
Exchange of shares of common stock in connection
with options exercised ........................................ (162,310) (186,063) -- (119,963)
See Notes to Consolidated Financial Statements.
30
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. (Company) is a bank holding company providing bank and bank
related services through its subsidiaries, Quad City Bank and Trust Company
(Quad City Bank & Trust), Cedar Rapids Bank and Trust Company (Cedar Rapids Bank
& Trust), Quad City Bancard, Inc. (Bancard), Allied Merchant Services, Inc.
(Allied), and QCR Holdings Capital Trust I (Capital Trust). Quad City Bank &
Trust is a commercial bank that serves the Quad Cities and adjacent communities.
Cedar Rapids Bank & Trust serves Cedar Rapids and adjacent communities. Both
banks are chartered and regulated by the state of Iowa, are insured and subject
to regulation by the Federal Deposit Insurance Corporation, and are members of
and regulated by the Federal Reserve System. Bancard is an entity formed in
April 1995 to conduct the Company's credit card operation and is regulated by
the Federal Reserve System. Allied was formed in March 1999 by Bancard as a
captive independent sales organization that markets merchant credit card
processing services. Allied is a wholly-owned subsidiary of Bancard. QCR Capital
Trust I was capitalized in June 1999 for the purpose of issuing Company
Obligated Mandatorily Redeemable Preferred Securities.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The allowance for estimated losses on loans is inherently subjective as it
requires material estimates that are susceptible to significant change. The fair
value disclosure of financial instruments is an estimate that can be computed
within a range.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. 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 amounts due from banks. Cash flows from
federal funds sold, certificates of deposit at financial institutions, loans,
deposits, and short-term borrowings are treated as net increases or decreases.
Cash and due from banks: The subsidiary banks are required by federal banking
regulations to maintain certain cash and due from bank reserves. The reserve
requirement was approximately $7,721,000, $5,580,000, and $3,641,000 as of
December 31, 2002 and June 30, 2002 and 2001, 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 significant 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.
31
Loans and allowance for estimated losses on loans: Loans are stated at the
amount of unpaid principal, reduced by an allowance for estimated losses on
loans. Interest is credited to earnings as earned based on the principal amount
outstanding. The allowance for estimated losses on loans is maintained at the
level considered adequate by management of the Company and the subsidiary banks
to provide for losses that are probable. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. In determining the
adequacy of the allowance, the Company and the subsidiary banks consider the
overall composition of the loan portfolio, types of loans, past loss experience,
loan delinquencies, potential substandard and doubtful credits, economic
conditions, and other factors that in management's judgment deserve evaluation.
Loans are considered impaired when, based on current information and events, it
is probable the Company and the bank involved will not be able to collect all
amounts due. The portion of the allowance for loan losses applicable to an
impaired loan is computed based on the present value of the estimated future
cash flows of interest and principal discounted at the loan's effective interest
rate or on the fair value of the collateral for collateral dependent loans. The
entire change in present value of expected cash flows of impaired loans is
reported as bad debt expense in the same manner in which impairment initially
was recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported. The Company and the Banks recognize interest income
on impaired loans on a cash basis.
Direct loan origination fees and costs are deferred and the net amounts
amortized as an adjustment of the related loan's yield.
Sales of loans: As part of its management of assets and liabilities, the Company
routinely sells residential real estate loans. Loans which are expected to be
sold in the foreseeable future are classified as held for sale and are carried
at the lower of cost or estimated market value in the aggregate.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit and standby letters of
credit. Such financial instruments are recorded when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for
as sales only when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when: (1) the assets have been
isolated from the Company, (2) the transferee obtains the right to pledge or
exchange the assets it received, and no condition both constrains the transferee
from taking advantage of its right to pledge or exchange and provides more than
a modest benefit to the transferor, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity or the ability to unilaterally cause the holder to
return specific assets.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method over the estimated useful lives.
Stock-based compensation plans: At December 31, 2002, the Company has two
stock-based employee compensation plans, which are described more fully in Note
13. The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Six Months
Ended Year Ended June 30,
December 31, --------------------------------------
2002 2002 2001 2000
-----------------------------------------------------
Net income, as reported ............... $3,196,544 $2,962,453 $2,395,732 $2,745,527
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects .. (39,503) (90,182) (70,328) (54,720)
----------------------------------------------------
Net income .................... $3,157,041 $2,872,271 $2,325,404 $2,690,807
====================================================
Earnings per share:
Basic:
As reported ....................... $ 1.16 $ 1.10 $ 1.06 $ 1.19
Pro forma ......................... 1.15 1.07 1.03 1.17
Diluted:
As reported ....................... 1.13 1.08 1.04 1.15
Pro forma ......................... 1.12 1.05 1.00 1.13
32
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 six months
ended December 31, 2002 and the years ended June 30, 2002, 2001, and 2000:
dividend rate of .59% for the six months ended December 31, 2002 and 0% for the
years ended June 30, 2002, 2001, and 2000: risk-free interest rates based upon
current rates at the date of grant (4.42% to 6.81%); expected lives of 10 years,
and expected price volatility of 20.74% to 24.81%.
Income taxes: The Company files its tax return on a consolidated basis with its
subsidiaries. The entities follow the direct reimbursement method of accounting
for income taxes under which income taxes or credits which result from the
inclusion of the subsidiaries in the consolidated tax return are paid to or
received from the parent company.
Deferred income taxes are provided under the liability method whereby deferred
tax assets are recognized for deductible temporary differences and net operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
Trust assets: Trust assets held by Quad City Bank & Trust in a fiduciary,
agency, or custodial capacity for its customers, other than cash on deposit at
the Bank, are not included in the accompanying consolidated financial statements
since such items are not assets of the Bank.
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.
Change in year-end: In August 2002, the Company changed its fiscal year-end from
June 30th to December 31st. The change in year-end resulted in a short fiscal
year covering the six-month transition period from July 1, 2002 to December 31,
2002. References to the transition period, fiscal 2002, 2001, and 2000
throughout these consolidated financial statements are for the six months ended
December 31, 2002 and the years ended June 30, 2002, 2001, and 2000,
respectively.
In connection with the Company's change in fiscal year, presented below is the
financial data for the comparable six month periods ended December 31, 2002 and
2001:
(Unaudited)
2002 2001
---------------------------
Total interest income .......................... $16,119,673 $13,845,800
Total interest expense ......................... 6,483,263 6,633,525
---------------------------
Net interest income .................... 9,636,410 7,212,275
Provision for loan losses ...................... 2,183,745 1,039,865
Noninterest income ............................. 8,839,721 4,040,240
Noninterest expenses ........................... 11,413,051 8,244,914
---------------------------
Net income before income taxes ......... 4,879,335 1,967,736
Federal and state income taxes ................. 1,682,791 630,126
---------------------------
Net income ............................. $ 3,196,544 $ 1,337,610
===========================
Earnings per common share:
Basic .......................................... $ 1.16 $ 0.51
Diluted ........................................ 1.13 0.50
Reclassification: Certain amounts in the prior year financial statements have
been reclassified, with no effect on net income or stockholders' equity, to
conform with the current period presentation.
33
Note 2. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income,
which for the Company is comprised entirely of unrealized gains and losses on
securities available for sale.
Other comprehensive income (loss) is comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------
Six months ended December 31, 2002:
Unrealized gains on securities available for
sale:
Unrealized holding gains arising during the period ...... $ 1,436,098 $ 537,283 $ 898,815
Less, reclassification adjustment for gains
included in net income ................................ 61,514 23,014 38,500
-----------------------------------------
Other comprehensive income .......................... $ 1,374,584 $ 514,269 $ 860,315
=========================================
Year ended June 30, 2002:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year ........ $ 1,241,584 $ 459,716 $ 781,868
Less, reclassification adjustment for gains
included in net income ................................ 6,433 2,382 4,051
-----------------------------------------
Other comprehensive income .......................... $ 1,235,151 $ 457,334 $ 777,817
=========================================
Year ended June 30, 2001:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during the year ........ $ 2,482,453 $ 887,041 $ 1,595,412
Less, reclassification adjustment for (losses)
included in net income ................................ (14,047) (5,019) (9,028)
-----------------------------------------
Other comprehensive income .......................... $ 2,496,500 $ 892,060 $ 1,604,440
=========================================
Year ended June 30, 2000:
Unrealized (losses) on securities available for sale:
Unrealized holding (losses) arising during the year ..... $(1,195,285) $ (410,590) $ (784,695)
Less, reclassification adjustment for (losses)
included in net income ................................ (28,221) (9,694) (18,527)
-----------------------------------------
Other comprehensive (loss) .......................... $(1,167,064) $ (400,896) $ (766,168)
=========================================
34
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of December 31,
2002 and June 30, 2002 and 2001 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
December 31, 2002:
Securities held to maturity:
Municipal securities ..... $ 250,332 $ 9,350 $ -- $ 259,682
Other bonds .............. 175,000 16,439 -- 191,439
-----------------------------------------------------------
$ 425,332 $ 25,789 $ -- $ 451,121
===========================================================
Securities available for sale:
U.S. Treasury securities ... $ 1,016,608 $ 19,879 $ -- $ 1,036,487
U.S. agency securities ..... 47,534,699 1,701,832 (1,243) 49,235,288
Mortgage-backed securities . 5,600,989 169,475 (18) 5,770,446
Municipal securities ....... 13,941,352 978,262 -- 14,919,614
Corporate securities ....... 7,691,358 475,136 -- 8,166,494
Trust preferred securities . 1,349,796 93,146 (10,985) 1,431,957
Other securities ........... 659,168 19,926 (10,631) 668,463
-----------------------------------------------------------
$ 77,793,970 $ 3,457,656 $ (22,877) $ 81,228,749
===========================================================
June 30, 2002:
Securities held to maturity:
Municipal securities ..... $ 250,440 $ 7,598 $ -- $ 258,038
Other bonds .............. 175,000 4,078 -- 179,078
-----------------------------------------------------------
$ 425,440 $ 11,676 $ -- $ 437,116
===========================================================
Securities available for sale:
U.S. Treasury securities ... $ 1,024,062 $ 9,239 $ -- $ 1,033,301
U.S. agency securities ..... 42,250,426 1,088,265 -- 43,338,691
Mortgage-backed securities . 5,758,421 124,191 -- 5,882,612
Municipal securities ....... 13,663,785 538,002 (15,213) 14,186,574
Corporate securities ....... 9,291,237 190,623 (6,309) 9,475,551
Trust preferred securities . 1,349,796 111,034 (14,405) 1,446,425
Other securities ........... 407,756 39,047 (4,279) 442,524
-----------------------------------------------------------
$ 73,745,483 $ 2,100,401 $ (40,206) $ 75,805,678
===========================================================
June 30, 2001:
Securities held to maturity:
Municipal securities ..... $ 500,559 $ 4,638 $ -- $ 505,197
Other bonds .............. 75,000 3,214 -- 78,214
-----------------------------------------------------------
$ 575,559 $ 7,852 $ -- $ 583,411
===========================================================
Securities available for sale:
U.S. agency securities ..... $ 31,787,602 $ 626,091 $ (104) $ 32,413,589
Mortgage-backed securities . 5,509,433 17,646 (18,797) 5,508,282
Municipal securities ....... 11,892,825 144,098 (39,556) 11,997,367
Corporate securities ....... 4,577,918 31,014 (13,185) 4,595,747
Trust preferred securities . 1,148,488 94,897 (14,405) 1,228,980
Other securities ........... 393,211 19,075 (21,730) 390,556
-----------------------------------------------------------
$ 55,309,477 $ 932,821 $ (107,777) $ 56,134,521
===========================================================
35
All sales of securities during the six months ended December 31, 2002 and the
years ended June 30, 2002, 2001, and 2000 were from securities identified as
available for sale. Information on proceeds received, as well as the gains and
losses from the sale of those securities is as follows:
Six Months
Ended Year Ended June 30,
December 31, ------------------------------------
2002 2002 2001 2000
--------------------------------------------------
Proceeds from sales of securities ... $2,141,382 $ 101,285 $1,262,841 $5,191,661
Gross gains from sales of securities 64,026 10,093 11,831 22,366
Gross losses from sales of securities 2,512 3,660 25,878 50,587
The amortized cost and fair value of securities as of December 31, 2002 by
contractual maturity are shown below. Expected maturities of mortgage-backed
securities may differ from contractual maturities because the mortgages
underlying the mortgage-backed securities may be called or prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary. Other securities are excluded from the
maturity categories as there is no fixed maturity date.
Amortized
Cost Fair Value
---------------------------
Securities held to maturity:
Due in one year or less ...................... $ 25,000 $ 25,407
Due after one year through five years ........ 350,332 368,068
Due after five years ......................... 50,000 57,646
---------------------------
$ 425,332 $ 451,121
===========================
Securities available for sale:
Due in one year or less ...................... $12,075,450 $12,254,687
Due after one year through five years ........ 40,712,394 42,487,322
Due after five years ......................... 18,745,969 20,047,831
---------------------------
71,533,813 74,789,840
Mortgage-backed securities ................... 5,600,989 5,770,446
Other securities ............................. 659,168 668,463
---------------------------
$77,793,970 $81,228,749
===========================
As of December 31, 2002 and June 30, 2002 and 2001, investment securities with a
carrying value of $55,974,583, $49,391,310, and $37,120,191, respectively, were
pledged on securities sold under agreements to repurchase and for other purposes
as required or permitted by law.
Note 4. Loans Receivable
The composition of the loan portfolio as of December 31, 2002 and June 30, 2002
and 2001 is presented as follows:
June 30,
December 31, ------------------------------
2002 2002 2001
-----------------------------------------------
Commercial ................................. $ 350,205,750 $ 305,019,327 $ 209,932,804
Real estate loans held for sale - mortgage . 23,691,004 8,498,345 5,823,820
Real estate - mortgage ..................... 28,760,597 34,033,494 32,191,024
Real estate - construction ................. 2,229,740 2,861,123 2,568,283
Installment and other consumer ............. 44,567,327 40,036,886 37,361,458
-----------------------------------------------
449,454,418 390,449,175 287,877,389
Deferred loan origination costs (fees), net 281,318 144,639 (12,623)
Less allowance for estimated losses on loans (6,878,953) (6,111,454) (4,248,182)
-----------------------------------------------
$ 442,856,783 $ 384,482,360 $ 283,616,584
===============================================
36
Loans on nonaccrual status amounted to $4,608,391, $1,559,609, and $1,231,741 as
of December 31, 2002 and June 30, 2002 and 2001, respectively. Interest income
in the amount of $311,519 and $156,478, for the six months ended December 31,
2002 and the year ended June 30, 2002, respectively, would have been earned on
the nonaccrual loans had they been performing in accordance with their original
terms. Cash interest collected on nonaccrual loans was $69,503 and $122,303 for
the six months ended December 31, 2002 and the year ended June 30, 2002,
respectively. Foregone interest income and cash interest collected on nonaccrual
loans was not material for the years ended June 30, 2001 and 2000.
Changes in the allowance for estimated losses on loans for the six months ended
December 31, 2002 and the years ended June 30, 2002, 2001, and 2000 are
presented as follows:
Six Months
Ended Year Ended June 30,
December 31, -----------------------------------------
2002 2002 2001 2000
--------------------------------------------------------
Balance, beginning ......................... $ 6,111,454 $ 4,248,182 $ 3,617,401 $ 2,895,457
Provisions charged to expense ............ 2,183,745 2,264,965 889,670 1,051,818
Loans charged off ........................ (1,454,192) (641,156) (300,463) (426,708)
Recoveries on loans previously charged off 37,946 239,463 41,574 96,834
--------------------------------------------------------
Balance, ending ............................ $ 6,878,953 $ 6,111,454 $ 4,248,182 $ 3,617,401
========================================================
Loans considered to be impaired are as follows:
December 31, June 30,
2002 2002
----------------------
Impaired loans for which an allowance has been provided $2,478,393 $4,717,907
======================
Allowance provided for impaired loans, included in
the allowance for loan losses ....................... $ 786,301 $ 908,217
======================
Impaired loans for which no allowance has been provided $2,434,463 $ 805,409
======================
Impaired loans for which no allowance has been provided have adequate
collateral, based on management's current estimates. Impaired loans were not
material as of June 30, 2001.
The average recorded investment in impaired loans during the six months ended
December 31, 2002 and the year ended June 30, 2002 was $5,795,054 and
$1,157,939, respectively. Interest income on impaired loans of $123,882 and
$42,414 was recognized for cash payments received for the six months ended
December 31, 2002 and the year ended June 30, 2002, respectively. Average
impaired loans and cash interest income on impaired loans were not material at
June 30, 2001 or for the years ended June 30, 2001 and 2000, respectively.
Loans past due 90 days or more and still accruing interest totaled $430,745,
$707,853, and $494,827 as of December 31, 2002 and June 30, 2002 and 2001,
respectively.
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 six months ended December 31, 2002 and years ended June 30, 2002 and
2001 was as follows:
Six Months
Ended Year Ended June 30,
December 31, ----------------------------
2002 2002 2001
--------------------------------------------
Balance, beginning ............................ $ 22,806,789 $ 19,383,492 $ 6,918,805
Net increase due to change in related parties -- -- 11,439,009
Advances .................................... 1,876,950 11,004,085 6,509,174
Repayments .................................. (1,416,373) (7,580,788) (5,483,496)
--------------------------------------------
Balance, ending ............................... $ 23,267,366 $ 22,806,789 $ 19,383,492
============================================
37
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of December
31, 2002 and June 30, 2002 and 2001:
June 30,
December 31, --------------------------
2002 2002 2001
-----------------------------------------
Land .............................. $ 813,400 $ 813,400 $ 813,400
Buildings ......................... 6,143,269 5,951,141 5,536,999
Furniture and equipment ........... 6,618,773 6,329,732 5,307,283
-----------------------------------------
13,575,442 13,094,273 11,657,682
Less accumulated depreciation ..... 4,350,900 3,887,512 2,998,799
-----------------------------------------
$ 9,224,542 $ 9,206,761 $ 8,658,883
=========================================
Certain facilities are leased under operating leases. Rental expense was
$430,576, $795,768, $615,058, and $451,097 for the six months ended December 31,
2002 and the years ended June 30, 2002, 2001, and 2000, respectively.
Future minimum rental commitments under noncancelable leases are as follows as
of December 31, 2002:
Year ending December 31:
2003 $ 527,000
2004 514,000
2005 504,000
2006 472,000
2007 151,000
Thereafter 284,000
-----------
$ 2,452,000
===========
Note 6. Deposits
The aggregate amount of certificates of deposit each with a minimum denomination
of $100,000, was $69,373,970, $62,919,139, and $50,298,560 as of December 31,
2002 and June 30, 2002 and 2001, respectively.
As of December 31, 2002, the scheduled maturities of certificates of deposit
were as follows:
Year ending December 31:
2003 $144,798,308
2004 35,677,951
2005 9,502,782
2006 1,559,430
2007 2,297,035
------------
$193,835,506
============
Note 7. Short-Term Borrowings
Short-term borrowings are summarized as follows:
June 30,
December 31, -------------------------
2002 2002 2001
---------------------------------------
Overnight repurchase agreements with customers $32,862,446 $29,128,709 $28,342,542
Federal funds purchased ...................... -- 5,500,000 --
---------------------------------------
$32,862,446 $34,628,709 $28,342,542
=======================================
38
Information concerning repurchase agreements is summarized as follows as of
December 31, 2002 and June 30, 2002 and 2001:
June 30,
December 31, -------------------------
2002 2002 2001
------------------------------------------
Average daily balance during the period ................. $32,121,426 $27,243,789 $21,584,795
Average daily interest rate during the period ........... 1.22% 1.93% 4.40%
Maximum month-end balance during the period ............. 33,384,561 31,262,688 28,342,542
Weighted average rate as of end of period ............... 1.26% 2.16% 4.34%
Securities underlying the agreements as of end of period:
Carrying value ........................................ $44,849,488 $44,909,718 $28,947,957
Fair value ............................................ 44,849,488 44,909,718 28,947,957
The securities underlying the agreements as of December 31, 2002 and June 30,
2002 and 2001 were under the Company's control in safekeeping at third-party
financial institutions.
Note 8. Federal Home Loan Bank Advances
The Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As of
December 31, 2002 and June 30, 2002 and 2001, the Banks held $3,926,800,
$2,622,100, and $1,487,000, respectively, of FHLB stock. Maturity and interest
rate information on advances from the FHLB as of December 31, 2002 and June 30,
2002 and 2001 is as follows:
December 31, 2002
-------------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
-------------------------------
Maturity:
Year ending December 31:
2003 ................................ $ 7,865,000 3.93%
2004 ................................ 20,701,166 3.34
2005 ................................ 4,750,000 3.68
2006 ................................ 7,610,000 4.18
2007 ................................ 8,200,000 4.02
Thereafter .......................... 25,862,154 4.70
------------
Total FHLB advances ..................... $ 74,988,320 4.05
============
Of the advances maturing after December 31, 2002, $19,000,000 have options which
allow the Banks the right, but not the obligation, to "put" the advances back to
the FHLB.
June 30, 2002
-------------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
-------------------------------
Maturity:
Year ending June 30:
2003 ................................ $ 9,704,780 5.55%
2004 ................................ 13,740,148 3.76
2005 ................................ 5,250,000 4.22
2006 ................................ 700,000 6.28
2007 ................................ 3,410,000 5.38
Thereafter .......................... 19,609,395 4.73
------------
Total FHLB advances ............. $ 52,414,323 4.64
============
39
June 30, 2001
--------------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
--------------------------------
Maturity:
Year ending June 30:
2002 ................................ $ 1,995,266 6.97%
2003 ................................ 7,894,786 6.35
2004 ................................ 1,815,009 5.90
2005 ................................ 750,000 5.90
2006 ................................ 700,000 6.28
Thereafter .......................... 16,557,698 5.12
------------
Total FHLB advances $ 29,712,759 5.67
============
Advances are collateralized by securities, with a carrying value of $2,109,106
at December 31, 2002. There were no securities pledged on FHLB advances at June
30, 2002 and 2001. Advances as of December 31, 2002 and June 30, 2002 and 2001
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.
Note 9. Other Borrowings
As of December 31, 2002 and June 30, 2002, the Company has a $10,000,000
revolving credit note, which is secured by all the outstanding stock of Quad
City Bank & Trust. The note, which matures July 1, 2004, has a balance
outstanding of $5,000,000 as of both December 31, 2002 and June 30, 2002.
Interest is payable quarterly at the adjusted LIBOR rates as defined in the
credit note agreement. As of December 31, 2002 and June 30, 2002, the interest
rate was 3.8% and 4.1%, respectively. As of June 30, 2001, the Company had a
revolving credit note for $3,000,000, which was secured by all the outstanding
stock of Quad City Bank & Trust. There was no outstanding balance on this note
as of June 30, 2001.
The revolving credit note agreement contains certain covenants that place
restrictions on additional debt and stipulate minimum capital and various
operating ratios.
Unused lines of credit of the subsidiary banks are summarized as follows:
June 30,
December 31, -------------------------
2002 2002 2001
---------------------------------------
Secured .............................. $ 4,000,000 $ 4,000,000 $ 8,000,000
Unsecured ............................ 34,000,000 32,000,000 23,000,000
---------------------------------------
$38,000,000 $36,000,000 $31,000,000
=======================================
Note 10. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures
The Company issued all of the 1,200,000 authorized shares of Company Obligated
Mandatorily Redeemable (COMR) Preferred Securities of QCR Holdings Capital Trust
I Holding Solely Subordinated Debentures. Distributions are paid quarterly.
Cumulative cash distributions are calculated at a 9.2% annual rate. The Company
may, at one or more times, defer interest payments on the capital securities for
up to 20 consecutive quarters, but not beyond June 30, 2029. At the end of any
deferral period, all accumulated and unpaid distributions will be paid. The
capital securities will be redeemed on June 30, 2029; however, the Company has
the option to shorten the maturity date to a date not earlier than June 30,
2004. The redemption price is $10 per capital security plus any accrued and
unpaid distributions to the date of redemption.
40
Holders of the capital securities have no voting rights, are unsecured and rank
junior in priority of payment to all of the Company's indebtedness and senior to
the Company's capital stock.
The debentures are included on the balance sheets as liabilities; however, for
regulatory purposes, approximately $11,480,000, $10,900,000, and $8,000,000 of
the capital securities are allowed in the calculation of Tier I capital as of
December 31, 2002 and June 30, 2002 and 2001, respectively, with the remainder
allowed as Tier II capital.
The capital securities are traded on the American Stock Exchange under the
symbol "CQP.PR.A".
Note 11. Sale of Merchant Credit Card Portfolio
On October 22, 2002, the Company announced Bancard's sale of its ISO-related
merchant credit card operations to iPayment, Inc. for the price of $3,500,000.
After contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a gain of approximately $1,300,000 or
$0.47 per share. Also included in the sale were all of the merchant credit card
processing relationships owned by Allied. Bancard will continue to provide
credit card processing for its local merchants and cardholders of the subsidiary
banks and agent banks. It is anticipated that the Company's termination of
ISO-related merchant credit card processing will reduce Bancard's future
earnings. However, the Company believes that Bancard can be profitable with its
narrowed business focus of continuing to provide credit card processing for its
local merchants and agent banks and for cardholders of the Company's subsidiary
banks.
Note 12. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components
for the six months ended December 31, 2002 and the years ended June 30, 2002,
2001, and 2000:
Six Months Ended
Ended Year Ended June 30,
December 31, --------------------------------------------
2002 2002 2001 2000
-----------------------------------------------------------
Current ........ $ 2,086,103 $ 1,948,841 $ 1,522,895 $ 2,079,186
Deferred ....... (403,312) (634,045) (362,995) (398,971)
----------------------------------------------------------
$ 1,682,791 $ 1,314,796 $ 1,159,900 $ 1,680,215
===========================================================
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
six months ended December 31, 2002 and the years ended June 30, 2002, 2001, and
2000:
Six Months Ended
December 31, Year Ended June 30,
--------------------- -------------------------------------------------------------------
2002 2002 2001 2000
--------------------- ------------------------ ------------------------------------------
% of % of % of % of
Pretax Pretax Pretax Pretax
Amount Income Amount Income Amount Income Amount Income
--------------------------------------------------------------------------------------------
Computed "expected"
tax expense ......... $ 1,707,767 35.0% $ 1,497,037 35.0% $ 1,244,471 35.0% $ 1,549,010 35.0%
Effect of graduated
tax rates ........... (48,793) (1.0) (42,772) (1.0) (35,556) (1.0) (44,257) (1.0)
Tax exempt income, net (105,270) (2.2) (196,870) (4.6) (147,396) (4.1) (132,769) (3.0)
State income taxes, net
of federal benefit .. 161,761 3.3 166,812 3.9 132,546 3.7 172,445 3.9
Other ................. (32,674) (0.6) (109,411) (2.6) (34,165) (1.0) 135,786 3.1
--------------------------------------------------------------------------------------------
$ 1,682,791 34.5% $ 1,314,796 30.7% $ 1,159,900 32.6% $ 1,680,215 38.0%
============================================================================================
41
The net deferred tax assets included with other assets on the balance sheet
consisted of the following as of December 31, 2002 and June 30, 2002 and 2001:
June 30,
December 31, ----------------------
2002 2002 2001
------------------------------------
Deferred tax assets:
Compensation ........................................ $ 628,825 $ 383,129 $ 180,863
Loan and credit card losses ......................... 2,481,400 2,281,753 1,701,189
Other ............................................... 66,978 62,406 65,651
------------------------------------
3,177,203 2,727,288 1,947,703
------------------------------------
Deferred tax liabilities:
Net unrealized gains on securities available for sale 1,290,725 776,456 319,122
Premises and equipment .............................. 609,785 566,993 469,893
Other ............................................... 139,689 135,878 87,438
------------------------------------
2,040,199 1,479,327 876,453
------------------------------------
Net deferred tax asset ................................ $1,137,004 $1,247,961 $1,071,250
====================================
The change in deferred income taxes was reflected in the financial statements as
follows for the six months ended December 31, 2002 and the years ended June 30,
2002, 2001, and 2000:
Six Months
Ended Year Ended June 30,
December 31, -----------------------------------
2002 2002 2001 2000
--------------------------------------------------
Provision for income taxes ............ $(403,312) $(634,045) $(362,995) $(398,971)
Statement of stockholders' equity-
accumulated other comprehensive
income, unrealized gains (losses)
on securities available for sale, net 514,269 457,334 892,060 (400,896)
------------------------------------------------
$ 110,957 $(176,711) $ 529,065 $(799,867)
================================================
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 six months ended December 31, 2002 and the years ended
June 30, 2002, 2001, and 2000 were as follows:
Six Months
Ended Year Ended June 30,
December 31, --------------------------------
2002 2002 2001 2000
--------------------------------------------
Matching contribution .......... $179,930 $318,457 $240,960 $155,237
Discretionary contribution ..... 60,500 49,000 41,500 50,000
--------------------------------------------
$240,430 $367,457 $282,460 $205,237
============================================
42
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 $10,000 and $20,000 annually. Interest is computed at The Wall Street
Journal prime rate and also differs by officer, with a minimum of 6% and a
maximum of 12%. Upon retirement, the officer will receive the deferral balance
in 180 equal monthly installments. During the six months ended December 31, 2002
and the years ended June 30, 2002, 2001, and 2000 the Company expensed $41,041,
$67,273, $27,791, and $41,860, respectively, related to the agreements. As of
December 31, 2002 and June 30, 2002 and 2001 the liability related to the
agreements totals $320,965, $253,923, and $139,651, respectively.
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 150,000 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. The Company's Board of
Directors adopted in November 1996 the QCR Holdings, Inc. 1997 Stock Incentive
Plan (Stock Incentive Plan). Up to 150,000 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
Stock Incentive Plan. The Stock Option Plan and the Stock Incentive Plan are
administered by the compensation committee appointed by the Board of Directors
(Committee).
The number and exercise price of options granted under the Stock Option Plan and
the Stock Incentive Plan is determined by the Committee at the time the option
is granted. In no event can the exercise price be less than the value of the
common stock at the date of the grant for incentive stock options. All options
have a 10-year life and will vest and become exercisable from 1-to-5 years after
the date of the grant. Only nonqualified stock options have been issued to date.
In the case of nonqualified stock options, the Stock Option Plan and the Stock
Incentive Plan 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, 2002 and June 30, 2002,
2001, and 2000 and changes during the six months ended and years ended on those
dates is presented below:
June 30,
December 31, --------------------------------------------------------------------
2002 2002 2001 2000
-------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
------------------------------------------------------------------------------------------
Outstanding, beginning 228,038 $ 10.89 236,437 $ 10.22 189,005 $ 10.24 190,171 $ 9.36
Granted ............ 700 14.95 18,325 14.50 50,200 10.52 25,900 14.83
Exercised .......... (24,270) 6.79 (23,375) 6.72 (150) 6.17 (26,060) 6.69
Forfeited .......... (4,193) 14.80 (3,349) 13.00 (2,618) 17.10 (1,006) 17.80
-----------------------------------------------------------------------------------------
Outstanding, ending .. 200,275 11.34 228,038 10.89 236,437 10.22 189,005 10.24
=========================================================================================
Exercisable, ending .. 128,414 139,090 153,390 138,834
Weighted average fair
value per option of
options granted
during the period .. $ 6.10 $ 6.93 $ 5.17 $ 7.68
43
A further summary of options outstanding as of December 31, 2002 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
- -----------------------------------------------------------------------------------------
$6.00 to $6.83 63,080 2.11 $ 6.66 63,080 $ 6.66
$7.83 to $8.83 8,385 3.43 8.75 8,385 8.75
$10.00 to $13.25 58,190 8.43 10.91 14,770 11.31
$13.33 to $13.67 21,215 4.50 13.67 21,215 13.67
$14.08 to $16.13 29,970 8.65 15.35 6,090 15.87
$17.75 to $21.33 19,435 6.01 20.25 14,874 20.43
------- -------
200,275 128,414
======= =======
Stock appreciation rights:
Additionally, the Stock Incentive Plan allows 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 will 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, 2002 and June 30, 2002, 2001, and 2000 there were
90,450, 90,850, 90,850, and 52,050 SARs, respectively, outstanding, with 48,820,
48,820, 28,200, and 17,490, respectively, exercisable.
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, 2003 there are 100,000 shares of Common Stock available for issuance
under the Purchase Plan. For each Offering Period, the Board of Directors will
determine how many of the total number of available shares will be offered. For
the Offering Period beginning January 1, 2003 and ending June 30, 2003, 15,000
shares are being 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.
Note 15. Regulatory Capital Requirements and Restrictions on Dividends
The Company (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company and Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the 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 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,
2002 and June 30, 2002 and 2001, that the Company and the Banks met all capital
adequacy requirements to which they are subject.
44
As of December 31, 2002, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since the notification that management
believes have changed the Banks' categories. The Company and the Banks' actual
capital amounts and ratios as of December 31, 2002 and June 30, 2002 and 2001
are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------
As of December 31, 2002:
Company:
Total risk-based capital ................ $52,482 10.9% $38,534 > 8.0% N/A N/A
Tier 1 risk-based capital ............... 45,922 9.5 19,267 > 4.0 N/A N/A
Leverage ratio .......................... 45,922 7.8 23,582 > 4.0 N/A N/A
Quad City Bank & Trust:
Total risk-based capital ............... $41,401 10.3% $32,155 > 8.0% $40,193 > 10.0%
Tier 1 risk-based capital .............. 36,368 9.1 16,077 > 4.0 24,116 > 6.0
Leverage ratio ......................... 36,368 7.1 20,364 > 4.0 25,454 > 5.0
Cedar Rapids Bank & Trust (A):
Total risk-based capital ............... $10,248 14.0% $ 5,846 > 8.0% $ 7,308 > 10.0%
Tier 1 risk-based capital .............. 9,332 12.8 2,923 > 4.0 4,385 > 6.0
Leverage ratio ......................... 9,332 11.0 3,396 > 4.0 4,245 > 5.0
As of June 30, 2002:
Company:
Total risk-based capital ............... $48,688 11.3% $34,373 > 8.0% N/A N/A
Tier 1 risk-based capital .............. 42,153 9.8 17,187 > 4.0 N/A N/A
Leverage ratio ......................... 42,153 8.3 20,432 > 4.0 N/A N/A
Quad City Bank & Trust:
Total risk-based capital ............... $37,546 10.0% $29,951 > 8.0% $37,439 > 10.0%
Tier 1 risk-based capital .............. 32,857 8.8 14,975 > 4.0 22,463 > 6.0
Leverage ratio ......................... 32,857 7.4 17,721 > 4.0 22,151 > 5.0
Cedar Rapids Bank & Trust (A):
Total risk-based capital ............... $10,230 20.6% $ 3,973 > 8.0% $ 4,966 > 10.0%
Tier 1 risk-based capital .............. 9,608 19.4 1,986 > 4.0 2,980 > 6.0
Leverage ratio ......................... 9,608 16.3 2,358 > 4.0 2,947 > 5.0
As of June 30, 2001:
Company:
Total risk-based capital ............... $39,351 12.2% $25,863 > 8.0% N/A N/A
Tier 1 risk-based capital .............. 31,228 9.7 12,932 > 4.0 N/A N/A
Leverage ratio ......................... 31,228 7.8 16,044 > 4.0 N/A N/A
Quad City Bank & Trust:
Total risk-based capital ............... $32,506 10.2% $25,464 > 8.0% $31,830 > 10.0%
Tier 1 risk-based capital .............. 28,524 9.0 12,732 > 4.0 19,098 > 6.0
Leverage ratio ......................... 28,524 7.3 15,693 > 4.0 19,616 > 5.0
(A) As a denovo bank, Cedar Rapids Bank & Trust may not, without the prior
consent of the Federal Reserve Bank, pay dividends until after the first
three years of operations and two consecutive satisfactory CAMELS ratings.
In addition, the Bank is required to maintain a tangible Tier I leverage
ratio of at least 9% throughout its first three years of operations.
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.
45
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 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 six months ended December 31, 2002 and the
years ended June 30, 2002, 2001, and 2000:
Six Months
Ended Year Ended June 30,
December 31, ------------------------------------
2002 2002 2001 2000
-------------------------------------------------
Net income ................................. $3,196,544 $2,962,453 $2,395,732 $2,745,527
=================================================
Weighted average common shares outstanding . 2,752,739 2,685,996 2,268,465 2,309,453
Weighted average common shares issuable upon
exercise of stock options .................. 66,677 57,809 45,869 76,387
-------------------------------------------------
Weighted average common and common
equivalent shares outstanding .............. 2,819,416 2,743,805 2,314,334 2,385,840
=================================================
Note 17. Commitments and Contingencies
In the normal course of business, the Banks make various commitments and incur
certain contingent liabilities that are not presented in the accompanying
consolidated financial statements. The commitments and contingent liabilities
include various guarantees, commitments to extend credit, and standby letters of
credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The 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 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 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, 2002 and June 30, 2002 and
2001 no amounts have been recorded as liabilities for the Banks' potential
obligations under these guarantees.
As of December 31, 2002 and June 30, 2002 and 2001, commitments to extend credit
aggregated $165,163,000, $153,487,000, and $91,893,000, respectively. As of
December 31, 2002 and June 30, 2002 and 2001, standby letters of credit
aggregated $4,914,000, $3,984,000, and $1,686,000, respectively. Management does
not expect that all of these commitments will be funded.
46
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $23,691,004, $8,498,345, and $5,823,820 at
December 31, 2002 and June 30, 2002 and 2001. These amounts are included in
loans held for sale at the respective balance sheet dates.
Bancard is subject to the risk of chargebacks from cardholders and the merchant
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.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed up by a performance bond in the amount of $1,000,000. As of December
31, 2002 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 $25,256,262, $13,379,699, and $15,146,866 as of December 31, 2002 and June
30, 2002 and 2001, respectively. In the opinion of management, no material risk
of loss exists due to the financial condition of the upstream correspondent
banks.
A significant portion of residential mortgage loans sold to investors in the
secondary market are sold with recourse. Specifically, certain loan sales
agreements provide that if the borrower becomes delinquent a number of payments
or a number of days, within six months to one year of the sale, the Banks must
repurchase the loan from the subject investor. The Banks did not repurchase any
loans from secondary market investors under the terms of these loan sales
agreements during the six months ended December 31, 2002, or the years ended
June 30, 2002, 2001, or 2000. In the opinion of management, the risk of recourse
to the Banks is not significant and, accordingly, no liability has been
established related to such.
Note 18. Quarterly Results of Operations (Unaudited)
Six Months Ended
December 31, 2002
----------------------------
September December
2002 2002
----------------------------
Total interest income ...................... $7,875,657 $8,244,016
Total interest expense ..................... 3,188,761 3,294,502
----------------------------
Net interest income ................ 4,686,896 4,949,514
Provision for loan losses .................. 636,800 1,546,945
Noninterest income ......................... 2,469,074 6,370,647
Noninterest expenses ....................... 4,771,406 6,641,645
----------------------------
Net income before
income taxes ....................... 1,747,764 3,131,571
Federal and state income taxes ............. 588,459 1,094,332
----------------------------
Net income ......................... $1,159,305 $2,037,239
============================
Earnings per common share:
Basic .................................... $ 0.42 $ 0.74
Diluted .................................. 0.41 0.72
47
Year Ended June 30, 2002
-------------------------------------------------
September December March June
2001 2001 2002 2002
-------------------------------------------------
Total interest income ....... $6,950,044 $6,895,756 $7,081,985 $7,592,352
Total interest expense ...... 3,520,220 3,113,305 3,129,885 3,106,744
-------------------------------------------------
Net interest income . 3,429,824 3,782,451 3,952,100 4,485,608
Provision for loan losses ... 408,490 631,375 497,500 727,600
Noninterest income .......... 1,847,654 2,192,586 1,828,673 2,045,746
Noninterest expenses ........ 3,925,786 4,319,128 4,395,187 4,382,327
-----------------------------------------------
Net income before
income taxes ........ 943,202 1,024,534 888,086 1,421,427
Federal and state income
taxes ..................... 294,965 335,161 274,003 410,667
-------------------------------------------------
Net income .......... $ 648,237 $ 689,373 $ 614,083 $1,010,760
=================================================
Earnings per common share:
Basic ..................... $ 0.26 $ 0.25 $ 0.22 $ 0.37
Diluted ................... 0.26 0.24 0.22 0.36
Year Ended June 30, 2001
------------------------------------------------
September December March June
2000 2000 2001 2001
-------------------------------------------------
Total interest income ....... $6,978,039 $7,264,701 $7,279,539 $7,021,657
Total interest expense ...... 4,119,175 4,323,023 4,313,369 3,856,182
-------------------------------------------------
Net interest income . 2,858,864 2,941,678 2,966,170 3,165,475
Provision for loan losses ... 176,075 343,800 148,374 221,421
Noninterest income .......... 1,372,085 1,415,496 1,632,061 1,893,426
Noninterest expenses ........ 3,077,638 3,466,171 3,471,466 3,784,678
-------------------------------------------------
Net income before
income taxes ........ 977,236 547,203 978,391 1,052,802
Federal and state income
taxes ..................... 316,987 203,258 355,520 284,135
-------------------------------------------------
Net income .......... $ 660,249 $ 343,945 $ 622,871 $ 768,667
=================================================
Earnings per common share:
Basic ..................... $ 0.29 $ 0.15 $ 0.28 $ 0.34
Diluted ................... 0.28 0.15 0.27 0.34
48
Year Ended June 30, 2000
------------------------------------------------
September December March June
1999 1999 2000 2000
-------------------------------------------------
Total interest income ........ $5,800,637 $5,935,251 $5,952,519 $6,390,791
Total interest expense ....... 3,102,826 3,329,541 3,299,703 3,556,523
-------------------------------------------------
Net interest income .. 2,697,811 2,605,710 2,652,816 2,834,268
Provision for loan losses .... 274,700 296,800 85,600 394,718
Noninterest income ........... 1,372,113 1,623,759 1,624,409 1,534,135
Noninterest expenses ......... 2,773,541 2,727,889 2,960,061 3,005,970
------------------------------------------------
Net income before
income taxes ......... 1,021,683 1,204,780 1,231,564 967,715
Federal and state income
taxes ...................... 389,035 461,860 471,890 357,430
-------------------------------------------------
Net income ........... $ 632,648 $ 742,920 $ 759,674 $ 610,285
=================================================
Earnings per common share:
Basic ...................... $ 0.28 $ 0.32 $ 0.33 $ 0.26
Diluted .................... 0.26 0.31 0.32 0.26
Note 19.Parent Company Only Financial Statements
The following is condensed financial information of QCR Holdings, Inc. (parent
company only):
Condensed Balance Sheets
June 30,
December 31, ----------------------------
ASSETS 2002 2002 2001
- -----------------------------------------------------------------------------------------------------
Cash and due from banks .............................. $ 493,677 $ 607,477 $ 723,209
Securities available for sale, at fair value ......... 1,479,421 1,261,449 1,419,536
Investment in Quad City Bank & Trust Company ......... 38,247,616 33,998,168 28,986,909
Investment in Cedar Rapids Bank & Trust Company ...... 9,551,420 9,683,719 --
Investment in Quad City Bancard, Inc. ................ 2,444,989 2,435,057 3,296,760
Investment in QCR Holdings Capital Trust I ........... 390,432 390,432 390,432
Net loans receivable ................................. 21,007 20,952 145,106
Other assets ......................................... 1,952,467 2,119,031 1,517,166
--------------------------------------------
Total assets ................................. $ 54,581,029 $ 50,516,285 $ 36,479,118
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------
Liabilities:
COMR preferred securities of subsidiary trust ...... $ 12,000,000 $ 12,000,000 $ 12,000,000
Other borrowings ................................... 5,000,000 5,000,000 --
Other liabilities .................................. 994,427 938,682 661,658
--------------------------------------------
Total liabilities ............................ 17,994,427 17,938,682 12,661,658
--------------------------------------------
Stockholders' Equity:
Common stock ....................................... 2,823,061 2,809,593 2,325,566
Additional paid-in capital ......................... 16,761,423 16,684,605 12,148,759
Retained earnings .................................. 15,712,600 12,654,202 9,691,749
Accumulated other comprehensive income ............. 2,144,054 1,283,739 505,922
Less cost of common shares acquired for the treasury (854,536) (854,536) (854,536)
--------------------------------------------
Total stockholders' equity ................... 36,586,602 32,577,603 23,817,460
--------------------------------------------
Total liabilities and stockholders' equity ... $ 54,581,029 $ 50,516,285 $ 36,479,118
============================================
Condensed Statements of Income
Six Months
Ended Year Ended June 30,
December 31, -----------------------------------------
2002 2002 2001 2000
--------------------------------------------------------
Total interest income ................... $ 42,939 $ 102,458 $ 170,319 $ 197,387
Investment securities gains (losses), net -- 6,433 (25,753) 21,983
Equity in net (loss) of Cedar Rapids
Bank & Trust Company .................. (275,095) (892,383) -- --
Equity in net income of Quad City
Bank & Trust Company .................. 2,510,614 5,133,113 3,471,422 2,808,058
Equity in net income of Quad City
Bancard, Inc. ......................... 1,580,932 111,057 184,234 596,224
Equity in net income of QCR
Holdings Capital Trust I ................ -- -- -- 10,432
Other ................................... 171,822 70,067 (7,745) 233,927
--------------------------------------------------------
Total income .................... 4,031,212 4,530,745 3,792,477 3,868,011
--------------------------------------------------------
Interest expense ........................ 666,398 1,334,921 1,134,541 1,137,402
Other ................................... 507,025 1,028,905 958,504 583,282
--------------------------------------------------------
Total expenses .................. 1,173,423 2,363,826 2,093,045 1,720,684
--------------------------------------------------------
Income before income tax benefit 2,857,789 2,166,919 1,699,432 2,147,327
Income tax benefit ...................... 338,755 795,534 696,300 598,200
--------------------------------------------------------
Net income ...................... $ 3,196,544 $ 2,962,453 $ 2,395,732 $ 2,745,527
========================================================
Condensed Statements of Cash Flows
Six Months
Ended Year Ended June 30,
December 31, ---------------------------------------------
2002 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .......................................... $ 3,196,544 $ 2,962,453 $ 2,395,732 $ 2,745,527
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Distributions in excess of (less than) earnings of:
Quad City Bank & Trust Company .................. (2,510,614) (4,333,113) (3,471,422) (2,808,058)
Cedar Rapids Bank & Trust Company ............... 275,095 892,383 -- --
Quad City Bancard, Inc. ......................... (9,932) 861,703 132,266 (596,224)
QCR Holdings Capital Trust I .................... -- -- -- (10,432)
Depreciation ...................................... 795 252 1,121 2,123
Provision for loan losses ......................... (55) (1,835) (3,790) 6,000
Investment securities (gains) losses, net ......... -- (6,433) 25,753 (21,983)
Tax benefit of nonqualified stock options exercised 87,922 60,332 -- 81,178
(Increase) decrease in accrued interest receivable (10,048) 4,016 (2,802) (20,140)
(Increase) decrease in other assets ............... 187,941 (608,624) 317,712 130,943
Increase (decrease) in other liabilities .......... (82,401) 277,024 457,834 (137,454)
------------------------------------------------------------
Net cash provided by (used in)
operating activities .......................... 1,135,247 108,158 (147,596) (628,520)
------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of securities available for sale ........... (251,411) (18,205) (269,279) (1,228,400)
Proceeds from sale of securities available for sale . -- 101,285 99,247 250,426
Proceeds from calls and maturities of securities .... -- 107,500 -- --
Capital infusion, Cedar Rapids Bank &
Trust Company ..................................... -- (10,500,000) -- --
Capital infusion, Quad City Bank & Trust Company .... (1,000,000) -- -- --
Capital infusion, Quad City Bancard, Inc. ........... -- -- (900,000) (500,000)
Net loans (originated) repaid ....................... -- 125,989 391,127 (538,443)
------------------------------------------------------------
Net cash (used in) investing activities ....... (1,251,411) (10,183,431) (678,905) (2,016,417)
------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from other borrowings ...................... -- 5,000,000 -- --
Purchase of treasury stock .......................... -- -- (255,056) (599,480)
Proceeds from issuance of common stock, net ......... 2,364 4,959,541 925 136,891
------------------------------------------------------------
Net cash provided by (used in) financing
activities .................................... 2,364 9,959,541 (254,131) (462,589)
------------------------------------------------------------
Net (decrease) in cash and due from banks ..... (113,800) (115,732) (1,080,632) (3,107,526)
Cash and due from banks:
Beginning ........................................... 607,477 723,209 1,803,841 4,911,367
------------------------------------------------------------
Ending .............................................. $ 493,677 $ 607,477 $ 723,209 $ 1,803,841
============================================================
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.
49
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 certificates of deposit at
financial institutions: The carrying amounts reported in the balance sheets
for cash and due from banks, federal funds sold, and certificates of deposit
at financial institutions equal their fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: The fair values for variable rate loans equal their
carrying values. The fair values for all other types of loans are estimated
using discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers with similar credit
quality.
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 represents 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 Company Obligated Mandatorily Redeemable
Preferred Securities: The fair value of the Company's Federal Home Loan Bank
advances and Company obligated mandatorily redeemable preferred securities is
estimated using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Other borrowings: The fair value for variable rate other borrowings is equal
to its carrying value.
Commitments to extend credit: The fair value of these commitments is not
material.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 2002 and June 30, 2002 and 2001 are presented as
follows:
June 30,
---------------------------------------------------------
December 31, 2002 2002 2001
--------------------------- --------------------------- ---------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value Value Fair Value
---------------------------------------------------------------------------------------
Cash and due from banks ......... $ 34,073,932 $ 34,073,932 $ 26,207,676 $ 26,207,676 $ 20,217,219 $ 20,217,219
Federal funds sold .............. 14,395,000 14,395,000 760,000 760,000 7,775,000 7,775,000
Certificates of deposit at
financial institutions ........ 5,400,213 5,400,213 7,272,213 7,272,213 10,512,585 10,512,585
Investment securities:
Held to maturity ................ 425,332 451,121 425,440 437,116 575,559 583,411
Available for sale .............. 81,228,749 81,228,749 75,805,678 75,805,678 56,134,521 56,134,521
Loans receivable, net ........... 442,856,783 451,842,783 384,482,360 388,248,360 283,616,584 289,206,000
Accrued interest receivable ..... 3,221,246 3,221,246 3,125,992 3,125,992 2,863,178 2,863,178
Deposits ........................ 434,747,623 437,275,623 376,317,309 378,049,309 302,155,224 302,813,000
Short-term borrowings ........... 32,862,446 32,862,446 34,628,709 34,628,709 28,342,542 28,342,542
Federal Home Loan Bank
advances ...................... 74,988,320 75,210,320 52,414,323 52,543,323 29,712,759 29,977,000
Other borrowings ................ 5,000,000 5,000,000 5,000,000 5,000,000 -- --
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely subordinated debentures 12,000,000 12,049,741 12,000,000 12,464,746 12,000,000 12,206,596
Accrued interest payable ........ 1,804,021 1,804,021 1,858,414 1,858,414 2,394,489 2,394,489
50
Note 21. Business Segment Information
Selected financial information on the Company's business segments is presented
as follows for the six months ended December 31, 2002 and the years ended June
30, 2002, 2001, and 2000:
Six Months
Ended Year Ended June 30,
December 31, -----------------------------------------------
2002 2002 2001 2000
----------------------------------------------------------------
Commercial banking:
Revenue ............. $ 18,860,169 $ 31,834,976 $ 30,786,066 $ 25,563,964
Net income .......... 1,893,051 3,151,538 2,599,978 2,446,654
Assets .............. 597,370,496 512,831,887 394,223,857 361,927,225
Depreciation ........ 483,920 888,186 724,330 584,872
Capital expenditures 494,914 1,453,335 1,702,763 751,653
Credit card processing:
Revenue ............. 4,841,477 2,263,866 1,883,540 2,520,136
Net income .......... 1,703,340 343,552 220,890 674,800
Assets .............. 3,759,355 3,061,251 3,672,002 1,998,280
Depreciation ........ 12,745 35,309 42,859 46,423
Capital expenditures 9,827 15,270 10,624 43,770
Trust management:
Revenue ............. 1,045,046 2,161,677 2,071,971 1,884,310
Net income .......... 222,117 540,942 523,670 463,353
Assets .............. N/A N/A N/A N/A
Depreciation ........ N/A N/A N/A N/A
Capital expenditures N/A N/A N/A N/A
All other:
Revenue ............. 212,702 174,277 115,427 265,204
Net (loss) .......... (621,964) (1,073,579) (948,806) (839,280)
Assets .............. 3,470,505 2,935,357 3,052,075 3,696,110
Depreciation ........ 795 252 1,121 2,123
Capital expenditures 10,500 3,020 -- --
51
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
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
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, 2002 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;
(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 to be
issued upon exercise of Weighted-average exercise Number of securities remaining
Plan category outstanding options price of outstanding options available for future issuance
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders .............. 200,275 $ 11.34 125,075 (1)
Equity compensation plans
not approved by security holders . -- -- --
--------------------------------------------------------------------------------------------
Total ...................... 200,275 $ 11.34 125,075 (1)
============================================================================================
(1) Includes 100,000 shares available under the QCR Holdings, Inc. Employee
Stock Purchase Plan, which was approved by stockholders at the Company's
annual meeting held on October 23, 2002 and was not effective until January
1, 2003.
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. Controls and Procedures
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses. There were no
significant deficiencies or material weaknesses identified in the evaluation and
therefore, no corrective actions were taken.
52
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(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(iii) of Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
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).
10.1 Employment Agreement between QCR Holdings, Inc., Quad
City Bank and Trust Company and Michael A. Bauer dated
July 1, 2000 (incorporated herein by reference to
Exhibit 10.1 of Registrant's Annual Report or Form 10-K
for the year ended June 30, 2000).
10.2 Employment Agreement between QCR Holdings, Inc., Quad
City Bank and Trust Company and Douglas M. Hultquist
dated July 1, 2000 (incorporated herein by reference to
Exhibit 10.2 of Registrant's Annual Report on Form 10-K
for the year ended June 30, 2000). Exhibit Number.
Exhibit Description
10.3 Executive Deferred Compensation Agreement between Quad
City Bank and Trust Company and Michael A. Bauer dated
June 28, 2000 (incorporated herein by reference to
Exhibit 10.3 of Registrant's Annual Report on Form 10-K
for the year ended June 30, 2000).
10.4 Executive Deferred Compensation Agreement between Quad
City Bank and Trust Company and Douglas M. Hultquist
dated June 28, 2000 (incorporated herein by reference
to Exhibit 10.4 of Registrant's Annual Report on Form
10-K for the year ended June 30, 2000).
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 April 11, 2001
(incorporated herein by reference to Exhibit 10.6 of
Registrant's Annual Report on Form 10-K for the year
ended June 30, 2001).
10.7 First Amendment of Lease Agreement dated October 2001,
between Cedar Rapids Bank and Trust Company f.k.a. Quad
City Bank and Trust Company, and Ryan Companies
(incorporated herein by reference to Exhibit 10.1 of
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002).
53
10.8 Executive Deferred Compensation Agreement dated January
2002 for Todd A. Gipple, Executive Vice President and
Chief Financial Officer of QCR Holdings, Inc.
(incorporated herein by reference to Exhibit 10.1 of
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).
10.9 Executive Deferred Compensation Agreement dated July
2001 for Larry J. Helling, President and Chief
Executive Officer of Cedar Rapids Bank and Trust
Company (incorporated herein by reference to Exhibit
10.2 of Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002).
10.10 Indenture by and between QCR Holdings, Inc. and First
Union Trust Company, National Association, as trustee,
dated June 9, 1999 (incorporated herein by reference to
Exhibit 4.1 of Registrant's Form S-2, file No.
33-77889).
10.11 Purchase and Sale Agreement, dated October, 2002
between Quad City Bancard, Inc., a Delaware
corporation, Allied Merchant Services, Inc., an
Illinois corporation (collectively referred to as
"Seller"), and iPayment, Inc., a Delaware corporation,
and Quad City Acquisition Corp., a Delaware
corporation, a wholly owned subsidiary of iPayment
("Purchaser") (incorporated herein by reference to
Exhibit 10.1 of Registrant's Quarterly Report on Form
10Q for the quarter ended September 30, 2002).
10.12 Employment Agreement between QCR Holdings, Inc. and
Todd A. Gipple dated January 5, 2000 (exhibit is being
filed herewith).
10.13 Employment Agreement between Quad City Bancard, Inc.
and John W. Schricker dated July 1997 (incorporated
herein by reference to Exhibit 10.4 of Registrant's
Annual Report on Form 10-KSB for the year ended June
30, 1998).
10.14 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).
10.15 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).
12.1 Statement re: Computation of Ratios (exhibit is being
filed herewith).
21.1 Subsidiaries of QCR Holdings, Inc. (exhibit is being
filed herewith).
23.1 Consent of Independent Accountant - McGladrey and
Pullen LLP (exhibit is being filed herewith).
99.1 Certification of the Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(exhibit is being filed herewith).
99.2 Certification of the Chief Financial Officer pursuant
to Section 906 of the Sarbanes- Oxley Act of 2002
(exhibit is being filed herewith).
99.3 Shareholder letter dated January 2003 discussing
earnings for the quarter ended December 31, 2002 and
related financial information (exhibit is being filed
herewith).
54
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K with the Securities and
Exchange Commission on October 22, 2002 under Item 5, which reported
information on the sale of a portion of its merchant credit card
business to iPayment, Inc. and the resulting gain in the format of a
press release.
The Company filed a current report on Form 8-K with the Securities and
Exchange Commission on October 23, 2002 under Item 5, which reported
information related to the Company's declaration of a dividend payable
January 3, 2002 and on its earnings for the quarter ended September 30,
2002 in the format of a press release.
The Company filed a current report on Form 8-K with the Securities and
Exchange Commission on February 10, 2003 under Item 5, which reported
information related to the Company's earnings for the quarter ended
December 31, 2002 in the format of a press release.
(c) Exhibits
Exhibits to the Form 10-K required by Item 601 of Regulation S-K are
attached or incorporated herein by reference as stated in the Index to
Exhibits.
(d) Financial Statements Excluded from Annual Report to Shareholders
Pursuant to Rule 14a3(b)
Not applicable
55
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 26, 2003 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 26, 2003
- ----------------------------
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive March 26, 2003
- ----------------------------
Douglas M. Hultquist and Financial Officer and Director
/s Patrick S. Baird Director March 26, 2003
- ---------------------------
Patrick Baird
/s/ James J. Brownson Director March 26, 2003
- ----------------------------
James J. Brownson
/s/ Larry J. Helling Director March 26, 2003
- ----------------------------
Larry J. Helling
/s/ John K. Lawson Director March 26, 2003
- ----------------------------
John K. Lawson
/s/ Ronald G. Peterson Director March 26, 2003
- ----------------------------
Ronald G. Peterson
/s/ Henry Royer Director March 26, 2003
- ----------------------------
Henry Royer
/s/ John W. Schricker Director March 26, 2003
- ----------------------------
John W. Schricker
56
SECTION 302 CERTIFICATION
I, Douglas M. Hultquist, Chief Executive Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of QCR Holdings, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the six-month
transition period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Douglas M. Hultquist
---------------------------
Douglas M. Hultquist
Chief Executive Officer
57
SECTION 302 CERTIFICATION
I, Todd A. Gipple, Chief Financial Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of QCR Holdings, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the six-month
transition period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Todd A. Gipple
---------------------------
Todd A. Gipple
Chief Financial Officer
58
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 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.
59
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant
banking and any other activity that the Federal Reserve, in consultation with
the Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. As of
the date of this filing, the Company has neither applied for nor received
approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed to
exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances at
10% ownership.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels, a bank
holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based
requirement expressed as a percentage of total assets weighted according to
risk; and (ii) a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio
of Tier 1 capital to total assets of 3% for the most highly rated companies,
with a minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain loan servicing rights and purchased
credit card relationships). Total capital consists primarily of Tier 1 capital
plus certain other debt and equity instruments that do not qualify as Tier 1
capital and a portion of the company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels. As of December 31, 2002, 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 allows 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.
60
The Banks
The Banks are Iowa-chartered banks, the deposit accounts of which 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 Banks are subject to the examination, supervision, reporting and enforcement
requirements of the Superintendent, as the chartering authority for Iowa banks,
and the Federal Reserve, the primary federal regulator of member banks. The
FDIC, as administrator of the BIF, also has regulatory authority over the Banks.
Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 2002, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2003, 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, 2002, the FICO assessment rate for
BIF and SAIF members was approximately 0.02% of deposits.
Supervisory Assessments. All Iowa banks are required to pay supervisory
assessments to the Superintendent to fund the operations of the Superintendent.
The amount of the assessment is calculated on the basis of the bank's total
assets. During the six months ended December 31, 2002, the Banks paid
supervisory assessments to the Superintendent totaling $17 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
Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total assets of 3% for the most highly-rated banks with a minimum requirement
of at least 4% for all others; and (ii) a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-weighted assets of
8%, and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%.
For purposes of these capital standards, the components of Tier 1 capital and
total capital are the same as those for bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, regulations of the
Federal Reserve provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.
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.
61
Federal law also provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized," in each case
as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include: (i)
requiring the institution to submit a capital restoration plan; (ii) limiting
the institution's asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii)
requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As December 31, 2002: (i) neither of the 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 Banks exceeded its
minimum regulatory capital requirements under Federal Reserve capital adequacy
guidelines; and (iii) each of the Banks was "well-capitalized," as defined by
Federal Reserve regulations.
Dividend Payments. The primary source of funds for the Company is dividends from
the Banks. Under the Iowa Banking Act, Iowa-chartered banks may not pay
dividends in excess of their undivided profits. 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 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 Banks
exceeded its minimum capital requirements under applicable guidelines as of
December 31, 2002. As of December 31, 2002, approximately $1.2 million would
have been available to be paid as dividends by the Banks. Notwithstanding the
availability of funds for dividends, however, the FDIC may prohibit the payment
of any dividends by the Banks if the FDIC 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.
62
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. Until 2001, an Iowa-chartered bank could only establish a
branch office within the boundaries of the counties contiguous to, or cornering
upon, the county in which the principal place of business of the bank was
located. Further, Iowa law prohibited an Iowa bank from establishing new
branches in a municipality other than the municipality in which the bank's
principal place of business was located, if another bank already operated one or
more offices in the municipality in which the branch was to be located. In 2001,
the Iowa Banking Act was amended to allow Iowa-chartered banks to establish up
to three branches at any location in Iowa, subject to regulatory approval, in
addition to any branches established under the branching rules described above.
Beginning July 1, 2004, Iowa-chartered banks will be permitted to establish any
number of branches at any location in Iowa, subject to regulatory approval.
State and national banks are allowed to establish interstate branch networks
through acquisitions of other banks, subject to certain conditions, including
certain limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. 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 allowed only if specifically authorized by
state law. Iowa law permits interstate mergers subject to certain conditions,
including a condition requiring an Iowa bank involved in an interstate merger to
have been in existence and continuous operation for more than five years. 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).
State Bank Investments and Activities. The Banks generally are permitted to make
investments and engage in activities directly or through subsidiaries as
authorized by Iowa law. 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 $42.1 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $42.1 million, the reserve
requirement is $1.083 million plus 10% of the aggregate amount of total
transaction accounts in excess of $42.1 million. The first $6.0 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Banks are in compliance with the foregoing requirements.
63
Appendix B
GUIDE 3 INFORMATION
The Following tables and schedules show selected comparative financial
information required by the Securities and Exchange Commission Securities Act
Guide 3, regarding the business of QCR Holdings, Inc. ("the Company") for the
periods shown.
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential. A and B. Consolidated Average Balance
Sheets and Analysis of Net Interest Earnings.
Six months Ended December 31,
-----------------------------------------------------------------
2002 2001
------------------------------- -----------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost (3) Balance or Paid Cost (3)
------------------------------- ------------------------------
ASSETS Interest earnings assets:
Federal funds sold .............. $ 10,593 $ 74 1.40% $ 8,277 $ 137 3.31%
Certificates of deposit at
other financial institutions . 6,441 203 6.30 9,811 315 6.42
Investment securities (1) ....... 82,723 2,058 4.98 63,294 1,780 5.62
Net loans receivable (2) ........ 412,560 13,748 6.66 307,683 11,538 7.50
Other interest earning assets ... 17,521 158 1.80 5,746 168 5.85
------------------------------------------------------------------
Total interest earning assets 529,837 16,241 6.13 394,811 13,938 7.05
Noninterest-earning assets:
Cash and due from banks ......... $ 23,651 $ 16,896
Premises and equipment .......... 9,174 9,033
Other ........................... 4,355 5,855
-------- --------
Total assets ................. $567,017 $426,595
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits $129,247 874 1.35% $100,840 1,084 2.15%
Savings deposits ................ 10,880 45 0.83 8,145 57 1.40
Time deposits ................... 189,891 3,233 3.41 155,353 3,596 4.63
Short-term borrowings ........... 35,810 225 1.26 28,651 350 2.44
Federal Home Loan Bank advances . 66,415 1,440 4.34 33,155 896 5.40
COMR ............................ 12,000 567 9.45 12,000 567 9.45
Other borrowings ................ 5,000 100 4.00 3,125 84 5.38
-------------------- -------------------
Total interest-bearing
liabilities .............. 449,243 6,484 2.90 341,269 6,634 3.89
Noninterest-bearing demand ...... 70,028 54,613
Other noninterest-bearing
liabilities .................. 13,026 3,016
Total liabilities ............... 532,297 398,898
Stockholders' equity ............ 34,720 27,697
-------- --------
Total liabilities and
stockholders' equity ..... $567,017 $426,595
======== ========
Net interest income ............. $ 9,757 $ 7,304
======== ========
Net interest spread ............. 3.23% 3.16%
===== =====
Net interest margin ............. 3.68% 3.70%
===== =====
Ratio of average interest earning
assets to average interest-
bearing liabilities .......... 117.94% 115.69%
======== ========
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
(3) Average yields/costs for the six months ended December 31, 2002 and 2001
are annualized.
64
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.
Year Ended June 30,
-----------------------------------------------------------------
2002 2001
------------------------------- -----------------------------
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 ............... $ 8,831 $ 258 2.92% $ 21,404 $ 1,267 5.92% $27,068 $ 1,488 5.50%
Certificates of deposit at
other financial institutions... 9,233 590 6.39 11,102 702 6.32 11,967 754 6.30
Investment securities (1) ........ 68,019 3,789 5.57 57,454 3,477 6.05 56,898 3,539 6.22
Net loans receivable (2) ......... 329,578 23,718 7.20 261,404 22,971 8.79 209,311 18,365 8.77
Other interest earning assets .... 8,642 386 4.47 4,915 245 4.98 477 24 5.03
-------------------- ------------------ ------------------
Total interest earning assets.. 424,303 28,741 6.77 356,279 28,662 8.04 305,721 24,170 7.91
Noninterest-earning assets:
Cash and due from banks .......... $ 18,665 $ 15,085 $ 13,699
Premises and equipment ........... 9,308 8,295 7,612
Other ............................ 8,777 5,231 8,822
-------- -------- --------
Total assets .................. $461,053 $384,890 $335,854
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits . $ 104,021 1,962 1.89% $ 86,639 2,918 3.37% $ 81,979 2,709 3.30%
Savings deposits ................. 8,597 112 1.30 6,707 132 1.97 6,112 125 2.05
Time deposits .................... 164,542 6,821 4.15 159,822 9,972 6.24 134,245 7,291 5.43
Short-term borrowings ............ 27,466 592 2.16 22,477 992 4.41 14,530 665 4.58
Federal Home Loan Bank advances .. 41,310 2,048 4.96 24,324 1,463 6.01 22,048 1,361 6.17
COMR ............................. 12,000 1,134 9.45 12,000 1,135 9.46 12,000 1,137 9.48
Other borrowings ................. 3,846 201 5.23 -- -- -- -- -- --
------------------- ------------------ ------------------
Total interest-bearing
liabilities ............... 361,782 12,870 3.56 311,969 16,612 5.32 270,914 13,288 4.90
Noninterest-bearing demand ....... 59,715 45,902 40,072
Other noninterest-bearing
liabilities ................... 10,143 5,133 5,492
Total liabilities ................ 431,640 363,004 316,478
Stockholders' equity ............. 29,413 21,886 19,376
-------- -------- --------
Total liabilities and
stockholders' equity....... $461,053 $384,890 $335,854
======== ======== ========
Net interest income .............. $ 15,871 $ 12,050 $10,882
======== ======== =======
Net interest spread .............. 3.22% 2.72% 3.00%
===== ===== =====
Net interest margin .............. 3.74% 3.38% 3.56%
===== ===== =====
Ratio of average interest earning
assets to average interest-
bearing liabilities ........... 117.28% 114.20% 112.85%
======== ======== ========
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
65
C. Analysis of Changes of Interest Income/Interest Expense
For the six months ended December 31, 2002
Components
Inc./(Dec.) of Change (1)
From -------------------
Prior Year Rate Volume
-------------------------------
2002 vs. 2001
-------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold............................ $ (63) $ (146) $ 83
Certificates of deposit at other financial
institutions ............................... (112) (6) (106)
Investment securities (2)..................... 278 (521) 799
Net loans receivable (2) (3).................. 2,210 (3,330) 5,540
Other interest earning assets................. (10) (350) 340
-----------------------------
Total change in interest income .... $ 2,303 $(4,353) $ 6,656
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits.............. $ (210) $ (814) $ 604
Savings deposits ............................. (12) (49) 37
Time deposits ................................ (363) (1,935) 1,572
Short-term borrowings......................... (125) (314) 189
Federal Home Loan Bank advances............... 544 (502) 1,046
COMR ......................................... -- -- --
Other borrowings ............................. 16 (56) 72
-----------------------------
Total change in interest expense ... $ (150) $(3,670) $ 3,520
-----------------------------
Total change in net interest income .......... $ 2,453 $ (683) $ 3,136
=============================
For the years ended June 30, 2002, 2001 and 2000
Components
Inc./(Dec.) of Change (1)
From -------------------
Prior Year Rate Volume
-------------------------------
2002 vs. 2001
-------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold........................ $ (1,009) $ (467) $ (542)
Certificates of deposit at other financial
institutions ........................... (112) 7 (119)
Investment securities (2)................. 312 (292) 604
Net loans receivable (2) (3).............. 747 (4,604) 5,351
Other interest earning assets............. 141 (27) 168
------------------------------
Total change in interest income $ 79 $(5,383) $ 5,462
------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits......... $ (956) $(1,461) $ 505
Savings deposits......................... (20) (52) 32
Time deposits............................ (3,151) (3,438) 287
Short-term borrowings.................... (400) (586) 186
Federal Home Loan Bank advances.......... 585 (293) 878
COMR..................................... (1) (1) -
Other borrowings......................... 201 - 201
------------------------------
Total change in interest expense $ (3,742) $(5,831) $ 2,089
------------------------------
Total change in net interest income ...... $ 3,821 $ 448 $ 3,373
==============================
66
Components
Inc./(Dec.) of Change (1)
From -------------------
Prior Year Rate Volume
-------------------------------
2002 vs. 2001
-------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold........................ $ (221) $ 108 $ (329)
Certificates of deposit at other financial
institutions............................ (52) 3 (55)
Investment securities (2)................. (62) (97) 35
Net loans receivable (2) (3).............. 4,606 28 4,578
Other interest earning assets............. 221 - 221
-----------------------------
Total change in interest income . $4,492 $ 42 $ 4,450
----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits......... $ 209 $ 53 $ 156
Savings deposits.......................... 7 (5) 12
Time deposits............................. 2,681 1,176 1,505
Short-term borrowings..................... 327 (25) 352
Federal Home Loan Bank advances........... 102 (36) 138
COMR...................................... (2) (2) -
Other borrowings.......................... - - -
---------------------------
Total change in interest income $3,324 $ 1,161 $ 2,163
---------------------------
Total change in net interest income ...... $1,168 $(1,119) $ 2,287
===========================
(1) The column "increase/decrease from prior year" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(3) Loan fees are not material and are included in interest income from loans
receivable.
67
II. Investment Portfolio
A. Investment Securities
The following tables present the amortized cost and fair value of investment
securities as of December 31, 2002, and June 30, 2002, 2001 and 2000.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------
December 31, 2002
- -----------------------------------------------------------------------------------
Securities held to maturity:
Municipal securities ......... $ 250,332 $ 9,350 $ - $ 259,682
Other bonds .................. 175,000 16,439 - 191,439
--------------------------------------------------
Totals .................. $ 425,332 $ 25,789 $ - $ 451,121
==================================================
Securities available for sale:
U.S. Treasury securities ..... $ 1,016,608 $ 19,879 $ - $ 1,036,487
U.S. agency securities ....... 47,534,699 1,701,832 (1,243) 49,235,288
Mortgage-backed securities ... 5,600,989 169,475 (18) 5,770,446
Municipal securities ......... 13,941,352 978,262 - 14,919,614
Corporate securities ......... 7,691,358 475,136 - 8,166,494
Trust preferred securities ... 1,349,796 93,146 (10,985) 1,431,957
Other securities ............. 659,168 19,926 (10,631) 668,463
--------------------------------------------------
Totals .................. $ 77,793,970 $ 3,457,656 $ (22,877) $ 81,228,749
==================================================
June 30, 2002
- -----------------------------------------------------------------------------------
Securities held to maturity:
Municipal securities ......... $ 250,440 $ 7,598 $ - $ 258,038
Other bonds .................. 175,000 4,078 - 179,078
--------------------------------------------------
Totals .................. $ 425,440 $ 11,676 $ - $ 437,116
==================================================
Securities available for sale:
U.S. Treasury securities ..... $ 1,024,062 $ 9,239 $ - $ 1,033,301
U.S. agency securities ....... 42,250,426 1,088,265 - 43,338,691
Mortgage-backed securities ... 5,758,421 124,191 - 5,882,612
Municipal securities ......... 13,663,785 538,002 (15,213) 14,186,574
Corporate securities ......... 9,291,237 190,623 (6,309) 9,475,551
Trust preferred securities ... 1,349,796 111,034 (14,405) 1,446,425
Other securities ............. 407,756 39,047 (4,279) 442,524
--------------------------------------------------
Totals .................. $73,745,483 $32,100,401 $ (40,206) $75,805,678
==================================================
68
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------
June 30, 2001
- -----------------------------------------------------------------------------------
Securities held to maturity:
Municipal securities ......... $ 500,559 $ 4,638 $ - $ 505,197
Other bonds .................. 75,000 3,214 - 78,214
--------------------------------------------------
Totals .................. $ 575,559 $ 7,852 $ - $ 583,411
==================================================
Securities available for sale:
U.S. agency securities ....... $31,787,602 $ 626,091 $ (104) $32,413,589
Mortgage-backed securities ... 5,509,433 17,646 (18,797) 5,508,282
Municipal securities ......... 11,892,825 144,098 (39,556) 11,997,367
Corporate securities ......... 4,577,918 31,014 (13,185) 4,595,747
Trust preferred securities ... 1,148,488 94,897 (14,405) 1,228,980
Other securities ............. 393,211 19,075 (21,730) 390,556
--------------------------------------------------
Totals .................. $55,309,477 $ 932,821 $ (107,777) $56,134,521
==================================================
June 30, 2000
- -----------------------------------------------------------------------------------
Securities held to maturity:
Municipal securities ......... $ 499,988 $ - $ (8,769) $ 491,219
Other bonds .................. 75,000 - (982) 74,018
--------------------------------------------------
Totals .................. $ 574,988 $ - $ (9,751) $ 565,237
==================================================
Securities available for sale:
U.S. Treasury securities ..... $ 3,000,406 $ - $ (11,607) $ 2,988,799
U.S. agency securities ....... 40,199,557 23,275 (1,018,786) 39,204,046
Mortgage-backed securities ... 7,006,906 - (297,413) 6,709,493
Municipal securities ......... 5,821,229 - (300,577) 5,520,652
Corporate securities ......... - - - -
Trust preferred securities ... 919,495 - (49,780) 869,715
Other securities ............. 277,925 1,474 (18,042) 261,357
--------------------------------------------------
Totals .................. $57,225,518 $ 24,749 $(1,696,205) $55,554,062
==================================================
69
B. Investment Securities, Maturities, and Yields
The following table presents the maturity of securities held on December 31,
2002 and the weighted average stated coupon rates by range of maturity:
Weighted
Amortized Average
Cost Yield
------------------------
U.S. Treasury securities:
After 1 but within 5 years ....................... $ 1,016,608 3.20%
========================
U.S. Agency securities:
Within 1 year .................................... $11,755,450 4.42%
After 1 but within 5 years ...................... 29,976,210 4.30%
After 5 but within 10 years ..................... 5,803,039 5.80%
------------------------
Total ........................................ $47,534,699 4.51%
========================
Mortgage-backed securities:
Within 1 year .................................... $ 67,656 5.81%
After 1 but within 5 years ....................... 211,027 5.75%
After 5 but within 10 years ...................... 3,299,587 4.80%
After 10 years ................................... 2,022,719 5.86%
------------------------
Total ........................................ $ 5,600,989 5.23%
========================
Municipal securities:
Within 1 year .................................... $ 320,000 6.42%
After 1 but within 5 years ...................... 4,151,373 6.20%
After 5 but within 10 years ..................... 5,022,933 6.60%
After 10 years .................................. 4,697,378 7.73%
------------------------
Total ........................................ $14,191,684 6.85%
========================
Corporate securities:
After 1 but within 5 years ....................... $ 5,818,535 5.68%
After 5 but within 10 years ...................... 1,872,8230 6.10%
------------------------
Total ........................................ $ 7,691,358 5.78%
========================
Trust preferred securities:
After 10 years ................................... $ 1,349,796 8.71%
========================
Other bonds:
Within 1 year .................................... $ 25,000 6.30%
After 1 but within 5 years ...................... 100,000 5.95%
After 5 but within 10 years ..................... 50,000 6.55%
------------------------
Total ........................................ $ 175,000 6.17%
========================
Other securities with no maturity or stated face rate .... $ 659,168
===========
The company does not use any financial instruments referred to as derivatives to
manage interest rate risk.
70
B. Investment Securities, Maturities, and Yields
The following table presents the maturity of securities held on June 30, 2002
and the weighted average stated coupon rates by range of maturity:
Weighted
Amortized Average
Cost Yield
-----------------------
U.S. Treasury securities:
After 1 but within 5 years .................... $ 1,024,062 3.20%
=======================
U.S. Agency securities:
Within 1 year ................................. $12,099,886 5.08%
After 1 but within 5 years ................... 23,575,610 5.21%
After 5 but within 10 years .................. 6,574,930 5.86%
-----------------------
Total ...................................... $42,250,426 5.27%
======================
Mortgage-backed securities:
After 1 but within 5 years .................... $ 505,326 5.87%
After 5 but within 10 years ................... 2,685,246 5.29%
After 10 years ................................ 2,567,849 5.93%
----------------------
Total ...................................... $ 5,758,421 5.62%
======================
Municipal securities:
Within 1 year ................................. $ 100,000 7.21%
After 1 but within 5 years ................... 3,588,759 6.15%
After 5 but within 10 years .................. 5,536,120 6.43%
After 10 years ............................... 4,689,346 7.65%
----------------------
Total ...................................... $13,914,225 6.77%
======================
Corporate securities:
After 1 but within 5 years .................... $ 7,417,608 5.71%
After 5 but within 10 years ................... 1,873,629 6.10%
----------------------
Total ...................................... $ 9,291,237 5.79%
======================
Trust preferred securities:
After 10 years ................................ $ 1,349,796 8.71%
======================
Other bonds:
Within 1 year .................................. $ 25,000 6.30%
After 1 but within 5 years ..................... 50,000 6.60%
After 5 but within 10 years .................... 50,000 5.30%
After 10 years ................................. 50,000 6.55%
----------------------
Total ....................................... $ 175,000 6.17%
======================
Other securities with no maturity or stated face rate .. $ 407,756
===========
The company does not use any financial instruments referred to as derivatives to
manage interest rate risk.
71
C. Investment Concentrations
At both December 31, 2002 and June 30, 2002, there existed no security in the
investment portfolio above (other than U.S. Government, U.S. Government
agencies, and corporations) that exceeded 10% of the stockholders' equity at
that date.
III. Loan Portfolio
A. Types of Loans
The composition of the loan portfolio is presented as follows:
June 30,
December 31, --------------------------------------------------------------------------
2002 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------
Commercial ............................ $350,205,750 $305,019,327 $209,932,804 $167,733,209 $136,258,237 $ 99,170,654
Real estate loans held for sale -
mortgage ............................ 23,691,004 8,498,345 5,823,820 1,121,474 2,033,025 4,766,243
Real estate - mortgage ................ 28,760,597 34,033,494 32,191,024 35,179,905 25,558,861 24,581,017
Real estate - construction ............ 2,229,740 2,861,123 2,568,283 3,463,682 3,367,458 1,798,257
Installment and other consumer ........ 44,567,327 40,036,886 37,361,458 34,405,138 30,810,455 32,732,322
------------------------------------------------------------------------------------------
Total loans ........... 449,454,418 390,449,175 287,877,389 241,903,408 198,028,036 163,048,493
Deferred loan origination costs
(fees), net ......................... 281,318 144,639 (12,623) (50,557) (51,344) (73,357)
Less allowance for estimated
losses on loans ............... (6,878,953) (6,111,454) (4,248,182) (3,617,401) (2,895,457) (2,349,838)
------------------------------------------------------------------------------------------
Net loans ............. $442,856,783 $384,482,360 $283,616,584 $238,235,450 $195,081,235 $160,625,298
==========================================================================================
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
Maturities After One Year
--------------------------------------------------------------------------
Due in one Due after one Due after Predetermined Adjustable
year or less through 5 years 5 years interest rates interest rates
-------------------------------------------------------------------------
At December 31, 2002
- -------------------------------------------------------------------------------------------------------------------------
Commercial .................................. $105,186,604 $208,469,595 $ 36,549,551 $191,765,759 $ 53,253,387
Real estate loans held for sale - mortgage .. -- -- 23,691,004 23,691,004 --
Real estate - mortgage ...................... 1,714,159 268,857 26,777,581 3,669,489 23,376,949
Real estate - construction .................. 2,148,748 80,992 -- 80,992 --
Installment and other consumer .............. 14,115,653 28,214,224 2,237,450 23,715,156 6,736,518
-------------------------------------------------------------------------
Totals ...................... $123,165,164 $237,033,668 $ 89,255,586 $242,922,400 $ 83,366,854
=========================================================================
At June 30, 2002
- -------------------------------------------------------------------------------------------------------------------------
Commercial .................................. $105,905,915 $165,129,672 $ 33,983,740 $152,204,339 $ 46,909,073
Real estate loans held for sale - mortgage .. -- -- 8,498,345 8,498,345 --
Real estate - mortgage ...................... 2,462,190 539,934 31,031,370 6,174,785 25,396,519
Real estate - construction .................. 2,780,131 80,992 -- 80,992 --
Installment and other consumer .............. 10,482,995 26,184,317 3,369,574 23,793,966 5,759,925
-------------------------------------------------------------------------
Totals ...................... $121,631,231 $191,934,915 $ 76,883,029 $190,752,427 $ 78,065,517
=========================================================================
72
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The following table represents Nonaccrual, Past Due, Renegotiated Loans, and
other Real Estate Owned:
June 30,
December 31, --------------------------------------------------------------
2002 2002 2001 2000 1999 1998
---------------------------------------------------------------------------
Loans accounted for on nonaccrual basis .. $4,608,391 $1,559,609 $1,231,741 $ 382,745 $1,287,727 $1,025,761
Accruing loans past due 90 days or more .. 430,745 707,853 494,827 352,376 238,046 259,277
Other real estate owned .................. -- -- 47,687 -- 119,600 --
Troubled debt restructurings ............. -- -- -- -- -- --
---------------------------------------------------------------------------
Totals ................... $5,039,136 $2,267,462 $1,774,255 $ 735,121 $1,645,373 $1,285,038
===========================================================================
The policy of the company is to place a loan on nonaccrual status if: (a)
payment in full of interest or principal is not expected, or (b) principal or
interest has been in default for a period of 90 days or more unless the
obligation is both in the process of collection and well secured. Well secured
is defined as collateral with sufficient market value to repay principal and all
accrued interest. A debt is in the process of collection if collection of the
debt is proceeding in due course either through legal action, including judgment
enforcement procedures, or in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in restoration to current status.
2. Potential Problem Loans. To management's best knowledge, there are no such
significant loans that have not been disclosed in the above table.
3. Foreign Outstandings. None.
4. Loan Concentrations. At both December 31, 2002 and June 30, 2002, there
were no concentrations of loans exceeding 10% of the total loans which are
not otherwise disclosed in Item III. A.
D. Other Interest-Bearing Assets
There are no interest-bearing assets required to be disclosed here.
73
IV. Summary of Loan Loss Experience
A. Analysis of the Allowance for Estimated Losses on Loans
The following table summarizes activity in the allowance for estimated losses on
loans of the Company:
June 30,
December 31, ----------------------------------------------------------------------
2002 2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------
Average amount of loans outstanding,
before allowance for estimated losses
on loans ............................. $419,103,659 $338,484,164 $262,237,267 $212,497,181 $184,756,698 $141,974,417
Allowance for estimated losses on loans:
Balance, beginning of fiscal period ...... 6,111,454 4,248,182 3,617,401 2,895,457 2,349,838 1,632,500
Charge-offs:
Commercial .................... (1,349,455) (437,048) (86,936) (43,295) (104,596) (62,763)
Real Estate ................... -- -- -- (6,822) (25,142) --
Installment and other consumer (104,737) (204,108) (213,527) (376,591) (348,777) (142,471)
---------------------------------------------------------------------------------------
Subtotal charge-offs .......... (1,454,192) (641,156) (300,463) (426,708) (478,515) (205,234)
---------------------------------------------------------------------------------------
Recoveries:
Commercial .................... 472 101,191 2,100 762 53,314 13,146
Real Estate ................... -- -- -- -- -- --
Installment and other consumer 37,474 138,272 39,474 96,072 79,020 7,450
---------------------------------------------------------------------------------------
Subtotal recoveries ........... 37,946 239,463 41,574 96,834 132,334 20,596
---------------------------------------------------------------------------------------
Net charge-offs................ (1,416,246) (401,693) (258,889) (329,874) (346,181) (184,638)
Provision charged to expense ............. 2,183,745 2,264,965 889,670 1,051,818 891,800 901,976
---------------------------------------------------------------------------------------
Balance, end of fiscal year............... $ 6,878,953 $ 6,111,454 $ 4,248,182 $ 3,617,401 $ 2,895,457 $ 2,349,838
=======================================================================================
Ratio of net charge-offs to average loans
outstanding .......................... 0.34% 0.12% 0.10% 0.16% 0.19% 0.13%
B. Allocation of the Allowance for Estimated Losses on Loans
The following table presents the allowance for the estimated losses on loans by
type of loans and the percentage of loans in each category to total loans:
-------------------------------------------------------------------------------
December 31, 2002 June 30, 2002 June 30, 2001
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
-------------------------------------------------------------------------------
Commercial ....................................... $6,176,545 77.91% $5,239,506 78.12% $3,231,286 72.92%
Real estate loans held for sale - mortgage ....... 23,691 5.27% 1,392 2.18% -- 2.02%
Real estate - mortgage ........................... 158,765 6.40% 301,928 8.72% 182,365 11.18%
Real estate - construction ....................... 11,149 0.50% 14,306 0.73% -- 0.89%
Installment and other consumer ................... 506,948 9.92% 554,322 10.25% 834,531 12.99%
Unallocated ...................................... 1,855 N/A -- N/A -- N/A
-------------------------------------------------------------------------------
Total .................................. $6,878,953 100.00% $ 6,111,454 100.00% $4,248,182 100.00%
===============================================================================
-------------------------------------------------------------------------------
June 30, 2000 June 30, 1999 June 30, 1998
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
-------------------------------------------------------------------------------
Commercial ....................................... $2,863,319 69.33% $ 2,164,668 68.80% $1,213,439 60.82%
Real estate loans held for sale - mortgage ....... -- 0.46% -- 1.03% -- 2.92%
Real estate - mortgage ........................... 121,530 14.55% 94,274 12.91% 74,702 15.08%
Real estate - construction ....................... 8,659 1.43% 8,419 1.70% 4,496 1.10%
Installment and other consumer ................... 617,893 14.23% 578,937 15.56% 515,489 20.08%
Unallocated ...................................... 6,000 N/A 49,159 N/A 541,712 N/A
-------------------------------------------------------------------------------
Total .................................. $3,617,401 100.00% $ 2,895,457 100.00% $2,349,838 100.00%
===============================================================================
74
V. Deposits.
The average amount of and average rate paid for the categories of deposits for
the six months ended December 31, 2002 and the years ended June 30, 2002, 2001,
and 2000 are discussed in the consolidated average balance sheets and can be
found on page 2 of Appendix B.
Included in interest bearing deposits at December 31, 2002 were certificates of
deposit totaling $69,373,970 that were $100,000 or greater. Included in interest
bearing deposits at June 30, 2002, 2001 and 2000 were certificates of deposit
totaling $62,919,139, $50,298,560, $50,814,599 respectively, that were $100,000
or greater. Maturities of these certificates were as follows:
June 30,
December 31, ---------------------------------------
2002 2002 2001 2000
-----------------------------------------------------
One to three months ................... $28,052,686 $18,222,577 $20,948,861 $24,105,269
Three to six months ................... 20,713,145 11,202,328 11,487,826 11,176,203
Six to twelve months .................. 12,591,505 24,463,968 12,972,591 11,781,428
Over twelve months .................... 8,016,634 9,030,266 4,889,281 3,751,699
----------------------------------------------------
Total certificates of
deposit greater than $100,000 $69,373,970 $62,919,139 $50,298,559 $50,814,599
====================================================
VI. Return on Equity and Assets.
The following table presents the return on assets and equity and the equity to
assets ratio of the Company:
June 30,
December 31, --------------------------------------------
2002 2002 2001 2000
------------------------------------------------------------
Average total assets ................. $567,017,337 $461,053,211 $384,890,061 $335,854,396
Average equity ....................... 34,719,756 29,412,548 21,886,477 19,375,865
Net income ........................... 3,196,544 2,962,453 2,395,732 2,745,527
Return on average assets ............. 1.13% 0.64% 0.62% 0.82%
Return on average equity ............. 18.41% 10.07% 10.95% 14.17%
Dividend payout ratio ................ 4.31% NA NA NA
Average equity to average assets ratio 6.12% 6.38% 5.69% 5.77%
VII. Short Term Borrowings.
The information requested is disclosed in the Notes to Consolidated Financial
Statements in Note 7.
75